Document/ExhibitDescriptionPagesSize
1: 6-K Satyam Computer Services Limited HTML 285K
2: EX-99.1 EX-99.1 Press Release of the Company, Dated July HTML 29K
18, 2008, Concerning Financial Results
3: EX-99.2 EX-99.2 Summary of Financial Results of the HTML 124K
Company, Dated July 18, 2008.
4: EX-99.3 EX-99.3 Investor Link News Update of the Company HTML 175K
Dated July 18, 2008.
5: EX-99.4 EX-99.4 Unconsolidated/Standalone Financial HTML 414K
Statements for the Quarter Ended June
30, 2008 as Per Indian Gaap (Audited).
6: EX-99.5 EX-99.5 Consolidated Financial Statements for the HTML 420K
Quater Ended June 30, 2008 as Per Indian
Gaap (Unaudited).
7: EX-99.6 EX-99.6 Consolidated Financial Statements for the HTML 629K
Quarter Ended June 30, 2008 as Per Ifrs
(Unaudited).
8: EX-99.7 EX-99.7 Consolidated Financial Statements for the HTML 376K Quarter Ended June 30, 2008 as Per Us Gaap (Unaudited).
EX-99.7 — EX-99.7 Consolidated Financial Statements for the Quarter Ended June 30, 2008 as Per Us Gaap (Unaudited). Exhibit Table of Contents
Accounts receivable, net of allowance for doubtful debts
545.2
408.9
508.4
Unbilled revenue
99.1
47.3
81.5
Deferred income tax assets
22.8
18.6
23.7
Derivative financial instruments
—
23.8
—
Prepaid expenses and other receivables
130.7
46.3
131.7
Total current assets
1,919.9
732.4
1,862.5
Investments in bank deposits
0.1
815.3
—
Investments in associated companies
4.8
4.6
4.7
Derivative financial instruments
—
2.3
0.3
Premises and equipment, net
246.6
186.8
236.6
Goodwill, net
99.2
34.3
80.0
Intangible assets, net
14.5
7.2
15.6
Other assets
54.2
58.1
43.9
Total assets
2,339.3
1,841.0
2,243.6
Liabilities and shareholders’ equity
Current liabilities
Short-term and current portion of long-term debt
44.5
20.4
29.3
0.05% Cumulative convertible redeemable preference shares of a
subsidiary, par value Rs.10 (US$0.25)* per share (Nil and
45,505,000 shares as of June 30, 2008 and 2007 respectively and
Nil as of March 31, 2008)
—
13.6
—
Accounts payable
32.5
18.9
32.4
Accrued expenses and other current liabilities
270.1
161.4
236.0
Derivative financial instruments
52.5
—
2.6
Unearned and deferred revenue
36.6
24.0
33.1
Total current liabilities
436.2
238.3
333.4
Long-term debt
5.7
23.6
24.8
Retirement benefit obligation — Gratuity
12.1
8.9
12.6
Derivative financial instruments
1.0
—
—
Deferred income tax liabilities
10.5
13.1
11.0
Total liabilities
465.5
283.9
381.8
Shareholders’ equity
Common stock — par value Rs.2 (US$0.05)* per equity share
(800 million equity shares authorized as of June 30, 2008, 2007
(unaudited )and March 31, 2008 respectively. 672,508,520 and
667,670,523 equity shares issued and outstanding as of June 30,2008 and 2007(unaudited) respectively and 670,479,293 as of March31, 2008.
36.2
36.0
36.1
Additional paid-in capital
606.0
560.1
592.4
Shares subscribed but unissued
—
1.1
0.5
Retained earnings
1,196.4
814.2
1,069.8
Accumulated other comprehensive income
36.3
146.9
164.1
1,874.9
1,558.3
1,862.9
Shares held by the SC-Trust under associate stock option plan (2,104,780 and 2,295,880 equity shares as of June 30, 2008 and 2007
respectively and 2,201,680 as of March 31, 2008)
(1.1
)
(1.2
)
(1.1
)
Total shareholders’ equity
1,873.8
1,557.1
1,861.8
Total liabilities and shareholders’ equity
2,339.3
1,841.0
2,243.6
*
The par value in US$ has been converted at the closing rate as of June 30, 2008, 1US$ = Rs 42.93
The accompanying notes form an integral part of these consolidated financial statements.
(Includes stock-based compensation of US$1.3 and US$2.7 for the three
months ended June 30, 2008 and 2007 (unaudited) respectively and US$9.8
for the year ended March 31, 2008)
Gross profit
251.6
163.1
778.9
Selling, general and administrative expenses
(117.6
)
(73.0
)
(370.2
)
(Includes stock-based compensation of US$2.6 and US$3.2 for the three
months ended June 30, 2008 and 2007 (unaudited) respectively and
US$13.0 for the year ended March 31, 2008)
Satyam Computer Services Limited Consolidated Statement of Shareholders’ Equity and Comprehensive Income (US Dollars in million except per share data and as stated otherwise)
Satyam Computer Services Limited, its consolidated subsidiaries and associated companies
(hereinafter referred to as “Satyam”) are engaged in providing Information Technology (“IT”)
services and Business Process Outsourcing (“BPO”) services. Satyam Computer Services Limited
(hereinafter referred to as “Satyam Computer Services”) is an IT services provider that uses global
infrastructure to deliver value-added services to its customers, to address IT needs in specific
industries and to facilitate electronic business or eBusiness initiatives. Satyam Computer Services
was incorporated on June 24, 1987 in Hyderabad, Andhra Pradesh, India. Satyam Computer Services has
offshore development centers located throughout India that enable it to provide high quality and
cost-effective solutions to clients. It also has offsite centers located in the United States,
United Kingdom, Japan, Australia, Singapore, Malaysia, Dubai, Germany, Canada, China, Hungary,
Saudi Arabia and Brazil. Satyam offers a comprehensive range of IT services, including application
development and maintenance, consulting and enterprise business solutions, extended engineering
solutions and infrastructure management services. Satyam Computer Services has established a
diversified base of corporate customers in a wide range of industries including insurance, banking
and financial services, manufacturing, telecommunications, transportation and engineering services.
Satyam BPO Limited (formerly known as Nipuna Services Limited) (“Satyam BPO”), a wholly owned
subsidiary of Satyam Computer Services is engaged in providing BPO services covering HR, Finance &
Accounting, Customer Care (Voice, Mail and Chat), and Transaction Processing (industry-specific
offerings).
