C M Y K SUBEX LIMITED ANNUAL REPORT 2007-2008 C M Y K C M Y K powering the ROC contents 01 highlights 2007-2008 03 key financials & indicators 05 chairman’s letter to shareholders about Subex Limited 06 products & solutions 09 product innovation 11 the Subex ROC: catalyst for communications innovation 13 innovation in engineering 15 Subexian pride award winners 17 Subex charitable trust 18 board of directors 19 management team general review & accountability 22 directors’ report 28 report on corporate governance 34 management’s discussion & analysis financials 45 financial review - subex limited (standalone) 68 financial review - subex limited (consolidated) 87 shareholders’ information A N N U A L R E P O R T 0 7 - 0 8 S u b e x L i m i t e d C M Y K C M Y K powering the ROC highlights 2007-2008 (cid:129) completed acquisition of Syndesis (cid:129) honoured by AT&T as outstanding supplier (cid:129) won ISV partner of the year award from Sun Microsystems (cid:129) changed name to Subex Limited (cid:129) won award from UKTI for successful listing at the London Stock Exchange (cid:129) made it to the Deloitte Technology Fast 50 India listing for the third year running (cid:129) Subash Menon appointed as chairman of the NASSCOM product forum (cid:129) consolidated all offices to a single location in Bangalore 01 A N N U A L R E P O R T 0 7 - 0 8 S u b e x L i m i t e d C M Y K C M Y K powering the ROC “ committing to seeing things differently to produce the best value in all fairness - the Subex way. ” 02 A N N U A L R E P O R T 0 7 - 0 8 S u b e x L i m i t e d C M Y K C M Y K key financials & indicators PARTICULARS (Consolidated) Total income Export Sales Operating Profits (EBDITA) Depreciation & Amortization Profit before Tax Profit after Tax Share Capital Reserves & Surplus Net Worth Gross Fixed Assets Net Fixed Assets Total Assets powering the ROC Year ended March 31, 2008 FIGURES IN RS. MILLION EXCEPT KEY INDICATORS 5408.9 4836.94 -107.54 184.04 -617.05 -680.72 348.47 7050.66 6792.52 1505.82 388.77 18463.32 -19.52 -31.01 194.92 1.36 -2.21 -14.02 -10.02 -0.67 Key Indicators Earning per Share (Year end) Cash Earning per Share (Year end) Book Value per Share Debt (including working capital) Equity Ratio EBDITA / Sales - % Net Profit Margin - % Return on year end Net Worth % Return on year end Capital Employed % 03 A N N U A L R E P O R T 0 7 - 0 8 S u b e x L i m i t e d C M Y K C M Y K powering the ROC “ we are confident that all the initiatives of the past 12 months and the progress achieved so far will help us gain our target. ” 04 A N N U A L R E P O R T 0 7 - 0 8 S u b e x L i m i t e d C M Y K C M Y K chairman’s letter to the shareholders powering the ROC Dear Shareholder, Financial year 2008 was quite turbulent and tumultuous. Two main elements buffeted us during the year and wreaked havoc with the financials. The first one was the level of complexity that we experienced while integrating Syndesis (the company that we acquired in April 2007) with our company and the other was the postponement of contracts by customers. Let me take a quick look at the figures before delving into the details of these issues. While the total revenue of the company increased by 42% to reach Rs.4855.91 million, product revenue recorded a growth of 58%. The contribution of products to the total revenue stood at 75% and the company made a net loss of Rs.680.72 million. Acquisition of Syndesis We acquired Syndesis at a total cost of US$ 180 million in April 2007. The rationale behind the acquisition was two fold. While we wanted to become an even more significant partner to the telcos by offering a wider and well integrated portfolio of products, we also aimed to expand our addressable market opportunity by entering an adjacent space. By March 2006, we had already achieved market leadership in the Revenue Maximization space and continuing growth seemed to be at risk. The solution was to enter a new, but adjacent area that would open up more opportunities. This strategy was supportive of the approach to address a new trend that was emerging. Most of the telcos, particularly the large ones, were demanding platforms that could handle multiple tasks in the OSS stream. Thus, an acquisition in the Service Fulfillment space seemed to help us to meet the twin objectives. Any move into a new space is fraught with risk owing to the complexities resulting from lack of familiarity with the space. Keeping this in mind, we had conducted an extensive due diligence to assess the risks and to prepare for the same. However, the true complexity that we experienced was more than what was estimated by us. Clearly we were ill equipped. This resulted in reduced revenue while the costs had not come down adequately leading to operational loss. To this was added the issue of a customer delaying contracts. Quite naturally, that delay also led to reduced revenue further increasing the operational loss. These two issues resulted in an operational loss of about US$ 20 million on revenue of US$ 91 million from products. Solution Your company is used to posting stellar performance and is not the sort that was posted in FY08. With the performance going downhill, it was imperative to get to the root cause of the issues and set them right at the earliest. A thorough study was conducted and the underlying problems were ascertained. The final solution had three components – completion of integration at the earliest, reduction of cost and faster conversion of backlog and orders booked to revenue. The company then went about implementing the solution. Implementing the Solution – Integration Integration was originally planned for completion by Jan 2008. Owing to the complexity, this period was at risk. Additional manpower was deployed to ensure that integration was completed as originally planned. I am glad to report that the same was achieved and all aspects of integration – transition of technology, merging of teams, functional training, redundancy etc. – were completed by January 2008. Implementing the Solution – Cost Reduction Software products business is very non-linear and so, the variability in expenses is very limited. Consequently, even when revenue reduces, the cost remains without much reduction. While this is a very positive feature when revenue is on the rise, it is extremely negative when the reverse happens. With the completion of the integration, the originally expected cost reduction of about US$ 12 million (for a full year) was achieved. It was required to reduce the cost further. The company has taken several measures to meet this objective. The result is expected to be a reduction of about 10% in the overall cost per Subexian per annum from the level in FY08. Implementing the Solution – Conversion to Revenue The revenue chain of the company has several links namely, pipeline, order intake, execution of projects and conversion to revenue. With the completion of integration, execution of the projects became quite smooth. Further, several initiatives were taken to improve the efficiency of delivery. These improvements, coupled with better execution, has brought about a significant progress in the rate of conversion of orders booked to revenue. We expect the revenue per Subexian per annum to increase by about 30% from the level in FY08. The combined effect of reduction in cost and increase in revenue earned per Subexian will have a salutary effect on profitability. And that is the focus for the current financial year FY09. Way Forward Your company has always posted financial results that demonstrated superior operational excellence. This was not true in FY08. Our key objective in FY09 is to turn the tide and post financial results that are in line with your expectations. We are confident that all the initiatives of the past 12 months and the progress achieved so far will help us to gain that target. 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 during these trying times. Dear shareholders, we will not leave any stone unturned in our efforts to meet your expectations. We will not fail you. SUBASH MENON FOUNDER CHAIRMAN, MANAGING DIRECTOR & CEO 05 A N N U A L R E P O R T 0 7 - 0 8 S u b e x L i m i t e d C M Y K C M Y K powering the ROC products & solutions Revenue Maximization solutions Moneta™ Revenue Assurance System is a first-of-its-kind, complete RA solution, designed to tackle critical revenue assurance challenges across the entire revenue chain. It offers a set of pre-configured solution templates to address RA challenges inherent to individual service verticals – Wireless, Fixed, Cable, MSPs & MVNOs. Nikira™ Fraud Management System is a state-of-the-art solution built to deliver on a 3-step philosophy of Detect-Investigate-Protect. Nikira detects known fraud types and patterns of unusual behaviour; helps investigate these unusual pattern for potential fraud and uses the knowledge thus generated to upgrade and protect against the future. Prevea™ Risk Management System empowers operators to continuously assess and mitigate risk presented by subscribers throughout their lifecycle, by tracking risk in realtime during subscriber acquisition, ongoing usage and collections & recovery. Concilia™ Interconnect Billing System allows operators to quickly and accurately settle charges with their network partners. It provides operators with the ability to manage these major costs & revenues on a day-to-day, hour-to- hour basis. Symphona™ Interparty Management System enables operators to bill their customers and settle with their partners on a single modular platform. The system is able to support multiple business models and multiple currency transactions within a single implementation through seamless addition of necessary modules. Optima™ Route Optimization System is designed to provide operators with the tools to manage network cost information. The system is capable of taking into account factors such as call quality rate information, capacity and network costs in calculating the optimum choice of operators. Subex Cost Assurance Solution protects and enhances operator margins by having a complete view of the profit equation. The Solution collects, collates and correlates the information from Switch, Inventory, Billing, Partner Invoices, and Financial systems to provide deeper insights about the cost aspects in an easier to understand format through Dashboards & Reports. The Solution focuses on Circuit assurance, Carrier to Carrier compensation assurance, Access assurance, Payment assurance, Accruals & Dispute management.” 06 A N N U A L R E P O R T 0 7 - 0 8 S u b e x L i m i t e d C M Y K C M Y K powering the ROC Fulfillment and Assurance solutions Syndesis Adaptive Resource Manager® is the industry's only ‘live’ inventory management solution which offers service providers a low- risk path to operational transformation and highly accurate inventory management. Syndesis Application Configuration Manager® automates the configuration, management, and detailed discovery of applications, policy servers, subscriber databases, and other service delivery platforms, making self-service a reality for the mass market. Syndesis Controller® offers pre-integrated, best-in-class Order Management, Service Catalog Management and Technical Workflow solution, providing the basis for the automation of the complete order- to-bill cycle and enhancing scalability and visibility for the entire fulfillment process. Syndesis Express® provides complete subscriber-centric fulfillment for IPTV, VoIP, Business Ethernet and other targeted advanced service offerings from a wholly integrated architecture, enabling rapid service definition; integrated service design and activation across connectivity and applications; and real-time subscriber self-management. Syndesis NetOptimizer® takes the risk, time and effort out of the toughest service migrations through service-aware automation, transforming over-engineered network into right-sized networks. Syndesis NetProvision® increases your revenues and drives down your time-to-market and operations costs by automating the design and activation of complex, application-aware connectivity, enabling flow- through provisioning of next-gen data and IP services across multi- vendor, multi-technology networks. Syndesis TrueSource® employs an operations-wide approach to solving data integrity problems, combining three powerful data integrity functions: multi-layer network and service discovery, data reconciliation, and discrepancy analytics. 07 A N N U A L R E P O R T 0 7 - 0 8 S u b e x L i m i t e d C M Y K C M Y K powering the ROC “ telecommunications service providers have experienced enormous changes in the past few years. But these changes are only the beginning as the voice and connectivity providers of yesterday re-invent themselves as the content providers and aggregators of tomorrow. ” 08 A N N U A L R E P O R T 0 7 - 0 8 S u b e x L i m i t e d C M Y K C M Y K product innovation in a time of change Innovation is the ability to see change as an opportunity - not a threat powering the ROC Telecommunications service providers have experienced enormous changes in the past few years. But these changes are only the beginning as the voice and connectivity providers of yesterday re-invent themselves as the content providers and aggregators of tomorrow. From the wholesale replacement of networks to the transformation of OSS and BSS systems, service providers are making huge investments to offer mass-market content and applications along with traditional connectivity and voice services. The stakes are high and the competition is formidable as Internet Innovators (such as Google and MSN) also bring applications and content to subscribers globally over the Internet. For communications providers, future success depends not only on offering new, must-have services but also on profitably delivering these services to subscribers. And achieving these goals depends on investing and substantially changing their existing software infrastructure. Subex sees service provider business transformation as an enormous opportunity. Through continued concentration on and innovation in the following three areas, we will continue to have the right products to enable service providers realize their transformation objectives. 1. We focus on providing our customers operational dexterity, the ability to immediately launch new product bundles while maximizing margins through automated and error-free fulfillment and elimination of revenue leakage. 2. We leverage our market position, domain knowledge, and customer experience to productize industry best practices, thus ensuring our solutions solve next-generation problems and are faster to deploy with a lower total cost-of-ownership. 3. We ensure that our products and solutions solve real customer problems and that our customers achieve value for their investment and therefore become our strongest reference. Subex will help service providers achieve operational dexterity through innovation in each of our product areas briefly described below. Fulfillment and Assurance Suite OSS was originally designed to support human operators managing custom processes. To enable content-based services, providers need to transform this OSS to reduce both reliance on manual steps and human error. With Subex’s FAS suite, providers can realize immediate, always-on, no-touch service fulfillment. They can achieve total automation without error due to our foundation of data accuracy. Providers can profit from convenient impulse buying – any time, anywhere, using any device available – because, with our solutions, service fulfillment configuration can be completed in seconds, allowing instant consumer gratification. The FAS suite also replaces custom processes with standards-based service and resource catalogues that enable rapid new service and product introduction. A new generation of OSS is required for content-based services, and Subex has the innovative fulfillment solutions to enable this transformation. Revenue Management Suite Service provider business transformation brings many new challenges that our RMS suite is ideally suited to resolve. A vastly growing number of content and application providers, as well as new types of interconnect partners, brings new settlement and route optimization challenges. More than ever before, service providers will be spending billions per year on these third parties, and invoice inaccuracy will prove to be a major cause of reduced margins. Subex’s innovative cost assurance offering, partner settlement, and route optimization products will drive down service provider costs and help grow margins. At the same time, fraudsters are getting smarter, and next-generation networks enable new types of fraud (such as bypass fraud) as well as new avenues for content-based, premium-rate, and revenue-share fraud. Our fraud management leadership position and innovation has allowed Subex to stay ahead of the curve and productize pre-packaged, next- generation fraud management solutions. Revenue Operations Center Nowhere is Subex’s product innovation more clearly demonstrated than with our Revenue Operations Center, an industry first that has the potential to transform the way service providers manage their business. For content-based service providers, having real-time, summarized visibility into the revenue and operational chains is essential. Knowing not only which services are gaining traction but which are profitable (factoring in network and operational costs) gives service provider executives the tools necessary to grow their businesses. Visibility across the delivery and assurance chains also helps service providers proactively monitor the customer experience and the propensity for customer churn due to operational challenges. Subex is uniquely positioned to provide timely access to both the revenue and operational chains by leveraging both our RMS and FAS portfolios. In summary, the transformations happening in the telecommunications industry are a major opportunity for Subex. We will continue to innovate and advance our product portfolio to capitalize on the investment that service providers need to make to succeed in this new digital economy. STEPHEN COOPER VICE PRESIDENT – PRODUCT MANAGEMENT 09 A N N U A L R E P O R T 0 7 - 0 8 S u b e x L i m i t e d C M Y K C M Y K powering the ROC “ this wave of innovation reaches a pinnacle in the form of the Revenue Operations Center (ROC), a strategic concept that Subex pioneered and which began gaining important adherents in the industry... ” 10 A N N U A L R E P O R T 0 7 - 0 8 S u b e x L i m i t e d C M Y K C M Y K powering the ROC the Subex ROC catalyst for communications innovation A revolution of innovation swept the manufacturing sector around the world some years ago. Spurred by dramatic rises in competition as the first stages of advanced globalization took hold, the revolution centered on the introduction of lean manufacturing and efficient operating principles. This crucible of competition-driven change forged new, highly competitive businesses that could continually create dramatically more value with ever fewer resources. A similar revolution is sweeping today’s communications industry, with similar effects. Communications service providers face rising competition as they seek to bring new, innovative services to market and capture a portion of the dramatically rising worldwide spend on communications services. A host of different types of companies are now engaged in a battle for “share of wallet” – looking to win consumer and enterprise spending on services such as television content, converged communications, gaming, social networking, news and the like. Today’s traditional telecommunications operator is competing not only against other operators to win subscribers. They are also competing against DVD rental shops, Internet-based video distribution networks, and voice-over-IP providers, all seeking to win a share of consumer spend on entertainment and communications. this backdrop of Against intense, wide-ranging competition, communications service providers are gaining a new appreciation for the principles of lean operations and high efficiency service delivery, and how these innovations can spur more competitive business practices. In fact, many are turning to Subex for advice and expertise in the techniques and best practices of lean operations, from automating mission critical processes to ensuring all due revenue is captured and costs are contained. This wave of innovation reaches a pinnacle in the form of the Revenue Operations Center (ROC), a strategic concept that Subex pioneered and which began gaining important adherents in the industry in fiscal year 2007-2008. A ROC could be described as “mission control” for a communications service provider. It is a collection of systems that monitor and analyze the impact of operations on revenues, costs and, ultimately, profits. A chief benefit of a ROC is that it helps the operator to understand the health of the enterprise at virtually any level, from an executive-level standpoint, to an operational view, to a marketing and planning perspective. Subex’s products are underlying systems that can be brought together to create a ROC platform, helping to streamline and integrate the processes associated with revenue management, resource management, fulfillment and the like. As the ROC concept has gained increasing market acceptance, it has evolved to become a central component of transformational initiatives for communications service providers seeking to achieve lean operations and adopt more nimble competitive stances. When Subex first began promoting the concept of the ROC some years ago, it was essentially an extension of the revenue assurance and fraud management solutions for which the company is known as the market leader. However, as Subex worked closely with communications service providers on their transformational projects, it became clear that the ROC could serve as a central platform for the gathering of data related to the performance of essential systems and processes. In effect, the ROC becomes a central monitoring and control point for understanding how the service provider enterprise is operating in relation to Key Performance Indicators, such as process throughput, revenue leakage rates and even service and subscriber profitability metrics. As fiscal year 2007-2008 drew to a close, Subex had achieved several important developments in the evolution of the ROC: (cid:129) The acquisition of Syndesis further strengthened the ROC concept and hastened its evolution. The Syndesis fulfillment products, which are now part of Subex’s Fulfillment & Assurance Business Unit, are production-proven systems for automating key operating processes, giving Subex even greater domain expertise in lean operations techniques and even better tools for enabling a ROC platform. (cid:129) The ROC was accepted by the OSS industry’s largest standards and collaboration body, the TeleManagement Form, for integration into a broad-ranging and definitive on-going demonstration of best practices for delivery of content-based services, such as IPTV, VoIP, and mobile video distribution. (cid:129) Several major customers began ROC-oriented projects, including one that was announced at Romtelecom in Romania not long after the close of the fiscal year. Emerging from these developments is the clear message that the ROC can serve as a tool for transformation. As communications service providers translate the lean operating principles from the world of manufacturing into the world of communications, a ROC can be a catalyst and an enabling platform, a focal point of process efficiency efforts. Because of its experience and expertise in this realm, Subex is now positioned as a trusted supplier to these communications service providers, who in turn are poised be achieve new gains in competitiveness, operational dexterity, and sustainable profitability. ADAM BOONE VICE PRESIDENT - MARKETING 11 A N N U A L R E P O R T 0 7 - 0 8 S u b e x L i m i t e d C M Y K C M Y K powering the ROC “ a holistic approach to innovation is essential to maintain our leadership and deliver superior experience consistently to all our customers. We therefore have different innovation initiatives running in parallel; each initiative focused on achieving the desired objectives. ” 12 A N N U A L R E P O R T 0 7 - 0 8 S u b e x L i m i t e d C M Y K C M Y K innovation in engineering powering the ROC 1. GENERAL INTRODUCTION “There are, of course, innovations that spring from a flash of genius. Most innovations, however, especially the successful ones, result from a conscious, purposeful search for innovation opportunities, which are found only in a few situations.” – Peter F. Drucker CONCEPTUALIZATION Innovation typically involves creativity, but is not identical to it: innovation involves acting on the creative ideas to make some specific and tangible difference in the domain in which the innovation occurs. For example, Amabile et al (1996) propose: The Subex engineering organization consciously looks out for innovation opportunities in all its endeavors. A holistic approach to innovation is essential to maintain our leadership and deliver superior experience consistently to all our customers. We therefore have different innovation initiatives running in parallel; each initiative focused on achieving the desired objectives. 2. INNOVATION IN THE ORGANIZATION In the organizational context, innovation may be linked to performance and growth through improvements in efficiency, productivity, quality, competitive positioning, market share etc. In a product development company like Subex, innovation can and will be applied during various stages of a product life cycle viz. Conceptualization, Growth, Maturity and Decline. Introduction (cid:129) Creativity (cid:129) New idea generation (cid:129) Know-how growth (cid:129) Disruptive innovation Growth (cid:129) Productization (cid:129) Process and Predictability (cid:129) Standardization (cid:129) Incremental innovation Maturity (cid:129) Operational efficiency (cid:129) Reduce cost of development (cid:129) Process innovation Decline (cid:129) Technology refresh (cid:129) Extend longevity of the product (cid:129) Experiential innovation "All innovation begins with creative ideas . . . We define innovation as the successful implementation of creative ideas within an organization. In this view, creativity by individuals and teams is a starting point for innovation; the first is necessary but not sufficient condition for the second". introduced where an In Subex creative thinking and a solution centric approach has been encouraged among the employees. A concept called ‘Innovation Days’ was teams demonstrate some of their creative ideas that help in the introduction of a new product, re-engineering of existing products and in general help in the betterment of the products. Such initiatives have led to filing of three patents at the US Patent and Trademark Office: individual employee and/or Adaptive Fraud detection – Automatic way of reconfiguring rules and thresholds that relies on statistical analysis of past data and the effectiveness of these rules/thresholds on that data over a period of time. Intelligent alarm qualifier - method (which relies on statistical analysis and is implemented as a self-learning time-dependent neural network) whereby the alarms raised by the rules/thresholds are prioritised into alarms based on the probability of the alarm being fraud. This consistently helps to detect about 80% of fraud by focussing only on about 20% of the alarms. Subscriber Pre-checks - The best way to get over fraud is to prevent it from happening - and the best way to do so is to prevent suspected fraudsters from getting a network connection. Subex Precheck feature detects possible fraudsters when they apply for a network connection - - it does so by statistical analysis of the demographics of the subscribers who wish to apply for a network connection, based on the demographics of the locality and other aspects of the subscriber is ideas though innovative ‘knowledge Another source of mining/management’ (KM). At Subex KM activities have been facilitated in various ways. While the project teams host various sessions pertaining to their activities on a regular basis, there are several technical seminars being held to promote knowledge sharing across technical groups. There is SubexWiki, an online portal that facilitates knowledge sharing on an ongoing basis. This is picking up among the technical community within Subex. 