FINANCIAL RESULTS

The liquidity position continued to be extremely tight. With the delays in salaries continuing, the employees who had formed a union decided to go on strike, which lasted for almost a month. Quite a few employees from the branches, especially Bangalore, Hyderabad, Mumbai and Pune, left the services of the Company completely crippling the operations of these branches. Obsolete stock of around Rs 90 lacs was written off. All these developments resulted in a turnover much lower than expected in all the product lines of the Company, resulting in a loss of Rs 281.12 lacs.

                                          Year ended       Period ended
                                          31.12.2003         31.12.2002
                                           (Rs.Lacs)          (Rs.Lacs)

Less: Depreciation                              8.12              13.21

Profit after tax                            (277.82)            (64.56)

Less: Income tax provision for earlier years    3.30                Nil

                                            (281.12)            (64.56)

Add: Balance brought forward from
previous year                                (10.29)              54.27

                                            (291.41)            (10.29)

Less:Transfer from General Reserve             22.00                Nil

Balance carried to Balance Sheet            (269.41)            (10.29)

The Board has not recommended any dividend for the year under review.

THE YEAR UNDER REVIEW

Servo Controlled Voltage Stabilisers (SCVS) and Isolation Transformers

The arrangement with dealers and vendors, who had come forward to invest in the working capital of these products, was put in place by April 2003. They were appointed as Licensed Manufacturers (LMs) and agreements were signed to give them the license to manufacture these products. Under this arrangement, the LM procures raw materials, produces stabilisers and isolation transformers and bills them directly to the customer. Alacritys role in this is to provide the manufacturing expertise by way of trained workers, collect orders, organise installation of the equipment, control receivables and provide after sales service. For these services, the LMs pay us a fee as a percentage of the value at which the product is being billed. With the LM scheme in place, the manufacturing activities were completely transferred to the units operated by the LMs, thus bringing a temporary suspension of such activities within the Company from April 2003.

As this arrangement took longer than expected to settle down, this delay coupled with the strike in the month of October that lasted for over three weeks had an instant and consequential affect on the productivity and output of the LMs. It was during this strike that quite a few employees and some members of the senior management team from the branches left the service^ of the Company, and sales in the branches were set back as a result.

The strike was resolvpH through a negotiated process wherein the unpaid salaries, bonus etc. were rated as airears meant to be paid when the Companys position improved. Also, assi tnces of regular payment of salaries in the months to come were given. Workers on their part co-operated and started work.

Inspite of the negative fall-out of the strike, most of the long standing employees both from the operations as well as from the management team were able to see that their collective experience and the good prospects, the business had could eventually pull the business out of the red. And, with this optimism, they stayed back with a greater conviction to turn the Company around.

Uninterrupted Power Supply (UPS)

M/s n-Logue, a company promoted by IIT Chennai, is in the business of providing communication kiosks in the villages of India, by using the technology of Wireless in Local Loop (WLL corDECT), patented by IIT Chennai. This project envisages setting up of kiosks in the villages to provide services for both Internet and telephony using this technology. These services will connect villages to larger towns and cities of the country enabling the villagers to obtain critical information for their livelihood, health-care and education. M/s n-Logue has a plan of setting up almost one million (10 Lac) kiosks, each requiring an UPS, throughout the villages of India over a period of 5 years.

Impressed by the commitment shown by our Design team, seen in the work they had put in since the year 1999 to develop a unique UPS, and the solutions we were able to offer to serve the needs of the kiosk (not experienced by them with any other vendor of theirs for UPS), M/s n-Logue signed an agreement with us in April 2003, making us their exclusive vendor for this UPS system. This translates into a business of almost Rs 700 crores for Alacritys UPS in a period of 5 years. Later in the year, on seeing the progress our design team had made, M/s n-Logue gave us a Letter of Intent in June 2003 for supply of 3000 units of UPS over a period of 6 months.

As it was necessary to substantially upgrade our UPS system, for most part of the year our design and development team was engaged in studying the quality of power and the duration of its availability in the villages. The process of fine tuning the design was still going on towards the end of the financial year and therefore no sale was possible in this period.

The total sales turnover for the products of Power Conditioner business was around Rs 408 lacs. As this sale was due to the billing done by the LMs, the income by way of fee being paid to Alacrity was Rs 142 lacs.

Instrumentation and Controls (I&C)

Due to the reasons stated above the turnover of this business was much lower than expected. The sale of panel meters and portable power and energy analysers resulted in a sales turnover of Rs 102 lacs. This was a direct income for Alacrity as these meters were billed directly by us to the customer. Keeping in mind the fact that the markets of energy management systems were getting competitive and the customer was increasingly getting cost-conscious, an indigenous vendor for meters, M/s Trinity Engineering, was identified to develop, manufacture and supply meters to us. Efforts to develop this vendor were on towards the end of the financial year.