2. Summary of Significant Accounting Policies
a) Principles of Consolidation and Basis of Presentation
The consolidated financial statements of Satyam Computer Services and its majority owned domestic
and foreign subsidiaries are prepared in accordance with generally accepted accounting principles
applicable in the United States (“US GAAP”). All significant inter-company balances and
transactions are eliminated.
Minority interest in subsidiaries represents the minority shareholders’ proportionate share of the
net assets and the results of operations of Satyam’s majority owned subsidiaries.
Satyam’s investments in business entities in which it does not have control, but has the ability to
exercise significant influence over operating and financial policies (generally 20-50 percent
ownership), are referred to as associated companies and are accounted for by the equity method.
A subsidiary or associated company may issue its shares to third parties as either a public
offering or private placement at per share amounts in excess of or less than Satyam’s average per
share carrying value. With respect to such transactions, the resulting gains or losses arising from
the change in interest are recorded in additional paid-in capital. Gains or losses arising on the
direct sales by Satyam of its investment in subsidiaries or associated companies to third parties
are recognized as income/(loss) in the statement of income. Such gains or losses are the difference
between the sale proceeds and net carrying value of investments.
The excess of the cost over the underlying net equity of investments in subsidiaries and associated
companies is allocated to identifiable assets based on fair values at the date of acquisition. The
unassigned residual value of the excess of the cost over the underlying net equity is recognized as
goodwill.
b) Interim Information (unaudited)
Interim information presented in the consolidated financial statements has been prepared by the
management without audit and in the opinion of management, includes all adjustments of a normal
recurring nature that are necessary for the fair presentation of the balance sheets, statements of
operations, statements of shareholders’ equity and comprehensive income, and statements of cash flows for the
periods shown in accordance with U.S. GAAP
c) Use of Estimates
The preparation of the consolidated financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities as of the date of the financial statements and
the reported amount of revenues and expenses during the reported period. Examples of such estimates
include: expected costs to be incurred to complete time- bound fixed price engagements, allowance
for doubtful debts, future obligation under employee benefit plans, valuation allowances for
deferred taxes, impairment of goodwill and useful lives of premises and equipment. Actual results
could differ materially from those estimates.
Satyam Computer Services Limited Notes to the Consolidated Financial Statements
d) Foreign Currency Translation
The accompanying consolidated financial statements are reported in US dollars. The Indian rupee is
the functional currency of Satyam Computer Services, its domestic subsidiaries and associated
companies. The US dollar, Pound sterling, Singapore dollar and Renminbi are the functional
currencies of its foreign subsidiaries located in the US, the UK, Singapore and China respectively.
The translation from the respective functional currencies to US dollars is performed for assets and
liabilities using the current exchange rates in effect at the balance sheet date and for revenue,
costs and expenses using average exchange rates prevailing during the reporting periods. Adjustment
resulting from the translation of functional currency financial statements to reporting currency
are accumulated and reported as other comprehensive income/(loss), a separate component of
shareholders’ equity.
Transactions in foreign currency are recorded at the exchange rate prevailing on the date of
transaction. Monetary assets and liabilities denominated in foreign currencies are translated into
the functional currency at the exchange rates in effect at the balance sheet date. Revenue, costs
and expenses are recorded using exchange rates prevailing on the date of transaction. Gains or
losses resulting from foreign currency transactions are included in the statement of income.
e) Revenue Recognition
Revenue from IT services, which includes software development, system maintenance, package software
implementation, engineering design services and e-Business, consists of revenue earned from
services performed either on a time-and-material basis or time bound fixed price engagements.
Revenue earned from services performed on a time-and-material basis are recognized as the services
are performed. IT services performed on time bound fixed-price engagements; require accurate
estimation of the costs which include salaries and related expenses of technical associates,
related communication expenses, travel costs, scope and duration of each engagement. Revenue and
the related costs for these projects are recognized on percentage of completion basis, with
revisions to estimates reflected in the period in which changes become known. The use of the
percentage of completion method reflects the pattern in which the obligations to the customer are
fulfilled. Satyam has used an input-based approach since the input measures are a reasonable
surrogate for output measures. Provisions for estimated losses on such engagements are made during
the period in which a loss becomes probable and can be reasonably estimated.
Revenue from BPO services consists of revenue from time-and-material services or time bound fixed
price engagements. Revenue from time-and-material services are recognized as the services are
performed. Revenue from BPO services are also on time bound fixed-price engagements, under which
revenue is recognized using the percentage completion method of accounting. The cumulative impact
of any revision in estimates of the percentage of work completed is reflected in the period in
which the change becomes known. Provision for estimated losses are made during the year in which a loss becomes probable and
can be reasonably estimated.
Amounts included in the financial statements, which relate to recoverable costs and accrued profits
not yet billed on contracts, are classified in current assets as “Unbilled revenue”. Billings on
uncompleted contracts in excess of accrued cost and accrued profit are classified in current
liabilities under the heading “Unearned and deferred revenue”. Satyam provides its clients with one
to three months’ warranty as post-sale support for its fixed price engagements. Satyam has not
provided for any warranty costs for the three months period ended June30, 2008 , 2007 (unaudited)
and for the year ended March 31, 2008 (unaudited) as historically Satyam has not incurred any
expenditure on account of warranties and since the customer is required to formally sign off on the
work performed, any subsequent work is usually covered by an additional contract.
In accordance with Emerging Issues Task Force (EITF) Issue no. 01-14 (formerly Topic D-103),
“Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses
Incurred”, Satyam has accounted for reimbursements received for out-of-pocket expenses as revenue
in the statement of income. Revenue is recognised net of applicable taxes.
f) Cash and Cash Equivalents
Satyam considers all highly liquid investments with an original maturity of three months or less at
the date of purchase to be cash equivalents. Cash equivalents approximate their fair value due to
the short maturity. Cash and claims to cash that are restricted as to withdrawal or use in the
ordinary course of business, are classified as other receivables (current) or other assets
(non-current) as the case may be.
g) Premises and Equipment
Premises and equipment are stated at actual cost less accumulated depreciation. Assets under
capital leases are stated at the present value of minimum lease payments. Depreciation is computed
using the straight-line method
Satyam Computer Services Limited Notes to the Consolidated Financial Statements
over the estimated useful lives. Assets under capital leases and leasehold improvements are
amortized on a straight-line basis over the shorter of their estimated useful life or the lease
term, as appropriate. Cost of application software for internal use is generally charged to the
statement of income as incurred due to estimated useful lives being relatively short, usually less
than one year.
The cost and the accumulated depreciation of premises and equipment sold, retired or otherwise
disposed off are removed from the stated values and the resulting gains and losses are included in
the statement of income. Interest related to the construction of qualifying assets is capitalized.
