PENTAGON GLOBAL SOLUTIONS LIMITED
ANNUAL REPORT 2003-2004
Your Directors have great pleasure in presenting the NINTH ANNUAL REPORT of
the Company with audited accounts for the period ended 30th June 2004.
Year Ended Year Ended
Operating Profit (-)19,390,691 32,395,756
Depreciation 27,776,511 29,508,732
Profit before Taxation (-) 47,167,202 2,887,024
Provision for Deferred Tax reversed 3,516,452 3,307,119
Profit after Tax (-) 43,650,750 6,194,143
Deposits There are no overdue deposits as on 30th June 2004.
During the period under review, your Company has earned a total income of
Rs.1055.47 Lakhs as against Rs.1972.97 lakhs in the previous year. The
export turnover was Rs.27.60 lakhs this year as against no exports during
last year. The net result is an operating loss of Rs.193.90 lakhs as
against an operating profit of Rs.323.96 lakhs last year.
After providing depreciation of Rs.277.76 lakhs (Rs.295.09 lakhs last
year), the loss before tax was Rs.471.67 lakhs as against a profit Rs.28.87
lakhs last year. There was no provision for income tax in the year as well
as last year. An amount of Rs.35.16 lakhs was reversed during the year as
excess provision of deferred tax, whereas an amount of Rs.33.07 lakhs was
reversed on this account last year. After making these adjustments, the
loss before tax for the year under review is Rs.436.50 lakhs as against a
profit of Rs.61.94 lakhs in the previous year.
Eshcol Computers Private Limited a company that focusses on VLSI continues
to design and develop IPs. IP cores on PCI,12C, UART have been successfully
tested and few more modifications have been initiated to bring in better
performance and cost reduction. The core team is actively involved in R&D
to enhance the design models of the IPs and also look at futuristic
integration of technology platforms. The company is also involved in
testing services and with the expertise in VLSI the company proposes to
offer cost-effective services in the Chip design industry. The company
proposes to tap the US, Asian market for promoting its testing services.
The company also intends to aggressively market VOIP design model in the
Vibrant Solutions Private Limited caters to the SME market segment. The ERP
suite has been successfully implemented and the feedback from the clients
has been very encouraging. New modules have also been added up in the new
version. The initial response has been positive for an ASP model of the
product, which the company proposes to launch. This model would become a
very cost-effective model - "pay as you use" and the company is bullish on
signing up lot of smaller clients in the near future.
Precious Multimedia Private Limited, an e-learning company has made
significant changes in the e-Learning platform and has added few more
domains in the existing product. The target audience for this product is
Schools, colleges, Private training institutions etc. The company has also
been working on offering the same in different Indian languages. To start
with the company is working on Tamil and Telugu and propose to start
development in the Zindi version in the early next quarter.
Your Company has undertaken several pro-active initiatives to meet the
challenges in the short term growth and to sustain growth in the long term.
Your Directors have taken conscious decision to shift the focus of
consulting business to BPO activity as the clients are shifting more jobs
to offshore and this offers major opportunity for them to increase their
profits. Your company has been working on marketing and developing the
necessary infrastructure and team to meet the needs of such a significant
shift in business. Your company remains confident that this initiative
would bring tremendous business and would create value addition both in
long term and short term, in terms of volume and value. Your company has
also recognized the need of investments on the marketing efforts and is
making the necessary investments by increasing the marketing team, project
the capabilities of your company in terms of infrastructure, manpower and
financial abilities to meet the needs of growing requirements of the
customers. Your company has a dynamic team and is focusing on the
healthcare outsourcing segment. The future of this segment is vibrant with
immense potential to be tapped and make your company one of the leading
service providers in the BPO segment.
Directors' Responsibility Statement
Pursuant to the requirement under Section 217(2AA) of the Companies Act,
1956, with respect to Directors' Responsibility Statement, it is hereby
(i) that in the preparation of the annual accounts for the financial period
ended 30th June 2004 the applicable accounting standards had been followed
along with proper explanation relating to material departures;
(ii) that the directors had selected such accounting policies and applied
them consistently and made judgments and estimates that were reasonable and
prudent so as to give a true and fair view of the state of affairs of the
Company at the end of the financial year and of the profit/loss of the
Company for the year under review;
(iii) that the directors had taken proper and sufficient care for the
maintenance of adequate accounting records in accordance with the
provisions of the Companies Act, 1956 for safeguarding the assets of the
Company and for preventing and detecting fraud and other irregularities;
(v) that the directors had prepared the accounts for the financial period
ended 30th June 2004 on a 'going concern' basis.