Building and Industrial Automation

The order to automate the switching functions of the power supply systems of an eye hospital was successfully completed. The process to sell more such systems was on towards the end of the period under review.

Service Revenue

Apart from the strike period, the inflows from this business were steady for most part of the year. The total income was Rs 90 lacs.

Aluminium Foil Transformers and Switched Reluctance Motors

Development work on the transformers meant for the Distribution System of the Electricity Board was on.

The motor required for the Hybrid Electric Drive system was also under development in the year under review.

Inventories

On revaluing the inventory of finished goods and packing materials, almost Rs 90 lacs worth of such goods v re written off as obsolete stock. Due to continuous changes in the design of product m response to market needs the incidence of obsolescence increase sharply P had to be provided for. A similar process of revaluing stocks will be adopted each yeai nereafier.

Debtors

As the incidence of obsolescence has also affected the old stock of various products lying with dealers, many of whom have either suspended or discontinued their arrangement with the Company given the unpredictability of supplies, the prospect of doubtful debt is something that the Company has to deal with practically and realistically. Efforts are on for recalling and upgrading the stock where possible. Once this process is completed suitable provision for bad and doubtful debts will be addressed. While the extent of receivable thus affected does reflect unsatisfactory marketing judgement, the experience and value gained from the efforts that went into the design and development of the products involved in these receivables cannot be underestimated. This value is best understood in the 5-year contract signed with n-Logue for supply of UPS (CPS as explained later), which could add up to a sales volume of nearly Rs 700 crores.

Banking operations

Since October 2003 the Companys account in Canara Bank is being treated as a Non Performing Asset (NPA) by them. Your Company was in the process of formulating a process of settlement with the bank towards the end of the period under review.

Optimisation of costs

Rationalisation of operations have so far brought the overall cost down by 40% as compared to those incurred in the previous year for the corresponding period.

General

1. Due to the dynamic situation your Company has been through, we were unable to have an internal audit. Despite this situation, your Company was able to keep all its records reasonably well.

2. Problems in cash flows created delays in the payment of employee salaries, resulting in accumulation of Provident Fund dues of around Rs 20 lacs.

3. For reasons mentioned above, quite a few statutory payments amounting to around Rs 40 lacs were not made. We are constantly in touch with the concerned authorities and updating them with our cash situation. They have all shown understanding and given us time to pay our dues to them.

Current Year Operations

The overall demand for the products of your Company has been good and the management believes that this trend will continue throughout the current year. The operations of the current year will have the following focus:-

1. Increase in the sale of products in the Power Conditioner and the I&C businesses by a minimum of 20% over the previous year.

The operations in the branches of South India have stabilised. Due to the diturbances of the previous year, many of our customers had switched over to the competition for their requirements. Assurances given and the performance that followed have now started to yeild results.

2. Expansion of service network to get additional revenues from Service Contracts.

3. Further cutting down costs and optimising manpower.

4. The On-line UPS developed by us has unique features that makes it a product capable of supplying clean power continuously to the computer connected to it. We have therefore decided to call this On-line UPS a Continuous Power Supply, the CPS.

Developments completed so far and the tests conducted on almost 18 units supplied to M/s n-Logue have yeilded results that are very satisfying. Encouraged by this M/s n-Logue are now v\tiling to start lifting 500 units per month from the month of June 2004. This will mean an additional sales turnover of around Rs 200 lacs for this year. The streamlining of production of CPS will be taken on a priority.

New Products

Development of products like the Distribution transformer made out of Aluminium Foil windings and the motor for the application of Electric Vehicle will be given special attention.

Given the market standing of your Company and the products it has developed, ARCI, a Research and Development organisation of the Government of India, situated in Hyderabad, has approached us to jointly develop Fuel Cells for the UPS application. We have recently signed a 5-year agreement with them for this purpose. This agreement gives your Company the first right of refusal to use this technology exclusively in India. As Fuel Cells are going to completely replace conventional batteries in the future, signing of this agreement acquires great significance.

The CPS will be further developed to make it suitable for many other critical applications such as Medical Equipments, On-line printing of bills and any other application that will require a back up of around 3 hours, which will include automation of common area lighting of residential complexes and power supply to equipment meant for automatic control of traffic signalling.