Advances paid towards the acquisition of premises and equipment that are outstanding at each
balance sheet date and the cost of premises and equipment not put to use before such date, are
disclosed as Assets under Construction.
h) Research and development Costs
Research and development costs are expensed as incurred. The expenses incurred amounted to US$
0.1million, US$0.1 million for the three months ended June 30,2008 and 2007 (unaudited)
respectively and US$0.4 million for the year ended March 31, 2008 (unaudited).
i) Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost of an acquired entity over the net of the amounts
assigned to assets acquired and liabilities assumed. In accordance with SFAS No. 142, “Goodwill and
Other Intangible Assets”, goodwill is tested for impairment using a fair-value approach at the
reporting unit level, annually or sooner when circumstances indicate impairment. Satyam follows the
two-step impairment recognition and measurement guidance in accordance with SFAS 142.
Satyam amortizes other intangible assets over their estimated useful life on a straight-line basis
unless such life is deemed indefinite. Amortizable intangible assets are tested for impairment
based on undiscounted cash flows, and, if impaired, written down to fair value based on either
discounted cash flows or appraised values.
j) Impairment of Long-lived Assets
Impairment of long-lived assets is accounted in accordance with the provisions of SFAS 144
“Accounting for the Impairment or Disposal of Long-Lived Assets”. All the long-lived assets are
tested for impairment whenever events or changes in business circumstances indicate the carrying
amount of assets may not be fully recovered. Impairment test is based on a comparison of the
undiscounted cash flows expected to be generated from the use of the asset to its recorded value.
If there is an indication of impairment, the asset is written down to its fair value. Assets to be
disposed are reported at the lower of the carrying value or the fair value less cost to sell.
k) Investments
Investments are accounted in accordance with the provisions of SFAS 115, “Accounting for Certain
Investments in Debt and Equity Securities”. Other investments that are not marketable are carried
at cost and tested for impairment.
Investments of Satyam consisted of other non-marketable securities amounting to US$3.9 million and
Satyam had recognized impairment for the entire carrying value.
l) Cost of Revenue and Selling, General and Administrative Expenses
Cost of revenue primarily includes the compensation cost of technical staff, stock-compensation
cost, depreciation on dedicated assets, system and application software cost, amortization of
intangibles, travel costs, data communication expenses and other expenses that are related to the
generation of revenue.
Selling, general and administrative expenses generally include the compensation cost of sales,
management and administrative personnel, stock-compensation cost, travel costs, advertising cost,
business promotion, depreciation on assets, rent, repairs, electricity and other general expenses
not attributable to cost of revenue.
m) Advertising Expenses
All advertising costs are charged to the statement of income as incurred. Such expenses amounted to
US$ 0.4 million, US$0.3 million for the three months ended June 30, 2008 and 2007 (unaudited)
respectively and US$1.9 million for the year ended March 31, 2008 (unaudited).
Satyam Computer Services Limited Notes to the Consolidated Financial Statements
n) Employee Benefits
i) Provident Fund
In accordance with Indian law, associates in India are entitled to receive benefits under the
Provident Fund, which is a defined contribution plan. Both the associate and the employer make
monthly contributions to the plan at a predetermined rate (presently 12%) of the associate’s basic
salary. Satyam has no further obligation under the plan beyond its monthly contribution. These
contributions are made to the fund administered and managed by the Government of India. Satyam’s
monthly contribution is charged to the statement of income in the period they are incurred.
ii) Gratuity Plan
Satyam provides a retirement benefit plan (“the gratuity plan”) to all its associates in India. The
gratuity plan, which is a defined benefit plan, provides a lump sum payment to vested associates at
retirement or termination of employment based on the last drawn salary and period of employment
with Satyam. The gratuity plan is unfunded.
Effective March 31, 2007, Satyam adopted the provisions of SFAS No. 158, “Employer’s Accounting for
Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87,
88, 106, and 132(R)”. The gratuity plan is accounted on the basis of actuarial valuation in
accordance with the provisions of SFAS 158. In accordance with the transition provisions of SFAS 158, Satyam has
accounted for the unrecognized actuarial losses as at March 31, 2007 as a liability with
corresponding adjustment to accumulated other comprehensive income (net of tax).
iii) Superannuation Plan
In addition to the above benefits, the senior associates of Satyam Computer Services in India are
entitled to benefits under the superannuation plan, which is a defined contribution plan. Satyam
Computer Services makes yearly contributions under the superannuation plan, which is administered
and managed by the Life Insurance Corporation of India, based on a specified percentage (presently
10%) of the employee’s basic salary. Satyam Computer Services has no further obligation under the
plan beyond its contribution.
o) Income Taxes
In
accordance with the provisions of SFAS No. 109,
“Accounting for Income Taxes”, income taxes are
accounted based on asset and liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences that are attributable to the difference between the carrying
amounts of assets and liabilities and their respective tax bases, and operating loss carry
forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the statement of income in the period of enactment. Based on management’s judgment,
the measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any
tax benefits where it is more likely than not that some portion or all of such benefits will not be
realized.
Effective April 1, 2007, Satyam adopted the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
clarifies the accounting for uncertainty in income taxes by prescribing a minimum recognition
threshold for a tax position taken or expected to be taken in a tax return that is required to be
met before being recognized in the financial statements. Satyam classifies potential interest and
penalties related to unrecognized tax benefits as interest expense and other expense respectively.
p) Earnings per Share
In
accordance with the provisions of SFAS 128, “Earnings Per
Share”, basic earnings per share is
computed on the basis of the weighted average number of shares outstanding during the period.
Diluted earnings per share is computed on the basis of the weighted average number of common and
dilutive common equivalent shares outstanding during the period, using the “treasury stock” method
for options and warrants, except where the results will be anti-dilutive.
q) Stock-Based Compensation
Effective April 1, 2006, Satyam adopted Statement of Financial Accounting Standard (“SFAS”) No.
123R, “Share-Based Payment,” utilizing the modified prospective method. SFAS 123R requires the
recognition of stock-based compensation expense in the consolidated financial statements for awards
of equity instruments to employees based on the grant-date fair value of those awards, estimated in
accordance with the provisions of
Satyam Computer Services Limited Notes to the Consolidated Financial Statements
SFAS 123R. Satyam recognizes these compensation costs on a graded vesting basis over the requisite
service period of the award. Prior to the adoption of SFAS 123R, Satyam followed the intrinsic
value method to account for its employee stock option plans in accordance with the recognition and
measurement principles of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock
Issued to Employees” and Related Interpretations (“APB 25”), as allowed by SFAS 123 and as amended
by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”. Satyam
historically reported pro forma results under the disclosure-only provisions of SFAS 123.