13 A N N U A L R E P O R T 0 7 - 0 8 S u b e x L i m i t e d C M Y K C M Y K powering the ROC GROWTH During the growth phase of the life cycle of a product, the innovative ideas are more focused in the areas of product betterment. (cid:129) Evaluation of new tools and technologies that assists in productization of features. (cid:129) New product features being rolled out. ‘Breakthrough innovations’ are done through regular R&D but incremental through practice, exchange of innovation comes information. An example would be: Improving the performance of our products: Nikira product has been re-engineered so that it performs faster on a given platform. The performance benefit achieved by software design changes is more than two times the existing processing speed. Similar changes in architectural changes have been done in Moneta – parse / load performance were improved one and half times. In Concilia, the speed for performing rating of interconnect records has been improved. All these translate as benefits directly to the customer by bringing down the cost of ownership (capex costs). It is important to note that the cost of ownership is on one of the important criteria for a customer to select a particular product. At Subex there is a technical forum presented by the CTO on a regular basis to address the growth aspects in technologies and domain. Product board meetings with stakeholders from across the globe discuss the region-specific interests and trends that help in defining a vision for products. An example would be New generation of products: Several new features have been developed in our products. These products help the user to achieve his objectives much faster and more easily. Some examples are listed below: In revenue assurance, typically the RA analyst has to go through large volumes of data and identify / analyze reasons for revenue leaks. This cumbersome process has been simplified to perform root cause analysis using a graphical representation of traffic trends. Similar trends are available for historic data and can be compared against current traffic situation. Configuration of data sources: The data sources (adaptors) are now configured using an intuitive GUI based tool. This has reduced the time for development of data adaptors Reuse of existing products in new domain areas: We have replaced one costly third party component at our customer with our internal product. This product was developed originally as an ETL tool. However, the same product was deployed in a completely different business scenario. This also gave the customer better performance (four times the performance improvement compared to the 3rd party product). We avoided the license cost to this 3rd party vendor due to this innovation MATURITY “Innovation, like many business functions, is a management process that requires specific tools, rules, and discipline.” Davila et al(2006) At the time when the product is maturing, innovation is seen more in reducing cost of operations by focusing on tools, technologies and processes that will help in productivity improvements. At Subex continuous process improvement is one of the key objectives discussed during quality review meetings where cross team statistics are shared and best practices emerge. Use of open source tools, automation of routine tasks is another focus area during this phase. Yet another focus area is providing support to the products deployed at customer locations. (Pro-active) Support in product companies is a very important function. Subex has developed a proactive support/monitoring product Early Alert Monitor. This product monitors the health of the system and generates warnings and alerts in case of malfunctions. This avoids continuous manual monitoring of our installations. DECLINE The focus during this phase would be to identify innovation that would stretch the longevity and relevance of the product line. One such initiative is ‘CAP’ - Cognitive Analytics Program, which is a framework (service offering) for doing periodic statistical analysis of fraud in order to proactively detect the changing parameters and take action. CAP is a blend of Statistical Analysis and Neural techniques (artificial intelligence) with insights that Subex has gained on fraud by virtue of being a front-runner in FMS product offerings - and is also designed with the aim of customizing it for operator specific data, since fraud and its manifestations not only change with time, but also change from operator to operator. 3. THE WAY FORWARD Programs of organizational innovation are tightly linked to organizational goals and objectives, to the business plan, and to market competitive positioning. For example, one driver for innovation programs in corporations is to achieve growth objectives. As Davila et al (2006) note, "Companies cannot grow through cost reduction and reengineering alone . . . Innovation is the key element in providing aggressive top-line growth, and for increasing bottom-line results" (p.6) At Subex innovation would continue to part and parcel of daily life, new programs and initiatives would need to be continuously devised to address the following: (cid:129) Increasing demands of customers (cid:129) Beating competition by introduction of new value added features (cid:129) Operation efficiency ANURADHA SENIOR VICE PRESIDENT – ENGINEERING 14 A N N U A L R E P O R T 0 7 - 0 8 S u b e x L i m i t e d C M Y K C M Y K Subexian pride award winners NAME Achintya Kumar G Ajitha B.G Ajmal Yusuf Alexander Thengumpalli Amar Vadher Aniruddh Munoli Arun Murali Arun R Arun Kumar K Arunava Sinha Arvind P Arvind R Ashley Hill Ashok Parhate Ashwin Menon Avatar Singh Thakur Babu K Bala Gangadhar Sabbavarapu Bernie Ingrams Bhagyalaxmi H C Binu K Blaze Thomas Boobathi P Brahim Bah Chandan P Chandre Gowda CA Chaodong He Chetana R Cigy Mathen Damian Hasak David Williams Dennis (Charlie) Foster Dipak Kumar Mondal Don Michael Morrill Doug Duke Eng-Teck Lee Gareth Deacon Girish Suresh Uttarkar Gordon Ide Graham Ellis Hari Sudhan V Harish H S Howard Miller Jaideep Gopinath James MacEwan Jayant Kashyap Jayaseelan G Jeff Canning Jerome Imhof Jinghua Du Jithu Thomas John Richardson John Cyriac Abraham Jubin David Julia Davis Kishore Kumar S Krishnoji Rao S Kumar M D Lihui Wang Lukas Brogli Mahesh V Manjunath G Manohar S S Martin Heathcote Matthew Francart Mohammed Muzammil Mohammed K A Aehthesham Muralidhar I M Nandagopal R Nataraja Prathab D Neville Collins Nikhil Naik Nitesh Namdeo Shende Norman Yanofsky Om Prakash Agrawal Pavan Kumar GV Poornima N S DIVISION Engineering Engineering PSO Engineering IT Engineering Engineering Engineering Engineering Engineering Engineering PSO BT Engineering Presales Engineering Facilities & Administration Engineering BT Engineering Engineering PSO Engineering Engineering Engineering Engineering PSO Engineering PSO Product Management PSO Pre Sales IT PSO Pre Sales Engineering PSO Engineering PSO BT Engineering IT BT Marketing PSO IT Facilities & Administration Engineering PSO PSO Engineering BT Engineering Engineering PSO PSO Facilities & Administration Facilities & Administration PSO PSO Engineering Engineering IT BT PSO Engineering Engineering Finance IT Engineering PSO Engineering Engineering Engineering IT PSO PSO LOCATION Bangalore Bangalore Colorado Bangalore London Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Dubai London Bangalore Bangalore Bangalore Bangalore Bangalore London Bangalore Bangalore Bangalore Bangalore Ontario Bangalore Bangalore Ontario Bangalore Bangalore Pittsburgh London Home Office Bangalore Colorado Melbourne Ottawa London Bangalore London London Bangalore Bangalore London Bangalore London Ontario Bangalore Ontario London Ontario Bangalore London Bangalore Bangalore Colorado Bangalore Bangalore Bangalore Ontario London Bangalore Bangalore Bangalore Ipswich Pittsburgh Bangalore Bangalore Bangalore Bangalore Bangalore London Bangalore Bangalore Ontario Bangalore Bangalore Bangalore NAME Prabhu H Prajay Shah Pramod K P Prasad Kamat Prasanna Kumar G Pratik Gaurang Shah Praveen Kumar KS Prema Menon Priyadarshini B Pynadath Cherian George Raghavendra M V Raghu Mitra S V Rahul Joseph Alexander Raj Kumar K V Rajendra Shankar Kulkarni Rajesh Abraham Rajkumar C Ram Prasad A S Ranit Sinha Ranjini H. C. Ravi Kumar S Reji Kumar R.V. Renji George Rohan Dattatry Rendalkar Rohit Maheshwari Roji Varghese Abraham Ryan Boydston Sabu Wahab Sagar Kumar Padhy Saktheesh Kumar Raja B Sandeep Singh Sandeep P S Sandesh Karanth K V Sanjeev Chirakattu Santhosh Srinivasaiah Santosh Rao Santosh S Sathyabodh V Mudhol Savio Joe Shaik Mujeeb Shilpa M Joshi Shiva Prakasha L Shivakumar Gowda K Siddalingeshwar Patil Simon Coates Sirisha Alluri Sivabalan K Sreedhanya R Sreejith Sreekumaran Srihari U S A Srikanth Nayak Sriram S Stephen Ashish Stuart Barnes Subha Chakraborty Subhadip Duttagupta Subhasis Nayak Sudha Yeramati Sujatha Chitti Sumith Varghese Suneet T Sugunan Sunil Kumar Surej Anwar Syed Nayeemuddin Syed Rehan Sajjad Thilakh Jacob Chacko Thomas Walker Thyagarajan Krishnamurthy Troy Rowe Tushar Gopinath Shenvi Vasanth P E Veeral Bhatt Veeresh Kanavalli Venkateswaralu V Vijay Raghunathan Will Richards DIVISION Facilities & Administration BT Engineering IT Engineering Engineering Facilities & Administration Facilities & Administration Engineering Engineering Finance Engineering IT Engineering Engineering PSO Legal Engineering Engineering Facilities & Administration IT Engineering PSO Engineering PSO PSO PSO Legal IT Engineering PSO Engineering Engineering IT Engineering Engineering Engineering Engineering Engineering Engineering Engineering Engineering IT Engineering Engineering Pre Sales Engineering Facilities & Administration Engineering Engineering Finance Engineering Facilities & Administration BT BT PSO Engineering PSO Facilities & Administration Engineering Engineering Engineering Engineering Engineering Engineering Engineering Pre Sales Finance PSO Engineering Facilities & Administration IT Engineering Facilities & Administration PSO BT powering the ROC LOCATION Bangalore London Bangalore London Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Colorado Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Ipswich Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Home Office Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Ipswich London Bangalore Bangalore Colorado Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Colorado Bangalore Home Office Bangalore Bangalore London Bangalore Bangalore Bangalore London 15 A N N U A L R E P O R T 0 7 - 0 8 S u b e x L i m i t e d C M Y K C M Y K powering the ROC “ how wonderful it is that nobody need wait a single moment before starting to improve the world... ”- Anne Frank 16 A N N U A L R E P O R T 0 7 - 0 8 S u b e x L i m i t e d C M Y K C M Y K Subex charitable trust powering the ROC Prerana Resource Center Prerana Resource Center is an organization for the rehabilitation of physically challenged girls. SCT’s support to Prerana has been an ongoing activity. Inmates of Prerana Resource Centre Salem Project In Salem, Tamil Nadu, SCT helped 11 school going children to continue their education by paying their fees and buying them school accessories such as uniforms and books. A little girl shied away from school because of a hearing impairment. SCT donated a hearing aid to this child so she could go back to school. In all, a sum of Rs. 12000/- was spent on the Salem project. These children are either hapless orphans or hail from impoverished families. SCT hopes to continue its support to these children in the years ahead. SCT members along with Youth for Seva in their School kit distribution program For the smooth running of this organization, SCT has paid their monthly water and electricity bills. Based on periodic needs, SCT also provides kitchen utensils, iron box, food processors, old computers, printers, etc. to the inmates. Youth for Seva Youth is an for Seva organization involved in the rehabilitation of orphans and slum children. Belaku Vruddhashram Belaku Vruddhashram is a home for senior citizens. SCT financially supports this institution by paying the water and electricity bills. SCT also pitches in by bearing the cost of the medical bills of the inmates. Education of these children is at the forefront of their activities. Their School Kit Sponsorship Program aims at providing school kits to these financially challenged children. SCT funded for the procurement of these kits. nurture merit SCT handing over the cheque to Vidya Poshak, a registered NGO which carries the Nurture Merit program. SCT members along with Youth for Seva in their School kit distribution program Subex Charitable Trust joined hands with Vidya Poshak, a registered NGO, to extend their Nurture Merit program to deserving students with socio-economic compulsions. SCT also invited nomination from Subexians for sponsoring meritorious students whom they referred. A total of 13 students were sponsored under this scheme. Under the Nurture Merit scheme, profiles of meritorious students are screened to determine the veracity of their financial needs. Short- listed students are then awarded with scholarships to enable them to pursue higher education of their choice. The performance of these students is routinely monitored and support is subject to satisfactory results. Totally 24 students have been sponsored by SCT under this scheme. 17 A N N U A L R E P O R T 0 7 - 0 8 S u b e x L i m i t e d C M Y K C M Y K powering the ROC board of directors SUBASH MENON Founder Chairman, Managing Director & CEO SUDEESH YEZHUVATH Chief Operating Officer V. BALAJI BHAT Director K. BALA CHANDRAN Director VINOD R. SETHI Director P.P. PRABHU Director HARRY BERRY Director ANDREW GARMAN Director 18 A N N U A L R E P O R T 0 7 - 0 8 S u b e x L i m i t e d C M Y K C M Y K management team powering the ROC MARK NICHOLSON Chief Technology Officer GREG LENEVEU President – Americas PAUL SKILLEN President - BT Business Unit VINOD KUMAR President - Revenue Maximization Solutions Business Unit SAUL NURTMAN President – EMEA SEKHARAN Y MENON Senior Vice President – Professional Services Organization SANJAY PAUL ANTONY Senior Vice President – Human Resources SUBASH MENON Founder Chairman, Managing Director & CEO ADAM BOONE Vice President – Marketing ANURADHA Senior Vice President – Engineering DEAN SMITH President – APAC SUDEESH YEZHUVATH Chief Operating Officer STEPHEN COOPER Vice President – Product Management COLIN HALES Vice President – Global Alliances RAJ KUMAR Chief Counsel & Company Secretary 19 A N N U A L R E P O R T 0 7 - 0 8 S u b e x L i m i t e d C M Y K C M Y K This page is intentionally left blank C M Y K GENERAL REVIEW & ACCOUNTABLITY A N N U A L R E P O R T 2007 - 2008 21 DIRECTORS’ REPORT TO THE MEMBERS OF SUBEX LIMITED Your directors have pleasure in presenting the 14th Annual Report of the Company on the business and operations together with the audited results for the year ended March 31, 2008. FINANCIAL RESULTS Consolidated Amount in Rs. million Standalone 2007-08 2006-07 2007-08 2006-07 5408.90 3710.92 2004.59 2361.84 (107.54) 812.46 369.08 447.83 509.51 (617.05) 63.66 (680.72) 235.85 576.61 (99.05) 675.66 419.20 (50.13) 11.76 (61.89) 188.74 259.09 50.95 208.14 1238.02 741.14 785.67 756.30 - - - - - 52.13 69.63 - - - - - 52.11 69.63 20.95 0.03 12.88 23.20 - 23.20 557.27 1238.02 723.75 785.67 Total revenue Profit before Interest, Depreciation & Amortization Interest, Depreciation & Amortization Profit before tax Provision for taxes Profit after tax Balance brought forward from previous year Appropriations Interim dividend Preference dividend Dividend proposed on equity shares Provision for tax on dividends Dividend including tax thereon Transfer to general reserve Surplus carried to balance sheet RESULTS OF OPERATIONS During the financial year ended March 31, 2008, the total revenue on a consolidated basis grew by 45.76 % to reach Rs. 5408.90 million. The company has incurred a loss of Rs. 680.72 million for the financial year 2007-08 as against the Profit After Tax of Rs. 675.66 million on the previous year. The revenue composition was 75 % from products and 25 % from services. On stand-alone basis, the total revenue is Rs.2004.59 million. The net loss for the financial year 2007-08 was Rs. 61.89 million. Products business, our focus area, is continuing to contribute a higher proportion to revenue with every passing year. Over the past 6 years, software products have increased their contribution in the overall revenue from a low figure of 7% in FY01 to 75 % in FY08. BUSINESS Your company is a provider of solutions in the Operations Support Systems area for telecom applications. This area can broadly be 22 A N N U A L R E P O R T 2007 - 2008 classified into Service Fulfillment, Service Assurance and Revenue Maximization. The company operates in Revenue Maximization and Service Fulfillment areas. While Revenue Maximization solutions improve the revenues and profits of the communications service providers through identification and elimination of leakages in their revenue chain, Service Fulfillment solutions enable the carriers to fulfill the needs of their subscribers through provisioning and activation of services. Subex conceptualizes and develops software products at its facilities in Bangalore and is focused on the telecom business segment. Subex has sales and support offices in the United States, Canada, UK, UAE, India and Australia. Subex is the global leader in revenue maximization for communications service providers. Carriers today are facing a variety of challenges. The key among them are (a) the competitive requirement to provide high quality services faster and cheaper and (b) the operational requirement to have a well integrated Operations Support System (OSS) to meet the competitive requirement. Subex provides software solutions to meet these critical requirements. Carriers have been building the support structure by acquiring disparate pieces of software and that has resulted in stove pipes getting built over time. Our well integrated platform called Revenue Operations Center (ROC) addresses this issue of a solid structure within their networks. The solutions that form part of the ROC enable the customers to achieve Operational Dexterity which is a combination of Operational Efficiency and Service Agility. While the former ensures that cost of operation is maintained at a low enough level, the latter ensures adequate service levels are achieved. INTEGRATION The company concluded the integration of Syndesis Limited with itself in January 2008. In line with the original expectation, the integration lasted 10 months. The process was divided into a few phases. The first one was integration of the sale teams. This was done within four weeks of closure of the transaction to ensure minimal disruption in the marketplace. The second phase was integration of the support departments namely, HR, Finance, Facilities etc. The last and longest phase was for the transition of technology and processes with regard to developments for customers, road map and professional services. This lasted about eight months and was also done ensuring that customer commitments were not impacted. Yet another element of the integration, which lasted throughout all the three phases, was cultural integration through joint exercises, out bound learning programs and standardization of policies and practices. CHANGE OF NAME During the year, your Company has changed its name from Subex Azure Limited to Subex Limited vide resolution passed in the Extraordinary General Meeting of the members held on November 26, 2007. The change of name was approved by the Registrar of Companies vide fresh Certificate of Incorporation dated November 30, 2007. DELISTING FROM BANGALORE STOCK EXCHANGE LIMITED During the year, your Company had in terms of Securities Exchange Board of India (Delisting of Securities) Guidelines 2003, voluntarily delisted its shares from the Bangalore Stock Exchange Limited vide a Special Resolution passed in the Extraordinary General Meeting of the members held on November 26, 2007. CHANGES IN THE SHARE CAPITAL ESOP SHARES During the year, your Company has allotted 30,927 equity shares under its ESOP 2000 scheme and 437 equity shares under its ESOP 2005 scheme to the option holders on their exercise of stock options. SUBSIDIARIES SUBEX TECHNOLOGIES LIMITED For the year ended March 31, 2008, Subex Technologies Limited earned an income of Rs. 713.47 million as against Rs. 41.75 million last year and a net profit of Rs. 27.55 million as against Rs. 2.72 million last year. During the financial year, the services business of Subex Limited including the investments in Subex Technologies Inc were transferred to Subex Technologies Limited, a wholly owned subsidiary of Subex Limited through a Scheme of Arrangement approved by the Hon’ble High Court of Karnataka. Subex Technologies Inc is a wholly owned subsidiary of Subex Technologies Limited. SUBEX (UK) LIMITED The name of the Company was changed from Subex Azure (UK) Limited to Subex (UK) Limited with effect from December 12, 2007. For the year ended March 31, 2008, the consolidated income of Subex (UK) Limited is Rs. 1521.27 million and the net loss is Rs. 314.76 million. Subex (Asia Pacific) Pte Limited and Subex Inc are subsidiaries of Subex (UK) Limited. SUBEX AMERICAS INC On April 1, 2007, the Company acquired Syndesis Limited, Canada. Subsequently the name was changed to Subex Azure Americas Inc which was further changed to Subex Americas Inc with effect from November 30, 2007. For the year ended March 31, 2008, the consolidated income of Subex Americas Inc is Rs. 1525.76 million and net loss is Rs. 338.72 million. Subex Azure Holdings Inc, Subex Azure (GB) Limited, 2101874 Ontario Inc and Syndesis Development India Private Limited are the subsidiaries of Subex Americas Inc. Subex Azure (US) Inc and Subex Azure (Delaware) Inc are subsidiaries of Subex Azure Holdings Inc. Subex Azure (Ireland) Limited is the subsidiary of Subex Azure (GB) Limited. Syndesis IP Holdings Limited Partnership is the subsidiary of 2101874 Ontario Inc. EMPLOYEE STOCK OPTION SCHEMES Your company has introduced various Stock Option plans 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. Since the scheme was formulated prior to the promulgation of SEBI guidelines on ESOP dated June 19, 1999, the Company has discontinued the scheme. EMPLOYEES STOCK OPTION PLAN-2000 (ESOP- II) Under this scheme, a corpus of 5,00,000 options were created for grant to the eligible employees. Each option is convertible into one fully paid-up equity share of Rs.10/- each. 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 3,87,125 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 is 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 vests 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 March 31, 2008, 50,729 options were available in this scheme for further grants. EMPLOYEE STOCK OPTION PLAN -2005 (ESOP-III) 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/- each. 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. The corpus of the scheme was enhanced by another 15,00,000 options during the financial year 2007-08. As per the scheme the Compensation Committee 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 vests 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 March 31, 2008, 2,75,031 options were available in this scheme for further grants. A N N U A L R E P O R T 2007 - 2008 23 2 3 4 5 6 7 8 9 10 11 12 13 14 ADDITIONAL INFORMATION AS ON MARCH 31, 2008 PER SEBI GUIDELINES SL.NO 1 PARTICULARS Net options granted as on March 31, 2008 Options granted during the year Pricing formula Options vested but not exercised as on March 31, 2008 Options exercised as on March 31, 2008 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 March 31, 2008 Options lapsed /cancelled as on March 31, 2008 Options lapsed /cancelled during the year Variation of terms of options No. of employees covered Employee wise details of options granted during the year under review to: (i) Senior managerial personnel Mr. Saul Nurtman Mr. Mark Nicholson Mr. Dean Smith Mr. Greg LeNeveu Mr. Paul Skillen Mr. Adam Boone Mr. Stephen Cooper Ms. Colin Hales Ms. Sudha Madhavan (ii) other employee who receives a grant in any one year of option amounting to 5% or more of option granted during that year 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 (iii) ESOP 2000 4,49,271 Nil As mentioned above 73,798 2,35,233 30,927 53,57,904 30,927 4,25,229 16,237 None 540 ESOP 2005 17,24,969 16,71,700 As mentioned above 1,05,539 6,724 437 1,89,142 437 3,99,911 3,75,551 None 1253 - - - - - - - - - NIL NIL 36,000 35,000 36,000 36,000 36,000 6,000 9,000 9,000 10,000 NIL NIL Diluted Earning per Share (EPS) pursuant to issue of shares on exercise of option calculated in accordance with Accounting Standard (AS) 20 ‘Earning 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 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 Description of the method used during the year to estimate the fair values of options, including the following weighted-average information: risk-free interest rate 1 expected life 2 expected volatility 3 4 expected dividends and 5 market price on grant date Rs (1.77) Rs (1.77) Losses would have been higher by Rs.39, 248, 238. Basic and Diluted EPS would have been lower by Rs.1.13 Weighted - average exercise price is Rs 380.31 Black Scholes method of valuation 6.50% 3 Years 63.92% 0.28% 424.14 Your Company has amended the ESOP Schemes viz., ESOP 2000 and ESOP 2005 with effct from July 9, 2008, to enable the employees to surrender their outstanding stock options. 24 A N N U A L R E P O R T 2007 - 2008 In addition to the present ESOP Schemes, your Company has instituted a new Employee Stock Option Plan – ESOP 2008, the details of which are given below: EMPLOYEE STOCK OPTION PLAN -2008 (ESOP-IV) Under this Scheme, a corpus of 20,00,000 options is created for grant to the eligible employees. 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 Company is in the process of making applications to the Stock Exchanges for obtaining requisite in principal approvals. TRANSFER OF SERVICES BUSINESS During the year, the company has transferred the services business of the company to Subex Technologies Limited, a wholly owned subsidiary, through a Scheme of Arrangement approved by the Hon’ble High Court of Karnataka. The consideration paid for the transfer was Rs. 31 Crores discharged by issue of equity shares of Rs. 3 Crores and unsecured loans repayable on demand of Rs. 28 Crores. The Scheme of Arrangement approved by the Hon’ble High Court of Karnataka is effective from September 01, 2007. CORPORATE GOVERNANCE Your Company strongly believes that the spirit of Corporate Governance goes beyond the statutory form. Sound Corporate Governance is a key driver of sustainable corporate growth and long-term value creation for the stakeholders and protection of their interests. Your Company endeavors to meet the growing aspirations of all stakeholders including shareholders, employees and customers. The Company is committed to maintain the highest level of transparency, accountability and equity in its operations. Your Company always strives to follow the path of good Governance through a broad framework of various processes. Your company has complied with all the requirements as per new Clause 49 of the listing agreement of the Stock Exchange. The auditor’s 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 Discussion & Analysis of the financial position of the company is provided in this annual report and is mentioned hereby for reference. AUDITORS’ REPORT There were no qualifications observed in the auditor’s report for the Financial Year 2007-08. 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. Andrew Garman. 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 power 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 M/s. Deloitte Haskins & Sells, the statutory auditors of the company 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. DIRECTORS Mr. S. N. Rajesh, a Nominee Director of UTI Venture Funds, has resigned from the Board of the Company with effect from September 5, 2007. The Board places on record, its appreciation for the services rendered by him during his tenure. As per Article 87 of the Articles of Association of the Company, atleast two-third of your directors shall be subject to retirement by rotation. One-third of these retiring directors must retire from office at each Annual General Meeting of the shareholders. A retiring director is eligible for re-election. Mr. Andrew Garman and Mr. Vinod R. Sethi retire by rotation and being eligible offer themselves for re-appoinment at this Annual General Meeting. FIXED DEPOSITS Your company has not accepted any fixed deposits from the public. PARTICULARS OF EMPLOYEES The particulars of employees required under Section 217(2A) of the Companies Act, 1956 and the rules made thereunder, are given in the annexure appended hereto (Annexure-1) and forming part of this report. In terms of Section 219(1)(b)(iv) of the Act, the Report and Accounts are being sent to the shareholders excluding the aforesaid annexure. Any shareholder interested in obtaining a copy of the said annexure may write to the Company Secretary at the Registered Office of the Company. 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 OF 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 a strong R&D Division responsible for developing technologies for its products in the telecom domain. The company holds many patents for its technological innovations. 