Mr. T Mahadevan, Managing Director was appointed in 1999 for a period of 5
years. As the appointment expires in 2004, he is reappointed for a further
period of 5 years.
Mr. M. Suresh Krishnan, whole-time Director was appointed in 1999 for a
period of 5 years. As the appointment expires in 2004, he is reappointed
for a further period of 5 years.
Mr. M. Satish Narayanan, whole-time Director was appointed in 1999 for a
period of 5 years. As the appointment expires in 2004, he is reappointed
for a further period of 5 years.
Mr. R. Jagadish, Director is due to retire by rotation at the forthcoming
Annual General Meeting and is eligible for reappointment.
Mr. R.S. Loganathan, Director is due to retire by rotation at the
forthcoming Annual General Meeting and is eligible for reappointment.
Mr. Paraschand Galada, the retiring Auditor, has expressed his inability to
continue as the Auditor of the Company for personal reasons. Mr. S.R.
Vijayakumar, B.Com., F.C.A., of M/s. Vijay & Co., Chartered Accountants,
has expressed his willingness to be the Auditor of the Company for the year
2004-2005, if appointed. The Company has received confirmation from him
that his appointment, if made, would be within the prescribed limits under
Section 224(1B) of the Companies Act, 1956. Accordingly, it is proposed to
appoint Mr. S.R. Vijaya Kumar the auditor of the Company at the ensuing
Annual General Meeting to hold office till the conclusion of the next
Annual General Meeting.
With reference to the Auditor's remarks in his Report (Paras 13 & 14 of the
Annexure) the directors have to report as under :
Para 13. The return of Deposits has since been submitted.
Para 16. For the Financial year ending 31.3.2001 the Company had filed a
Return involving a tax payment of Rs.5.85 lakhs. The Assessing Officer by
his Assessment order dated 25.03.2004 had asked the Company to pay a tax of
Rs.1.98 crores. The Company has filed a Revision Petition u/s 264 of the LT
Act with the Commissioner of Income-tax, Chennai III against the Assessment
order and your Board is very confident of getting a favourable decision.
Conservation of Energy, Technology Absorption
The Company has no activity relating to conservation of energy or
Foreign Exchange Earnings/Outgo
During the year the Company has made exports worth Rs.27,60,000. There
were, however no outgo of foreign exchange during the year.
Auditor's Certificate on Corporate Governance
The certificate from the Auditor of the Company under Clause 41 of the
Listing Agreements with the Stock Exchanges regarding compliance of the
provisions of corporate governance is enclosed to this Report.
Your Directors wish to place on record their appreciation of the hard work
put in by the employees. The Directors would like to thank the South Indian
Bank Limited for their continued support, as also the shareholders and
valued customers for their continued support and patronage.
By Order of the Board
Place : Chennai T. MAHADEVAN
Date : 30th September2004 Managing Director
COMPLIANCE CERTIFICATE ON CORPORATE GOVERNANCE
The Board of Directors of
Pentagon Global Solutions Limited
I have reviewed implementation of Corporate Governance procedure set by
Pentagon Global Solutions Limited ('The Company') for the year ended 30th
June, 2004 with the relevant records and documents maintained by the
Company and furnished to me for my review.
Based on my verification and information and explanations given to me, I
certify that the Company has complied with the conditions of Corporate
Governance as stipulated under Clause 49 of the Listing Agreement with
Place : Chennai K. Paras Chand Galada
Date : 30th September 2004 Chartered Accountant
MANAGEMENT DISCUSSION AND ANALYSIS REPORT
Pentagon Global Solutions Limited an end-to-end IT solutions and services
company, specializes in providing cost effective turnkey software solutions
in VLSI/ASIC Design, Embedded Systems, Engineering Services, Multimedia and
Graphics, Client/Server Technology, ERP, Web-centric applications and e-
commerce. Apart from this the company is also focusing on the Healthcare
The Indian IT sector has proved to be the country's fastest growing
segment, even in troubled times-in the globally challenging economic
environment of 2001-2003. The software and services industry, a major
component of India's IT sector, showed significant momentum, higher than
that of other industries in the country. India continued to be a compelling
investment destination, as leading companies either set up shop here or
beefed up their existing infrastructure. Outsourcing of IT requirements by
leading global companies to Indian majors also picked up pace during 2002-
03, in line with worldwide trends.
IT software and services exports
Software and services exports continued to remain on top of the IT
industry's revenue table. The export driven software sector saw major long
term projects come to Indian ICT leaders and Indian companies bagging a
larger and larger share of the global outsourced business. The software
export sector logged in a revenue of Rs.47,500 crore during 2002-03, a jump
of around 30 percent, as compared to the previous year.
