federal technologies ltd Management discussions

FEDERAL TECHNOLOGIES LIMITED ANNUAL REPORT 2004-2005 MANAGEMENT DISCUSSION AND ANALYSIS RESULTS OF OPERATION: The Revenue of the Company for the current year is Rs.474.94 Lakhs as compared to Rs. 580.83 Lakhs for the previous year. The Company generated a net surplus of Rs. 1569.38 Lakhs for the year from its operations and from the sale of business undertaking. SALE OF BUSINESS During the year, your Company sold its business operations to Avnisoft Systems Private Limited (Purchaser), a wholly owned Subsidiary of Flextronics International, incorporated under the laws of India, as a going concern and on a slump sale basis. Consequently, all the Business Assets and Business Liabilities were transferred to the Purchaser and the Corporate Assets and Corporate Liabilities were retained by your Company. Your Directors approved the sale of business in the Board Meeting held on 22.07.2005 and your consent was received through a postal ballot process which was a mandatory requirement under the Companies Act , the result of which was in favour of the transaction and was announced on August 23, 2005 and ratified at the Extra Ordinary Meeting of Members held on September 21, 2005. BUSINESS: During the year, till the date of slump sale, the company continued its business of developing and licensing ready-to-manufacture reference designs in digital television products and technologies, predominantly for set-top boxes for the global market. Last year we had introduced new products and technologies apart from the MPEG2 digital broadcast products in the form of portable media players and recorders for MPEG4 based technologies and applications. Your company continued to build on these products and have acquired new customers internationally towards both readymade reference products and technologies licensing. Post the sale of Business, in accordance with the terms and conditions of the Business Sale Agreement, your company has discontinued its current business operations and have transferred all its Business Assets and Business Liabilities including all the employees to the Purchaser. Overview 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 Federal Technologies Limited accepts responsibility for the integrity and objectivity of these financial statements, as well as for various estimates and judgments used therein. In addition to the historical information contained herein, the following discussion includes forward looking statements which involve risks and uncertainties, including, but not limited to, risks inherent in the Companys growth strategy, dependence on certain clients, dependence on availability of qualified technical personnel and other factors discussed in this report. Commentary on the financial statements 1. Share capital 1.1. The Company has at present, only one class of shares. The Company had forfeited 18,97,900 Equity Shares during 1998-99, for non-payment of Allotment Money in accordance with the Articles of Association of the Company. Of these, during 1999-2000, the Company had re-issued 5,92,900 equity shares on preferential basis to Mutual Funds. Further, during the year 2000-01 the Company re-issued 25,000 equity shares for consideration other than in cash for acquisition of IndusLabs a division of InduSoft Private Limited. Total outstanding shares as on date is 38,25,000 equity shares of Rs.10/- each. The Board of Directors reserve the right under Articles of Association of the Company to re-issue balance of 12,80,000 forfeited shares to such persons on such terms and condition as it deems fit. 2. Reserves and Surplus 2.1. Capital reserve of Rs. 20.36 Lakhs represents Application money received during the public issue against the 5,92,900 Equity Shares, which were subsequently forfeited and re issued as follows: 5,92,900 equity shares re - issued at a premium on preferential basis to mutual funds during the year 1999 and 25,000 equity shares issued towards consideration other than for cash towards acquisition of Indus Labs during the year 2001. 2.2. Share premium account represents the cash premium collected on the re- issue of forfeited shares of 5,92,900 equity shares issued on preferential basis to mutual funds during 1999-2000. 2.3. The Company has transferred Rs 157 Lakhs (Previous year - Rs. 6 Lakhs) to General Reserves during the year. 3. Secured & Un Secured Loans 3.1. During the year Company took a unsecured loan of Rs. 1,31,31,258/- from Future Software Limited carrying a interest of 10.25% Per Annum. Since all the assets of the Company was pledged with the State Bank of India towards the Cash Credit loan extended to the Company this loan was used to repay the Secured Loan with State Bank of India . How ever being the loan of the Business Undertaking the same was transferred to the Purchaser. 3.2 During the year the Company has re paid the working capital loan to the tune of Rs. Rs.100 Lakhs State Bank of India, Industrial Finance Branch. 