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 A N N U A L R E P O R T 2007 - 2008 25 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 exchange earnings as compared to previous years. During the year 2007-08 total foreign exchange inflow and outflow is as follows: i) Foreign Exchange earnings Rs. 1489.21 Million (previous year Rs. 1825.73 Million) ii) Foreign Exchange outgo is as below: Travelling expenses Interest expense Rs. 49.99 Million (previous year Rs. 49.43 Million) Rs. 147.89 Million Rs. 194.84 Million (previous year Rs. 1456.33 Million) Consideration for acquired assets Rs. 0.67 Million Product marketing expense and other expenditure incurred overseas for software development SOCIAL RESPONSIBILITIES - SUBEX CHARITABLE TRUST The trust was set up to provide for welfare activities for underprivileged and the needy in the society. The trust is managed by Trustees elected amongst the Subexians. During the year the Trust has provided active support for education of economically challenged meritorious students, financial assistance to old age homes and to individuals who needed medical help. HUMAN RESOURCE MANAGEMENT QUALITY 2008 was an interesting and challenging year for Subex. HR too had its challenges, most importantly, in areas related to acquisition. Most important was the effort to bring the two organizations into one entity- in the areas of benefits, job leveling, culture, norms and so on. This was done through a series of integration camps, consistent communication channels like open house, lunch with CEO, integration blogs, internal newsletter and numerous meetings. The year also witnessed Subex moving to a more robust appraisal system, a move towards a model aligned to latest thinking in the area of performance appraisals. We now have a robust system and to use the two words used to evaluate a performance appraisal system- an efficient and effective system. We have a system based on Key Result Areas and Competencies. We have also rolled out an online appraisal system for all locations, across the globe. Another milestone for HR this year had been its launch of an Oracle HRMS (Human Resource Management System). Recruitment also bought in its challenges as we had to hire professionals with exposure to a heterogeneous, multi-technology, multi-vendor telecom domain. During the forthcoming year, as our company grows bigger, the most important asset will be the uniqueness of the Subexians for their technical and domain expertise and our culture and commitment which we exhibit. CHANGE IN REGISTERED OFFICE OF THE COMPANY During the year the company has moved to an integrated office situated at the outer ring road area of Bangalore. The new office building has a built up area of approx 125,000 sq.ft. The registered office of the Company was shifted to the new office located at Adarsh Tech Park, Outer Ring Road, Devarabisanahalli, Bangalore – 560 037 with effect from December 7, 2007. DIRECTORS’ RESPONSIBILITY STATEMENT 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 March 31, 2008, the applicable accounting standards have been followed and there are no material departures there from. that the accounting policies have been selected and applied b) 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 March 31, 2008 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) been prepared on a going concern basis. APPRECIATION / ACKNOWLEDGEMENTS We thank our clients, vendors, investors and bankers for the 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. that the accounts for the year ended March 31, 2008 has Place : Bangalore Date : July 29, 2008 for and on behalf of the Board Subash Menon Founder Chairman, Managing Director & CEO 26 A N N U A L R E P O R T 2007 - 2008 , 1 3 h c r a M 8 0 0 2 , 1 3 h c r a M 8 0 0 2 , 1 3 h c r a M 8 0 0 2 , 1 3 h c r a M 8 0 0 2 , 1 3 h c r a M 8 0 0 2 , 1 3 h c r a M 8 0 0 2 , 1 3 h c r a M 8 0 0 2 , 1 3 h c r a M 8 0 0 2 , 1 3 h c r a M 8 0 0 2 , 1 3 h c r a M 8 0 0 2 7 0 0 2 . 4 0 . 1 0 7 0 0 2 . 4 0 . 1 0 7 0 0 2 . 4 0 . 1 0 7 0 0 2 . 4 0 . 1 0 7 0 0 2 . 4 0 . 1 0 7 0 0 2 . 4 0 . 1 0 7 0 0 2 . 4 0 . 1 0 7 0 0 2 . 4 0 . 1 0 7 0 0 2 . 4 0 . 1 0 6 0 0 2 . 6 0 . 3 2 4 7 8 1 0 1 2 o i r a t n O * * # c n I i s s e d n y S i s g n d o H P l I * * # d t L x e b u S * * c n I i l s g n d o H e r u z A i s s e d n y S t n e m p o e v e D * * d t L t v P a d n I l i x e b u S ) e r a w a e D l ( * * c n I x e b u S ) d n a e r I ( l * * d t L x e b u S ) S U ( * * c n I x e b u S ) B G ( * * d e t i m L i x e b u S s a c i r e m A c n I x e b u S c i f i c a P a s A i * d t L . e t P x e b u S * c n I x e b u S ) K U ( d e t i m L i x e b u S * * * c n I x e b u S d e t i m L i l i s e g o o n h c e T l i s e g o o n h c e T . s R n i t n u o m A 8 0 - 7 0 0 2 Y F e h t r o f i s e n a p m o c i y r a d s b u s i o t g n i t a e r l , 6 5 9 1 , t c A i s e n a p m o C e h t f o ) 8 ( 2 1 2 n o i t c e S r e d n u i d e v e c e r n o i t p m e x e o t t n a u s r u p t n e m e t a t S - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - t a 0 0 1 l e u a v r a p o n f o 2 D G S h c a e 1 , 1 3 h c r a M 8 0 0 2 , 1 3 h c r a M 8 0 0 2 , 1 3 h c r a M 8 0 0 2 , 1 3 h c r a M 8 0 0 2 f o 0 0 0 , 1 6 0 0 2 . 6 0 . 3 2 5 4 2 , 5 6 5 , 9 3 0 , 5 f o 0 0 0 3 6 0 0 2 . 6 0 . 3 2 0 0 0 2 . 1 0 . 2 1 D S U 1 0 . 0 h c a e . 0 P B G 1 0 0 0 0 h c a e f o h c a e 7 6 . 0 D S U 5 0 0 2 . 3 0 . 8 2 4 9 9 , 9 9 9 h c a e - / 0 1 . s R f o - - - - - - - - - - - - ) 0 4 6 , 1 1 4 , 8 ( ) 4 3 9 , 1 0 3 , 2 ( ) 5 0 0 , 2 9 9 , 5 2 ( 8 9 0 , 9 1 3 , 2 5 6 3 , 0 8 5 , 7 1 5 2 3 , 3 9 5 , 4 ) 0 6 6 , 2 2 9 , 4 3 3 ( ) 4 5 6 , 2 8 6 , 6 8 ( ) 7 2 5 , 2 5 4 , 4 1 3 ( 6 7 7 , 7 7 3 , 6 8 9 8 6 , 9 9 0 , 7 3 0 7 , 1 5 5 , 7 2 - 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- - - - - ) 0 4 6 , 1 1 4 , 8 ( - - - - - - - - ) 4 3 9 , 1 0 3 , 2 ( ) 5 0 0 , 2 9 9 , 5 2 ( 8 9 0 , 9 1 3 , 2 5 6 3 , 0 8 5 , 7 1 5 2 3 , 3 9 5 , 4 ) 0 6 6 , 2 2 9 , 4 3 3 ( ) 4 5 6 , 2 8 6 , 6 8 ( ) 7 2 5 , 2 5 4 , 4 1 3 ( - - - - - - - - - - - - 5 6 5 , 2 8 1 ) 4 3 9 , 1 0 3 , 2 ( 9 4 9 , 1 6 8 , 1 ) 5 0 0 , 2 9 9 , 5 2 ( 2 3 2 , 5 7 7 , 6 8 9 0 , 9 1 3 , 2 4 9 8 , 7 0 4 5 6 3 , 0 8 5 , 7 1 0 3 2 , 8 4 2 2 7 , 1 1 5 , 3 9 2 - 0 3 2 , 8 4 8 6 3 , 3 5 2 , 2 5 2 3 , 3 9 5 , 4 - 2 2 7 , 1 1 5 , 3 9 2 0 9 4 , 3 3 8 , 7 2 5 , 1 ) 0 6 6 , 2 2 9 , 4 3 3 ( - - - - - - 5 9 4 5 9 4 7 7 4 , 0 6 2 , 4 7 ) 4 5 6 , 2 8 6 , 6 8 ( 1 2 0 , 6 6 0 , 1 1 3 ) 7 2 5 , 2 5 4 , 4 1 3 ( 8 5 4 , 8 6 9 , 0 3 1 7 5 8 , 2 4 9 , 5 3 1 , 1 - 2 8 6 , 0 9 5 , 4 4 6 7 7 , 7 7 3 , 6 8 8 6 4 , 6 9 3 , 2 1 8 8 6 , 3 5 0 , 9 0 2 8 6 4 , 6 9 3 , 2 1 - 1 4 9 , 5 2 4 , 5 1 3 1 4 9 , 5 2 4 , 5 1 3 - 5 9 8 , 2 0 4 , 6 4 2 5 9 8 , 2 0 4 , 6 4 2 9 3 6 , 0 7 4 , 3 1 7 2 1 5 , 3 2 8 , 1 1 3 2 8 , 3 2 7 , 4 9 8 6 , 9 9 0 , 7 - - ) 6 7 3 , 0 5 6 , 2 1 ( 0 0 0 , 0 0 0 , 0 1 ) 6 7 3 , 0 5 6 , 2 1 ( 7 0 0 , 3 6 4 , 1 9 7 6 , 5 8 9 , 8 0 6 9 7 6 , 5 8 9 , 8 0 6 - - - 2 7 1 , 4 0 0 , 1 5 5 7 , 2 4 1 , 0 3 2 5 0 , 1 9 5 , 2 3 0 7 , 1 5 5 , 7 2 d e i i y r a d s b u S e h t f o e m a N i i y r a d s b u s a g n m o c e b i f o e t a D t s e r e t n i ’ s y n a p m o c g n d o H l i d e d n e d o i r e p l i a c n a n F i y n a p m o c g n d o h e h t l i l y b d e h s e r a h S i i y r a d s b u s e h t n i d o i r e p t n e r r u c e h t r o f y r a d s b u s e h t i i ) s e s s o l ( r o s t i f o r p f o e t a g e r g g a t e n e h T f o f o s r e b m e m e h t s n r e c n o c t i s a r a f o s y n a p m o c g n d o h e h t l i t n u o c c a e h t r o f i d e d v o r p r o h t i w t l a e d y n a p m o c g n d o h e h t l i f o e h t n i r o f i d e d v o r p r o h t i w t l a e d t o n y n a p m o c g n d o h e h t l i f o s t n u o c c a . a . b s n r e c n o c t i s a r a f o s y r a d s b u s e h t i i y n a p m o c g n d o h e h t l i f o s r a e y l i a c n a n i f f o s r e b m e m e h t i s u o v e r p r o f ) s e s s o l ( r o s t i f o r p f o e t a g e r g g a t e n e h T e h t f o t n u o c c a e h t n i r o f i d e d v o r p r o h t i w t l a e d y n a p m o c g n d o h l i f o s t n u o c c a e h t n i r o f i d e d v o r p r o h t i w t l a e d t o n y n a p m o c g n d o h e h t i l . a . b l a t i p a c e r a h s d e b i r c s b u S & d e u s s I s t e s s a l a t o T s e i t i l i b a i l l a t o T s t n e m t s e v n I m r e T g n o L s e v r e s e R s n a o L t n e r r u C l a t o T r e v o n r u T n o i t a x a t e r o f e b ) s s o L ( / t i f o r P n o i t a x a t r e t f a ) s s o L ( / t i f o r P n o i t a x a t r o f n o s v o r P i i i i d n e d v d d e s o p o r P . y n a p m o c t n e r a p s a e s r e v o e h t h t i w d e a d t i l o s n o c n e e b e v a h d n a l a n o i t a r e p o n o n e r a y e h t s a n e v g i t i o n e r a s e n a p m o c s a e s r e v o e s e h t r o f n o i t a m r o n f i e h T # d e t i i i l m L s e g o o n h c e T x e b u S f i i o y r a d s b u s d e n w o y l l o h W * * * c n I s a c i r e m A x e b u S f i i o s e i r a d s b u s d e n w o y l l o h W * * t i i m L ) K U ( x e b u S f i i o s e i r a d s b u s d e n w o y l l o h W * A N N U A L R E P O R T 2007 - 2008 27 REPORT ON CORPORATE GOVERNANCE I. COMPANY’S PHILOSOPHY ON CORPORATE 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 equally important as regards to the structure, activities and policies of the organization. Consequently, the organization is able to attract investors, and enhance the trust and confidence of the stakeholders. Subex Limited’s compliance with the corporate governance guidelines as stipulated by the stock exchanges is described in this section. The company believes that sound corporate governance is critical to enhance and retain investor’s trust. Subex respects minority rights in its business decisions. The company’s corporate governance philosophy is based on the following principles: 1. Satisfy the spirit of the law 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 company is run internally. 4. Comply with the laws in all the countries in which the company operates. Subex is committed to good Corporate Governance practices. Consistent with this commitment, Subex seeks to achieve a high level of responsibility and accountability in its internal systems and policies. Subex 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 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 January 25, 2000 and amendments made thereto. II. BOARD OF DIRECTORS The Board of Directors of Subex Limited comprises 8 Directors out of which 2 are executive directors and 6 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 June 30, 2008 % Category 12.50% Promoter directors 75.00% Non-executive Independent directors 12.50% Other executive directors 100% Total No. of directors 1 6 1 8 B. Attendance of directors at the Board Meetings and the last AGM and details about directorships and memberships in committees as on March 31, 2008. Director Position No. of Board meetings held No. of Board meetings attended Last AGM attendance No. of directorships in other companies ▲ No. of committees in which the director is Chairman ■ No. of committees in which the director is a member ■ Mr. Subash Menon Mr. Sudeesh Yezhuvath Mr. V. Balaji Bhat Mr. Vinod R.Sethi Mr. K. Bala Chandran Mr. S N Rajesh(cid:1) Mr. P.P.Prabhu Mr. Harry Berry Mr. Andrew Garman Founder, Chairman Managing Director & CEO Chief Operating Officer and Executive Director Non Executive Independent Director Non Executive Independent Director Non Executive Independent Director Non Executive Independent Director Non Executive Independent Director Non Executive Independent Director Non Executive Independent Director 4 4 4 4 4 2 4 4 4 4 3 4 2 2 2 4 2 2 Yes Yes Yes No No No Yes No No 1 1 5 10 1 1 2 - - - - 3 - - - 1 - - 1 1 3 3 4 - 2 - 1 Excluding private limited companies & overseas companies. Includes only audit committee and shareholder’s grievance committee. Memberships in committees in Subex Ltd are included. (cid:1) Mr. S N Rajesh ceased to be a member consequent to his resignation from the Board of Directors on September 05, 2007. 28 A N N U A L R E P O R T 2007 - 2008 ▲ ■ C. Number and dates of Board meetings 4 (four) Board meetings were held during the financial year 2007-08. The dates on which meetings were held are as follows: April 30, 2007; July 26, 2007; October 23, 2007; January 29, 2008. D. Brief details of directors seeking re-appointment Mr. Vinod R Sethi Vinod R. Sethi is a member of the Board of Directors since 2000. He is a graduate in Chemical Engineering and also holds a degree in B.Tech from IIT, Mumbai and an MBA in Finance from Stern School of Business, New York University. His earlier assignments include working with Morgan Stanley as Chief Investment Officer and Portfolio Manager of Morgan Stanley Asset Management managing over USD 2.4 billion of investments in India. Mr. Andrew Garman Andrew Garman is a member of the Board of Directors since 2006. He is a managing partner at New Venture Partners LLC where he focuses on the firm’s software, services, networking and communications investment areas. Mr. Garman joined Lucent’s New Ventures Group in 1999. Before Lucent, Mr. Garman was a managing director of BT Ventures at Bankers Trust Company, where he created and managed a portfolio of internally generated corporate spin-outs in information technology. Prior to joining BT Ventures in 1996, Mr. Garman was the Vice President of Strategy and Business Development for Xerox’s New Enterprise Group. At Xerox, he helped expand the firm’s internal venture portfolio by developing eleven companies based upon technology innovations, primarily derived from the Xerox Palo Alto Research Centre. From 1985 to 1991, Mr. Garman was a general partner at CommTech International Inc., an incubator and venture capital firm with exclusive rights to commercialise the technology of SRI International, a non- profit research institution. Mr. Garman was formerly a director of AcuPrint, Amati Communications, Celiant, Certco, ColoRep, Document Forum, dpiX, InXight Software, Lucent Public Safety Systems (now Intrado), Placeware, Microwave Photonics, Vidus Ltd. and Visual Insights. Mr. Garman holds an AB in 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 Advisers. III. AUDIT COMMITTEE Terms of Reference A. 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 and quarterly 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 Mr.Vinod R Sethi Mr. K.Bala Chandran 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 is listed. B. Composition of Audit Committee Composition Mr. V. Balaji Bhat, Chairman Category 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 2007-08, four audit committee meetings were held. The unaudited financial results for the financial year ended March 31, 2008 were taken on record at the meeting held on April 29, 2008. The audited financial results for the year ended March 31, 2008 were taken on record at the meeting held on June 30, 2008. Mr. Andrew Garman Mr.Subash Menon Attendance of committee members at the audit committee meetings held during the financial year 2007-08: No. of audit committee meetings held Member 4 Mr. V. Balaji Bhat 4 Mr. K. Bala Chandran 4 Mr. Vinod R. Sethi 2 Mr. S. N. Rajesh* 4 Mr. Andrew Garman 4 Mr. Subash Menon * Mr. S N Rajesh ceased to be a member consequent to his resignation from the Board of Directors on September 05, 2007. No. of audit committee meetings attended 4 2 2 2 2 4 A N N U A L R E P O R T 2007 - 2008 29 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 April 30, 2007. IV. REMUNERATION COMMITTEE Composition of the committee Mr. Vinod R. Sethi - Chairman Mr. K. Bala Chandran Mr. V. Balaji Bhat Mr. Harry Berry Details of remuneration to directors Name Designation Salary Commission Amount in Rs. Total 4,800,000 4,800,000 Mr. Subash Menon Mr. Sudeesh Yezhuvath Founder Chairman, Managing Director & CEO Chief Operating Officer and Wholetime Director 4,800,000* 4,800,000* - - * excludes contribution to Provident Fund Note:During the year ended March 31, 2008, the Company has paid an amount of Rs. 38,285,906 to its Whole-time directors towards remuneration and has applied to the Central government for approval of payments that are in excess of the maximum remuneration payable under the Companies Act, 1956. Pending the Central government’s approval, such excess is treated as monies due from the Whole-time directors being held by them in trust for the Company and is included under loans and advances. The following directors have been allotted stock options under the employee stock options scheme of the Company. Name Designation No. of options granted No. of shares vested and exercised as on March 31, 2008 Mr. K. Bala Chandran Mr. V. Balaji Bhat Mr. Vinod R. Sethi Mr. P. P. Prabhu Non–Executive Independent Director Non–Executive Independent Director Non–Executive Independent Director Non–Executive Independent Director 7,500 7,500 7,500 7,500 7,500 7,500 7,500 4,875 The above stock options were granted on the same terms and conditions as mentioned in the ESOP scheme - 2000 of the Company. During the financial year under review, no additional stock options were granted to any of the Directors of the Company. The Non-Executive Directors are paid sitting fees at the rate of Rs. 2,500 for attendance in the board meetings. 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. In case of severance from the company, Mr. Subash Menon is eligible for getting compensation of not less than twenty times and Mr. Sudeesh Yezhuvath is eligible for getting compensation not less than fifteen times of their total remuneration for the preceding 12 months from the date of the notice. 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 option schemes of the company. V. SHARE TRANSFER COMMITTEE A. Composition of the committee Mr. Sudeesh Yezhuvath, Chairman Mr. Subash Menon Authorised Representative of Share Transfer Agents. B. Meetings during the year The Company holds Share Transfer Committee Meetings upto three times a month, as may be required, for approving the transfers/ transmissions/rematerialisation 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 2007-08 on the following dates: Date of the meeting October 31, 2007 November 30, 2007 December 15, 2007 December 31, 2007 No. of transfer deeds received Shares pursuant to the deeds Rematerialisation requests received Shares involved 4 1 4 1 1600 400 400 400 - - - - - - - - The Company ensures that the share transfers are effected within one month of the receipt of request for transfer. 30 A N N U A L R E P O R T 2007 - 2008 INVESTOR GRIEVANCE COMMITTEE VI. A. Composition of the committee The members of the company’s investor grievance committee are: Mr. K. Bala Chandran, Chairman Mr. Sudeesh Yezhuvath This committee is responsible for addressing the investors’ complaints and grievances. The Company secretary is the compliance officer of the Company. B. Meetings during the year The committee met 4 (four) times during the current financial year 2007-08 on these dates: April 30, 2007; July 26, 2007; October 23, 2007; January 29, 2008. Details of grievances of the investors are provided in the “Shareholders’ Information” section of this report. VII. ESOP COMMITTEE (Compensation committee) The Company has instituted employee stock option schemes 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 directors: Mr. V. Balaji Bhat, Chairman Mr. K. Bala Chandran Mr. Subash Menon B. Meetings during the year The committee met 8 (eight) times during the current financial year 2007-08 on the following dates: April 18, 2007; June 01, 2007; July 13, 2007; September 06, 2007; December 07, 2007; January 10, 2008; February 05, 2008; March 24, 2008. VIII. GENERAL BODY MEETINGS A. Location and time of the last three AGMs Venue Date of AGM Year Le Meridien – July 28, 2005 2005 Bangalore Le Meridien – Bangalore Le Meridien – Bangalore Time 3:00 p.m. August 28, 2006 July 26, 2007 4:00 p.m. 4:00 p.m. 2006 2007 Location and time of the last three EGMs held Year Date of EGM Venue Time Le Meridien - Bangalore 3:00 p.m. 2007 January 29, 2007 4:00 p.m. 2007 April 23, 2007 Corporate office 4:00 p.m. 2007 November 26, 2007 Corporate office B. Postal ballot No special resolutions were required to be passed under Section 192A of the Companies Act, 1956 during the financial year under review. 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. Transactions with the related parties are disclosed in Note II.10 Schedule P to the financial statements in the Annual Report. 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. C. The Company has complied with all the mandatory requirements of Clause 49 of the Listing Agreement. X. MEANS OF COMMUNICATION 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 or Financial Express and Udayavani. The complete financial statements are posted on the Company’s website www.subexworld.com. Subex 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. General shareholder information is provided in the “Shareholders’ Information” section of the Annual Report. XII. Auditors’ Certificate in respect of compliance of conditions of corporate governance as per Clause 49 of the Listing Agreement entered into with the Stock Exchanges forms part of this Annual Report. 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. A. The Board 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. A N N U A L R E P O R T 2007 - 2008 31 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 behaviours, 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 internal communications. None of our employees has been denied access to this facility. through appropriate this policy Place : Bangalore Date : June 30, 2008 for Subex Limited Subash Menon Founder Chairman, Managing Director & CEO C. Shareholders’ rights We communicate with investors regularly through emails, telephones and face to face meetings like investor conferences, earnings calls, 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 endeavour 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 32 A N N U A L R E P O R T 2007 - 2008 COMPLIANCE CERTIFICATE TO THE MEMBERS OF SUBEX LIMITED 1. We have examined the compliance of conditions of corporate Governance by Subex Limited (formerly Subex Azure Limited) [‘the Company’] for the year ended March 31, 2008, 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. In our opinion and to the best of our information and according to the explanations given to us and the representations made 3. 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 : June 30, 2008 for Deloitte Haskins & Sells Chartered Accountants V. Srikumar Partner Membership No. 84494 DECLARATION BY THE CEO UNDER CLAUSE 49 I (D) OF THE LISTING AGREEMENT REGARDING ADHERENCE TO THE CODE OF CONDUCT To, The Members of Subex Limited In accordance with Clause 49 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 March 31, 2008. Place : Bangalore Date : June 30, 2008 for Subex Limited Subash Menon Founder Chairman, Managing Director & CEO A N N U A L R E P O R T 2007 - 2008 33 MANAGEMENT’S DISCUSSION AND ANALYSIS OVERVIEW Subex Limited (Subex) is listed on the National Stock Exchange of India Limited (NSE) and the Bombay Stock Exchange Limited (BSE). The Global Depositary Receipts and the Foreign Currency Convertible Bonds of the company are listed on the London Stock Exchange (LSE). The management of Subex is committed to improving 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 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 results for the year under review. In addition to the historical information contained herein, the following discussion may include forward looking statements which 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. 1.1 Subex is a provider of solutions in the Operations Support Systems area for telecom applications. This area can broadly be classified into Service Fulfillment, Service Assurance and Revenue Maximization. The company operates in Revenue Maximization and Service Fulfillment areas. While Revenue Maximization solutions improve the revenues and profits of the communications service providers through identification and elimination of leakages in their revenue chain, Service Fulfillment solutions enable the carriers to fulfill the needs of their subscribers through provisioning and activation of services. Subex conceptualizes and develops software products at its facilities in Bangalore and is focused on the telecom business segment. Subex has sales and support offices in the United States, Canada, UK, UAE, India and Australia. Subex is the global leader in revenue maximization for communications service providers. Carriers today are facing a variety of challenges. The key among them are (a) the competitive requirement to provide high quality services faster and cheaper and (b) the operational requirement to have a well integrated Operations Support System (OSS) to meet the competitive requirement. Subex provides software solutions to meet these critical requirements. Carriers have been building the support structure by acquiring disparate pieces of software and that has resulted in stove pipes getting built over time. Our well INDUSTRY 34 A N N U A L R E P O R T 2007 - 2008 OPPORTUNITIES AND THREATS integrated platform called Revenue Operations Center (ROC) addresses this issue of a siloed structure within their networks. The solutions that form part of the ROC enable the customers to achieve Operational Dexterity which is a combination of Operational Efficiency and Service Agility. While the former ensures that cost of operation is maintained at a low enough level, the latter ensures adequate service levels are achieved. 2. 2.1 Strategy Subex has always approached its’ business in a very strategic manner. Over the past 6 years, we have been executing a well thought out strategy. The innovative strategy that we adopted was to blend organic growth with inorganic growth to achieve leadership in a focused area. It is our belief that telcos around the world will demand platform based solutions from an increasingly lower number of partners in the years to come. In order to succeed in such a transforming environment, companies need to expand their offering on a continuous basis while ensuring synergy among the different parts of the offering. In keeping with this strategy, we have been embellishing our offering – both through acquisitions and internal development – and have developed an extensive platform spanning revenue maximization and service fulfillment. We are now poised to take advantage of the growth in the Telecom OSS industry globally. 2.2 Market Opportunity We address an ever increasing market. The data on market size is provided below. 2007-2010 CAGR: 15% ) n m $ S U ( 1, 543 370 336 355 266 216 2005 1, 745 420 390 410 300 225 2006 2, 300 550 510 555 420 265 2008 1, 995 480 445 480 350 240 2007 3, 050 700 690 760 600 300 2010 2, 632 622 590 640 500 280 2009 Fraud and Revenue Assurance Inventory Management Provisioning Interconnect Billing Activation 3. BUSINESS SEGMENTS AND INDUSTRY OUTLOOK 3.1 Business segments Subex 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 55 54 45 46 67 64 33 36 80 70 60 50 40 30 20 10 0 t e g a n e c r e P 75 67 64 Price set by the Market Cost of Service Delivery 36 33 25 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 Revenue from Products Revenue from Services 3.2 Telecom software products There is a fundamental shift in the telecom business’ economics. Telecom operators have seen their margins shrink dramatically as the business model has changed from a regulated market to a free market. In a regulated market, operators could easily add their desired or guaranteed margin to the cost and set the price. In today’s free market, they need eke out their margin as the pricing is fixed by the competitive environment. This situation has been pictorially represented below. Earlier: Regulated Today: Free Market Price Approved Cost Plus Price set by the Market Margin Earned Competitive Pricing Cost of Service Delivery Margin Guaranteed Cost of Service Delivery Telco’s Strategy Grow ARPU • Manage up revenue Telco’s Strategy Grow AMPU • Manage up revenue • Manage down cost The key challenge therefore is build a strategic framework that fosters sustained profitable growth. Telecom operators now need to focus on the combination of: Service agility by reducing time-to- market for new service • • achieving rapid service provisioning • maintaining high quality of service delivery and Operational efficiency • reducing the cost of delivery of service Enhanced Margins Service Agility Gain- Improved price realization for services Operational Efficiency Gain- Reduced cost of service delivery We call this combination as Operational Dexterity. Operational dexterity ultimately allows operators to reverse the pressure on the margins by enjoying improved price realization through better quality of service and reduced cost of service through an efficient operation. Thus, we enable them to expand their margin by increasing the revenue through service agility gain and by reducing the cost of operation through operational efficiency gain. In short, we help them gain operational dexterity by providing two sets of solutions as detailed below. Solutions for Operational Efficiency gains There are six products in this solution category. They are Nikira, Moneta, Prevea, Concilia, Symphona and Optima. Nikira Nikira™ Fraud Management System is the next generation fraud management solution built to deliver on a 3-step philosophy of Detect-Investigate-Protect. Nikira detects known fraud types and patterns of unusual behaviour; helps investigate these unusual patterns for potential fraud and uses the knowledge thus generated to upgrade and protect against future intrusions. Nikira is differentiated by its unique architecture that harnesses the power of proven rules-based alarms and pattern matching driven by advanced statistical techniques. Adding power to this hybrid detection system is a set of strong case management tools. These tools provide all relevant case data which are made easily accessible through a single window in a fast web-based GUI. Nikira’s high flexibility allows operators of different sizes to customize rules to suit unique network and business requirements. Moreover, seamless visual alarm linking using 3rd party visualization software reduces investigation efforts, thus decreasing case turnover time. Nikira has the ability to detect fraud types in all telecom environments - Wireline (PSTN, ISP, VoIP), Wireless (2G, 2.5G, 3G) and across all services - postpaid, prepaid, VAS, MMS, M-commerce Moneta Moneta™ Revenue Assurance System is a first-of-its kind, complete RA solution, designed to tackle critical revenue assurance challenges across the entire revenue chain. Moneta offers a set of pre-configured solution templates to address RA challenges inherent to individual service verticals - Wireless, Fixed, Cable MSPs & MVNOs. These solution templates address revenue assurance issues across multiple functional areas such as service fulfilment, usage integrity, retail billing, interconnect/wholesale billing and content settlement. Each solution template is ready-to-use and includes: Set of appropriate health checks to monitor • A N N U A L R E P O R T 2007 - 2008 35 Subscriber acquisitioning, Ongoing usage Collections and recovery Control points & interfaces to extract data Reports & dashboards to present results, and • • • Workflow to monitor, action & close cases Using these solution templates, operators can dramatically reduce the time required to implement or extend the coverage of their RA practice. Moreover, operators can easily reconfigure or remodel existing templates to accommodate changing business requirements. Prevea The Prevea™ Risk Management System empowers operators to continuously assess and mitigate risk presented by subscribers throughout their lifecycle. Prevea tracks risk in a near real-time during: • • • Prevea provides the operator with a holistic view that helps in understanding subscriber risk profile and thereby aids its management. Further, Prevea can quickly, and seamlessly, accommodate new service information to provide an accurate picture of the exposure at any point in time. Allowing the operator to easily, and quickly, define various risk indicators and controls enables Prevea to adapt to local cultural and regulatory requirements. This also enables the operator to stay agile in changing socio-economic conditions that affect the overall level of risk in a region. Concilia Concilia™ Interconnect Billing System allows operators to quickly and accurately settle charges with their network partners. Shrinking margins have highlighted the increased need for visibility of each deal’s impact on operator’s bottom line. For interconnect agreements with domestic and international operators, Concilia provides with the ability to manage these major costs and revenues on a day-to- day, hour-to-hour basis. New types of interconnect agreements, in areas such as IP and SMS, require new system capabilities to ensure that operators have accurate data available to assure revenues. Concilia’s flexibility, scalability and ease of use empowers all types of operators – fixed or mobile, a national PTT or a new entrant, giving them the edge needed to survive and prosper in today’s market. Symphona The Symphona™ Interparty Management System enables operators to bill their customers and settle with their partners on a single modular platform. Symphona supports all operational and management information needs. Its unique architecture allows calculation of multiple charges for each transaction, and the correlation of retail revenues with interconnect cost. As product bundles and their related tariff plans become more complex, this ability to see all revenues and related costs is vital to ensuring a healthy bottom line. Symphona is able to support multiple business models within a single implementation through seamless addition of necessary modules. Examples of such modules include Retail, Wholesale, Satellite, IP and Inter-Company. The Symphona framework has been designed to evolve with minimal impact to ongoing operations. 