Under the modified prospective method, the provisions of SFAS 123R apply to all awards granted or
modified after the date of adoption. In addition, the unrecognized expense of awards not yet vested
at the date of adoption, determined under the original provisions of SFAS No. 123, “Accounting for
Stock-Based Compensation” (“SFAS 123”), are recognized in net income in the periods after the date
of adoption. In accordance with the modified prospective transition method, Satyam’s Consolidated
Financial Statements for the prior periods have not been restated to reflect, and do not include,
the impact of SFAS 123R.
r) Derivative financial instruments
Satyam enters into foreign exchange forward and options contracts where the counter party is
generally a bank. Satyam purchases foreign exchange forward and options contracts to mitigate the
risk of changes in foreign exchange rates on cash flows denominated in certain foreign currencies.
These contracts do not qualify for hedge accounting under SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities”, as amended. Any derivative that is either not a designated
hedge, or is so designated but is ineffective is marked to market and recognized in earnings
immediately.
s) Recently issued accounting pronouncements
In December 2007, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 141
(revised 2007), Business Combinations (“SFAS 141R”), which replaced SFAS 141. SFAS 141R retains the
fundamental requirements of SFAS 141, but revises certain principles, including the definition of a
business combination, the recognition and measurement of assets acquired and liabilities assumed in
a business combination, the accounting for goodwill, and financial statement disclosure. This
Statement applies to Satyam prospectively to business combinations for which the acquisition date
is on or after April 1, 2009. Early adoption of SFAS 141R is prohibited. Satyam will adopt this
statement in fiscal year 2010 and its effect on future periods will depend on the nature and
significance of any acquisitions that are subject to this statement.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements — An Amendment of ARB No. 51. SFAS 160 establishes new accounting and reporting
standards for the non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a non-controlling interest
(minority interest) as equity in the consolidated financial statements and separate from the
parent’s equity. The amount of net income attributable to the non-controlling interest will be
included in consolidated net income on the face of the income statement. SFAS 160 clarifies that
changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are
equity transactions if the parent retains its controlling financial interest. In addition, this
statement requires that a parent recognize a gain or loss in net income when a subsidiary is
deconsolidated. Such gain or loss will be measured using the fair value of the non-controlling
equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure
requirements regarding the interests of the parent and its non-controlling interest. SFAS 160 is
effective from fiscal year beginning on April 01, 2009 to Satyam. Satyam does not expect the
adoption of this statement to have a material effect on the consolidated financials statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities (“SFAS 161”). SFAS 161 requires disclosure of the fair values of derivative instruments
and their gains and losses in a tabular format. It also requires more information about an entity’s
liquidity by requiring disclosure of derivative features that are
credit risk-related. Finally, it
requires cross-referencing within footnotes to enable location of important information about
derivative instruments. SFAS 161 is effective from year ending March 31, 2009 to Satyam. Satyam is
in the process of evaluating the impact SFAS 161 will have on the disclosures.
t) Recently adopted accounting pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157,
“Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes a common definition for fair value to
be applied to U.S.GAAP requiring use of fair value, establishes a framework for measuring fair
value, and expands disclosure about such fair value measurements. SFAS No. 157 is effective for
financial assets and financial liabilities for fiscal years beginning on April 01, 2008. Issued in
February 2008, FSP 157-1 “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other
Accounting Pronouncements That Address Fair Value
Satyam Computer Services Limited Notes to the Consolidated Financial Statements
Measurements for Purposes of Lease Classification or Measurement under Statement 13” removed
leasing transactions accounted for under Statement 13 and related guidance from the scope of SFAS
No. 157. FSP 157-2 “Partial Deferral of the Effective Date of Statement 157” (FSP 157-2), deferred
the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities to
fiscal years beginning on April 01, 2009.
The implementation of SFAS No. 157 for financial assets and financial liabilities did not have a
material impact on Satyam’s consolidated financial position and results of operations. Satyam is
currently assessing the impact of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities
on its consolidated financial position and results of operations.
In February 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159
(“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities”. Under SFAS
159, companies may elect to measure certain financial instruments and certain other items at fair
value. The standard requires that unrealized gains and losses on items for which the fair value
option has been elected be reported in earnings. SFAS 159 was effective for Satyam beginning on
April 01, 2008. Satyam currently did not elect to measure any financial instrument at fair value.
u) Reclassification
Certain items previously reported in specific financial statement captions have been reclassified
to conform to the current period’s presentation.
3. Acquisitions
The following paragraphs describe each of the acquisitions made by Satyam during 2008, 2007 and
2006. Descriptions regarding each acquisition will vary dependent upon the complexity and
materiality of the transaction. Unless otherwise noted, pro-forma disclosures regarding these
purchases have not been provided because they are not material to the operations of Satyam.
These acquisitions have been accounted for by following the purchase method of accounting. The
purchase consideration has been allocated to the assets acquired and liabilities assumed based on
their fair values as of the date of acquisition based on management’s estimates and valuations done
by independent valuers in accordance with SFAS No. 141, “Business Combinations”.
a) Citisoft Plc.
On May 12, 2005, Satyam Computer Services acquired a 75% interest in Citisoft Plc or Citisoft, a
specialist business and systems consulting firm located in the United Kingdom that has focused on
the investment management industry since 1986. The results of Citisoft’s operations have been
consolidated by Satyam Computer Services from the consummation date of May 12, 2005.
The consideration for the 75% equity interest in Citisoft amounted to US$17.4 million comprising of
an initial consideration of US$14.3 million (including direct acquisition costs of US$0.9 million)
and deferred consideration (non-contingent) of US$3.1 million (paid in June 2006). On June 29,2006, Satyam Computer Services exercised its call option to acquire the remaining 25% equity
interest in Citisoft for a deferred consideration (non-contingent) of US$5.9 million (paid during
fiscal 2008). During fiscal 2008, Satyam Computer Services also contributed US$2.0 million to
Employee Benefit Trust (“EBT”) formed by Citisoft. Satyam Computer Services also entered into an
amendment agreement with the selling shareholders due to which it made additional employee related
pay out of US$0.4 million. These have been accounted for as part of cost of revenues in the
consolidated statement of income. Satyam was also required to pay an earn-out consideration based
on achievement of targeted revenues and profits for the years ended April 30, 2007 and 2008
respectively. However since the revenue and profit targets have not been achieved, the total earn
out consideration is not payable.
b) Knowledge Dynamics Pte Ltd (“Knowledge Dynamics”).