4. Fixed assets 4.1. During the year the Company added assets worth Rs. 3.96 Lakhs, pre sale of business. (Previous year-Rs. 169.20 Lakhs) to its Gross Block. How ever all the Fixed Assets of the Business Undertaking except Office Building and Vehicles of the Company transferred to the purchaser. 4.2. The Company has assets worth Rs 7.55 Lakhs (Previous Year - Rs. 10.56 Lakhs) under Hire Purchase Agreements. This being Corporate Assets of the Company has not been transferred to the purchaser. 4.3. Property, plant and equipment are stated at cost less accumulated depreciation. The Company computes depreciation for all property, plant and equipment using the straight-line method. Assets Depreciation Rates Computers 20% Plant & Machinery 14.29% Office Equipment and Furniture & Fixtures 14.29% Vehicles 20% 4.4 Building is depreciated as per the provisions of the Companies Act, 1956 at 1.63%. This being corporate asset of the Company it has not been transferred to the Purchaser. 4.5 Goodwill, arising out of acquisition of Indus labs being long-term asset and having an intrinsic value, in excess of cost is not being amortised This being the asset of the Business undertaking has been transferred to the purchaser on account of sale. 4.6 The Company has not planned any Capital Expenditure. 5. Investments 5.1 The Company has invested an amount of USD 3000 (Rs.1.45 Lakhs) in 2001- 02 in Fedtec Inc,USA an wholly owned subsidiary . 6. Sundry Debtors 6.1 All sundry debtors appearing in the Books of Accounts, being asset of the Business Undertaking on the date of sale have been transferred to the purchaser. 6.2 Dues from Companies under the same management - Nil (Previous Year - Nil) 7. Cash and bank balances 7.1 The bank balances includes Rs. 2991.62 Lakhs (Previous Year - Rs. 0.19 Lakhs) in Current and Fixed Deposits accounts. 8. Loans and advances 8.1 Advances recoverable in cash, kind or value to be received, are primarily towards prepayments for value to be received and loans and advances given and includes a sum of Rs. 300.61 Lakhs held in an Escrow Account out of the Purchase consideration with the purchaser for a period of 12 months from the date of sale towards adjustments to the purchase consideration on account of events occurring during this period, that could impact the value of the transferred Business Undertaking. 8.2 Tax deducted at source Rs 20.55 Lakhs (Previous Year-Rs. 9.13 Lakhs) 8.3 Dues from Companies under the same management - Nil (Previous year - Nil). 8.4 Deposits represent lease deposits paid for staff accommodation, and sales tax deposits. Company has paid Rs.6.00 Lakhs (Previous Year - Rs. 14.50 Lakhs) as deposits for its operation and facilities and towards above said deposits. 9. Current liabilities 9.1 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. Sundry creditors - others include creditors for operational expenses, accrued employee incentives and benefits. How ever all the liabilities of the Business undertaking except the Corporate liabilities have been transferred to the purchaser on account of sale. 10 Profit & Loss Account 10.1 Income 10.1.1 The Company derived its income of Rs. 490.59 Lakhs (Previous Year - Rs. 580.83 Lakhs) from designing, developing and providing services in embedded consumer electronic devices with vertical focus on digital television technologies through ready to manufacture reference designs of set-top boxes and wireless communication products, and services rendered till the date of sale of business. Rs. in Lakhs Particulars 2004-2005 2003-2004 Value % Value % Design, Development , sale of 474.93 96.81 580.82 99.99 products and services Other Income 15.66 3.19 000.01 00.01 Total 490.59 100.00 580.83 100.00 10.1.2 Non-operating income 10.1.2.1 Non-operating income presently consists of income derived by the Company from interest on deposits with Bank and other income. 10.2 Operating profits 10.2.1 The operating profit of the company amounted to Rs. 95.83 Lakhs and the surplus generated out of the sale of the business undertaking amounted to Rs. 2106.88 Lakhs. 10.3 Interest & Bank Charges 10.3.1 The Company incurred an expenditure of Rs. 15.08 Lakhs (Previous Year - Rs. 22.50) towards interest and bank charges. 10.4 Depreciation 10.4.1 The Company provided a sum of Rs.88.02Lakhs (Previous Year- Rs.73.84 Lakhs) towards depreciation on its assets as per its Accounting Policy. Post sale of business all the Assets except Office Building and Vehicles transfered to the purchaser. 10.5 Provision for tax 10.5.1 The Company has provided Rs. 631.74 (Previous Year Nil) for tax liability during the year in accordance with the applicable provisions of the Income Tax Act, 1961. 10.6 Net Profit / Loss 10.6.1 The operating Profit the Company amounted to Rs. 95.83 lakhs and the surplus generated out of the sale of the business undertaking amounted to Rs. 2106.88 Lakhs as against Operating Net profit of Rs. 64.24 Lakhs during the previous year. 10.7 Earnings per share 10.7.1 Earnings per share as on the Balance Sheet date was Rs 41.03 per share (Previous Year.(Rs. 1.68 per share). 10.8 Cost of Software Tools Charged off 10.8.1 Cost of Software Tools charged off to revenue during the year amounted to Rs. Nil Lakhs as against Rs. 0.80 Lakhs for the previous year.