36 A N N U A L R E P O R T 2007 - 2008 Optima Optima™ Route Optimization System is designed to provide operators with the tools to manage network cost information supplied by other operators. Additional analysis on the impact of current operator tariffs as well as forecasts on potential future operator tariffs is also featured. The system is capable of taking into account factors such as call quality rate information, capacity and network costs in calculating the optimum choice of operators. Optima ensures that the entire end-to-end processes from dial code/destination operator rate imports to switch updates is controllable and auditable. Optima is fully supported by a comprehensive list of reports, and when generating an optimized routing table the system provides an integrated management of the routing table changes across multiple business functions. The automated routing management functionality converts the routing table into MML script for either manual or automatic implementation on the switch. Solutions for Service Agility gains Solutions in this category can be grouped into four categories as given below. Automated, Subscriber-centric Fulfillment • Syndesis Application Configuration Manager • Syndesis Express • Syndesis NetProvision Data Integrity Management • Syndesis TrueSource Inventory/Resource Management • Syndesis Adaptive Resource Manager New Service Creation, Order Management • Syndesis Controller Service & Network Migration & Optimization • Syndesis NetOptimizer Syndesis Application Configuration Manager Syndesis Application Configuration Manager (ACM) automates the configuration, management, and detailed discovery of applications, policy servers, subscriber databases, and other service delivery platforms, making self-service a reality for the mass market. With its high-performance, event-driven bus architecture, scalable J2EE platform, and high-volume activation capabilities, ACM supports thousands of requests per second with instantaneous response time. This enables subscribers to manage their services 24 hours a day, 7 days a week and supports zero- touch provisioning, self-care and multi-media impulse buying. ACM validates service request attributes against pre-defined service logic, generates application configurations based on service needs, and activates affected control nodes or databases (e.g., IPTV servers, Unified Messaging servers, HLRs, HSSs, softswitches, VoIP feature servers, etc.) via Syndesis Application Modules. A wide range of off-the-shelf, productized Application Modules is available for market leading vendors such as Alcatel, Microsoft, Nortel, Siemens, Sonus, Sylantro and others, speeding time-to- market with innovative service offerings. Syndesis Express Recognizing the demands of the new communications environment, Syndesis Express is a subscriber-centric fulfillment solution that allows carriers to react quickly to ever-changing market conditions and customer requirements. With Express, new services can be defined and deployed within days, not weeks or months. Express is a pre-integrated solution bundle that provides complete, off-the- shelf, subscriber-centric fulfillment for IPTV, VoIP (for both Business and Consumer), and other targeted advanced service offerings. From the wholly integrated Syndesis Express architecture, providers can quickly and easily create, roll-out, and deliver advanced services to a broad customer base while achieving new levels of subscriber control and customization. And because Express coordinates both application and connectivity service components from a unified platform, it simplifies and improves the efficiency of next generation service delivery and management while decreasing operations costs. Syndesis NetProvision In the world of converging and ubiquitous communications, effective service fulfillment is all about meeting demand – satisfying increasing order volumes, aggressive delivery schedules, diverse service requirements, and customers’ heightened expectations. Traditional approaches to service fulfillment are not equipped to keep pace with the demands of evolving networks, services, and subscribers. Manual and siloed service provisioning, in particular, is slow, complicated, and error-prone, forming a significant barrier to both revenue growth and customer satisfaction and retention. Syndesis NetProvision automates the design and activation of complex, application-aware connectivity services, enabling flow-through provisioning of next-gen data and IP offerings across multi-vendor, multi-technology networks. NetProvision uses the industry’s most advanced and most widely deployed discovery engine, enabling the system to perform design and assign based on the network and logical resources as they really exist, not as an off-line database thinks they might. This significantly reduces fallout rates and decreases the time required to activate a service. NetProvision also features productized Equipment Modules (i.e., device interfaces); native support for the widest range of convergent IP/ data technologies; and a modular, extensible, and scalable design – all of which speed time-to-market for new offerings while reducing project risk and TCO. Syndesis TrueSource Without consistently accurate network and service information, OSS and BSS implementations are delayed, their overall effectiveness falters, asset tracking becomes a guessing game, and revenue leaks abound. Syndesis TrueSource combats these problems by providing the high levels of data integrity central to OSS and BSS data reconciliation and essential for the network and for business operations. TrueSource is the industry’s first Data Integrity Management (DIM) solution for improving the quality of data that drives key service provider processes, resulting in lower costs and higher service profitability. TrueSource employs an operations-wide approach to solving data integrity problems, combining three powerful data integrity functions: multi-layer network and service discovery, data reconciliation, and discrepancy analytics. Leveraging inherent cross-domain intelligence and extensive off-the-shelf network equipment support, TrueSource discovers devices and logical services in complex multi-layer, multi-vendor, multi-service environments and reconciles this data with OSS/BSS on a continuous, controlled basis. The result is consistent, relevant data throughout service provider operations, enhancing the effectiveness and value of service fulfillment, service assurance, and billing systems. Syndesis Adaptive Resource Manager Syndesis Adaptive Resource Manager (ARM), the industry’s only “live” inventory management solution, offers service providers a low-risk path to operational transformation and highly accurate inventory management. By considering the complete deployment and consumption life cycle of both the network and applications, ARM provides more comprehensive intelligence and control over the service provider enterprise. Wholly integrated with the Syndesis Subscriber-Centric Fulfillment Suite, ARM is a rapidly deployed resource management system designed specifically to meet the rigorous demands of complex next generation networks, services, and business environments. ARM an speed new service introduction and delivery, accelerate new equipment deployment and payback, and ease OSS transformations while lowering total cost of ownership for next-gen inventory. Syndesis Controller An extension of the Syndesis Subscriber-Centric Fulfillment Solution, Syndesis Controller is a pre-integrated, best-in-class Order Management, Service Catalog Management and Technical Workflow solution. Based on industry-leading technology, Controller simplifies the orchestration between Syndesis Fulfillment Solution and other systems, including BSS systems and any manual processes associated with mobile and wireline service turn-up. Controller leverages pre-built integration and service workflow templates based on the best practices for service delivery. It provides the basis for the automation of the complete order-to- bill cycle and enhances scalability and visibility for the entire fulfillment process, an essential pre-requisite for customer self- service. Controller decomposes orders into constituent parts, enabling end-to-end service delivery process management and operational process improvements. Syndesis NetOptimizer Network maintenance is an unavoidable cost of doing business. The world’s largest networks continually evolve and change, as Service Providers add bandwidth, replace defective hardware, perform upgrades, introduce new network infrastructure, optimize existing capacity and change technology providers. Because each of these changes affects services offered, carriers must be able to execute large scale changes quickly and accurately while preserving service integrity and the customer experience. Syndesis NetOptimizer is a high-performance, carrier-class service migration and maintenance software tool that takes the risk, time and effort out of the carriers’ toughest grooming operations and service migrations. Based on accurate views of the network, NetOptimizer’s automation of large scale reprovisioning activities enables carriers to rapidly, safely and strategically redistribute their services to optimize their existing resources and take advantage of new equipment, technologies, and topologies. 3.3 Customer Base The company today serves over 180 customers spread across 65 countries. Our wide customer base has enabled us to garner the top slot in our traditional business of fraud and revenue assurance. We have also been up-selling and cross-selling within this wide base of customers. A N N U A L R E P O R T 2007 - 2008 37 3.4 Revenue Model Subex licenses its software solutions on per subscriber or per transaction basis for every service stream of our customers, 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. Finally, we have a fifth stream called Bureau wherein we provide the solutions as a service (similar to Software as a Service – SaaS) through multi-million, multi-year contracts. The following graph gives the revenue from each of the streams and from Third Party during FY04, FY05, FY06, FY07 and FY08. t e g a n e c r e P 100 90 80 70 60 50 40 30 20 10 0 2 10 88 Revenue Composition 5 13 18 64 9 5 19 67 2 9 6 26 57 3 8 10 30 49 FY05 FY04 License & Addl. License Customization FY06 FY07 FY08 Support Bureau Third Party A large portion of our revenue (38% in FY08) is annuity and that provides a stable base. At the same time, license (a highly profitable stream) continues to be significant indicating that the business is not close to saturation. 3.5 Geographical Mix Given the nature of our products and the challenges faced by communications service providers in both developed and developing countries, we have huge opportunities in all the geographies. This is quite evident from the geographical mix given below. t e g a n e c r e P 100 90 80 70 60 50 40 30 20 10 0 Geographical Mix 23 23 54 14 34 52 9 36 55 15 35 50 27 36 37 FY04 FY05 FY06 FY07 FY08 EMEA Americas APAC 38 A N N U A L R E P O R T 2007 - 2008 3.6 Average Revenue Per Subexian In the Products business, our Average Revenue Per Subexian (ARPS), a key measure that leads to increased profitability, has been growing steadily. The following graph shows the progression on this front. Average Revenue Per Subexian 120000 100000 80000 $ S U 60000 53000 65000 108000 84000 75000 40000 20000 0 FY04 FY05 FY06 FY07 FY08 3.7 Quality Subex is dedicated to maintain the highest levels of quality standards throughout its operations. We are an ISO 9001:2000 certified company. 4. RISKS AND CONCERNS Any business has several risks related to that and ours is no different. Following are the risks that we are cognizant of. 4.1 Market The business model of communications service providers is highly dependant on consumer behaviour and any reduction on spend by consumers will negatively impact the fortunes of the telcos. That will result in reduction of investment by the telcos and a consequent contraction of market for our products. 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 is fully dependant on the telecom industry. So, any vagaries in the telecom business environment will considerably impact the fortunes of the company. 4.2 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 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 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. Towards this, it provides an empowered atmosphere with extensive mentoring, career counseling and constant learning opportunities in cutting edge and challenging technologies. 4.3 Intellectual Property 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. 4.4 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. 4.5 Client Concentration Consequent to the acquisition of Azure Solutions, we now have client concentration at BT plc (erstwhile British Telecom). However, non-BT business is growing faster than BT business thereby mitigating the risk. 4.6 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, variability could continue. 4.8 Statutory Obligations Subex has registered with Special Economic Zone 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 pollutionfree industry, is not subject to any environmental regulations. 4.10 Foreign Exchange Subex has substantial exposure to foreign exchange related risks on account of revenue from export of software and outstanding liabilities. These are hedged with banks and risks mitigated to the extent possible. Despite this, particularly given the volatility in the foreign exchange market, there could be significant variations. 4.11 Taxation Consequent to the end of STPI related tax benefits for Subex, we have moved to a Special Economic Zone (SEZ). While tax protection is expected to continue under the SEZ scheme, there is a significant amount of uncertainty in the regulatory environment. This could lead to incidence of higher tax. 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 has no material litigation pending against it in any court in India or abroad. 4.13 Contractual Obligation In terms of the contract entered into by Subex 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 to financial and other risks. A N N U A L R E P O R T 2007 - 2008 39 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. 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 revised Clause 49 of the Listing Agreement, the CEO / CFO has 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. The adequacy of the Company’s internal controls are tested from time to time and control deficiencies, if any, identified during the assessments are addressed appropriately. 6. DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE 6.1 Key financials and ratio analysis Financial Highlights / Year ending March 31 2008 2005 2006 2007 Amount in Rs million, except key indicators 2002 2004 2003 Consolidated Standalone Consolidated Standalone Standalone Total income Operating Profits (EBDITA) 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 Earning per Share (Year end) Cash Earning per Share (Year end) Book value per Share Debt (including Working capital) Equity Ratio EBDITA / Sales - % Net Profit Margin - % Return on year end Net Worth % Return on year end Capital Employed % 5,408.90 (107.54) 184.04 (617.05) (680.72) Nil 348.47 7,050.66 6,792.52 1,505.82 388.77 18,463.32 (19.49) (31.01) 194.92 1.36 -2.21% -14.02% -10.02% -0.67% 2,004.59 369.08 123.10 (50.13) (61.89) Nil 348.47 7,241.00 7,015.32 742.71 265.97 17,119.66 (1.77) (15.53) 201.32 1.26 0.26 -4.30% -0.88% 2% 3,710.92 812.46 148.53 576.61 675.66 20% 348.16 8,059.12 8348.10 821.73 358.55 17787.98 19.41 12.74 239.78 1.01 23.83% 19.82% 8.09% 4.84% 2361.84 447.83 113.39 259.09 208.14 20% 348.16 7614.14 7949.89 662.67 306.44 17088.88 5.98 3.03 228.34 1.06 21.14% 10% 3% 3% 1,841.19 539.44 90.79 422.23 391.50 25% 217.58 1,597.75 1,816.20 653.06 391.61 2,159.76 17.99 22.17 83.47 0.01 29% 21% 22% 30% 1,172.35 356.74 71.43 261.10 253.03 30% 100.67 1,132.05 1,233.04 555.42 367.83 1,745.12 891.94 246.02 42.68 189.04 177.50 20% 73.54 540.94 799.39 209.61 89.66 1,085.76 25.13 32.23 122.48 24.14 29.94 108.70 0.23 30% 22% 21% 23% 0.21 28% 20% 22% 26% 706.41 162.19 37.98 101.75 96.12 10% 73.44 403.26 628.85 161.55 77.84 997.68 13.09 18.26 85.63 0.32 23% 14% 15% 20% 592.51 95.67 35.68 47.92 41.84 10% 71.23 458.01 367.11 163.81 109.53 896.16 5.87 10.88 51.54 0.46 16% 7% 11% 18% Note: Earning per share, cash earning per share and book value of share are in Rupees. 40 A N N U A L R E P O R T 2007 - 2008 COMMENTARY ON FINANCIAL STATEMENTS 7. 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 March 31, 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 January 6, 2006 in the ratio of 1:1 by capitalizing the securities premium. 1,109,878 shares of Rs.10/- each to the GDR holders as on April 7, 2006 @ Rs.400/-. 11,728,728 shares of Rs.10/- each to the GDR holders as on June 22, 2006 towards consideration of the cost of acquisition of Azure Solutions Ltd at Rs.532.24. 7.1.2 During 2006-07 the Company issued 219,551 (including Bonus shares, wherever options are eligible) shares of Rs. 10/- each to various employees on exercise of Stock Options granted under the Employee Stock Option Plan (ESOP – II & III). 7.1.3 During 2007-08, the Company issued 31,364 (including bonus shares, wherever options are eligible) shares of Rs. 10/- each to various employees on exercise of Stock Options granted under the Employee Stock Option Plan (ESOP – II & III). 7.1.4 There are no calls in arrears. 7.1.5 During 2007-08, the Company allotted 2,230,000 warrants to promoters/ promoters group, entitling each holder to obtain allotment of one equity share against each such warrant on a preferential basis at a price of Rs. 630.31. Under the terms of issue, the company received 10% of the total consideration amounting to Rs. 140.55 Million. 7.2 Reserves And Surplus 7.2.1 Capital Reserve of Rs.13.00 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 Securities 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. 1,109,878 equity shares issued at a premium of Rs.390/- per share to holders of GDR at a price of Rs.400/-. 11,728,728 equity shares issued at a premium of Rs.522.24 per share to holders of GDR at price of Rs.532.24 250,915 (including Bonus shares, wherever options are eligible) equity shares allotted to the employees under ESOP II & III Scheme as per the provisions of the Scheme at various premiums. 7.2.3 The Company has transferred Rs. Nil (previous year: Rs.23.2 million) to General Reserves during the year. 7.2.4 In accordance with the guidelines issued by the Institute of Chartered Accountants of India on Accounting for Deferred Taxes, a net gain / (charges) of Rs.7.26 million on stand alone basis and Rs.(37.33) million on consolidated basis have been recorded in the P&L A/c, due to recognition of deferred tax asset as at year end amounting to Rs.124.08 million on consolidated basis and Rs.24.18 million on stand alone basis. 7.2.5 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 adjusted and credited to reserves on a net basis as at March 31, 2008 is Rs.69.65 million (previous year: Rs.19.64 million). 7.3 Secured Loans On consolidated basis, the secured loan of Rs. 1,150.16 million (previous year: Rs.635.17 million) and on stand alone basis, the secured loan of Rs.737.23 million (previous year: Rs.583.76 million) outstanding in the books as at March 31, 2008 consists of Rs.22.16 million pertaining to motorcars financed by the Company through hire purchase scheme with the financiers and is secured by hypothecation of the vehicles and Rs.715.07 million pertaining to the working capital loan from Axis Bank Ltd and State Bank of India, which is secured by Receivables. 7.4 Unsecured Loans The unsecured loan of Rs.7,200.00 million (previous year: Rs. 7,807.50) outstanding in the books as at March 31, 2008 pertains to Foreign Currency Convertible Bonds issued during the previous year. The bonds carry interest of 2% per annum and are redeemable by March 9, 2012 if not converted into equity shares as per terms of issue. These bonds are listed in the Professional A N N U A L R E P O R T 2007 - 2008 41 ● ● ● ● ● ● ● ● ● ● ● ● ● Securities Market of London Stock Exchange. The movement in the year relates to unrealised gains. 7.5 Fixed Assets 7.5.1 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. 7.5.2 During the year, the Company added Rs.152.80 million on consolidated basis and Rs.89.74 million on stand alone basis, to its gross block. The Company disposed off certain assets no longer required. The Company has net assets worth Rs.388.77 million (previous year: Rs. 358.55 million) on consolidated basis and Rs.265.97 million (previous year: Rs. 306.44 million) on stand-alone basis. 7.6 Investments 7.6.1 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. During the year, the Company filed an application with Hon’ble High Court of Karnataka to transfer the Services Business Division to Subex Technologies Ltd, a wholly owned subsidiary of Subex Ltd under a scheme of arrangement. On obtaining the order from the Hon’ble High Court of Karnataka, the Company has transferred the Services business to Subex Technologies Ltd with effect from September 1, 2007 (appointed date) at an aggregate consideration of Rs.310,000,000. In accordance with the order of the Hon’ble High Court, the Company shall receive 3,000,000 shares of Subex Technologies Ltd valued at Rs.30,000,000 in settlement of the consideration with the balance Rs. 280,000,000 being treated as unsecured loan taken by the subsidiary from the Company. 7.6.2 The Company has subscribed to the entire share capital of Subex Technologies Ltd, a wholly owned subsidiary Company for a cost of Rs 10 million and as mentioned in 7.6.1 above, is to receive shares worth Rs. 30,000,000. 7.6.3 On June 23, 2006, the Company acquired the entire share holding of Azure Solutions Ltd, UK. The consideration was discharged by issued of 11,728,728 GDRs each representing one equity share of Rs.10/- at a premium of Rs.522.24 per share and cash of Rs.214.57 million. 7.6.4 During the year, the Company completed the acquisition of Syndesis Ltd, Canada, a Company engaged in service assurance and fulfillment space in the telecom service industry. The investment carrying value of Rs. 7,749,575,428 includes the incidental costs of acquisition. Pursuant to the acquisition, Syndesis Limited has been renamed as Subex Americas Inc. 7.7 Sundry Debtors 7.7.1 At the year end, the Company has securitized a portion of its receivables amounting to Rs. 133.36 million (previous year: Rs.416.66 million) with Axis Bank Ltd. 42 A N N U A L R E P O R T 2007 - 2008 7.7.2 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. 7.7.3 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 requirements. 7.7.4 Sundry Debtors as a percentage of total revenue is 28% as against 36% in the previous year. 7.7.5 The age profile on consolidated basis is as given below:ntages Amount in Rs. million 2006-2007 % Value 62.49 760.45 37.51 456.37 100.00 1,216.82 100.00 Value 1040.10 Less than 180 days 273.21 More than 180 days Total 1,313.31 The age profile on stand-alone basis is as given below: 2007-2008 % 79 21 Particulars Particulars Value 324.96 15.71 340.67 Value 452.37 323.57 775.94 2007-2008 % 95.39 4.61 100.00 Amount in Rs. million 2006-2007 % 58.30 Less than 180 days 41.70 More than 180 days Total 100.00 7.7.6 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.290.35 million (previous year: Rs.150.62 million) on consolidated basis and Rs.288.69 million (previous year: Rs.150.00 million) on stand alone basis. 7.8 Cash and Bank Balances 7.8.1 The bank balances in India includes both rupee accounts and foreign currency accounts. The fixed deposit of Rs.27.99 million on consolidated basis and Rs.17.42 million on standalone basis is the margin money with the bankers for establishing bank guarantee/ issuing corporate credit cards. 7.8.2 Cash and Bank balances constitute 1.38% of the total assets (previous year: 5.36%) on consolidated basis and 0.56% of the total assets (previous year: 4.9%) on stand alone basis. 7.9 7.9.1 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. 7.9.2 Deposits represent rent deposit, electricity deposit, telephone deposits and advances of like nature. Loans and Advances 7.9.3 Dues from Companies under the same management Rs.394.61 million from Subex Technologies Limited (previous year: Rs.12.91 million), Rs.597.31 million (previous year: Rs. 351.86 million) due from Subex (UK) Ltd, Rs.330.40 million (previous year: Rs. 249.85 million) due from Subex Inc, Rs.39.76 million (previous year: Rs. 10.67 million) due from Subex (Asia Pacific) Pte Ltd and Rs. 341.13 million (previous year: nil) due from Subex Americas Inc. 7.10 Current Liabilities 7.10.1 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, amount payable to vendors for supply of goods, creditors for operational expenses, accrued salaries and benefits and advances received from clients for delivery of future sales. 7.11 Provisions Provisions for taxation represent income tax, dividend tax and wealth tax liability. The provision would be set off upon payment of tax. 7.12 Financial Instruments 7.12.1 Letters of Credit The company has an outstanding Letters of credit amounting to Rs.26.05 million (previous year: Rs.29.99 million) on consolidated and standalone basis. These letters of credit are in the nature of procurement of capex/ corporate credit card. 7.12.2 Guarantees The company has outstanding guarantees amounting to Rs.22.41 million (previous year: Rs.5.24 million). These guarantees are in the nature of performance guarantees and bid bonds and are subject to the risk of performance by the Company. The company has provided a Corporate Guarantee to ABN Amro Bank, Bangalore to provide credit facilities to Subex Americas Inc. Canada and Subex (UK) Ltd, London amounting to Rs. 500,000,000 (previous year: nil). 