On October 1, 2005, Satyam Computer Services acquired a 100% interest in Knowledge Dynamics Pte
Ltd, Singapore, (“Knowledge Dynamics”), a leading Data Warehousing and Business Intelligence
Solutions provider. The results of Knowledge Dynamics operations have been consolidated by Satyam Computer
Services from the consummation date of October 1, 2005. The consideration for this acquisition
amounted to US$3.3 million comprising of initial consideration of US$1.8 million (including direct
acquisition costs of $11 thousand) and deferred consideration (non-contingent) of US$1.5 million
(paid in fiscal 2007 and 2008). During fiscal 2008, Satyam Computer Services also entered into an
amendment agreement with the selling shareholders due to which it has accounted for US$1.0 million
as part of cost of revenues in the consolidated statement of income out of which US$0.7 million was
paid in fiscal 2008 and US$0.3 million has been paid during the three months ended
Satyam Computer Services Limited Notes to the Consolidated Financial Statements
June 30, 2008. Satyam was also required to pay an earn-out consideration based on achievement of
targeted revenues and profits for the years ended April 30, 2007 and 2008 respectively. However
since the revenue and profit targets have not been achieved, the 2007 earn out consideration is not
payable.
c) Acquisition of Minority interests in Satyam BPO
During the year ended March 31, 2008, in accordance with the Share Purchase, Redemption and
Amendment Agreement (“SPRA Agreement”), Satyam Computer Services acquired 26% equity shares of
Satyam BPO from the Investors for a consideration of US$46.5 million (also refer Note 4). Further
during the year ended March 31, 2008, an Employee Stock Option Exercises and Share Transfer
Agreement was entered into between Satyam Computer Services, Satyam BPO and certain employees of
Satyam BPO holding Satyam BPO-ESOP. The exercise of options by the employees has resulted in a
dilution of ownership interest of Satyam Computer Services in Satyam BPO. Satyam BPO issued 358,952
equity shares to the employees at amounts per share higher than Satyam Computer Services’ average
cost per share. With respect to this transaction the resulting gain of US$1.0 million, net of taxes
has been recorded as an increase in additional paid-in capital during the year ended March 31,2008. Satyam Computer Services has acquired these shares at their fair value determined based on an
independent valuation of US$7.2 per share. Since the awards were fully vested and were cash settled
at its current fair value as of the settlement date no incremental compensation cost has been
recognized.
The purchase price was allocated as follows: US$8.9 million to customer relationships, US$3.0
million to deferred tax liability and the balance US$43.4 million to goodwill. The goodwill has
been allocated to the BPO services segment.
Satyam Computer Services’ ownership interest in Satyam BPO is 100% as at March 31, 2008 as against
74% as at March 31, 2007.
d) Acquisition of Nitor Global Solutions Ltd., (“Nitor”)
Satyam Computer Services acquired 100% of the shares of Nitor Global Solutions Ltd, United Kingdom
(“Nitor”), a Company specialized in the Infrastructure Management Services (IMS) space. The
results of Nitor’s operations have been consolidated by Satyam Computer Services from the
consummation date of January 4, 2008. The consideration for this acquisition amounted to US$5.6
million comprising of initial consideration of US$3.0 million and performance-based payment of up
to US$2.6 million over two years conditional upon specified revenue and profit targets being met.
The purchase price was allocated as follows: US$0.7 million to current assets, US$0.1 million to
non compete agreement, US$0.6 million to customer contracts and relationships, US$0.2 million to
internally developed technology, US$0.2 million deferred tax liability and the balance US$1.7
million to goodwill. The goodwill has been allocated to the IT services segment.
e) Bridge Strategy Group
On April 04, 2008, Satyam Computer Services acquired 100% of the shares of Bridge Strategy Group
LLC, (“Bridge”) a Chicago based strategy and general management consulting firm for a total
consideration of US$ 35.0 million comprising of initial consideration, deferred consideration (non
contingent) and a contingent consideration. The initial consideration of US$19.0 million has been
paid on April 04, 2008 and the deferred consideration has been recognized as a liability. The
results of Bridge’s operations have been consolidated by Satyam Computer Services from the consummation date of April4, 2008.
The acquisition has been accounted using the purchase method and the purchase price has been
allocated to the assets acquired and liabilities assumed as of the date of acquisition, on a
preliminary basis based on management’s estimates. The finalization of the purchase price
allocation, which is expected to be completed within one year from the date of the acquisition,
will result in adjustments to the purchase price allocation. The preliminary allocation of the
purchase price resulted in goodwill of US$25.9 million. The goodwill has been allocated to the IT
services segment.
f) S&V Management consulting
On April 21, 2008, Satyam Computer Services announced its intention of acquiring S&V Management
Consultants (“S&V”) a Belgium based SCM Strategy consulting firm for a total consideration of
US$35.5 million comprising of an up-front, deferred guaranteed and deferred retention payments. The
transaction is not consummated as at June 30, 2008.
Satyam Computer Services Limited
Notes to the Consolidated Financial Statements
g) Computer Associate’s 50% stake in CA-Satyam JV
On April 21, 2008, Satyam Computer Services announced its intention of acquiring remaining 50%
equity held by CA Inc in its joint venture CA Satyam ASP Pvt. Ltd. (“CA Satyam”) for a total
consideration of US$1.5 million payable in two tranches. The transaction is not consummated as at
June 30, 2008.
h) Caterpillar’s business division
On April 21, 2008, Satyam Computer Services announced its intention to acquire the Market research
and Customer Analytics (MR&CA) business unit from Caterpillar Inc., USA (CAT) including the related
Intellectual Property which consists of software, processes and know-how. The proposed acquisition
is for a consideration of US$60.0 million comprising of initial and deferred consideration. The
transaction is not consummated as at June 30, 2008.