Some of the key service lines for Indian players continued to be:
* Custom Application development and maintenance
* Applications outsourcing
* IT enabled services
* R&D services
Indian companies also made modest headway in segments such as packaged
software support and installation, product development and design services
and embedded software solutions.
IT Enabled services (ITES)/BPO
NASSCOM estimates indicate that during 2002-03, the IT-enabled services
segment grew by a phenomenal 65 percent. Revenues from this sector rose
from around Rs. 71 billion in 2001-02 to approximately Rs. 117 billion in
2002-03. Compared to other competing ITES nations such as Ireland, the
Philippines and China, India drew the bulk of the global ITES/BPO business
on account of its unmatched price/performance/quality proposition.
The ITES/BPO industry took root in most of India's leading cities. Some of
the leading hubs of these services were NCR, Mumbai, Bangalore, Chennai,
Kolkata, Hyderabad, Kochi, Ahmedabad and Pune.
IT software and services market in India continued to be driven by exports,
which exhibited robust growth during the 2003-04 period. The export
segment, which had logged in revenues of Rs.461 billion (US$9.55 billion)
in 2002-03, accounted for around 60 percent of the total revenues of the IT
industry that year. Software and services exports meanwhile are expected to
cross the Rs.555.1 billion mark (US$12.2 billion) in 2003-04, a jump of
20.4 percent in rupee terms and 28 percent in dollar terms.
India's value proposition is based on its low cost-high quality-scalability
model, which gives it an edge over other emerging ITES-BPO destinations
such as Ireland, the Philippines, China and other Latin American countries.
Indian ITES-BPO service providers offer customers the following advantages:
* Improved efficiency and higher service levels due to streamlined
processes and adherence to quality standards and a better skilled
workforce. The Indian ITES-BPO vendors have implemented industry standards
such as SEI-CMM, ISO, TQM, Six Sigma QualityTM and COPCTM.
* Cost savings of around 40-50 percent and higher free cash flows due to
reduced investments in physical infrastructures, telecom and equipment.
Wage arbitrage has also led to increased cost savings.
* A high quality, pool of knowledge workers who have English speaking and
relevant domain skills and give India an edge over other offshore
* The ability to focus on core competencies and use off shoring to access
new technologies and talent to strengthen and expand existing business
Trends in Indian software and services exports
The Indian software and services market continued to remain export
oriented, with sales to overseas customers accounting for the bulk of the
sector's turnover for 2003-04. While software and services exports grew at
a healthy 26 percent, logging in a revenue of Rs.46.10 billion (US$ 9.55
billion) during 2002-03, the numbers were estimated to touch Rs.55.51
billion (US$ 12.2 billion) in the 2003-04 period. This represented a jump
of around 20.4 percent in Rupee terms and 28 percent in US dollar terms.
Future trends and opportunities for the Indian software and services
industry According to leading global business intelligence analysts, the
offshore outsourcing market, still in a nascent stage, is expected to
witness substantial growth over the next few years.
* Forrester Research estimates that only 3-4 percent of the Fortune 500
companies offshore more than 10 percent of their IT services spending.
Considering the mammoth IT budgets of these companies, there is a vast
untapped potential that the segment offers Indian software and services
* Industry watchers are hopeful that industry pricing will remain
relatively stable over the near-to intermediate term and that Indian
services firms may even be able to raise prices.
* Supply side factors indicate that India will continue to have a
significant pool of "tech-ready" and "tech-trainable" students over the
next few years. It was estimated that during 2003 around 375,000 students
joined up engineering or other technical programs. This was in addition to
the 500,000 non-engineering graduates that passed out of India's higher
* It is expected that over the next few years, Indian software and services
companies will adopt a global delivery model based on four components:
onshore (same country as client); on-site (at the client site), near shore
(country near to client country) and offshore (based in India)
The Indian ITES-BPO industry was a key driver of the overall Indian IT
software and services sector during 2003-04, recording revenues of US$ 3.6
billion in that period. According to recent studies by the National
Association of Software and Services Companies (NASSCOM), the Indian ITES-
BPO industry grew at about 54 percent during 2003-04.