7.13 Profit & Loss Account 7.13.1 Income The Company derives its income from providing Software Development Services, and licensing of Software Products. The segment wise break up of income on consolidated basis is given below: Amount in Rs. million except percentages Particulars 2007-08 2006-07 Software Services Software Products Total Value 1,237.43 3,618.48 4,855.91 % % Value 32.89 25.48 1,121.33 74.52 67.11 2,287.67 100.00 3,409.00 100.00 The segment wise break up of income on stand-alone basis is given below: Amount in Rs. million except percentages Particulars 2007-08 2006-07 Software Services Software Products Total Value 523.96 914.73 1,438.69 % 36.42 63.58 100.00 % Value 52.68 1116.15 1002.47 47.32 1812.16 100.00 7.13.2 Geographically, the Company earns income from export of software services to USA and software products to various countries in EMEA and Americas. 7.14 Other income 7.14.1 Other income consists of income derived by the Company from, interest on deposit with Bank, insurance claims received towards damages of assets, VAT refund and exchange fluctuation (including exchange gain on restatement of FCCB) 7.15 Expenditure 7.15.1 The staff cost increased to Rs.4,022.37 million (previous year: Rs.2,079.88 million) on consolidated basis and decreased to Rs.944.48 million (previous year: Rs.1,436.97 million) on stand alone basis on account of integration of Syndesis Limited, Canada, new recruitment, increments and increase in onsite consultancy services in US. 7.15.2 The Company incurred administration and other expenses at 26.06% of its total Income during the year as compared to 19.10% during the previous year on consolidated basis and 29.95% of its total Income during the year as compared to 16.45 % during the previous year on a stand-alone basis. 7.16 Operating Profits During the year, on consolidated basis, the company earned an Operating Profit/(Loss) (before interest, depreciation and tax) of Rs.(107.54) million being 1.99% of total income as against Rs.812.46 million at 21.89% during the previous year. On a stand-alone basis, the Company earned an Operating Profit (before interest, depreciation and tax) of Rs.369.08 million being 18.41% of total income as against Rs.447.83 million at 18.96% during the previous year. 7.17 Interest & Bank Charges The Company incurred an expenditure of Rs.325.47 million (previous year: Rs.87.31million) on consolidated basis and Rs.296.10 million (previous year: Rs.75.35 million) on stand-alone basis. The interest paid is related to temporary overdrawals and securitized receivables. The interest on FCCBs provided alone amounted to Rs.160.77 million 7.18 Depreciation 7.18.1 The provision for depreciation for the year amounted to A N N U A L R E P O R T 2007 - 2008 43 at providing a competitive edge to the business through a qualified and motivated workforce by recruiting, developing and retaining the best in the Industry. It consistently strives to drive and implement Subex HR strategy in areas of recruitment, compensation benefits, subexian relations, retention strategies, performance management processes, M&A integration strategies, HR processes and policies. Recruiting Subex hires entry level graduates from the top engineering and management universities in India. The company has created and implemented high quality, repeatable recruiting practices and procedures to attract the best talent. The main sources of its hires come through Subexians referral programs, advertisements, placement consultants, website postings and walk-ins. All jobs would require a strong focus on both technology and domain in order to analyze the customer requirements. They also get exposure to Heterogeneous, Multi-technology, and Multi-vendor OSS/NMS/ EMS/FMS/RA domain as compared to Homogenous, Single-vendor, and Single-vendor scenarios offered by most companies. 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, to provide them cutting-edge skill sets. Performance Management System Subexian Development System or Performance Management System focuses on the evaluation of the key result area set for Subexians at the start of the appraisal cycle and the competencies they require to execute their tasks in a given role. The process comprises a series of steps like self, peers and managers appraisals and also involves normalization and moderation process to ensure an unbiased appraisal system. Compensation Subex 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. Rs.172.32 million (previous year: Rs.125.56 million) on consolidated basis and Rs.123.10 million (previous year: Rs.113.39 million) on stand alone basis. The increase in provision on consolidated basis is mainly on account of the depreciation on the assets of Syndesis Group. 7.18.2 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.84.36 million (previous year: Rs.82.42 million) has been depreciated in the financial year under review. 7.19 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. 7.20 Net Profit On consolidated basis, the net profit/(loss) of the Company amounted to Rs.(680.72) million as against Rs. 675.66 million during the previous year. On stand-alone basis, the net profit/(loss) of the Company amounted to Rs.(61.89) million as against Rs. 208.14 million during the previous year. 7.21 Earning per Share Earning/(loss) per share computed on the basis of number of common stock outstanding, as on the Balance Sheet date was Rs.(19.49) per share (previous year: Rs.21.1per share) on consolidated basis and Rs.(1.77) per share (previous year: Rs. 6.50 per share) on stand-alone basis. The diluted Earnings per share for the year was Rs.(19.49) per share (previous year: Rs. 21.02 per share) as on consolidated basis and Rs.(1.77) per share (previous year: Rs. 6.48 per share) on stand-alone basis. 7.22 Foreign Exchange Difference An amount of Rs.528.66 million has been accounted for as gain during the current year compared to an amount of Rs.217.26 million during the previous year on consolidated basis and an amount of Rs.547.00 million has been accounted for as gain during the current year compared to an amount of Rs.207.20 million during the previous year on stand alone basis, on account of foreign exchange differences arising due to timing differences between accrual of income / expense and receipt / payment of the same. 8. MATERIAL DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS FRONT, INCLUDING NUMBER OF PEOPLE EMPLOYED. Subexians As of March 31, 2008, we had over 1175 Subexians on our rolls. They are highly trained and motivated people and 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 our corporate headquarters in Bangalore and oversees HR functions across all the geographies where the company operates. The HR team aims 44 A N N U A L R E P O R T 2007 - 2008 Financial Review Subex Limited (Standalone) A N N U A L R E P O R T 2007 - 2008 45 AUDITORS’ REPORT TO THE MEMBERS OF SUBEX LIMITED 1. We have audited the attached Balance Sheet of Subex Limited (formerly Subex Azure Limited), as at March 31, 2008, the Profit and Loss Account and the Cash Flow Statement of the Company for the year ended on that date 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) 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. (e) 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 March 31, 2008 and taken on record by the Board of Directors, we report that none of the directors is disqualified as on March 31, 2008 from being appointed as a director in terms of clause (g) of sub-section (1) of Section 274 of the Companies Act 1956. (g) 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 and give a true and fair view in conformity with the accounting principles generally accepted in India, (i) in the case of the Balance Sheet, of the state of affairs of the Company as at March 31, 2008; and in the case of the Profit and Loss Account of the loss for the year ended on that date, (ii) (iii) in the case of the Cash Flow Statement, of the cash flows for the year ended on that date. For Deloitte Haskins & Sells Chartered Accountants V.Srikumar Partner M. No. 84494 Place: Bangalore Date: June 30, 2008 ANNEXURE TO THE AUDITORS’ REPORT (REFERRED TO IN OUR REPORT OF EVEN DATE TO THE MEMBERS OF SUBEX LIMITED) 1. The provisions of clauses ii, iii (d) to (g), (viii), (x), (xii), (xiii), (xiv), (xv), (xviii), (xix), (xx) as contained in para 4 and 5 of the Companies (Auditors’ Report) Order, 2003, are not applicable to the Company for the current year. In respect of its fixed assets: (c) The fixed assets disposed off during the year, in our opinion, do not constitute a substantial part of the fixed assets of the Company and such disposal has, in our opinion, not affected the going concern status of the Company. In respect of loans, secured or unsecured, granted or taken by the Company to or from companies, firms or other parties covered in the register maintained under section 301 of the Companies Act, 1956, according to the information and explanations given to us: 2. (a) The Company has maintained proper records showing full particulars, including quantitative details and situation of fixed assets. 3. (a) the Company has granted loans to four parties. At the year end, the outstanding balances of such loans granted aggregated to Rs. 1,603,737,888 and the maximum amount involved during the year was Rs. 1,603,737,888. (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. 46 A N N U A L R E P O R T 2007 - 2008 (b) in our opinion, having regard to the explanation that the loans are granted to wholly owned subsidiaries with an intention of providing financial support, the terms and conditions of the interest free loans are, prima facie, prejudicial to the interest of the Company. under paragraph 3 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. (c) in terms of the loans granted, no principal was due for 4. 5. repayment during the year ending. In our opinion and according to the information and explanations given to us, having regard to the explanations that some of the Company’s transactions of (a) purchases of goods and services and (b) services rendered, are of a specialized nature for which comparable quotations are not available, 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 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: 6. The Company has not accepted deposits from the public. 7. In our opinion, the internal audit functions carried out during the year by a firm of Chartered Accountants appointed by the management has been commensurate with the size of the Company and the nature of its business. In respect of Statutory dues: 8. (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 were no such dues that were outstanding at March 31, 2008 for a period of more than six months from the date they became payable. (a) the particulars of contracts or arrangements referred to in Section 301 that needed to be entered into the register, maintained under the said section have been so entered. (b) where each of such transactions (excluding loans reported (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 March 31, 2008, on account of any dispute are given below: Name of statute Nature of the dues Amount (Rs.) Income Tax Act, 1961 Income tax 5,357,900 Period to which the amount relates 2003-04 Forum where dispute is pending Income Tax Appelate Tribunal 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. 14. 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. For Deloitte Haskins & Sells Chartered Accountants V.Srikumar Partner M. No. 84494 Place: Bangalore Date: June 30, 2008 10. In our opinion and according to the information and explanations given to us, the term and conditions of the guarantees given by the Company to financial institutions for loans taken by its subsidiaries are not, prima facie, prejudicial to the interests of the Company. 11. To the best of our knowledge and belief and according to the information and explanations given to us, in our opinion, term loans availed by the Company were, prima facie, applied by the Company during the year for the purposes for which the loans were obtained, other than temporary deployment pending application. 12. According to the information and explanations given to us and on an overall examination of the balance sheet of the Company, funds raised on short term basis have, prima facie, not been used during the year for long term investment. 13. According to the information and explanations given to us, the price at which the Company has made preferential allotment of warrants to parties and companies covered in the Register maintained under Section 301 of the Companies Act, 1956 is not prima facie prejudicial to the interest of the Company. A N N U A L R E P O R T 2007 - 2008 47 BALANCE SHEET AS AT SOURCES OF FUNDS SHAREHOLDERS’ FUNDS Share Capital Monies received pending allotment [Refer Note II.7, Schedule P] Reserves and Surplus LOAN FUNDS Secured Loans Unsecured Loans Total APPLICATION OF FUNDS FIXED ASSETS Gross Block Less : Depreciation Net Block Capital work in progress INVESTMENTS DEFERRED TAX ASSET (Net) CURRENT ASSETS, LOANS & ADVANCES Sundry Debtors Cash & Bank balances Loans & Advances Unbilled Revenue Less: Current Liabilities & Provisions Current liabilities Provisions Net Current Assets Total Schedule March 31, 2008 March 31, 2007 Amount in Rs. A B C D E F G H I J 348,470,890 140,559,130 348,157,250 - 7,241,001,219 7,730,031,239 7,614,743,935 7,962,901,185 737,232,874 8,114,824,891 8,852,057,765 16,582,089,004 583,759,501 7,807,500,000 8,391,259,501 16,354,160,686 742,708,202 476,733,586 265,974,616 - 340,670,191 92,874,559 1,980,223,013 152,302,809 2,566,070,572 425,292,788 112,283,015 537,575,803 265,974,616 14,263,443,608 24,176,011 306,441,130 14,195,582,212 16,917,000 662,665,154 360,261,651 302,403,503 4,037,627 775,941,945 801,158,095 768,268,999 224,571,526 2,569,940,565 538,913,980 195,806,241 734,720,221 2,028,494,769 16,582,089,004 1,835,220,344 16,354,160,686 Significant Accounting policies & Notes to the accounts P 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 V. Srikumar Partner Membership No. 84494 Bangalore June 30, 2008 48 A N N U A L R E P O R T 2007 - 2008 Subash Menon Founder Chairman, Managing Director & CEO Sudeesh Yezhuvath Chief Operating Officer V. Balaji Bhat Director Raj Kumar Chief Counsel & Company Secretary PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED Schedule March 31, 2008 Amount in Rs. March 31, 2007 Income Sales & Services Other Income Total EXPENDITURE : Direct Cost Personnel Costs Other Operating, Selling and Administrative Expenses Financial Costs Depreciation Total Profit/(Loss) Before Taxation Provision for taxation for continuing operations - Current - MAT Credit carried forward - Fringe Benefit Tax - Deferred Profit/(Loss) After Taxation Profit/(Loss) before tax from continuing operations Tax Expenses Profit/(Loss) before tax from discontinued operations [Refer Note II.5 & II.14 and Schedule P] Provision for Current Taxes Profit/(Loss) After Taxation Balance brought forward from Previous year Profit Available for Appropriation APPROPRIATION : Transfer to General Reserve Dividend - Equity Shares - Proposed Final Dividend 2006-07 - Equity Shares - Interim Dividend 2006-07 - Equity Shares - Final Dividend 2005-06 - Equity Shares - Final Dividend 2006-07 Tax on distributed profits Surplus carried to Balance Sheet Earnings/(Loss) Per Share (Face value of Rs.10/- each) - Basic - Diluted K L M N O E 1,438,684,166 565,904,838 2,004,589,004 90,691,643 944,484,923 600,336,524 296,098,176 123,103,856 2,054,715,122 (50,126,118) 17,129,780 (10,042,000) 11,930,660 (7,259,005) - - - 26,412 66,195,845 (11,128,731) 4,887,171 (9,005,000) 69,631,450 52,113,210 12,883,222 - 11,759,435 (61,885,553) (76,648,345) 4,756,955 (81,405,300) 26,522,227 7,002,480 19,519,747 (61,885,553) 785,666,570 723,781,017 - 26,412 4,489 723,750,116 723,781,017 (1.77) (1.77) 2,118,612,682 243,226,341 2,361,839,023 88,596,558 1,436,970,428 388,438,521 75,345,976 113,394,684 2,102,746,167 259,092,856 50,949,285 208,143,571 158,797,599 7,957,397 150,840,202 100,295,257 42,991,888 57,303,369 208,143,571 756,300,496 964,444,067 23,200,000 134,627,882 20,949,615 785,666,570 964,444,067 6.50 6.48 Significant Accounting policies & Notes to the accounts P 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 V. Srikumar Partner Membership No. 84494 Bangalore June 30, 2008 Subash Menon Founder Chairman, Managing Director & CEO Sudeesh Yezhuvath Chief Operating Officer V. Balaji Bhat Director Raj Kumar Chief Counsel & Company Secretary A N N U A L R E P O R T 2007 - 2008 49 CASH FLOW STATEMENT FOR THE YEAR ENDED March 31, 2008 Amount in Rs. March 31, 2007 259,092,856 (50,126,118) (482,878,101) 314,435,696 277,466,684 102,269,262 113,394,684 (33,843,931) 75,345,976 3,761,806 (463,514) 10,760,906 150,000,000 (208,784,608) (39,652,428) 329,611,747 123,103,856 (17,129,916) 296,098,176 - (1,096,373) 50,005,707 288,690,000 (595,294,231) (101,006,118) (6,755,017) Cash flow from operating activities Net Profit/(Loss) before Tax Adjustments for : a) Depreciation and amortization b) Interest c) Interest and bank 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 Adjustments for : a) Sundry Debtors b) Loans and advances c) Trade and other payables Cash generated from/(used in) operations Cash Flow from Investing activities a) Purchase of Fixed Assets b) Sale / disposal of fixed assets c) Cash flows on acqusitions of subsidiaries d) Interest received e) Loans to Subsidiaries Net Cash from Investing Activities Cash Flow from Financing Activities 457,173,808 a) Proceeds/(Utilisation) from issue of Share Capital/ Options/Warrants 570,247,932 b) Proceeds from/(repayment) of short term borrowings - Net 8,049,544,180 c) Proceeds from Long term borrowings (4,752,531) d) Repayment of Long term borrowings (98,720,943) e) Dividends & Dividend tax paid (75,345,976) f) Interest and bank charges paid (616,265,172) g) Incidental expenses on issue of FCCB & GDR, (incurred)/refunded 8,281,881,298 Net Cash from Financing Activities 395,480,152 Net increase in Cash or Cash equivalents [A + B + C] 405,677,943 Cash or Cash equivalents at the start of the year Cash or Cash equivalents at the close of the year 801,158,095 Note : Cash & Cash Equivalents include balance with Scheduled Banks on Dividend Account of Rs.702,822 (PY : Rs.839,784), fixed deposit of Rs.17,424,597 (PY : Rs.320,425,029) which are not available for use by the Company. Significant Accounting policies & Notes to the accounts 145,225,998 304,409,517 764,496,174 - (81,503,996) (296,098,176) 38,374,819 874,904,336 (708,283,536) 801,158,095 92,874,559 (40,389,091) 8,864,512 (7,635,103,606) 33,843,931 (615,260,873) (8,248,045,127) (87,261,489) 5,720,518 (345,879,403) 17,129,916 (1,275,166,676) (1,685,457,134) 7,989,734 (265,278,984) 289,321,484 361,643,981 P C A B In terms of our report of even date for Deloitte Haskins & Sells Chartered Accountants V. Srikumar Partner Membership No. 84494 Bangalore June 30, 2008 50 A N N U A L R E P O R T 2007 - 2008 Subash Menon Founder Chairman, Managing Director & CEO Sudeesh Yezhuvath Chief Operating Officer V. Balaji Bhat Director Raj Kumar Chief Counsel & Company Secretary SCHEDULES TO THE BALANCE SHEET AS AT Schedule - A Share capital Authorised 48,040,000 (previous year, 48,040,000) equity shares of Rs. 10 each 200,000 Redeemable Optionally Convertible Cumulative Preference Shares (ROCCPS) of Rs. 98 each Total Issued, subscribed and paid up Equity 34,847,089 (previous year, 34,815,725) 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 shares of Rs. 10 each are allotted as bonus shares by capitalisation of securities premium; e) 11,728,728 shares (GDRs) of Rs. 10 each are allotted in full settlement of cost of acquisition of Azure Solutions (UK) Ltd Total Schedule - B Reserves & Surplus Capital Reserve General Reserve - opening balance Add : Additions during the year Less : Adjustment in pursuance of transitional provisions of Accounting Standard-15 [Refer Note II.16.7] Securities premium account - opening balance Add : Additions during the year Add/(Less) : Reversal of/(Utilised towards) incidental costs of issue of FCCBs & GDRs (Refer Note II.6, Schedule P) Less : Redemption premium on FCCBs [Refer Note II.6, Schedule P] Less: Adjustments on account of Demerger Scheme [Refer Note II.5, Schedule P] Employees Stock Options outstanding Less: Deferred employees compensation expenses FCCB Redemption reserve - opening balance Add : Additions during the year [Refer Note II.6, Schedule P] Profit & Loss Account Total Schedule - C Secured loans Short Term Working capital loans from banks (Secured by charge on fixed assets and receivables) Other loans from banks (Secured by hypothecation of assets financed by these loans) [Amount repayable within one year: Rs.7,334,336/-, Previous year, Rs.4,335,771) Total Schedule - D Unsecured loans Short Term Working capital loans from banks Other loans from banks [Amount repayable within one year: NIL, PY : NIL] (Refer Note II.16.10, Schedule P) Foreign Currency Convertible Bonds (Note II.6, Schedule P) Total March 31, 2008 March 31, 2007 Amount in Rs. 177,975,580 - - 6,576,304,853 4,353,213 38,374,819 589,904,656 404,560,001 162,476,740 92,831,021 42,150,000 589,904,656 480,400,000 19,600,000 500,000,000 348,470,890 348,470,890 13,006,920 177,975,580 5,624,568,228 69,645,719 632,054,656 723,750,116 7,241,001,219 715,073,869 22,159,005 480,400,000 19,600,000 500,000,000 348,157,250 348,157,250 13,006,920 177,975,580 6,576,304,853 19,640,012 42,150,000 785,666,570 7,614,743,935 570,247,932 13,511,569 163,302,608 23,200,000 8,527,028 656,262,011 6,578,458,014 (616,265,172) 42,150,000 - 52,775,309 33,135,297 737,232,874 583,759,501 158,976,153 755,848,738 7,200,000,000 8,114,824,891 - - 7,807,500,000 7,807,500,000 A N N U A L R E P O R T 2007 - 2008 51 - - 2 2 6 , 3 6 8 , 1 4 8 7 7 , 0 5 4 , 5 4 9 1 4 , 7 7 9 , 5 2 1 1 7 5 , 3 1 5 , 5 2 1 0 , 6 5 2 , 2 0 3 0 , 9 5 2 , 3 2 4 7 6 , 4 5 4 , 2 6 0 0 3 , 3 9 9 , 3 3 1 7 , 7 4 3 , 7 - - - 4 3 6 , 1 9 1 , 3 2 5 8 7 , 5 8 7 , 2 0 1 7 9 1 , 8 2 4 , 1 7 1 0 8 3 , 5 9 7 , 5 2 7 4 , 8 6 2 , 1 4 9 2 , 9 5 6 , 6 5 4 0 7 , 3 1 7 , 5 8 1 4 2 , 9 7 0 , 6 3 1 0 , 1 4 3 , 1 1 - - - 0 9 7 , 8 7 7 , 6 2 7 0 4 , 9 4 6 , 4 4 1 e r a w d r a H r e t u p m o C 9 3 8 , 0 4 5 , 3 2 5 6 8 , 2 7 1 , 2 6 e r a w t f o S r e t u p m o C 0 6 7 , 5 0 0 , 3 3 5 2 , 5 3 3 , 8 s e r u t x F i & e r u t i n r u F 8 6 6 , 8 7 5 , 6 1 6 8 3 , 8 2 4 , 7 2 3 1 0 , 9 2 4 , 5 1 6 9 2 , 5 2 0 , 5 4 0 2 , 4 9 9 , 6 5 0 1 , 0 6 4 , 3 1 9 9 3 , 7 5 8 , 2 4 1 0 5 , 3 0 6 , 9 7 2 1 , 2 2 4 , 2 2 3 7 7 , 8 3 0 , 0 3 l s e c h e V i 1 2 9 , 4 5 2 , 2 9 0 4 , 8 4 0 , 9 8 1 6 , 0 9 2 , 6 0 0 3 , 6 7 4 , 7 5 4 5 , 0 7 2 , 4 1 7 1 3 , 5 3 9 , 5 1 0 4 , 2 5 0 1 8 , 5 3 9 , 1 1 9 7 , 7 5 7 , 2 8 0 9 , 1 5 0 , 4 9 0 5 , 8 1 7 , 4 8 1 9 , 6 6 7 , 3 1 2 6 8 , 5 0 2 , 0 2 0 4 3 , 8 9 3 7 3 , 7 9 9 , 3 1 9 2 8 , 6 0 3 , 6 i s t n e m p u q E e c i f f O 0 0 3 , 8 8 8 , 4 2 2 9 5 9 , 1 8 2 , 5 4 1 0 5 1 , 3 1 1 , 2 5 2 1 4 3 , 6 0 6 , 9 7 9 0 8 , 6 0 5 , 2 7 1 9 0 1 , 5 9 3 , 7 9 3 9 0 1 , 5 9 3 , 7 9 3 3 0 5 , 3 0 4 , 2 0 3 6 1 6 , 4 7 9 , 5 6 2 6 8 5 , 3 3 7 , 6 7 4 7 9 6 , 7 7 0 , 5 2 3 6 , 9 4 5 , 1 2 1 1 5 6 , 1 6 2 , 0 6 3 2 0 2 , 8 0 7 , 2 4 7 1 4 8 , 1 0 7 , 9 9 8 8 , 4 4 7 , 9 8 4 5 1 , 5 6 6 , 2 6 6 9 2 2 , 4 1 1 , 7 8 3 3 0 5 , 3 0 4 , 2 0 3 1 5 6 , 1 6 2 , 0 6 3 4 0 9 , 4 6 7 , 8 1 8 7 8 , 5 7 0 , 3 1 1 7 7 6 , 0 5 9 , 5 6 2 4 5 1 , 5 6 6 , 2 6 6 6 1 4 , 9 2 6 , 7 2 4 6 6 , 9 2 2 , 7 3 6 0 9 , 4 6 0 , 3 5 6 r a e Y i s u o v e r P x e b u S m o r f e s n e p x e l e b a c o l l a o t e u d ) 6 0 8 8 1 3 , . s R , r a e y i s u o v e r P ( 4 2 2 , 4 5 5 , 1 . s R f o t n e t x e e h t o t r e h g h i s 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 i n o i t a c e r p e D : e t o N [ ] . d t L l i s e g o o n h c e T - - - - 8 1 9 , 6 6 7 , 3 1 l l i w d o o G y t r e p o r P l a u t c e l l e t n I s t h g R i l a t o T 1 2 3 4 5 6 7 . s R n i t n u o m A k c o b l t e N n o i t i a c e r p e D k c o b l s s o r G E - l e u d e h c S s t e s s a d e x F i t , a s A 7 0 0 2 1 3 h c r a M t , a s A 8 0 0 2 1 3 h c r a M o t p U 8 0 0 2 , 1 3 h c r a M n O s n o i t l e e d n w a r d h t i W e h t r a e y r o F o t p U 7 0 0 2 , 1 3 h c r a M 8 0 0 2 t a s A , 1 3 h c r a M r a e y g n i r u d s n o i t e e D l e h t r a e y s n o i t i d d A g n i r u d 7 0 0 2 t a , 1 s A l i r p A l s r a u c i t r a P . o N . l S 52 A N N U A L R E P O R T 2007 - 2008 SCHEDULES TO THE BALANCE SHEET AS AT Schedule - F Investments (Long term, trade, unquoted) In wholly owned subsidiaries Subex Technologies Inc Current Year : NIL (Previous year-incorporated in U.S.A, common stock 3,000 shares, fully paid up, of no par value) [Refer Note II.5, Schedule P] Subex Technologies Ltd incorporated in India, common stock 999,994 (Previous year, 999,994 )shares, fully paid up, at par value of Rs.10/- each) Advance for Share Capital in Subex Technologies Ltd [Refer Note II.5, Schedule P] Subex (UK) Ltd incorporated in UK, (common shares 5,039,565,245 fully paid, at par value of GBP0.00001 each) Subex Americas Inc incorporated in Canada, (common stocks 100 shares fully paid, at no par value ) [Refer II.4, Schedule P] Advance for acquisition Total Schedule - G Sundry debtors (Unsecured) Outstanding for more than six months - Considered good - Considered doubtful Others - Considered good - Considered doubtful Less: Provision for doubtful debts Total (considered good) Schedule - H Cash & bank balances Cash on hand Balance with scheduled banks in Current account in Indian Rupees in Deposit account in Indian Rupees in Exchange Earner’s Foreign Currency account - - - 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. 1,182,120) in Checking account with First Union Bank, New Jersey (Maximum outstanding during the year Rs. 43,396,115) - - ABN Amro Bank - Dubai - - (Maximum outstanding during the year Rs. 4,364,000) in Bank of China - RMB account - China (Maximum outstanding during the year Rs.2,180,181) in HSBC Bank - PARIS (Maximum outstanding during the year Rs.19,045,600) (Maximum outstanding during the Year Rs. 360,362,605) - Wachovia Bank, USA - Wachovia Bank, USA - HSBC Bank - Dubai (Maximum outstanding during the year Rs.1,076,250) (Maximum outstanding during the year Rs.5,272,524) Total March 31, 2008 March 31, 2007 Amount in Rs. - 308,018,007 9,999,940 9,999,940 30,000,000 6,473,868,240 - 6,473,868,240 7,749,575,428 - - 14,263,443,608 7,403,696,025 14,195,582,212 15,707,751 260,449,673 324,962,440 28,690,000 323,569,496 203,788,312 452,372,449 - 276,157,424 353,652,440 629,809,864 289,139,673 340,670,191 22,470 1,619,419 17,424,597 69,088,130 64 875,319 211,549 1,337,294 144,955 458,672 - - 1,692,090 92,874,559 - 527,357,808 452,372,449 979,730,257 203,788,312 775,941,945 61,435 8,509,020 403,750,607 21,921,738 937,379 917,455 2,156,371 - 1,465,235 - 360,362,605 1,076,250 801,158,095 A N N U A L R E P O R T 2007 - 2008 53 March 31, 2008 March 31, 2007 Amount in Rs. 172,657,203 1,603,737,888 111,730,708 21,170,731 70,926,483 1,980,223,013 43,545,621 625,303,150 42,535,399 11,128,731 45,756,098 768,268,999 149,303,457 300,145,835 99,439,197 152,316,742 23,428,378 - 805,014 70,997,989 - - 32,505,652 2,866,506 5,912,868 88,675,783 3,346,731 18,397,515 127,535,322 812,794 93,606,845 69,631,450 11,833,865 17,750,427 2,983,654 - 425,292,788 112,283,015 537,575,803 17,129,916 681,256 1,096,373 546,997,293 565,904,838 538,913,980 195,806,241 734,720,221 33,843,931 2,182,173 - 207,200,237 243,226,341 SCHEDULES TO THE BALANCE SHEET AS AT Schedule - I Loans & Advances (Unsecured, considered good, subject to confirmation) Loans and advances recoverable in cash or in kind or for value to be received Loans and advances to wholly owned subsidiaries Advance Income Tax including TDS MAT credit entitlement Other Deposits Total Schedule - J Current Liabilities & Provisions Current Liabilities: Sundry Creditors (other than dues to Micro & Small Enterprises) (Note II.16.8, Schedule P) Advance received from Customers Deferred Income Duties & Taxes Subex Technologies Inc. (Net) (Wholly owned Subsidiary) Unclaimed Dividends Provisions: Taxation Dividends Tax on proposed dividends Employee Benefits Warranty Others Total Schedule - K Other income Interest Income (Gross of TDS of Rs.3,329,016, Previous year, Rs.3,794,118) Other income Profit on sale of Fixed Assets (Net) Exchange Fluctuation gain (Net) Total 54 A N N U A L R E P O R T 2007 - 2008 SCHEDULES TO THE PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED March 31, 2008 Amount in Rs. March 31, 2007 Schedule - L Direct cost Purchased systems & solutions Support expenses Total Schedule - M Personnel costs Salaries, wages & allowances Contribution to provident fund and other funds Other staff related costs Sub contract charges Total Schedule - N Other operating, selling and administration expenses Software purchases Rent Power, fuel and water charges Repairs & Maintenance Insurance Communication Costs Printing & Stationery Travelling & Conveyance Directors sitting fees Rates & Taxes including filing fees Commission on sales Advertisement & Business promotion Consultancy charges Provision for doubtful debts Loss on sale of Assets & Assets written off (Net) Miscellaneous expenses Total Schedule - O Financial costs Interest on FCCBs and other term loans Other interest & bank charges Total 35,868,381 54,823,262 90,691,643 90,691,643 444,550,710 22,156,844 50,141,769 427,635,600 944,484,923 6,812,885 48,113,674 7,829,648 19,425,600 4,551,036 19,452,011 3,195,818 105,148,445 22,500 18,568,491 4,841,236 50,372,193 17,990,158 288,690,000 - 5,322,829 600,336,524 179,306,882 116,791,294 296,098,176 52,187,455 36,409,103 88,596,558 88,596,558 396,828,475 13,751,205 26,451,102 999,939,646 1,436,970,428 4,767,391 30,639,977 7,048,363 8,099,126 3,713,714 14,804,483 2,759,106 106,177,110 42,500 2,749,911 22,267,351 16,860,387 9,026,377 150,000,000 3,298,292 6,184,433 388,438,521 11,566,667 63,779,309 75,345,976 A N N U A L R E P O R T 2007 - 2008 55 Schedule – P SIGNIFICANT ACCOUNTING POLICIES I. 