4. Preferred Stock of Subsidiary
Satyam BPO issued 45,669,999 and 45,340,000 0.05% convertible redeemable cumulative preference
shares of par value Rs. 10 (US$0.23) per share in October 2003 and June 2004 respectively to the
investors at an issue price of Rs. 10 (US$0.23) per share, in exchange for an aggregate
consideration of US$20 million. On November 20, 2006, a Share Purchase, Redemption and Amendment
Agreement (“SPRA Agreement”) was entered into between Satyam, the Investors and Satyam BPO. Satyam
had reclassified 50% of the preference shares as a current liability as of March 31, 2007 and these
were redeemed in August 2007 for US$13.8 million. The balance 50% got converted into equity shares
of Satyam BPO in January 2007 based on the terms of the existing subscription agreement into
6,422,267 equity shares of Satyam BPO. Due to the issue of shares by Satyam BPO, Satyam Computer
Services’ ownership interest in Satyam BPO reduced from 100.0% as at March 31, 2006 to 74.0% as at
March 31, 2007 and the resulting gain of US$7.9 million, net of taxes during the year ended March31, 2007 was recorded as an increase in additional paid in capital. The Investors holding in
Satyam BPO had been accounted for as a minority interest. Further as per the SPRA Agreement,
Satyam agreed to purchase and the Investors agreed to sell these equity shares at an aggregate
purchase price based on a formula. The forward contract was freestanding and had been accounted
for under SFAS 150. The forward contract had a zero fair vale since as per regulatory requirements
the transaction could take place only at fair value. During the year ended March 31, 2008, Satyam
Computer Services acquired the minority interest of 26% equity shares in Satyam BPO from the
investors for a consideration of US$46.5 million. (Refer Note 3c).
5. Investments in bank deposits
Investments in bank deposits represent term deposits placed with banks earning fixed rate of
interest. Investments in bank deposits with maturities of less than a year are disclosed as current
assets and with maturities of more than one year as non current. Interest on investments in bank
deposits is recognized on accrual basis. Investments in bank deposits amounted to US$ 770.7
million, US$815.3 million and US$826.7 million as of June 30, 2008, 2007 (unaudited) and March 31,2008 (unaudited) respectively with maturities of less than twelve months from the balance sheet
date.
6. Investments in associated companies
The carrying values of investments in various associated companies of Satyam are as follows:
On October 28, 1999, Satyam Computer Services entered into an agreement with Venture Industries,
USA (“Venture”) to form an equally held joint venture company Satyam Venture Engineering Services
Private Limited. (“Satyam Venture”). Satyam Computer Services holds 50% in Satyam Venture. The
joint venture was formed on January 3, 2000 at Hyderabad, India. Satyam Venture is engaged in
providing engineering solutions, software development and customization services specifically for
the automotive industries worldwide. Satyam Computer Services’ share in the profit of Satyam
Venture, net of taxes amounted to US$0.2 million, US$20 thousand for the
Satyam Computer Services Limited
Notes to the Consolidated Financial Statements
three months ended June 30, 2008 and 2007 (unaudited) respectively and US$48 thousand for the year
ended March 31, 2008 (unaudited). (Also refer note 18(g)).
CA Satyam
On December 29, 2000, Satyam Computer Services entered into an agreement with Computer Associates
International, Inc. (“CA”) to form an equally held joint venture company CA Satyam ASP Private
Limited (“CA Satyam”). Satyam Computer Services holds 50% in CA Satyam. The joint venture was
formed in January 2001, at Mumbai, India. As per the agreement, both Satyam Computer Services and
CA have invested US$1.5 million each in the joint venture. Satyam Computer Services share in the
profit / (losses) of CA Satyam, net of taxes amounted to US$(0.1) million, US$(22) thousand for the
three months ended June 30, 2008 and 2007 (unaudited) respectively and US$76 thousand for the year
ended March 31, 2008 (unaudited). (Also refer note 3(g)).
Satyam has established the estimated useful lives of assets for depreciation purposes as follows:
Premises
28 years
Computers including servers
2-5 years
System Software
3 years
Office equipment
5 years
Furniture and fixtures
5 years
Vehicles
5 years
Depreciation expense amounted to US$ 11.1 million and US$9.3 million for the three months ended
June 30, 2008 and 2007 respectively and US$39.7 million for the year ended March 31, 2008
(unaudited).
During the period Satyam has not recognized any impairment of other intangible assets. Satyam has
adopted the provisions of SFAS 141 and 142, and has accordingly assessed the remaining useful lives
of identified intangibles with definite useful lives and provides for amortization over the
determined useful life of the asset. Satyam does not have any intangible assets with indefinite
useful life.
The following table presents the reconciliation of changes in carrying values of other intangible
assets:
US$ in million
Three months ended June 30,
Year ended March31,
2008
2007
2008
(unaudited)
(unaudited)
(unaudited)
Identifiable intangibles at the beginning of the period
A reconciliation of the income tax expense to the amount computed by applying the statutory income
tax rate to income before income tax expense is summarized below:
Difference arising from different tax rates in other tax jurisdictions
0.8
0.2
7.4
Difference arising from different tax rates on gain on sale of
investment
—
—
—
Stock- based compensation (non-deductible)
0.3
0.2
1.5
Changes in valuation allowance, including losses of subsidiaries
1.8
0.8
1.4
Effect of tax rate change
—
(0.1
)
0.1
Others
5.3
2.1
2.2
Income taxes recognized in the statement of income
13.7
11.8
52.9
The current provision for income taxes, net of payments, were US$31.4 million and US$18.3 million
for the three months ended June 30, 2008 and 2007 (unaudited) respectively and US$26.4 million for
the year ended March 31, 2008 (unaudited) respectively. The foreign taxes are due to income taxes
payable in overseas tax jurisdictions by Satyam’s offsite and onsite centers, principally in the
United States. Satyam Computer Services benefits from tax incentive provided to software entities
as an exemption from payment of Indian corporate income taxes for a period of ten consecutive years
of operations of software development facilities designated as “Software Technology Parks” (“STP
units”). The benefit of this tax incentive has historically resulted in an effective tax rate for
Satyam Computer Services well below statutory rates. In case of Satyam Computer Services for
various registered STP units these exemptions expire starting from fiscal 2006 through fiscal 2009.
During the three months ended June 30, 2008 the exemption available to STP units is extended to
fiscal 2010. Satyam Computer Services subsidiaries are subject to income taxes of the countries in
which they operate.
Satyam has not recognized deferred income taxes arising on income of Satyam Computer Services
due to the tax benefit available to it in the form of a exemption from taxable income, except to
the extent of temporary differences which reverse after the tax holiday period or unless they
reverse under foreign taxes. However,
Provision for accounts receivable, advances and investments
7.8
4.3
7.7
Premises and equipment
1.3
3.6
1.3
Provision for gratuity and unutilized leaves
19.1
14.3
20.2
Gross deferred tax assets
59.1
50.4
59.2
Less: Valuation allowance
(30.9
)
(28.2
)
(30.0
)
Total deferred tax assets
28.2
22.2
29.2
Deferred tax liabilities:
Premises and equipment
(2.1
)
(7.8
)
(2.5
)
Provision for accounts receivable and advances
(3.7
)
(3.2
)
(3.7
)
Intangible assets
(5.2
)
(2.6
)
(5.0
)
Investments in associated companies and gain on dilution
(3.2
)
(2.8
)
(3.4
)
Total deferred tax liabilities
(14.2
)
(16.4
)
(14.6
)
Net deferred tax assets
14.0
5.8
14.6
Satyam has not provided for any deferred income taxes on undistributed earnings of foreign
subsidiaries due to the losses incurred by them since their inception. These losses aggregated to
approximately US$47.5 million and US$40.3 million as of June 30, 2008 and 2007 (unaudited)
respectively and US$42.6 million as of March 31, 2008 (unaudited).