Trends defining the Indian ITES-BPO market
The key trends that are defining and strengthening the Indian ITES-BPO
market and will create future business opportunities for the industry
include the following :
* Increasing maturity: The industry is rapidly gaining maturity and
consolidation, following a large number of mergers and acquisitions during
2002-03. The trend towards maturity has been escalated by the entry of
traditional IT services players, who have added the ITES-BPO portfolio to
their existing offerings in order to provide customers with a complete
umbrella of end-to-end services. The idea is to leverage the synergies
between their ITES-BPO operations and the IT services offerings
* Growth in multiple vendor and BOT contracts: The Indian ITES-BPO industry
is witnessing an increase in multi-vendor and build-operate-transfer (BOT)
contracts which offer customers advantages such as low risks, scalability
and competitive pricing
* Expansion of the services footprint: Indian ITES-BPO vendors are
expanding the spectrum of their service offering in client locations and
even setting up facilities in other low cost ITES-BPO destinations such as
China and the Philippines, in order to tap these markets
* Higher value add offerings: A number of Indian ITES-BPO vendors are
moving up the value chain to offer high-end services such as equity
research and analytics, insurance and technology support and development
* Vendor polarization: Growth within the ITES-BPO segment is getting
centered around the larger players that can offer clients benefits such as
scalability, delivery capability, track record, customer referrals, etc.
Industry observers believe that by 2005 the Indian BPO industry will have
eight to ten US$100 million third-party BPO companies. This will give
companies a critical mass to compete against multinationals such as EDS,
Computer Sciences Corporation (CSC), and Accenture. Further, it gives
prospective clients enough confidence to trust them with larger contracts
* Expanding capacity: The Indian ITES-BPO industry, including MNC and third
party service providers have been expanding their capacities during 2002-
04. The number of seats has increased from 140,000 at the end of March
2003, to around 210,000 in March 2004. Captive units account for almost 65-
70 percent of the existing capacity
The domestic IT market was divided along the following lines: software
services, ITES-BPO, packaged software and the IT training segment. While
software services took the lead with a 66.8 percent share of the total
market during 2003-04, packaged software accounted for 13.7 percent of
sales, and domestic ITES and hardware services contributed the remaining
19.5 percent. The Indian training and education industry meanwhile showed
signs of a resurgence during 2003-04, increasing revenues to Rs.12 billion
(US$ 270 million).
Your Company is also consolidating its position in the VLSI and Embedded
capabilities with companies like Ford Visteon in U.S. Similarly the efforts
are being put in with semiconductor and chip manufacturing companies for
the embedded and VLSI development efforts.
IT Enabled Services - Medical Transcription and Billing services
Your Company has been positioned as a strong Healthcare solution provider
and now offers Medical Transcription and Medical Billing and coding
services to US clients. Industry estimates have put the annual requirement
at 35,000 to 40,000 medical transcriptionists. The US medical transcription
industry has been estimated at $17 to $20 billion, annually. Countries such
as India, the Philippines and Pakistan have been competing for the pie.
Your company has ambitious plans of grabbing a major share in the
offshoring of MT services to India, which according to industry analysts is
estimated to be around $100 million.
Review of Operations
Your company could achieve only a moderate growth during the year as
compared to previous year. The takeover procedure and restructuring of the
various team was the primary reason for this year's performance. Because of
the reasons already explained, the achievement made should be considered
satisfactory in such circumstances.
Your company has always been rightly proud of its Human Resources, which
form a solid asset base for the Company, viz. a committed team of
professionals with caliber in all its areas of activity. However, prudent
measures had to be taken to face the current challenges by downsizing the
human resource in the software segment and at the same time strengthening
it in the new areas of activity.
Internal Control Systems
The Company has a proper and adequate system of internal control to ensure
that all assets are safeguarded and protected against the loss from
unauthorized use or disposition and that transactions are authorized,
recorded and reported correctly.
The internal control system is supplemented by a regular program of
internal audit and review by the management. The internal control system is
designed to ensure that the financial and other records are reliable, for
preparing financial statements and other reports and for maintaining
accountability of assets.
The adequacy of internal control is reviewed by the Audit Committee of the
Board of Directors.
Challenges, Risks and concerns
The slow down in U S economy, which has resulted in cut down in IT spending
has forced Indian software companies to sit up and take notice of
compelling them to adopt alternative strategies for survival.
The alternative is to tap the potential from other countries, exploring
avenues for domestic growth including the huge Govt. sector, developing its
own IT products and branching into IT enabled services.
The market for technology services companies is growing at a phenomenal
rate. The coming year will be a year of consolidation of your company with
the various products and solutions in hand to deliver to the various
clients. The hottest horizontals in these tech services are e-Customer
Relationship Management (eCRM), Supply Chain Management (SCM), Knowledge
Management (KM), network management and ASP. Here the Indian companies have
a good opportunity to get a strong footing.