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 under the Companies (Accounting Standard) Rules 2006 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. I.3. Revenue recognition Revenue from Contracts for software product licences includes fees for transfer of licences, installation and commissioning. This revenue is recognized under the percentage completion method based on the extent of work determined to have been completed as compared to the work involved in the overall scope of the contract. In the event of any expected losses on a contract, the entire amount is provided for in the accounting period in which such losses are first anticipated. Revenue from sale of additional software licences are recognized on transfer. Revenue from Software development is recognized on the basis of chargeable time or achievement of prescribed milestones as relevant to each contract. Sale of hardware under reseller arrangements are recognized on dispatch of goods to customers and are recorded net of discounts, rebates for price adjustment, projections, shortage in transit, taxes and duties. Interest on investments and deposits are booked on a time proportion basis taking into account the amount invested and the rate of interest. 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 the useful lives of assets. Depreciation is charged on pro-rata basis for assets purchased/sold during the year. 56 A N N U A L R E P O R T 2007 - 2008 Depreciation Rates % 25.00 20.00 20.00 20.00 20.00 20.00 The rates of depreciation adopted are as under: Particulars Computers (including Software) Furniture & Fixtures Vehicles Office equipments Intellectual Property Rights Goodwill Individual assets costing less than Rs. 5,000 are depreciated in full, in the year of purchase. I.6. 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 Option under Employees Stock Option Plan – II and Plan-III (ESOP-II and ESOP-III) 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. I.7. Employee Benefits The Company’s contribution to provident fund, a defined contribution scheme, is charged to the profit and loss account on accrual basis. Liability for gratuity is funded with Life Insurance Corporation of India (LIC). Gratuity expense for the year has been accounted based on actuarial valuation carried out at the end of the financial year. The retirement benefit obligation recognized in the balance sheet represents the present value of the defined benefit obligations adjusted for unrecognized past service cost and as reduced by the fair value of scheme assets. Any asset resulting from this calculation is limited to past service cost plus the present value of available refunds and reduction in future contributions to the scheme. Liability for encashment of leave considered to be long term liability is accounted for on the basis of an actuarial valuation. Provision for outstanding leave credits considered as short term liability is as estimated by the management and accrued for based on last month’s salary. Other short term employee benefits like medical, leave travel etc are accrued based on the terms of employment on a time proportion basis I.8. Research and development Expenses incurred on research and development is 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.9. 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 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, in the Profit and Loss account. 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 average/ daily exchange rates prevailing during the year. I.10. Investments Long term Investments are stated at cost. Diminution in the value of investments other than temporary in nature is provided for. I.11. 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 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. Deferred tax assets are recognized and carried forward to the extent that there is a reasonable / virtual certainty, as applicable, that sufficient future taxable income will be available against which such deferred tax assets can be realized. Minimum alternative tax (MAT) paid in accordance to the tax laws, which gives rise to future economic benefits in the form of adjustment of future income tax liability, is considered as an asset if there is convincing evidence that the Company will pay normal income tax after the tax holiday period. Accordingly, MAT is recognized as an asset in the balance sheet when it is probable that the future economic benefit associated with it will flow to the Company and the asset can be measured reliably. I.12. Cash Flow Statement Cash flow statement has been prepared in accordance with the indirect method prescribed in Accounting Standard 3, issued under the Companies (Accounting Standard) Rules 2006. I.13. 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.14. 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. I.15 Impairment Of Fixed Assets At each balance sheet date, the Company reviews the carrying amounts of its fixed assets to determine whether there is any indication that those assets suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment loss. Recoverable amount is the higher of an asset’s net selling price and value in use. In assessing value in use, the estimated future cash flows expected from the continuing use of the asset and from its disposal are discounted to their present value using a pre-tax discount rate that reflects the current market assessments of time value of money and the risks specific to the asset. Reversal of impairment losses recognized in prior years, if any, is recorded when there is an indication that the impairment losses recognized for the asset no longer exist or have decreased. However, the increase in carrying amount of an asset due to reversal of an impairment loss is recognized to the extent it does not exceed the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognized for the asset in prior years. II. II.1. Deferred income taxes a) Provision for income taxes has been made in terms of Accounting Standard 22 ‘Accounting for Taxes on Income’ issued by Institute of Chartered Accountants of India. NOTES TO ACCOUNTS Amount in Rs. 2007-08 Movement in deferred tax asset (Liability) Particulars Net deferred tax asset at beginning of the year Add: Impact of timing difference for the year Net deferred tax asset at end of the year 16,917,000 7,259,010 24,176,010 2006-07 7,912,000 9,005,000 16,917,000 b) The net deferred tax asset as at March 31, 2008 comprises the tax impact arising from timing differences on account of: Particulars Depreciation As at March 31, 2008 24,176,010 Amount in Rs. As at March 31, 2007 16,917,000 II.2. Contingent liabilities Receivables factored – Rs. 133,367,178 (previous year: Rs. 416,664,307) Claims against the Company not acknowledged as debt – Rs. 24,365,085 (previous year: Rs. 39,136,631). These claims relate to income tax demands pertaining to FY 2002-03 & 2003-04. The demands are being contested by the Company. The Company has provided a Corporate Guarantee to ABN Amro Bank, Bangalore to provide credit facilities to Subex Americas Inc, Canada and Subex (UK) Ltd, London – Rs. 500,000,000 (previous year: Nil) A N N U A L R E P O R T 2007 - 2008 57 II.3. The Company has made 2 issues of Global Depository receipts (GDRs) in April 2006 and June 2006. The details of these issues are as given below : Sl No. Month of Equivalent Equity shares 1 of Rs. 10 each 1 of Rs. 10 each Amount in Rs. Issue price No. of GDRs per GDR (Rs.) 400.00 532.24 Issue April 2006 June 2006 issued 1,109,878 1 2 11,728,728 In addition, the Company has completed a programme of sponsored GDR offerings, whereby an option has been offered to the existing share holders of the Company to transfer their holdings in favour of Institutional Investors. All the above GDR’s are listed on the Professional Securities Market of the London Stock Exchange. II.4. Acquisition of Subex Americas Inc (formerly Syndesis Ltd, Canada) During the year, the Company completed the acquisition of Syndesis Ltd, Canada, a Company engaged in Service Assurance and fulfillment space in the Telecom service industry. The investment carrying value of Rs. 7,749,575,428 includes the incidental costs of acquisition. Pursuant to the acquisition, Syndesis Limited has been renamed as Subex Americas Inc. II.5. Scheme of Arrangement – Services Business During the year, the Company filed an application with Hon’ble High Court of Karnataka to transfer the Services Business Division to Subex Technologies Ltd, a wholly owned subsidiary of Subex Ltd under a scheme of arrangement. On obtaining the order from the Hon’ble High Court of Karnataka, the Company has transferred the Services business to Subex Technologies Ltd with effect from 1st September 2007 (appointed date) at an aggregate consideration of Rs.310,000,000. In accordance with the order of the Hon’ble High Court the Company shall receive 3,000,000 shares of Subex Technologies Ltd valued at Rs.30,000,000 in settlement of the consideration with the balance Rs. 280,000,000 being treated as unsecured loan taken by the subsidiary from the Company. The deficit arising out of the transfer amounting to Rs 404,560,001 as detailed below has been charged to the Securities Premium account, in accordance with the order of the Court. Amount in Rs. 406,541,994 308,018,007 714,560,001 (310,000,000) 404,560,001 Particulars of assets and liabilities transferred Net current assets Investments in Subex Technologies Inc Book value of assets transferred Consideration received Amount written off to Securities premium Also refer Note II.14, Schedule P. II.6. Foreign Currency Convertible Bonds (FCCB) During the year 2006-07, the Company issued Foreign Currency Convertible Bonds (FCCBs) aggregating to US$ 180 million to Institutional Investors. The bonds carry an initial interest rate of 2% per annum and are redeemable by March 9, 2012, if not converted in to equity shares as per terms of issue. Other terms and conditions governing the bonds are as follows: a) Conversion of the bonds into equity shares at the option of the bond holders at any time after 18th April 2007 58 A N N U A L R E P O R T 2007 - 2008 b) Conversion Price – Rs.656.20 per share c) Exchange Rate for purpose of conversion - 1 US$ = Rs.44.08 d) Interest of 2% per annum payable semi-annually in arrears e) Redemption with yield to maturity guaranteed return of 8% per annum, calculated on semi-annual basis The Company can exercise an option to redeem the bonds in whole or in part on or any time after 9th March 2010, but prior to 29th January 2011, subject to appropriate approvals at a price determined on the terms defined in the offer document. g) Listing on the Professional Securities Market of London Stock f) Exchange The difference between the yield to maturity guaranteed rate of return of 8% and the coupon rate of 2% represents the due premium payable on redemption and is charged to Securities Premium over the life of the bonds. II.7. Monies received pending allotment During the year, the company allotted 2,230,000 warrants to promoters/ promoters group, entitling each holder to obtain allotment of one equity share against each such warrant on a preferential basis at a price of Rs.630.31. Under the terms of issue, the Company has received 10% of the total consideration amounting to Rs.140.55 Million. To obtain the underlying equity shares, the balance 90% shall be paid within 18 months from the date of allotment of the warrants in one or more tranches. The money received by the Company has been utilized for long term working capital requirements. II.8. 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.48,113,674 (previous year: Rs. 29,915,778) As of March 31, 2008 future minimum lease payments for non- cancelable operating leases for the next five fiscal years are: Amount in Rs. March 31, 2008 March 31, 2007 32,478,686 81,377,844 55,814,278 - 132,917,145 - Within one year Due in a period between one year and five years Due after five years II.9. Employees Stock Option Plan (ESOP) ESOP – II During 1999-2000, the Company established a Stock Option Scheme 2000 under which 500,000 options have been allocated for grant to the employees of the Company and its subsidiaries. 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 June 19, 1999. As per the scheme, the Compensation 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 449,271 net options have been granted to 540 employees as at March 31, 2008. Out of the above 73,798 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 resulted in a debit of Rs.19,082,165 (Previous year: Debit of Rs. 2,238,027) to the Profit & Loss account for the year. ESOP – III During 2005-2006, the Company established a new Stock Option Scheme 2005 under which 500,000 options have been allocated for grant to the employees. Subsequently, during the year 2006- 2007, the number of options allocated for grant to the employees was increased to 2,000,000 options. 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 June 19, 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 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 March 31, 2008, 1,724,969 (net) options have been granted to 1,253 employees under this scheme. Out of the above 105,539 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 resulted in a debit of Rs.4,236,147 (Previous year: Debit of Rs. 11,981,639) to the Profit & Loss account for the year. Employee Stock Options details as on the balance sheet date are : ESOP – II : As at March 31, 2008 March 31, 2007 As at Options outstanding at the beginning of the year Granted during the year Forfeited/ cancelled Exercised Balance at end of the year ESOP – III : Options outstanding at the beginning of the year Granted during the year Forfeited/ cancelled Exercised Balance at end of the year 261,202 - 16,237 30,927 214,038 364,027 112,200 108,393 106,632 261,202 As at March 31, 2008 March 31, 2007 As at 422,533 1,671,700 375,551 437 1,718,245 70,380 382,800 24,360 6,287 422,533 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. Particulars Options outstanding at the beginning of the year ESOP – II ESOP – III Granted during the year ESOP – II ESOP – III Exercised during the year ESOP – II ESOP – III Cancelled & Lapsed during the year ESOP – II ESOP – III Options outstanding at the end of the year ESOP – II ESOP – III Options exercisable at the end of the year ESOP – II ESOP – III 2007-08 2006-07 Options (Nos) Weighted average exercise price per stock options (Rs.) Weighted average exercise price per stock options (Rs.) Options (Nos) 261,202 422,533 - 1,671,700 30,927 437 16,237 375,551 408.57 429.37 364,027 70,380 284.25 342.55 - 112,200 522.32 380.31 382,800 442.38 106,632 6,287 108,393 24,360 214,038 1,718,245 427.48 261,202 408.57 366.67 422,533 429.37 73,798 105,539 24,634 2,963 A N N U A L R E P O R T 2007 - 2008 59 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 is : risk-free interest rate of 6.50%, expected life : 3 years, expected volatility of share : 63.92% and expected dividend yield: 0.28%. 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/(loss) (as reported) Add: Stock-based employee compensation relating to grants after April 1, 2006 Less: Stock based compensation expenses determined under fair value based method for the above grants Net Profit/(loss) (proforma) Basic Earning per share (as reported) Basic Earning per share (proforma) Diluted Earning per share (as reported) Diluted Earning per share (proforma) March 31, 2008 Amount in Rs. March 31, 2007 (61,885,553) 23,318,312 62,566,550 (101,133,791) (1.77) (2.90) (1.77) (2.90) 208,143,571 14,219,667 22,757,321 199,605,917 6.50 6.23 6.48 6.41 II.10. Related party information A) Related parties Wholly owned subsidiaries controlled by the company: Subex Technologies Inc., USA Subex Technologies Ltd, India Subex (UK) Ltd Subex Inc, USA Subex (Asia Pacific) Pte Ltd Subex America Inc., Subex Azure (U.S) Inc. Subex Azure Holdings Inc Subex Azure (Delaware) Inc Syndesis Development India Private Ltd Syndesis IP Holdings Limited, Canada 2101874 Ontario Inc Subex Azure (GB) Ltd Subex Azure (Ireland) Ltd Enterprises over which some of the directors exercise significant infulence Cellcomm Solutions Ltd Subex Holdings Private Limited (SHPL) Key Management Personnel Subash Menon, Founder Chairman, Managing Director & CEO Sudeesh Yezhuvath, Whole Time Director 60 A N N U A L R E P O R T 2007 - 2008 B) Details of the transactions with the related parties other than employees who are related to the Directors of the company are as under: Nature of Transaction Subsidiaries 2007-08 2006-07 463,299,185 - 50,165,299 3,354,235 999,939,646 36,687,827 28,286,929 - - - 89,642,235 37,085,234 17,864,752 49,777,248 13,323,908 3,021,228 a) Purchase of services: i) STI* ii) STL** iii) Subex (UK) Ltd iv) Subex Inc b) Purchase of hardware from Cellcomm Solutions Ltd c) Sale of services: Subex (UK) Ltd i) ii) Subex Inc iii) Subex (Asia Pacific) Pte Ltd d) Royalty Received from: Subex (UK) Ltd i) ii) Subex Inc iii) Subex (Asia Pacific) Pte Ltd e) Salary, Perquisites, Commission etc. (Refer Note: II.12, Schedule P) f) Amount due as at year end from STI* i) ii) STL** iii) Subex (UK) Ltd iv) Subex Inc v) Subex (Asia Pacific) Pte Ltd vi) Subex Americas Inc, Canada 55,597,295 155,426,129 939,972 - - 394,612,450 597,305,795 330,403,496 39,759,581 341,125,764 g) Expenses incurred on behalf of Subex Americas Inc, Canada (see Note 3) h) Amount due as at year end to STI* i) ii) Cellcomm Solutions Ltd 162,975,799 - - - i) Sharing of expenses related to services business (STL) see Note – 1 7,593,353 j) Expenses allocated to Subex (UK) Ltd i) ii) Subex Inc iii) Subex (Asia Pacific) Pte Ltd iv) Subex Americas Inc v) Subex Technologies Ltd (see Note 2) k) Commission paid on service business l) Transfer of Service Business to STL Shares alloted from STL i) ii) Loan to STL m) Money received against warrants issued n) Corporate Guarantee provided by Company to financial institutions in respect of finances availed by Subsidiaries 27,326,167 10,574,251 3,725,496 61,645,149 35,663,585 - 30,000,000 280,000,000 - 500,000,000 - - - - 144,231,174 12,911,455 351,862,273 249,856,467 10,672,956 - - - 271,766,496 - 5,616,032 20,302,150 17,636,896 3,413,161 - - 1,405,562 - - - - Enterprises over which some of the directors exercise significant infulence 2006-07 2007-08 Amount in Rs. Key Management Personnel 2007-08 2006-07 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 113,455,800 - - - - - 693,243 - - - - - - - - - - - - - - - 330,496 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 12,180,000 - - - 24,946,139 - - - - - - - - - - - - - - - - - - 27,103,330 - - - - - - - - - - - - - - - - - - - - - * STI = Subex Technologies, Inc. ** STL = Subex Technologies Ltd Note-1 – Sharing of expenses is in relation to expenses borne by Subex Technologies Ltd towards software service business of Subex Limited as agreed between both companies. These have been accounted under depreciation, personnel cost and various heads included under Schedule-N Note -2 – Sub Contract charges under schedule M is net of costs allocated to STL of Rs.35,663,585 (Previous year : Nil) Note – 3- the Personnel costs under schedule M is net of recovery of costs of Rs.162,975,799 (Previous year : Nil) incurred on behalf of Subex Americas Inc A N N U A L R E P O R T 2007 - 2008 61 II.11. Earnings/(Loss) per share (EPS): Profits after tax attributable to shareholders Weighted average number of shares for basic EPS Weighted average number of shares for diluted EPS Earnings per share – basic Earnings per share – diluted 2007-08 (61,885,553) 34,930,103 35,237,883 (1.77) (1.77) Amount in Rs. 2006-07 208,143,571 32,020,111 32,145,562 6.50 6.48 Face value of shares : Rs. 10 each The difference in the number of shares information used for calculation of diluted EPS as compared to that used for computing Basic EPS is due to outstanding stock options that are granted to employees. The Company issued certain warrants during the year which are outstanding at the end of the year. Considering the issue price of these warrants are higher than the fair value of the underlying shares at the end of the year, they are ignored for computing number of shares for purpose of diluted earnings per share. The options and warrants outstanding at March 31, 2008 are anti-dilutive at the date and hence ignored for purposes of computing Diluted EPS. II.12. a) Remuneration to Directors; A. B. Remuneration to Whole-time directors Salary and allowances (including perqusites of Rs. 1,305,906 (2006-07 – Rs. 522,143) Contribution to Provident Fund Total (A) Remuneration to Non-Executive directors Sitting fees paid to Non-executive directors Commision paid to Non-executive Directors Total (B) Total (A+B) b) Computation of Net Profit in accordance with Section 198 / 349 of the Companies Act, 1956 Particulars Profit / (Loss) before tax as per the Profit & Loss Account Remuneration to Directors (Including Commission & Sitting fees) - See (a) above Add/(Less): Surplus/(Loss) on sale of Fixed Assets (Net) Net Profit / (Loss) u/s 198 / 349 of the Companies Act, 1956 Maximum Remuneration of Whole-time Directors under provisions of the Companies Act Remuneration to Whole-time Directors included in the Profit and Loss account (including Commission Rs. Nil, Previous Year : Nil) Maximum Commission to Non-executive directors under the Companies Act Commission Paid Amount in Rs. 2007-08 2006-07 9,600,000 2,580,000 12,180,000 22,500 - 22,500 12,202,500 2007-08 (50,126,118) 12,202,500 1,096,373 (36,827,245) 9,600,000* 23,242,139 1,704,000 24,946,139 42,500 2,000,000 2,042,500 26,988,639 Amount in Rs. 2006-07 259,092,856 26,988,639 (3,298,292) 282,783,203 28,278,320 9,600,000 Nil Nil 24,946,139 2,847,832 2,000,000 * In view of the inadequacy of profits in Year ending March 31, 2008, the maximum remuneration is based on Schedule XIII to the Companies Act, 1956 and excludes Contribution to Provident Fund. c) During the year ended March 31, 2008, the Company has paid an amount of Rs. 38,285,906 to its Whole-time directors towards remuneration and has applied to the Central government for approval of payments that are in excess of the maximum remuneration payable under the Companies Act, 1956. Pending the Central government’s approval, such excess is treated as monies due from the Whole-time directors being held by them in trust for the Company and is included under Loans and advances (Schedule I to the financial statements). 62 A N N U A L R E P O R T 2007 - 2008 II.13. Auditors remuneration Audit fees (including fees for audit of consolidated account & issuance of report on the corporate governance and tax audit) (including service tax as applicable) For tax matters (including service tax as applicable) Other services Reimbursement of expenses 2007-08 2,150,000 200,000 - - Amount in Rs. 2006-07 2,413,160 224,480 7,888,654* 260,247* * Represents fees and out of pocket expenses towards work done in connection with issue of FCCBs and GDRs. These amounts have been debited to the securities premium. II.14. Pursuant to court order, the Company has transferred Service business to its wholly-owned subsidiary, Subex Technologies Ltd. The disclosure required under the Accounting Standard 24 “Discontinuing Operations”, with regard to the Service business are as follows: Amount in Rs. Particulars Revenue from discontinued operations Expenses from discontinued operations Net Cash flow from operating activities Net Cash flow from Investing activities Net Cash flow from financing activities The Service division was a separate business segment as per AS 17 segment reporting. for the year ended March 31, 2008 523,956,263 497,434,036 (139,400,000) - - March 31, 2007 1,116,146,027 1,015,850,770 100,080,000 - - II.15. Details of warranty Year 2007-08 2006-07 Probable period of outflow in case of warranty is 6-12 months. Opening balance 2,983,654 3,157,312 Additions during the year 2,866,506 2,983,654 II.16. Others 1 The Company is availing non-fund based limits and overdrafts against lien on the fixed deposits. Amount of such non-fund based limits utilized as on March 31, 2008 is Rs.48,463,522 (previous year: Rs. 343,017,163) 2. Estimated amount of contracts, remaining to be executed on capital account and not provided for (net of advances paid) Rs.5,199,547 (previous year: Rs. 9,277,855) 3. Unclaimed dividend of Rs.805,014 represent dividends not claimed for the period from 2001-2008. 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’. (i) Forward/Option Contracts (Also refer Note II.16.5, Schedule P) Utilisation / (reversal) during the year (2,983,654) (3,157,312) Amount in Rs. Closing balance 2,866,506 2,983,654 4. Personnel Cost for the year includes expenditure on Research and Development of Rs.66,755,179 (previous year: Rs. 44,871,701). This is as certified by the management and relied upon by the auditors. 5. As per the recent guidelines on accounting for Derivatives issued by the Institute of Chartered Accountants of India, the Company has provided for Mark to Market losses of Rs. 5,912,868 (included in Other provisions under Schedule J) in respect of the derivative contracts outstanding at the end of the year. 6. The Company has entered into the following derivative instruments for the purposes of hedging the risks associated with foreign exchange exposures as at March 31, 2008: Particulars Forward contracts Option contracts March 31, 2008 Buy/Sell Sell Sell Amount (INR) 55,987,000 202,244,000 US$ 1,400,000 5,000,000 March 31, 2007 Buy/Sell Sell Nil US$ 800,000 Nil Amount (INR) 37,238,000 Nil A N N U A L R E P O R T 2007 - 2008 63 (ii) The year end foreign currency exposures that have not been hedged by a derivative instrument or otherwise are given below: March 31, 2008 Receivable towards Export of Goods & Services Net Receivable from wholly owned subsidiaries Rs. 4,581,770 71,011,476 77,350,790 3,393 2,246,915 597,305,795 671,529,260 39,759,581 Foreign currency GBP 56,893 Euro 1,120,828 US$ 1,929,140 AED 311 AUD 60,874 GBP 7,415,031 USD 16,748,037 SGD 1,367,613 March 31, 2007 Rs. 9,972,165 47,465,366 862,864,309 1,502,028 Foreign currency GBP 118,480 Euro 830,250 US$ 19,971,259 CAD 40,551 351,862,273 249,856,467 10,672,955 GBP 4,253,265 US$ 5,519,653 SGD 374,097 Amounts payable in foreign currency on account of: Import of Goods & Services Capital imports [including intangibles] Foreign Currency Convertible Bonds March 31, 2008 Rs. 19,697,427 - 305,021 355,359 Foreign currency US$ 491,257 - GBP 3,787 US$ 8,863 March 31, 2007 Rs. 137,695,655 2,263,268 - 2,160,075 Foreign currency US$ 3,149,436 Euro 39,000 - US$ 49,800 7,200,000,000 US$ 180,000,000 7,807,500,000 US$ 180,000,000 64 A N N U A L R E P O R T 2007 - 2008 7. The Company adopted the Revised Accounting Standard 15 on employee benefits with effect from April 1, 2006. The net incremental liability towards leave salary and gratuity amounting to Rs. 8,527,028 has been adjusted against the opening balance of reserves at April 1, 2006. The Company offers the following employee benefit schemes to it’s employees. The following table sets out the funded status of the defined Benefit Schemes and the amount recognized in the financial statements as of March 31, 2008. I 1 2 3 4 5 6 7 8 II 1 2 III 1 2 3 4 5 IV 1 2 3 4 5 6 7 8 9 10 V 1 2 3 4 5 6 7 VI 1 2 3 4 Components of employer expense Current Service cost Interest cost Expected return on plan assets Curtailment cost/(credit) Settlement cost/(credit) Past Service Cost Actuarial Losses/(Gains) Total expense recognized in the Statement of Profit & Loss Account Actual Contribution and Benefit Payments for year ended 31 March 2008 Actual benefit payments Actual Contributions Net asset/(liability) recognized in Balance Sheet as at March 31, 2008 Present value of Defined Benefit Obligation (DBO) Fair value of plan assets Funded status [Surplus/(Deficit)] Unrecognized Past Service Costs Net asset/(liability) recognized in Balance Sheet Change in Defined Benefit Obligations during the year ended March 31, 2008 Present Value of DBO at beginning of year Current Service cost Interest cost Curtailment cost/(credit) Settlement cost/(credit) Plan amendments Acquisitions Actuarial (gains)/ losses Benefits paid Present Value of DBO at the end of year Change in Fair Value of Assets during the year ended March 31, 2008 Plan assets at beginning of year Acquisition Adjustment Actual return on plan assets(estimated) Actuarial Gain/(Loss) Actual Company contributions(less risk premium, ST) Benefits paid Plan assets at the end of period Actuarial Assumptions Discount Rate Expected Return on plan assets Salary escalation Attrition Rate Amount in Rupees Gratuity March 31,2008 March 31,2007 2,487,700 529,720 (91,370) - - - 1,221,020 4,147,070 3,426,895 333,852 98,418 - - - (72,395) 3,786,772 1,215,060 1,102,330 632,474 366,658 10,295,070 1,092,920 (9,202,150) - (9,202,150) 7,229,036 1,062,832 (6,166,204) - (6,166,204) 7,229,036 2,487,700 529,720 - - - - 1,263,670 (1,215,060) 10,295,070 1,062,832 - 91,370 51,440 1,102,330 (1,215,060) 1,092,920 8.70% 9.00% 5.00% 5.00% 4,173,156 3,426,895 333,852 - - - - (72,393) (632,474) 7,229,036 1,230,230 - 98,418 - 366,658 (632,474) 1,062,832 8.00% 8.00% 5.00% 5.00% A N N U A L R E P O R T 2007 - 2008 65 8. Based on information available with the Company there are no dues to Small Scale Industries and Micro and Small enterprises as defined in The Micro, Small & Medium Enterprises Development Act, 2006. This has not been verified by the auditors. 