Operating loss carry forwards for tax purposes of Satyam amounts to approximately US$86.9 million
and US$76.4 million as of June 30, 2008 and 2007 (unaudited) respectively and US$81.9 million as of
March 31, 2008 (unaudited) and are available as an offset against future taxable income of such
entities These carry forwards expire at various dates primarily over a period of 8 years in India
and 20 years in other jurisdictions. Realization is dependent on such subsidiaries generating
sufficient taxable income prior to expiration of the loss carry forwards. A valuation allowance is
established attributable to deferred tax assets and loss carry forwards in subsidiaries where,
based on available evidence, it is more likely than not that they will not be realized. Currently,
a full valuation allowance has been made for such losses since Satyam believes that these
subsidiaries will not generate sufficient taxable income prior to expiration of carry forwards and
under Indian regulations Satyam Computer Services is not allowed to file a consolidated tax return.
Net deferred tax asset/ (liabilities) included in the consolidated balance sheet are as follows:
Current liabilities — accrued expenses and other liabilities*
(3.7
)
(3.3
)
(3.7
)
Long-term liabilities — deferred income taxes
(10.5
)
(13.1
)
(11.0
)
Net deferred tax asset/ (liabilities)
14.0
5.8
14.6
*
Included in “other assets” and “accrued expenses and other liabilities” respectively.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109 (“FIN 48”). The Interpretation clarifies the accounting
for uncertainty in income taxes recognized in a company’s financial statements and prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. The Interpretation
also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN 48 is effective from fiscal year beginning on April1, 2007. As a result of the adoption of FIN 48, Satyam did not have to recognize any
increase/decrease in the liability for unrecognized tax benefits related to tax positions taken in
prior periods.
Satyam Computer Services Limited Notes to the Consolidated Financial Statements
11. Borrowings
Short-term debt
Short-term
debt amounted to US$ 26.1 million and US$18.4 million as of June 30, 2008 and 2007
(unaudited) respectively and US$26.9 million as of March 31, 2008 (unaudited). Short-term debt
represents overdraft facility of Satyam BPO at a floating rate interest of LIBOR+0.25% and is secured by a charge on book debts, accounts
receivable and other moveable assets of Satyam BPO. The weighted-average interest rate on this
borrowing was 9.21% and 7.24% for three months ended June 30, 2008 and 2007 (unaudited)
respectively and 8.44 %for the year ended March 31, 2008 (unaudited).
Working capital term loan and external commercial borrowing have been taken by Satyam BPO. Satyam
Computer Services has given a corporate guarantee to the bank for these borrowings. These
borrowings are repayable in 3 years from each draw down date.
Aggregate maturities of long-term debt subsequent to June 30, 2008, are US$16.5 million in fiscal
2009, US$3.6 million in fiscal 2010, US$1.6 million in fiscal 2011 and US$1.1 million in fiscal
2012 and thereafter.
Satyam Computer Services Limited Notes to the Consolidated Financial Statements
12. Employee Benefits
The Gratuity Plan
The following table sets forth the status of the Gratuity Plan of Satyam, and the amounts
recognized in Satyam’s consolidated balance sheet and statement of income.
Projected benefit obligation at beginning of the period
16.3
10.2
10.2
Service cost
1.1
0.7
3.0
Interest cost
0.4
0.2
1.0
Actuarial loss/(gain)
(1.1
)
(0.3
)
2.7
Benefits paid
(0.2
)
(0.3
)
(1.3
)
Effect of exchange rate changes
(1.1
)
0.6
0.7
Projected benefit obligation at end of the period
15.4
11.1
16.3
Funded status of the plans
(15.4
)
(11.1
)
(16.3
)
Unrecognized net actuarial loss
—
—
—
Retirement benefit obligation at the end of the period
(15.4
)
(11.1
)
(16.3
)
Less: Current portion of retirement benefit obligation
3.3
2.2
3.7
Retirement benefit obligation — non-current
(12.1
)
(8.9
)
(12.6
)
The components of net gratuity costs are reflected below:
Service cost
1.1
0.7
3.0
Interest cost
0.4
0.2
1.0
Amortization
0.2
0.1
0.2
Net gratuity costs
1.7
1.0
4.2
The assumptions used in accounting for the gratuity plan for the three months ended June 30, 2008
and 2007 (unaudited) and for the year ended March 31, 2008 (unaudited) are set out below:
Weighted-average assumptions used to determine benefit obligations:
Satyam Computer Services Limited Notes to the Consolidated Financial Statements
Cash Flows
Satyam expects to contribute US$ 3.1 million to its Gratuity plan during the year ending March 31,2009. The following benefit payments, which reflect expected future service, as appropriate, are
expected to be paid:
For the financial year ended March 31,
Expected contribution
2010
3.6
2011
4.5
2012
5.8
2013
7.0
2014 - 2019
28.8
During the year ended March 31, 2008 (unaudited), actuarial losses of US$0.9 million was
additionally recognised in Accumulated Other Comprehensive Income, net of tax of US$0.4 million.
Consequently, actuarial losses amounting to US$1.9 million, net of tax of US$0.9 million form part
of accumulated other comprehensive income as at March 31, 2008 (unaudited).
Provident Fund
Satyam’s contribution towards the Provident Fund amounted to US$6.5 million, US$ 4.5 million and
US$3.0 million for the three months ended June 2008, 2007 (unaudited)) and year ended March 31,2008 (unaudited) respectively.
Superannuation Plan
Satyam Computer Services’ contribution towards the Superannuation Plan maintained by LIC amounted
to US$ 1.2 million, US$ 0.6 million and US$3.5 million for the three months ended June 2008, 2007
(unaudited)) and year ended March 31, 2008 (unaudited) respectively.