Banking operations

As mentioned earlier, our account with Canara Bank is now NPA. To settle this issue, we have recently approached the bank with the offer of One Time Settlement (OTS). We have requested the bank to recover this amount from the accruals of the contract signed with M/s n-Logue. We believe that the margins from this business will be around Rs 120 lacs in the first year of its operations. The bank therefore can recover the total due of around Rs 336 lacs over a period of 3 years. Companys properties viz. Factory land, and office space in Bangalore, Pune and Mumbai, given as collateral will then get released. The Company intends to sell these properties and pay off most of the statutory dues, settle arrears in employees salaries and partly settle its unsecured loans. Alternatively, the bank could settle dues partly by sale of properties and partly by securitising receivables from the n-Logue contract. The negotiations with the bank are currently going on.

Opportunities and Threats Opportunity

With industrial markets looking up, the Company believes that it can not only sustain its lines of business, but to also expand them by introducing new products like the CPS and Aluminium Foil Wound Distribution Transformers. The tie up with ARCI Hyderabad, will also give a definite edge to your Companys products in the market in the coming years. These opportunities will have to be utilised by using the intrinsic strengths of the Company such as:-

* A close-knit team that has displayed courage and resilience during extremely difficult times.

* A strategic product range and a brand image that has endured despite recent poor market performance of these products.

Threats

The Company recognises the following business risks:-

* Dealing with the bank to resolve the NPA issue.

* Dealing with the employees for settlement of salary arrears, with the settlement being dependent on the sale of Companys properties and future business income.

* Dealing with the LMs on whose working capital future production is being made completely dependent.

* all the above decisions have been well considered the Company is confident of seeing these matters through and paving the way for early turnaround of the business.

DIRECTORS RESPONSIBILITY

Pursuant to Section 217(2AA) of the Companies (Amendment) Act, 2000 the Directors confirm that:

1. In the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures.

2. The directors had selected such accounting policies and applied them consistently and made judgements and estimates that are 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 or loss of the company for that period.

3. The directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities.

4 The directors had prepared the annual accounts on a going concern basis.

PUBLIC DEPOSITS

Your Company has neither invited nor accepted any deposits from the Public.

CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION, FOREIGN EXCHANGE EARNINGS AND OUTGO

The activities of the Company involve very little use of energy, electrical or otherwise and hence, no particulars are presented under this head. Disclosures relating to R & D, technology absorption and foreign exchange outgo are furnished in Annexure - A.

PARTICULARS OF EMPLOYEES

None of the personnel in the Company was in receipt of remuneration in excess of the limits prescribed in section 217(2A) of the Companies Act, 1956 during the period under report.

LISTING

Your Companys shares are listed at Chennai, Mumbai, Coimbatore and Hyderabad Stock Exchanges and the Company is yet to pay the listing fees to Stock Exchanges for the year 2003-2004.

DIRECTORS

Mr. Amol Karnad retires by rotation at the ensuing Annual General Meeting and being eligible, offers himself for re-election. Mr. Vijay Nagaswami, resigned from the Board with effect from 30* January 2004 due to preoccupation of his own profession. Mr. Ulhas Gokarn has been appointed as additional director with effect from 30th October 2003.

SECRETARY

The Company Secretarys post in your Company is vacant.

AUDITOR

Mr. Rajan Verghese Chacko, Chartered Accountant, Auditor of the Company, retires at the ensuing Annual General Meeting and is eligible for re-appointment.

ACKNOWLEDGEMENTS

We thank the Companys employees, customers, bankers, suppliers, various departments/agencies of the Central and State Governments and you - the members - for the sustained co-operation and support extended to us.

                                                 On behalf of the Board

Chennai                                                     Amol Karnad
April 30, 2004                                                 Chairman

1. The following products are under development:

* CPS (On-line UPS) based on high frequency switching for applications other than. Personal Computers

* Switched Reluctance Motor for application in Servo Controlled Voltage Stabilisers and as an electric drive for a Hybrid Electric Vehicle

* Aluminium foil transformers for the application of Distribution of Electric Power

2. Benefits derived as a resuh of above R&D:,

* Opportunity to tap the large market potential available for UPS, which will enable the Company to generate substantial revenue, either through sale of technology or by marketing the product through an OEM with an established distribution network

* SR Motors will be used as electrical drive in Hybrid Electric Vehicle. It will also be used as a servo motor in our Servo Controlled Voltage Stabilisers, enabling better performance and cost reduction

* Aluminium foil transformers will provide a more reliable and economical option to the existing copper transformers being currently used for Distribution of Electric Power

3. Future plan of action:

The development work in the following areas would be continuing:

* Foil winding machines for HT transformers

* On-line tap changing transformers

* Extending the use of SR Motors to Industrial applications

4. Expenditure on R & D:

a) Revenue expenditure (Product development expenditure) Rs.57,553/-

b) Capital expenditure                                              Nil

c) Total                                                    Rs.57,553/-

Technology absorption & Innovation:

Continuous efforts are being made to reduce input costs through Value-Engineering and to develop products using indigenous technology. Hence, there has been ha import of technology.