9. During the year, the Company revised its accounting policy for accounting exchange gain/loss on liabilities incurred in acquiring fixed assets. Exchange differences on settlement/payment of such liabilities are being charged to profit and loss account pursuant to the revised policy, in line with the Companies (Accounting Standard) Rules 2006. Such differences were adjusted to the cost of fixed assets in earlier years. The impact on the results for the year on account of the change in the accounting policy was not significant. 10. A director of the Company has provided a personal guarantee in respect of long term loans from Banks of Rs.755,848,738 included in schedule D of the financial statements. Further, the promoters’ shares have also been pledged towards these loans. 11. Since the Company prepares consolidated financial statements, no segment information is disclosed in these financial statements. 12. Previous year’s figures have been regrouped to conform to the classifications for the current year. II.17. Other information pursuant to Schedule VI of the Companies Act, 1956. Year ended March 31, 2008 Amount in Rs. Year ended March 31, 2007 19,315,371 31,589,202 49,994,507 147,893,999 670,332 1,883,954 20,793,484 49,433,888 - - 194,844,732 1,456,331,194 1,489,211,407 1,825,734,725 415,754 - 3 - - - - 464,490 - 3 - 311,077 CIF value of imports : Import of systems and solutions Capital goods Expenditure in foreign currency Traveling expenses Interest expenses Consideration for acquired assets Product marketing expense and other expenditure incurred overseas for software development Earnings in foreign exchange Income from software development services and products on receipt basis 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 2006-07 2005-06 2007-08 2006-07 2007-08 2006-07 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 Sudeesh Yezhuvath Director Director Place : Bangalore V. R. Suresh Rao Date : 25th April, 2006 Legal Counsel Accounts & Finance 66 A N N U A L R E P O R T 2007 - 2008 Subash Menon V. Balaji Bhat Chairman & Managing Wholetime Director Rajkumar C Company Secretary & General Manager - BALANCE SHEET ABSTRACT AND COMPANY’S GENERAL BUSINESS PROFILE COMPANY: SUBEX AZURE LIMITED I. II. III. Registration details Registration No. Balance sheet date 1 6 6 6 3 3 1 - 0 3 - 2 0 0 8 State code Capital raised during the year (Rupees in thousands) Public issue Bonus issue - - Rights issues Private placements - Equity - Preference Preferential offer of shares under Employee Stock Option Plan scheme* - Equity Position of the mobilisation and development of funds (Rupees in thousands) Total liabilities 1 6 5 8 2 0 8 9 . 0 0 Total assets YEAR : 2007-2008 0 8 - - - 3 1 3 . 6 4 1 6 5 8 2 0 8 9 . 0 0 Source of funds Paid up capital Secured loans 3 4 8 4 7 0 . 8 9 7 3 7 2 3 2 . 8 7 Share application money Reserves & surplus 1 4 0 5 5 9 . 1 3 7 2 4 1 0 0 1 . 2 2 Unsecured loans Deferred tax liability 8 1 1 4 8 2 4 . 8 9 - Application of funds Net fixed assets Net current assets Miscellaneous expenditure 2 6 5 9 7 4 . 6 2 2 0 2 8 4 9 4 . 7 7 - Investments Deferred tax assets Accumulated lossess 1 4 2 6 3 4 4 3 . 6 1 2 4 1 7 6 . 0 1 - IV. Performance of Company (Rupees in thousands) 2 0 0 4 5 8 9 . 0 0 ( 5 0 1 2 6 . 1 2 ) ( 1 . 7 7 ) Total expenditure Profit/(loss) after tax Earning per share from ordinary activities (diluted) (Rs.) 2 0 5 4 7 1 5 . 1 2 ( 6 1 8 8 5 . 5 5 ) ( 1 . 7 7 ) Turnover Profit/(Loss) before tax Earning per share from ordinary activities (basic) (Rs.) Interim dividend rate % Final dividend rate % - - V. Generic name of three principal products/ services of the Company (As per monetary terms) Item code no. (ITC code no.) Product Description 8 5 / 2 4 C O M P U T E R S O F T W A R E *Issue of shares arising of the exercise of option granted to employees under the Company’s ESOP II (2000) Subash Menon Founder Chairman & Managing Director Sudeesh Yezhuvath Chief Operating Officer V. Balaji Bhat Director Place : Bangalore Date : June 30, 2008 Raj Kumar Chief Counsel & Company Secretary A N N U A L R E P O R T 2007 - 2008 67 Financial Review Subex Limited (Consolidated) 68 A N N U A L R E P O R T 2007 - 2008 AUDITORS’ REPORT TO THE BOARD OF SUBEX LIMITED 1. We have audited the attached Consolidated Balance Sheet of Subex Limited, formerly Subex Azure Limited, (“the Company”) and it’s subsidiaries (the Company and its subsidiaries constitute “the Group”) as at March 31, 2008, 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, whose financial statements reflect gross total assets of Rs. 4,968,761,974 as at March 31, 2008, total revenues of Rs. 4,854,259,919 and net cash outflows of Rs. 79,565,647 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 and where applicable, their conversion based on accounting principles generally accepted in India have been reported on by other accountants. These report/returns have been furnished to us, and our opinion, in so far 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/accountants. 4. We report that the consolidated financial statements have been prepared by the Company’s management in accordance with the requirements of Accounting Standard (AS) 21, ‘Consolidated Financial Statements’, issued under the Companies (Accounting Standard) Rules, 2006. 5. On the basis of the information and explanations given to us and on the consideration of the separate audit and accountants reports on individual financial statements and on the other financial information of the components of Subex 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: in the case of the Consolidated Balance Sheet, of the state of affairs of the Group as at March 31, 2008; in the case of the Consolidated Profit and Loss Account, of the loss of the Group for the year then ended; in the case of the consolidated Cash Flow Statement of the cash flows of the Group for the year then ended. c) a) b) For Deloitte Haskins & Sells Chartered Accountants V Srikumar Partner M. No. 84494 Place : Bangalore Date : June 30, 2008 A N N U A L R E P O R T 2007 - 2008 69 CONSOLIDATED BALANCE SHEET AS AT Schedule March 31, 2008 March 31, 2007 Amount in Rs. SOURCES OF FUNDS SHAREHOLDERS’ FUNDS Share Capital Monies received pending allotment [Refer Note II.7, Schedule P] Reserves and Surplus LOAN FUNDS Secured Loans Unsecured Loans Total APPLICATION OF FUNDS Fixed assets Gross Block Less : Depreciation Net Block Capital work in progress Investments Goodwill Deferred tax assets (Net) Current assets, Loans & Advances Sundry Debtors Cash & Bank balances Loans & Advances Unbilled Revenue Less: Current liabilities & Provisions Current liabilities Provisions A B C D E F G H I J 348,470,890 140,559,130 348,157,250 - 7,050,658,948 7,539,688,968 8,059,119,459 8,407,276,709 1,150,161,402 8,120,839,291 635,166,392 9,271,000,693 7,807,500,000 8,442,666,392 16,849,943,101 16,810,689,661 1,505,824,566 1,118,734,067 387,090,499 1,682,246 1,313,308,647 231,185,346 493,494,014 586,456,946 2,624,444,953 1,440,554,624 212,076,170 1,652,630,794 821,726,754 467,212,184 354,514,570 4,037,627 388,772,745 - 15,293,562,487 124,078,067 358,552,197 7,403,696,025 7,021,229,033 168,488,974 1,216,826,081 903,476,921 245,646,663 423,896,364 2,789,846,029 740,373,039 197,662,665 938,035,704 Net Current Assets Miscellaneous expenditure (To the extent not written off or adjusted) [Refer Note II.13.7, Schedule P] Total Significant Accounting policies & Notes to the accounts P The Schedules referred to above form an integral part of the Balance Sheet 971,814,159 1,851,810,325 32,462,203 16,810,689,661 46,166,547 16,849,943,101 In terms of our report of even date for Deloitte Haskins & Sells Chartered Accountants V. Srikumar Partner Membership No. 84494 Bangalore June 30, 2008 70 A N N U A L R E P O R T 2007 - 2008 Subash Menon Founder Chairman, Managing Director & CEO Sudeesh Yezhuvath Chief Operating Officer V. Balaji Bhat Director Raj Kumar Chief Counsel & Company Secretary CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED Schedule March 31, 2008 March 31, 2007 Amount in Rs. INCOME Sales & Services Other income Total EXPENDITURE Direct cost Personnel costs Other operating, selling and administrative expenses Financial costs Miscellaneous expenses amortised Depreciation Total Profit / (Loss) before taxation Provision for taxation K L M N O E 4,855,907,768 552,991,366 5,408,899,134 84,469,871 4,022,373,009 1,409,600,242 325,465,007 11,721,965 172,319,419 6,025,949,513 (617,050,379) - Current - MAT credit carried forward - Fringe benefit tax - Deferred Profit / (Loss) after taxation Add: Balance brought forward from previous year Profit available for appropriation APPROPRIATION Transfer to general reserve Dividend - Equity shares - proposed final dividend 2006-07 - Equity shares - interim dividend 2006-07 - Equity shares - final dividend 2005-06 - Equity shares - final dividend 2006-07 Tax on distributed profits Surplus carried to balance sheet Earning / (Loss) Per Share (Face value of Rs.10 each) - Basic - Diluted 24,444,655 (10,042,000) 11,930,660 37,331,677 70,226,003 (11,128,731) 5,107,115 63,664,992 (163,255,141) (680,715,371) 1,238,020,941 557,305,570 69,631,450 52,113,210 12,883,222 - - - - 26,412 - 26,412 4,489 557,274,669 557,305,570 (19.49) (19.49) 3,409,002,598 301,915,848 3,710,918,446 89,965,014 2,079,876,888 728,621,337 87,318,294 22,964,112 125,563,180 3,134,308,825 576,609,621 (99,050,754) 675,660,375 741,138,063 1,416,798,438 23,200,000 134,627,882 20,949,615 1,238,020,941 1,416,798,438 21.10 21.02 Significant Accounting policies & Notes to the accounts P 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 V. Srikumar Partner Membership No. 84494 Bangalore June 30, 2008 Subash Menon Founder Chairman, Managing Director & CEO Sudeesh Yezhuvath Chief Operating Officer V. Balaji Bhat Director Raj Kumar Chief Counsel & Company Secretary A N N U A L R E P O R T 2007 - 2008 71 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED March 31, 2008 March 31, 2007 Amount in Rs. Cash flow from operating activities Net Profit/(Loss) before Tax Adjustments for : a) Depreciation and amortization b) Interest / Dividend Income c) Interest and bank charges d) Assets written off / Loss on sale e) Profit on sale of assets f) Employee compensation Expenses g) Provision for doubtful debts & debts written off h) Unrealised exchange fluctuations i) Termination Benefits paid j) Direct Taxes paid Operating Profit before Working Capital Changes Adjustments for : a) Sundry Debtors b) Loans and advances c) Trade and other payables Cash generated from operations Cash Flow from Investing activities a) Purchase of Fixed Assets b) Sale / disposal of fixed assets c) Cash flows on acquisitions of subsidiaries d) Interest received e) Adjustments on account of Demerger (Refer Note II.5, Schedule P) B Net Cash from Investing Activities Cash Flow from Financing Activities A a) Proceeds from issue of Share Capital/Options/Warrants 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 and bank charges g) Incidental expenses on issue of FCCBs & GDR (incurred)/refunded C Net Cash from Financing Activities Exchange fluctuation reserve on consolidation Net increase/(decrease) in Cash or Cash equivalents [A + B + C] Consolidation Adjustments Cash or Cash equivalents at the start of the year Cash or Cash equivalents at the close of the year (617,050,379) 186,023,763 (20,661,716) 325,465,007 - (1,096,373) 50,005,707 293,139,148 (621,437,873) - (140,247,795) (545,860,511) (50,412,652) (16,606,390) (565,912,690) (1,178,792,243) (146,208,824) 8,611,552 (275,884,850) 20,661,716 (404,560,001) (797,380,407) 145,225,998 666,416,047 769,213,190 - (81,503,996) (325,465,007) 38,374,819 1,212,261,051 (15,887,977) (763,911,599) 107,508,001 903,476,921 231,185,346 576,609,621 148,527,292 (35,339,870) 87,318,294 3,761,806 (463,514) 10,760,906 150,629,851 (208,784,608) (69,130,659) (42,560,496) 621,328,623 (340,619,544) (447,547,258) (3,608,669) (170,446,848) (73,393,930) 10,045,172 (7,664,757,570) 35,339,870 - (7,692,766,458) 457,173,808 618,894,432 8,049,728,942 (4,752,531) (98,720,943) (87,318,294) (616,265,172) 8,318,740,242 (18,075,084) 455,526,936 60,010,315 406,014,754 903,476,921 Note : Cash & Cash Equivalents include balance with Scheduled Banks on Dividend Account of Rs.702,822 (PY : Rs.692,487), and fixed deposit of Rs. 17,424,597 (PY : Rs.320,425,029) which are not available for use by the Company. Significant Accounting policies & Notes to the accounts P In terms of our report of even date for Deloitte Haskins & Sells Chartered Accountants V. Srikumar Partner Membership No. 84494 Bangalore June 30, 2008 72 A N N U A L R E P O R T 2007 - 2008 Subash Menon Founder Chairman, Managing Director & CEO Sudeesh Yezhuvath Chief Operating Officer V. Balaji Bhat Director Raj Kumar Chief Counsel & Company Secretary SCHEDULES TO THE CONSOLIDATED BALANCE SHEET AS AT March 31, 2008 March 31, 2007 Amount in Rs. Schedule - A Share capital Authorised : 48,040,000 (previous year, 48,040,000) Equity Shares of Rs. 10 each 200,000 Redeemable Optionally Convertible Cumulative Preference Shares (ROCCPS) of Rs.98/- each Total Issued, subscibed and paid up: Equity : 34,847,089 (previous year, 34,815,725) 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 (PY: Nil) shares of Rs.10 each are allotted as Bonus shares by capitalisation of Securities premium; e) 11,728,728 shares (GDRs) of Rs.10 each are allotted in full settlement of cost of acquisition of Azure Solutions (UK) Ltd Total Schedule - B Reserves & Surplus Capital Reserve General Reserve - Opening Balance Add: Additions during the year Less: Adjustment in pursuance of transitional provisions of Accounting Standard-15 [Refer Note II.13.7, Schedule P] Securities Premium Account - Opening Balance Add : Additions during the year Add/(Less) : Reversal of/(Utilised towards) incidental costs of issue of FCCBs & GDRs(Refer Note II.6, Schedule P) Less: Redemption premium on FCCBs [Refer Note II.6, Schedule P] Less : Adjustments on account of Demerger Scheme (Refer Note II.5, Schedule P) Employees Stock Options Outstanding Less: Deferred Employees Compensation Expenses FCCB Redemption Reserve - Opening Balance Add : Additions during the year (Refer Note II.6, Schedule P) Exchange Reserve on Consolidation Profit & Loss Account Total Schedule - C Secured Loans Short Term: Working Capital Loans from Banks (Secured by charge on Receivables and fixed assets) Other Loans from Banks (Secured by Hypothecation of Assets financed by these loans) [Amount repayable within one year: Rs.7,334,336/- (Previous year, Rs.5,261,159/-) Total Schedule - D Unsecured Loans Short Term: Working Capital Loans from Banks Other Loans from Banks [Amount repayable within one year: NIL, PY : NIL] (Refer Note II.13.5, Schedule P) Foreign Currency Convertible Bonds (Refer Note II.6, Schedule P) Total 480,400,000 19,600,000 500,000,000 348,470,890 348,470,890 13,006,920 177,975,580 5,624,568,228 69,645,719 632,054,656 (23,866,824) 557,274,669 7,050,658,948 1,126,539,390 23,622,012 177,975,580 - - 6,576,304,853 4,353,213 38,374,819 589,904,656 404,560,001 162,476,740 92,831,021 42,150,000 589,904,656 480,400,000 19,600,000 500,000,000 348,157,250 348,157,250 13,006,920 177,975,580 163,302,608 23,200,000 8,527,028 656,262,011 6,578,458,014 (616,265,172) 42,150,000 52,775,309 33,135,297 - 6,576,304,853 19,640,012 - 42,150,000 (7,978,847) 1,238,020,941 8,059,119,459 618,894,432 16,271,960 1,150,161,402 635,166,392 158,976,153 761,863,138 7,200,000,000 8,120,839,291 - - 7,807,500,000 7,807,500,000 A N N U A L R E P O R T 2007 - 2008 73 r a e Y e h t r o F 1 9 0 , 3 2 6 , 7 5 3 7 1 , 6 5 6 , 0 1 1 6 8 , 2 9 9 , 5 5 2 6 , 4 7 7 , 7 6 3 4 , 5 1 3 , 3 4 9 7 , 7 5 7 , 2 1 9 3 , 6 0 6 , 9 7 8 4 0 , 3 9 5 , 4 0 0 3 , 8 8 8 , 4 2 2 9 0 9 , 1 8 2 , 5 4 1 1 0 2 , 3 1 1 , 2 5 2 4 9 1 , 3 2 1 , 2 1 1 7 7 , 4 7 1 , 8 1 4 9 , 2 4 2 , 2 4 9 0 2 , 4 3 4 , 6 6 0 5 , 4 1 1 , 9 0 5 6 , 2 4 0 , 4 9 0 4 , 8 4 0 , 9 9 8 3 , 6 1 7 , 9 1 9 0 5 , 5 9 2 , 9 2 5 0 5 , 8 7 8 , 6 1 4 8 4 , 3 4 5 , 7 8 6 1 , 0 3 7 , 2 7 2 6 2 , 2 8 2 , 6 2 9 4 0 , 6 7 3 , 0 6 1 - 5 1 6 , 0 9 2 , 6 3 0 3 , 6 7 4 , 7 0 3 9 , 4 7 5 , 7 1 6 7 9 , 3 2 0 , 9 5 2 6 1 , 4 5 4 - - - 4 6 8 , 6 3 0 , 5 4 0 7 , 4 2 3 , 5 - - 6 4 9 , 7 7 8 , 1 9 3 4 8 , 0 3 8 , 9 5 - 4 4 1 , 9 4 5 , 9 2 0 3 9 , 1 4 8 , 7 5 8 2 3 , 3 4 9 , 1 1 4 8 5 , 8 2 4 , 4 1 8 5 5 , 3 1 6 , 6 2 9 0 5 , 8 1 7 , 4 2 5 6 , 3 7 2 , 0 8 4 1 0 , 4 7 1 , 6 4 6 0 9 , 8 9 5 , 6 7 8 1 9 , 6 6 7 , 3 1 1 1 3 , 8 5 6 , 6 8 1 - 9 0 8 , 6 0 5 , 2 7 1 9 0 1 , 5 9 3 , 7 9 3 - - - - - - - - 3 8 3 , 7 9 6 , 7 8 6 3 9 , 8 2 8 , 3 2 5 2 6 , 0 7 0 , 5 4 2 5 , 8 8 3 , 4 6 8 0 , 3 9 3 , 0 1 7 2 1 , 2 2 4 , 2 2 - 1 3 8 , 1 9 5 0 1 1 , 8 5 4 , 4 1 9 1 4 , 6 7 0 , 2 3 6 3 2 , 3 5 5 , 8 9 9 1 9 , 7 9 8 , 9 5 9 3 1 , 6 7 2 , 4 6 4 3 8 , 7 5 0 , 1 2 3 7 9 , 4 4 1 , 4 3 8 0 2 , 6 5 6 , 0 3 8 1 9 , 6 6 7 , 3 1 e r a w t f t o S r e u p m o C i s e r u t x F & e r u t i n r u F s t n e m p u q E e c i i f f O l l i w d o o G l s e c h e V i 9 0 1 , 5 9 3 , 7 9 3 i s t h g R y t r e p o r P l a u c e t l l e n t I 1 2 3 4 5 6 7 8 0 7 5 , 4 1 5 , 4 5 3 9 9 4 , 0 9 0 , 7 8 3 7 6 0 , 4 3 7 , 8 1 1 , 1 6 6 9 , 0 3 9 , 0 1 9 1 4 , 9 1 3 , 2 7 1 0 3 4 , 3 3 1 , 0 9 4 8 9 6 , 2 3 9 , 2 9 3 0 7 5 , 4 1 5 , 4 5 3 5 8 1 , 2 1 2 , 7 6 4 4 9 1 , 5 0 2 , 9 1 0 8 1 , 3 6 5 , 5 2 1 1 2 0 , 1 5 0 , 8 8 4 8 1 , 2 1 2 , 7 6 4 6 7 1 , 3 0 8 , 2 7 2 6 6 5 , 4 2 8 , 5 0 5 , 1 6 4 1 , 6 4 4 , 8 1 0 8 0 , 5 9 7 , 2 5 1 8 7 8 , 8 4 7 , 9 4 5 4 5 7 , 6 2 7 , 1 2 8 L A T O T 4 5 7 , 6 2 7 , 1 2 8 5 6 3 , 0 5 2 , 9 2 9 6 1 , 7 0 1 , 9 6 6 7 0 , 4 3 1 , 6 1 1 4 7 8 , 5 3 7 , 5 6 6 R A E Y S U O V E R P I 6 6 7 , 7 4 5 , 6 3 7 0 1 , 2 0 1 , 1 2 9 6 , 7 1 4 , 0 5 2 9 3 , 2 9 1 , 7 3 0 0 3 , 5 2 2 , 3 1 s t n e m e v o r p m d o H e s a e L I l 3 1 9 , 6 4 1 , 9 6 9 1 0 , 7 4 6 , 6 4 1 5 4 9 , 2 9 8 , 7 0 5 6 3 2 , 5 1 1 0 3 7 , 7 2 3 , 2 7 2 0 6 3 , 7 5 0 , 8 7 1 4 6 9 , 9 3 5 , 4 5 6 4 0 6 , 0 9 3 , 2 2 1 9 , 8 2 0 , 2 2 3 3 7 2 , 4 0 2 , 7 4 2 e r a w d r a H t r e u p m o C . s R n i t n u o m A K C O L B T E N I I N O T A C E R P E D K C O L B S S O R G E - l e u d e h c S s t e s s a d e x F i t , a s A 7 0 0 2 t , a s A 8 0 0 2 o t p U 8 0 0 2 1 3 h c r a M 1 3 h c r a M , 1 3 h c r a M n o n w a r d h t i W s n o i t l e e d t n e m t s u d A j , 1 3 h c r a M , 1 3 h c r a M o t p U 7 0 0 2 t a s A 8 0 0 2 r a e y g n i r u d s n o i t e e D l e h t r a e y s n o i t i d d A g n i r u d t n e m t s u d A j 7 0 0 2 t a , 1 s A l i r p A l s r a u c i t r a P . o N . l S 74 A N N U A L R E P O R T 2007 - 2008 SCHEDULES TO THE CONSOLIDATED BALANCE SHEET AS AT Schedule - F Investments (Long term, trade) Advance for Acquisition [Refer Note II.4, Schedule P] Schedule - G Sundry debtors (Unsecured) Outstanding for more than six months - considered good - considered doubtful Others - considered good - considered doubtful Less: Provision for Doubtful Debts Total (considered good) Schedule - H Cash & Bank Balances Cash on hand Balance with Scheduled Banks - - - in Current Account in Indian Rupees in Deposit Account in Indian Rupees in Exchange Earner’s Foreign Currency account Balance with Non Scheduled Banks Total Schedule - I 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 MAT credit entitlement Other Deposits Total March 31, 2008 March 31, 2007 Amount in Rs. - - 7,403,696,025 7,403,696,025 273,209,491 280,451,408 1,040,099,156 28,690,000 456,366,957 203,788,312 760,459,124 - 660,155,269 760,459,124 1,420,614,393 203,788,312 1,216,826,081 61,435 110,750,716 403,815,607 21,933,868 366,915,295 903,476,921 80,808,673 44,601,158 11,128,731 109,108,101 245,646,663 553,660,899 1,068,789,156 1,622,450,055 309,141,408 1,313,308,647 38,939 3,048,916 27,992,954 69,100,260 131,004,277 231,185,346 182,363,905 195,166,695 21,170,731 94,792,683 493,494,014 A N N U A L R E P O R T 2007 - 2008 75 SCHEDULES TO THE CONSOLIDATED BALANCE SHEET AS AT March 31, 2008 March 31, 2007 Amount in Rs. 694,172,865 100,140,877 575,530,366 69,905,502 805,014 134,408,936 - - 68,887,860 2,866,506 5,912,868 489,919,581 88,675,783 93,920,975 67,043,906 812,794 94,795,108 69,631,450 11,833,865 18,418,588 2,983,654 - 740,373,039 197,662,665 938,035,704 35,339,870 31,533,710 - 17,780,065 217,262,203 301,915,848 89,965,014 89,965,014 1,755,513,817 133,362,412 52,065,472 138,935,187 2,079,876,888 1,440,554,624 212,076,170 1,652,630,794 20,661,716 2,574,816 1,096,373 - 528,658,461 552,991,366 84,469,871 84,469,871 3,414,127,688 167,099,066 193,665,785 247,480,470 4,022,373,009 Schedule - J Current Liabilities & Provisions Sundry Creditors Advance received from Customers Deferred Income Duties & Taxes Unclaimed Dividends Provisions : Taxation Dividends Tax on proposed dividends Employee Benefits Warranty Others Total Schedule - K Other Income Interest Income Other income Profit on sale of Fixed Assets (Net) Provisions written back Exchange Fluctuation account (net) Total Schedule - L Direct costs Purchased Systems & Solutions Total Schedule - M Personnel costs Salaries, Wages & Allowances Contribution to Provident Fund and Other Funds Other staff related costs Sub Contract Charges Total 76 A N N U A L R E P O R T 2007 - 2008 SCHEDULES TO THE CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED March 31, 2008 March 31, 2007 Amount in Rs. Schedule - N 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 Provision for Doubtful Debts Commission on Sales Loss on sale of Assets & Assets Written Off (Net) Miscellaneous Expenses Total Schedule - O Financial costs Interest on FCCBs and other term loans Interest & Bank Charges Total 16,645,747 185,993,051 32,437,542 88,153,952 13,896,389 117,545,832 11,582,357 356,019,968 22,500 26,591,206 95,665,156 108,735,957 2,785,990 290,353,158 13,997,278 - 49,174,159 1,409,600,242 294,331,303 31,133,704 325,465,007 27,604,255 91,352,573 7,745,824 16,060,108 17,631,573 46,644,945 8,781,492 191,080,568 42,500 7,605,983 35,403,762 62,857,794 24,983,956 150,629,851 22,272,447 3,337,815 14,585,891 728,621,337 11,566,667 75,751,627 87,318,294 A N N U A L R E P O R T 2007 - 2008 77 SCHEDULE – P I. SIGNIFICANT ACCOUNTING POLICIES I.1. Basis for preparation of consolidated financial statements The consolidated financial statements relate to Subex 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 under the Companies (Accounting Standard) Rules 2006 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. I.3. Principles of Consolidation The financial statements of the Company and it’s 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. Name of entity no. Country of incorporation % of ownership held at March 31, 2008 % of ownership held at March 31, 2007 7 8 9 10 11 12 13 14 Subex Holdings Inc (wholly owned subsidiary of Subex Americas Inc) Subex (Delaware) Inc (wholly owned subsidiary of Subex Americas Inc) Syndesis Development India Pvt Ltd (wholly owned subsidiary of Subex Americas Inc) Syndesis IP Holdings Ltd (wholly owned subsidiary of Subex Americas Inc) 2101874 Ontario Inc (wholly owned subsidiary of Subex Americas Inc) Subex Americas Inc Subex (GB) Ltd (wholly owned subsidiary of Subex Americas Inc) Subex (Ireland) Ltd (wholly owned subsidiary of Subex Americas Inc) USA USA 100 100 India 100 Canada 100 USA Canada UK 100 100 100 Ireland 100 Nil Nil Nil Nil Nil Nil Nil Nil 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. During the year, the Company acquired Syndesis Ltd, Toronto, Canada [Now known as Subex Americas Inc] and its subsidiaries. The consolidated financial statements include the balances disclosed in the table relating to the consolidated financial statements of Syndesis Ltd at the Balance Sheet date. U S A India UK USA 100 100 100 100 100 100 100 100 Date of Acquisition Liabilities Current liabilities Secured loans Assets Fixed assets Net current assets Revenue Expenditure Profit / (loss) after tax Amount in Rs. million March 31, 2008 706.80 336.07 47.87 692.30 1,525.76 1,864.49 (338.73) Singapore 100 100 USA 100 Nil Figures pertaining to subsidiaries were reclassified to bring them in line with company’s financial statements. I.4. Revenue recognition Revenue from Contracts for software product licences includes fees for transfer of licences, installation and commissioning. 1 2 3 4 5 6 Subex Technologies Inc. Subex Technologies Ltd. India Subex (UK) Ltd. Subex Inc.(wholly owned subsidiary of Subex (UK) Ltd.) Subex (Asia Pacific) Pte. Ltd, (wholly owned subsidiary of Subex (UK) Ltd.) Subex Inc (wholly owned subsidiary of Subex Americas Inc) 78 A N N U A L R E P O R T 2007 - 2008 This revenue is recognized under the percentage completion method based on the extent of work determined to have been completed as compared to the work involved in the overall scope of the contract. In the event of any expected losses on a contract, the entire amount is provided for in the accounting period in which such losses are first anticipated. Revenue from sale of additional software licences are recognized on transfer. Revenue from Software development is recognized on the basis of chargeable time or achievement of prescribed milestones as relevant to each contract. Sale of hardware under reseller arrangements are recognized on dispatch of goods to customers and are recorded net of discounts, rebates for price adjustment, projections, shortage in transit, taxes and duties. Interest on investments and deposits are booked on a time proportion basis taking into account the amount invested and the rate of interest. Maintenance and service income is recognised on accrual basis. 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 are as under: Depreciation Rates % 25.00 20.00 20.00 20.00 20.00 20.00 Particulars Computers (including Software) Furniture & Fixtures Vehicles Office equipments Intellectual Property Rights Goodwill Individual assets costing less than Rs. 5,000 are depreciated in full, in the year of purchase. I.7. Employee Stock Option Employee Stock Option 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 financial year 2005-06, which is on the same lines as ESOP II. I.8. Employee Benefits The company’s contribution to provident fund, a defined contribution scheme, is charged to the profit and loss account on accrual basis. Liability for gratuity is funded with Life Insurance Corporation of India (LIC). Gratuity expense for the year has been accounted based on actuarial valuation carried out at the end of the financial year. The retirement benefit obligation recognized in the balance sheet represents the present value of the defined benefit obligations adjusted for unrecognized past service cost and as reduced by the fair value of scheme assets. Any asset resulting from this calculation is limited to past service cost plus the present value of available refunds and reduction in future contributions to the scheme. Liability for encashment of leave considered to be long term liability is accounted for on the basis of an actuarial valuation. Provision for outstanding leave credits considered are short term liability is as estimated by the management and accrued for, based on last month’s salary. Other short term employee benefits like medical, leave travel etc are accrued based on the terms of employment on a time proportion basis Other companies in the group run defined contribution schemes, the cost of which is fully provided for and charged to expenditure. Accrued leave is accounted for fully and charged to the profit & loss account. I.9. Research and development Expenses incurred on research and development is 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 translated at the exchange rate 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 to the Profit and Loss account. Any profit or loss arising on cancellation or renewal or retirement of forward contract is recognized in profit and loss account as appropriate. On Consolidation, • In the case of non-integral operations, assets and liabilities are translated at the exchange rate prevailing on the balance sheet date. Revenue and expenses are translated at yearly average exchange rates prevailing during the year. Exchange differences arising out of theses translations are included in ‘Exchange Reserve’ under Reserves & Surplus. In the case of integral operations, 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 translations have been charged to the Profit and Loss account. • A N N U A L R E P O R T 2007 - 2008 79 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 of 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 certainty as applicable 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. Minimum alternative tax (MAT) paid in accordance to the tax laws, which gives rise to future economic benefits in the form of adjustment of future income tax liability, is considered as an asset if there is convincing evidence that the Company will pay normal income tax after the tax holiday period. Accordingly, MAT is recognized as an asset in the balance sheet when it is probable that the future economic benefit associated with it will flow to the Company and the asset can be measured reliably. I.13. Cash Flow Statement Cash flow statement has been prepared in accordance with the indirect method prescribed in Accounting Standard 3, issued under the Companies (Accounting Standard) Rules 2006. I.14. 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.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. I.16 Impairment Of Fixed Assets At each balance sheet date, the Company reviews the carrying amounts of its fixed assets to determine whether there is any indication that those assets suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment loss. Recoverable amount is the higher of an asset’s net selling price and value in use. In assessing value in use, the estimated future cash flows expected from the continuing use of the asset and from 80 A N N U A L R E P O R T 2007 - 2008 its disposal are discounted to their present value using a pre-tax discount rate that reflects the current market assessments of time value of money and the risks specific to the asset. Reversal of impairment losses recognized in prior years, if any, is recorded when there is an indication that the impairment losses recognized for the asset no longer exist or have decreased. However, the increase in carrying amount of an asset due to reversal of an impairment loss is recognized to the extent it does not exceed the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognized for the asset in prior years. 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” issued by Institute of Chartered Accountants of India. Movement in deferred tax asset (Liability) Amount in Rs. 2006-07 2007-08 Net deferred tax asset at the beginning of the year Add: Input of timing differences for current year Net deferred tax asset at the end of the year 168,488,974 7,727,514 (44,410,906) 160,761,460 124,078,066 168,488,974 Particulars b) The net deferred tax asset as at March 31, 2008 comprises the tax impact arising from the timing differences on account of: Amount in Rs. As at March 31, 2008 March 31, 2007 13,353,449 155,135,525 168,488,974 - Depreciation - Business loss Net deferred asset 23,111,851 100,966,217 124,078,068 As at Deferred tax assets recognized on unabsorbed tax losses at March 31, 2008, pertain to the company’s subsidiary, Subex (UK) Ltd. The recognition is restricted to the extent that there is virtual certainty of future taxable incomes arising and is supported by the business achieved subsequent to the year end and on the basis of confirmed orders on hand in the subsidiary. II.2. Contingent liabilities Receivables factored – Rs. 133,367,178 (previous year: Rs. 416,664,307) Claims against the company not acknowledged as debts: Income tax matters under appeal – Rs. 24,365,085 (previous year: Rs. 39,136,631) Claim from erstwhile employees – approximately Rs. 48,000,000 (previous year: Rs. Nil) Others – approximately Rs.50,000,000 (previous year: Rs. Nil) II.3. The Company has made 2 issues of Global Depository receipts (GDRs) in April 2006 and June 2006. The details of these issues are as given below : Sl No. Month of issue Equivalent equity shares 1 of Rs. 10 each 1 of Rs. 10 each Amount in Rs. Issue price No. of GDRs per GDR (Rs.) 400.00 532.24 issued April 2006 June 2006 1,109,878 1 2 11,728,728 In addition, the company has completed a programme of sponsored GDR offerings, whereby an option has been offered to the existing share holders of the company to transfer their holdings in favour of Institutional Investors. All the above GDR’s are listed on the Professional Securities Market of the London Stock Exchange II.4. Acquisition of Subex Americas Inc (formerly Syndesis Ltd, Canada) During the year, the Company completed the acquisition of Syndesis Ltd, Canada, a Company engaged in Service Assurance and fulfillment space in the Telecom service industry. The acquisition was effective April 1, 2007 and as at March 31, 2007, the Company had incurred an amount of Rs. 7403.69 million (including advances paid to erstwhile owners of Syndesis Limited). Syndesis Limited has been renamed as Subex Americas Inc during the year. II.5. Scheme of Arrangement – Services Business During the year, the Company filed an application with Hon’ble High Court of Karnataka to transfer the Services Business Division to Subex Technologies Ltd, a wholly owned subsidiary of Subex Ltd under a scheme of arrangement. On obtaining the order from the Hon’ble High Court of Karnataka, the Company has transferred the Services business to Subex Technologies Ltd with effect from 1st September 2007 (appointed date) at an aggregate consideration of Rs.310,000,000. The deficit arising out of the transfer amounting to Rs. 404,560,001 as detailed below has been charged to the Securities Premium account, in accordance with the order of the Court. Amount In Rs. Amount (Rs.) 406,541,994 308,018,007 714,560,001 310,000,000 404,560,001 Particulars of assets and liabilities transferred Net current assets Investments in Subex Technologies Inc Book value of assets transferred Consideration received Amount written off to Securities premium II.6. Foreign Currency Convertible Bonds (FCCB) During the year 2006-07, the Company issued Foreign Currency Convertible Bonds (FCCBs) aggregating to US$ 180 million to Institutional Investors. The bonds carry an initial interest rate of 2% per annum and are redeemable by March 9, 2012, if not converted into equity shares as per terms of issue. Other terms and conditions governing the bonds are as follows: a) Conversion of the bonds into equity shares at the option of the bond holders at any time after April 18, 2007 b) Conversion price – Rs. 656.20 per share c) Exchange rate for purpose of conversion - 1 US$ = Rs. 44.08 f) d) Interest of 2% per annum payable semi-annually in arrears e) Redemption with yield to maturity guaranteed return of 8% per annum, calculated on semi-annual basis The Company can exercise an option to redeem the bonds in whole or in part, on or any time after March 9, 2010, but prior to January 29, 2011, subject to appropriate approvals at a price determined on the terms defined in the offer document g) Listing on the Professional Securities Market of London Stock Exchange The difference between the yield to maturity guaranteed rate of return of 8% and the coupon rate of 2% represents the premium payable on redemption for is charged to Securities Premium over the life of the bonds. II.7. Monies received pending allotment During the year, the company allotted 2,230,000 warrants to promoters/ promoters group, entitling each holder to obtain allotment of one equity share against each such warrant on a preferential basis at a price of Rs.630.31. Under the terms of issue, the Company has received 10% of the total consideration amounting to Rs.140.55 Million. To obtain the underlying equity share, the balance 90% shall be paid within 18 months from the date of allotment of the warrants in one or more tranches. The money received by the Company has been utilized for long term working capital requirements. II.8. 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 are Rs. 185,993,051 (previous year: Rs.91,352,573) As of March 31, 2008 future minimum lease payments for non- cancelable operating leases for the next five fiscal years are: Particulars Within one year Due in a period between one year and five years Due after five years Amount In Rs. March 31, 2008 March 31, 2007 104,428,881 175,042,669 320,237,727 12,796,360 140,026,532 - II.9. Employee Stock Option Plan (ESOP) ESOP – II During 1999-2000, the Company established a Stock Option Scheme 2000 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 June 19, 1999. As per the scheme, the Compensation 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 A N N U A L R E P O R T 2007 - 2008 81 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 449,271 option have been granted to 538 employees as at March 31, 2008. Out of the above 73,798 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 resulted in a debit of Rs.19,082,165 (Previous year: Debit of Rs. 2,238,027) to the Profit & Loss account for the year. ESOP – III During 2005-2006, the Company established a new Stock Option Scheme 2005 under which 5,00,000 options have been allocated for grant to the employees. Subsequently, during the year 2006- 2007, the number of options allocated for grant to the employees was increased to 2,000,000 options. 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 June 19, 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 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 March 31, 2008, 1,724,969 (net) options have been granted to 989 employees under this scheme. Out of the above 105,539 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 resulted in a debit of Rs.4,236,147 (Previous year: Debit of Rs. 11,981,639) to the Profit & Loss account for the year. Employee Stock Options details as on the balance sheet date are ; ESOP – I : Nil ESOP – II : Amount In Rs. March 31, 2008 March 31, 2007 Options outstanding at the beginning of the year Granted during the year Forfeited/ cancelled Exercised Balance at end of the year ESOP – III Options outstanding at the beginning of the year Granted during the year Forfeited/ cancelled Exercised Balance at end of the year 261,202 - 16,237 30,927 214,038 364,027 112,200 108,393 106,632 261,202 March 31, 2008 March 31, 2007 422,533 1,671,700 375,551 437 1,718,245 70,380 382,800 24,360 6,287 422,533 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. Particulars Options outstanding at the beginning of the year ESOP – II ESOP – III Granted during the year ESOP – II ESOP – III Exercised during the year ESOP – II ESOP – III Cancelled & Lapsed during the year ESOP – II ESOP – III Options outstanding at the end of the year ESOP – II ESOP – III Options exercisable at the end of the year ESOP – II ESOP – III 82 A N N U A L R E P O R T 2007 - 2008 2007-08 2006-07 Options (Nos) Weighted average exercise price per stock option (Rs.) Options (Nos) Weighted average exercise price per stock option (Rs.) 261,202 422,533 408.57 429.37 364,027 70,380 - 1,671,700 - 112,200 380.31 382,800 284.25 342.55 522.32 442.38 30,927 437 16,237 375,551 106,632 6,287 108,393 24,360 214,038 1,718,245 427.48 261,202 366.67 422,533 408.57 429.37 73,798 105,539 24,634 2,963 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 is : risk-free interest rate of 6.50%, expected life :3 years, expected volatility of share : 63.92% and expected dividend yield : 0.63%. 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 /(loss) (as reported) Add: Stock-based employee compensation relating to grants after April 1, 2007 Less: Stock based compensation expenses determined under fair value based method for the above grants Net profit /(loss) (proforma) Basic Earning /(loss) per share (as reported) Basic Earning /(loss) per share (proforma) Diluted Earning /(loss) per share (as reported) Diluted Earning /(loss) per share (proforma) March 31, 2008 (680,715,371) 23,318,312 62,566,550 (719,963,609) (19.49) (20.61) (19.49) (20.61) Amounts in Rs. March 31, 2007 675,660,375 14,219,667 22,757,321 667,122,721 21.10 20.83 21.02 20.75 II.10. Related party information A) Related parties Enterprises over which some of the directors exercise significant influence: Cellcomm Solutions Ltd (formerly known as Subex Cellcomm Ltd), Subex Holdings Private Limited (SHPL) Key management personnel Subash Menon, Founder Chairman, Managing Director & CEO Sudeesh Yezhuvath, Whole Time Director B) Details of the transactions with the related parties other than employees who are related to the directors of the company are as under: Nature of Transaction Enterprises over which some of the directors exercise significant influence Amounts in Rs. Key management personnel a) Salary, perquisites and commission etc. b) Purchase of hardware from Cellcomm Solutions Limited c) Amount due to Cellcomm Solutions Limited as at year end d) Money recieved against warrants issued * During the year ended March 31, 2008, the Company has paid an amount of Rs. 38,285,906 to its Whole-time directors towards remuneration and has applied to the Central government for approval of payments that are in excess of the maximum remuneration payable under the Companies Act, 1956. Pending II.11. Earning per Share (EPS) Profits /(loss) after tax attributable to shareholders Weighted average number of shares for basic EPS Weighted average number of shares for diluted EPS Earning /(loss) per Share – basic Earning /(loss) per Share – diluted Face value of shares : Rs. 10 each The difference in the number of shares information used for calculation of diluted EPS as compared to that used for computing Basic EPS is due to existence of stock options that are granted to employees. The Company issued certain warrants during the year which are outstanding at the end of the year. Considering the issue price of 2007-08 - - - 113,455,800 2006-07 - 693,243 330,469 - 2007-08 12,180,000* - - 27,103,330 2006-07 24,946,139 - - - the Central government’s approval, such excess is treated as monies due from the Whole-time directors being held by them in trust for the Company and is included under Loans and advances (Schedule I to the financial statements). 2007-08 (680,715,371) 34,930,103 35,237,883 (19.49) (19.49) Amount in Rs. 2006-07 675,660,375 32,020,111 32,145,562 21.10 21.02 these warrants are higher than the fair value of the underlying shares at the end of the year, they are ignored for computing number of shares for purpose of diluted earnings per share. The options and warrants outstanding at March 31, 2008 are anti- dilutive at the date and hence ignored for purposes of computing Diluted EPS. A N N U A L R E P O R T 2007 - 2008 83 II.12. Segmental Reporting The Group’s operation comprises of software development and services. Primary segmental reporting comprises of products and services segment. Secondary segments are identified 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 allo- cable 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. Amounts in Rs. Particulars Products Services Consolidated Revenues Segment results before interest, depreciation & taxes Add: Unallocable Income, net of unallocable expense Interest expense Depreciation & Amortization Profit before tax Provision for taxation: Current MAT carried forward Fringe benefit tax Deferred Profit after tax 2007-08 3,618,480,866 2006-07 2006-07 2,287,666,256 1,237,426,902 1,121,336,342 2007-08 2007-08 4,855,907,768 2006-07 3,409,002,598 (787,497,615) 453,574,552 72,453,627 123,980,655 (715,043,988) 577,555,207 607,500,000 325,465,007 184,041,384 (617,050,379) 234,900,000 87,318,294 148,527,292 576,609,621 24,444,655 (10,042,000) 11,930,660 37,331,677 (680,715,371) 70,226,003 (11,128,731) 5,107,115 (163,255,141) 675,660,375 Particulars of Segment Assets & Liabilities Products Services Unallocable 2007-08 2006-07 918,285,409 1,451,945,892 843,240,596 1,518,221,858 2007-08 2006-07 1,602,065,947 1,245,949,317 297,699,646 394,773,128 2006-07 2007-08 Segment assets Segment liabilities Unallocable assets exclude Goodwill Investments Advance income taxes Deferred tax asset Total Unallocable liabilities exclude Loans - secured Loans – unsecured Provisions Total 84 A N N U A L R E P O R T 2007 - 2008 Amount in Rs. Consolidated 2007-08 2,818,051,002 1,518,221,858 2006-07 3,092,668,337 843,240,596 15,293,562,487 - 195,166,695 124,078,066 7,021,229,033 7,403,696,025 55,729,889 168,488,974 15,612,807,248 14,649,143,921 1,150,161,402 8,120,839,291 134,408,936 9,405,409,629 635,166,392 7,807,500,000 94,795,108 8,537,461,500 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 Information about secondary business segment Revenue attributable to location of customers is: 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. Amount in Rs. Products Services Consolidated APAC, etc AMERICAS EMEA Total 2007-08 561,219,422 1,255,241,906 1,802,019,538 3,618,480,866 2006-07 440,139,320 591,977,963 1,255,548,973 2,287,666.256 2007-08 - 1,237,426,902 - 1,237,426,902 2006-07 - 1,121,336,342 - 1,121,336,342 2007-08 561,219,422 2,492,668,808 1,802,019,538 4,855,907,768 2006-07 437,522,649 1,715,930,976 1,255,548,973 3,409,002,598 Segment assets based on their location APAC AMERICAS EMEA Total 2007-08 908,543,276 1,075,479,416 834,028,310 2,818,051,002 Amount in Rs. 2006-07 1,341,346,632 780,896,007 970,425,698 3,092,668,337 II.13. Others 1. The Company is availing non-fund based limits and overdrafts against lien on the fixed deposits. Amount of such non-fund based limits utilized as on the balance sheet date is Rs. 48,463,522 (Previous year: Rs. 343,017,163). Estimated amount of contracts, remaining to be executed on capital account and not provided for (net of advances paid) Rs.5,199,547 (Previous year: Rs. 9,277,855) 2. 3. Unclaimed dividend of Rs.805,014 represent dividends not claimed for the period from 2001-2008. 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’. Personnel Cost for the year includes expenditure on Research and Development of Rs.66,755,179 (Previous year: Rs. 44,871,701). This is as certified by the management and relied upon by the auditors. 4. 6. 5. A director of the Company has provided a personal guarantee in respect of long term loans from Banks of Rs.755,848,738 included in schedule D of the financial statements. Further, the promoters’ shares have also been pledged towards these loans. The Company has applied to the Central Government to regularize the excess managerial remuneration paid to whole time directors for the year ended March 31, 2008 amounting to Rs. 28,685,906. [Pending Central Government’s approval, such excess is treated as monies due from the wholetime Directors held by them, in trust, for the Company and is included under loans & advances (Schedule I to the financial statements)]. The Company adopted the Accounting Standard 15 on Employee Benefits with effect from April 1, 2006. In accordance with the transitional provisions of the Standard. The net Incremental Liability on account of gratuity and • leave salary amount to Rs.8,527,028 has been charged to the balance of General Reserve at April 1, 2006. Termination benefits (included under Miscellaneous expenditure in the balance sheet) incurred in respect of employees in Subex (UK) Limited in the financial year 2006-07 amounting to Rs.69,130,659 has been amortized over a period from the time such costs were incurred till March 31, 2010 on a prorata basis. 7. • 8. The Company offers the following employee benefit schemes to it’s employees. The following table sets out the funded status of the defined Benefit Schemes and the amount recognized in the financial statements. A N N U A L R E P O R T 2007 - 2008 85 I 1 2 3 4 5 6 7 8 II 1 2 III 1 2 3 4 5 IV 1 2 3 4 5 6 7 8 9 10 V 1 2 3 4 5 6 7 VI 1 2 3 4 Components of employer expense Current Service cost Interest cost Expected return on plan assets Curtailment cost/(credit) Settlement cost/(credit) Past Service Cost Actuarial Losses/(Gains) Total expense recognized in the Statement of Profit & Loss Account Actual Contribution and Benefit Payments for year ended 31 March 2008 Actual benefit payments Actual Contributions Net asset/(liability) recognized in Balance Sheet as at March 31, 2008 Present value of Defined Benefit Obligation (DBO) Fair value of plan assets Funded status [Surplus/(Deficit)] Unrecognized Past Service Costs Net asset/(liability) recognized in Balance Sheet Change in Defined Benefit Obligations during the year ended March 31, 2008 Present Value of DBO at beginning of year Current Service cost Interest cost Curtailment cost/(credit) Settlement cost/(credit) Plan amendments Acquisitions Actuarial (gains)/ losses Benefits paid Present Value of DBO at the end of year Change in Fair Value of Assets during the year ended March 31, 2008 Plan assets at beginning of year Acquisition Adjustment Actual return on plan assets(estimated) Actuarial Gain/(Loss) Actual Company contributions(less risk premium, ST) Benefits paid Plan assets at the end of period Actuarial Assumptions Discount Rate Expected Return on plan assets Salary escalation Attrition Rate March 31 2008 2,487,700 529,720 (91,370) - - - 1,221,020 4,147,070 Amount in Rs. March 31 2007 3,426,895 333,852 98,418 - - - (72,395) 3,786,772 1,215,060 1,102,330 632,474 366,658 10,295,066 1,092,912 (9,202,154) - (9,202,154) 7,229,036 2,487,700 529,720 - - - - 1,263,670 (1,215,060) 10,295,066 1,062,832 - (91,370) 51,440 1,102,330 (1,215,060) 1,092,912 8.70% 9.00% 5.00% 5.00% 7,229,036 1,062,832 (6,166,204) - (6,166,204) 4,173,156 3,426,895 333,852 - - - - (72,393) (632,474) 7,229,036 1,230,230 - 98,418 - 366,658 (632,474) 1,062,832 8.00% 8.00% 5.00% 5.00% 9. The Company has entered into the following derivative instruments for the purposes of hedging the risks associated with foreign exchange exposures as at March 31, 2008: (i) Forward /Option Contracts: Particulars Forward contracts Option contracts March 31, 2008 Buy/Sell Sell Sell Amount (INR) 55,987,000 202,244,000 US$ 1,400,000 5,000,000 March 31, 2007 US$ 800,000 Nil Buy/Sell Sell Nil Amount (INR) 37,238,000 Nil Amount in Rs. As per the recent guidelines on accounting for Derivatives issued by the Institute of Chartered Accountants of India, the Company has provided for Mark to Market losses of Rs. 5,912,868 (included in Other provisions under Schedule J) in respect of the derivative contracts outstanding at the end of the year. 10. Previous year’s figures have been regrouped to conform to the classifications for the current year. 86 A N N U A L R E P O R T 2007 - 2008 SHAREHOLDERS’ INFORMATION : REGISTERED AND CORPORATE OFFICE The Registered office of the company is at Adarsh Tech Park, Devarabisanahalli, Outer Ring Road, Bangalore – 560 037 DATE AND VENUE OF THE ANNUAL GENERAL MEETING (AGM) Date Venue : September 23, 2008 : Adarsh Tech Park, Devarabisanahalli, Outer Ring Road, Bangalore – 560 037 4.00 P.M. Time DATES OF BOOK CLOSURE From September 22, 2008 to September 23, 2008 (both days inclusive) BOARD MEETINGS & FINANCIAL CALENDAR Financial year Calendar of board meetings to adopt the accounts (tentative and subject to change): For quarter ending June 30, 2008 For quarter ending September 30, 2008 – on October 29, 2008 For quarter ending December 31, 2008 – on January 29, 2009 For the year ending March 31, 2009 DIVIDEND The Directors have not proposed any dividend to be paid for the financial year 2007 – 2008. LISTING ON STOCK EXCHANGES Shares of the Company are quoted on National Stock Exchange of India Limited (NSE) since September 5, 2003; on Bombay Stock Exchange Limited (BSE) since July 31, 2000 and the Global Depositary Receipts (GDRs) and Foreign Currency Convertible : April 1 to March 31 – on April 29, 2009 – on July 29, 2008 Bonds (FCCBs) of the company are listed at London Stock Exchange since March 9, 2007. During the financial year 2007 – 2008, the company has voluntarily delisted from the Bangalore Stock Exchange Limited. Listing Fees have been paid to all the above Stock Exchanges for 2008-09. The stock codes of the Company at the Stock Exchanges are as follows: Name and address of the stock exchange National Stock Exchange of India Limited, Exchange Plaza, 5th Floor, Bandra Kurla Complex, Mumbai- 400051 Bombay Stock Exchange Ltd, Phiroze Jeejeebhoy Towers Dalal Street, Fort, Mumbai 400023 London Stock Exchange 10 Paternoster Square London EC4M 7LS Stock code SUBEX 532348 SUBX The International Securities Identification Number (ISIN) for the company’s shares in dematerialized form is INE754A01014. CUSTODIAL FEE Pursuant to the Securities and Exchange Board of India (SEBI) Circular No. MRD/DoP/Stock Exchange/DEP/CIR-4/2005 dated January 28, 2005 issuer companies are required to pay custodial fees to the depositories with effect from April 1, 2005. Accordingly, the company has paid custodial fees for the year 2008-09 to NSDL and CDSL on the basis of the number of beneficial accounts maintained by them as on March 31, 2008. STOCK MARKET DATA RELATING TO SHARES LISTED IN INDIA Monthly high and low quotations during each month in last financial year as well as the volume of shares traded at National Stock Exchange of India Limited and The Bombay Stock Exchange Limited are: Month Apr ‘07 May ‘07 Jun ‘07 Jul ’07 Aug ‘07 Sep’ 07 Oct ‘07 Nov ‘07 Dec ‘07 Jan ‘08 Feb ‘08 Mar ‘08 High Rs. 670.00 675.00 687.00 644.00 600.00 612.00 448.70 353.00 370.00 378.00 328.00 269.90 TOTAL NSE Low Rs. 520.00 556.00 577.05 575.25 505.00 415.00 321.05 273.00 292.25 230.00 248.00 138.00 Volume Nos. 1149169 891712 775606 893932 500025 2814095 2555839 685313 1468454 1364787 333743 1421973 14854648 High Rs. 629.90 675.00 646.00 644.00 600.00 610.00 450.00 357.95 365.00 379.00 324.00 270.00 TOTAL BSE Low Rs. 520.00 575.05 578.00 538.70 440.00 415.10 320.00 273.00 292.55 234.00 245.00 139.20 Volume Nos. 451256 489335 527022 546409 245720 1276892 2165870 379346 10166923 845169 154867 813161 18061970 A N N U A L R E P O R T 2007 - 2008 87 SUBEX LIMITED SHARE PRICE VERSUS NSE S&P CNX NIFTY AND SENSEX 7000 6000 5000 4000 3000 2000 1000 0 Apr May Aug Jul Jun Subex share price Sep 800 700 600 500 400 300 200 100 0 25000 20000 15000 10000 5000 0 800 700 600 500 400 300 200 100 0 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Subex SENSEX Oct Nov Dec Jan S&P CNX NIFTY SHAREHOLDING PATTERN Distribution of shareholding: No. of Equity shares held As on March 31, 2008 As on March 31, 2007 No. of shareholders 15,748 % of shareholders 91.86 No. of shareholders 9,735 % of shareholders 87.35 660 342 89 65 42 70 127 17,143 3.84 1.99 0.51 0.37 0.24 0.40 0.74 100 699 303 94 74 36 70 134 11,145 6.27 2.72 0.84 0.66 0.32 0.63 1.20 100 As on March 31, 2008 No. of share holders Voting strength % No. of shares held 16,331 694 2 16 60 40 17,143 40.77 5.86 8.85 13.00 0.40 31.12 100.00 1,42,08,388 20,43,775 30,83,103 45,28,486 1,38,234 1,08,45,103 3,48,47,089 As on March 31, 2007 Voting strength No. of share holders No. of shares held 10,312 685 2 32 77 37 11,145 18.93 3.87 8.73 14.59 0.52 53.35 100.00 65,91,762 13,46,948 30,40,960 50,79,842 1,81,885 1,85,74,328 3,48,15,725 1 5001 10001 – – – 5000 10000 20000 20001 – 30000 30001 40001 50001 - - 40000 50000 - 100000 100001 and above Categories of shareholders Category Public & Others Companies Core Promoters Mutual Funds ESOP FII TOTAL 88 A N N U A L R E P O R T 2007 - 2008 R&T AGENTS AND SHARE TRANSFER SYSTEM By a tripartite agreement dated December 5, 2001 in respect of shares held with NSDL and by a tripartite agreement dated November 27, 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. 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 up to 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: 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 SHARES HELD IN PHYSICAL AND DEMATERIALISED FORM As on March 31, 2008, 99.80% of the company’s shares were held in dematerialized form and the rest in physical form. OUTSTANDING GDRs / ADRs / WARRANTS / CONVERTIBLE INSTRUMENTS AND THEIR IMPACT ON EQUITY As on March 31, 2008, 9,601,964 GDRs issued by the company are outstanding. The company issued Foreign Currency Convertible Bonds amounting to US $ 180 Million in March 2007, which are outstanding as on March 31, 2008. The details of the warrants issued during the financial year are disclosed in Note II.7 Schedule P to the financial statements in the Annual Report. LEGAL PROCEEDINGS There are no legal proceedings against the company which are of material nature. NOMINATION 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 the R&T Agents. Members holding shares in electronic form are requested to give the nomination request to their respective Depository Participants directly. 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 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 Declared at the AGM / Board meeting held on March 17, 2000 June 19, 2000 July 13, 2001 November 15, 2002 September 9, 2003 August 24, 2004 January 27, 2005 July 28, 2005 October 28, 2005 August 28, 2006 January 29, 2007 July 26, 2007 Nature of dividend % of dividend Due date for transfer to the fund Interim Final Final Final Final Final Interim Final Interim Final Interim Final 35 5 20 10 10 20 10 20 15 10 15 20 See note below* See note below* Before August 12, 2008 Before December14, 2009 Before October 8, 2010 Before September 23, 2011 Before February 26, 2012 Before August 27, 2012 Before November 27, 2012 Before September 27, 2013 Before February 28, 2014 Before September 25, 2014 The Company declared bonus at 1:1 in the years 2000-01 and 2005-06. * The interim dividend and final dividend declared for the FY 1999-00 which was unclaimed for 7 years from the date of payment being due, was transferred to the Investor Education and Protection Fund. 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. A N N U A L R E P O R T 2007 - 2008 89 INVESTOR GRIEVANCES Investor grievances received from April 1, 2006 to March 31, 2007: 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 Cleared - - - - 5 5 - - - - 5 5 During the year ended March 31, 2008, the Company has attended to all the investors’ grievances / correspondence within a period of 10 days from the date of receipt of the same. ADDRESS FOR CORRESPONDENCE For any queries, please write to: Raj Kumar Chief Counsel & Company Secretary Subex Limited, Adarsh Tech Park, Devarabisanahalli, Outer Ring Road, Bangalore – 560 037, India. Telephone: 91 80 6659 8700 Fax: 91 80 6696 3333 Email: rajkumar.c@subexworld.com investorrelations@subexworld.com WEBSITE Company’s website www.subexworld.com contains comprehensive information about the company, products, press releases and investor relations. It serves to inform the shareholders by providing key information like Board of Directors and the committees, financial results, shareholding pattern, distribution of shareholding, dividend etc. 90 A N N U A L R E P O R T 2007 - 2008 C M Y K SUBEX LIMITED, ADARSH TECH PARK , DEVARABISANAHALLI, OUTER RING ROAD, BANGALORE 560 037, INDIA BROOMFIELD lDUBAI lLONDON lIPSWICH lMELB OURNE ONTARIO lOT TAWA lPIT TSBURGH lSINGAPORE lSYDNEY www.subexworld.com Q 2 C M Y K
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