13. Earnings per Share
Basic earning per share is computed on the basis of the weighted average number of shares
outstanding. Allocated but unvested or unexercised shares held by the
SC - Trust not included in
the calculation of weighted-average shares outstanding for basic earnings per share 278,100 and
146,200 as of June 30, 2008 and 2007 (unaudited) respectively and 52,000 as of March 31, 2008
(unaudited).
In
addition to the above, the unallocated shares held by SC - Trust, which are by definition
unvested, have been excluded from all earnings per share calculations. Such shares amounted to
1,826,680 and 2,149,680 as of June 30, 2008 and 2007 (unaudited) respectively and 2,149,680 as of
March 31, 2008 (unaudited). Diluted earnings per share is computed on the basis of the weighted
average number of shares outstanding plus the effect of outstanding stock options using the
“treasury stock” method.
The components of basic and diluted earnings per share were as follows:
(US$ in millions except per share data and as stated otherwise)
Dilutive effect of Associate Stock Options (in millions)
12.4
14.4
13.0
Share and share equivalents (in millions)
681.6
679.5
679.4
Earnings per share
Basic
$0.19
$0.14
$0.63
Diluted
$0.19
$0.14
$0.61
14. Stock-based Compensation Plans
ASOP plan
In May 1998, Satyam Computer Services established its Associate Stock Option Plan (the “ASOP
plan”), which provided for the issue of 26,000,000 shares, as adjusted to eligible associates.
Satyam Computer Services issued
Satyam Computer Services Limited Notes to the Consolidated Financial Statements
warrants to purchase these shares to a controlled associate welfare trust called the Satyam
Associate Trust (the “SC-Trust”). In December 1999, the SC- Trust exercised all its warrants to
purchase Satyam Computer Services shares prior to the stock split using the proceeds obtained from
bank loans. The warrants vest immediately or vest over a period ranging from one to three years.
Upon vesting, associates have 30 days in which to exercise these warrants. As of June 30, 2008,
warrants (net of lapsed and cancelled) to purchase 24,152,720 equity shares have been granted to
associates pursuant to ASOP since inception.
ASOP B plan
In April 2000, Satyam Computer Services established its Associate Stock Option Plan B (the “ASOP
B”) and reserved options for 83,454,280 shares to be issued to eligible associates with the
intention to issue the options at the market price of the underlying equity shares on the date of
the grant. These options vest over a period ranging from two to four years, starting with 20% in
second year, 30% in the third year and 50% in the fourth year. Upon vesting, associates have 5
years to exercise these options. As of June 30, 2008, options (net of lapsed and cancelled) to
purchase 53,264,538 equity shares have been granted to associates under this plan since inception.
ASOP ADS plan
In May 2000, Satyam Computer Services established its Associate Stock Option Plan (ADS) (the ‘ASOP
(ADS)’) to be administered by the Administrator of the ASOP (ADS) which is a committee appointed by
the Board of Directors of Satyam Computer Services and reserved 5,149,330 ADSs (10,298,660 shares)
to be issued to eligible associates with the intention to issue the options at a price per option
which is not less than 90% of the value of one ADS as reported on NYSE on the date of grant
converted into Indian Rupees at the rate of exchange prevalent on the grant date. These options
vest over a period of 1-10 years from the grant date. As of June 30, 2008, options (net of lapsed
and cancelled) for 3,178,352 ADSs representing 6,356,696 equity shares have been granted to
associates under the ASOP ADS since inception.
Associate Stock Option Plan — Restricted Stock Units (ASOP — RSUs)
In January 2007, Satyam Computer Services established a scheme “Associate Stock Option Plan —
Restricted Stock Units (ASOP — RSUs)” to be administered by the Administrator of the ASOP — RSUs,
a committee appointed by the Board of Directors of the Company. Under the scheme 13 million equity
shares are reserved to be issued to eligible associates at a price to be determined by the
Administrator which shall not be less than the face value of the share. ASOP RSUs vest over a
period of 1-4 years from the date of the grant. Upon vesting, associates have 5 years in which to
exercise these options. As of June 30, 2008, options for 3,366,661 shares have been granted under
the ASOP — RSUs.
In January 2007, Satyam Computer Services has established a scheme “Associate Stock Option Plan —
RSUs (ADS)” to be administered by the Administrator of the ASOP — RSUs (ADS), a committee
appointed by the Board of Directors of the Company. Under the scheme 13 million equity shares minus
the number of shares issued from time to time under the Associate Stock Option Plan — RSUs are
reserved to be issued to eligible associates at a price to be determined by the Administrator not
less than the face value of the share. These RSUs vest over a period of 1-4 years from the date of
the grant. Upon vesting, associates have 5 years in which to exercise these options. As of June 30,2008, options for 287,187 ADS representing 578,920 shares have been granted under the ASOP — RSUs
(ADS).
Weighted average fair value of
options granted during the period
—
$9.26
—
—
—
—
As of June 30, 2008 options vested and expected to vest are 278,100 with an aggregate grant date
intrinsic value of US$2.10 million.
The total grant-date intrinsic value of the options exercised during the three months ended June30, 2008, 2007 and year ended March 31, 2008 was US$0.81 million, Nil and US$0.54 million
respectively.
The total grant-date fair value of the options vested during the three months ended June 30, 2008,
2007 and year ended March 31, 2008 was US$ 0.55 million, Nil and US$0.86 million respectively..
During the year ended March 31, 2007, the SC-Trust issued immediately vesting warrants for 39,000
shares (26,400 shares during the year ended March 31, 2006) and warrants for 91,000 shares (61,600
shares during the year ended March 31, 2006) with longer vesting periods to the associates under
the ASOP plan.
Satyam Computer Services Limited Notes to the Consolidated Financial Statements
the total grant-date fair value of the options vested during the three months ended June 30, 2008
and 2007 was US$11.99 million and US$19.12 million respectively and US$29.69 million for the year
ended March 31, 2008.
Weighted average fair
value of options granted
during the period
—
—
—
—
—
—
As of June 30, 2008 options vested and expected to vest are 2,473,004 with an aggregate grant date
intrinsic value of US$ Nil.
Since the options were issued at fair market value, the grant-date intrinsic value of the options
exercised was Nil.
The total grant-date fair value of the options vested during the three months ended June 30, 2008
and 2007 was US$ 1.19 million and US$ 3.03 million respectively and US$5.18 million for the year
ended March 31, 2008.
Weighted average fair value of
options granted during the period
—
$12.27
—
$12.09
—
$8.93
As of June 30, 2008 options vested and expected to vest are 497,740 with an aggregate grant date
intrinsic value of US$ 5.34 million.
The total grant-date intrinsic value of the options exercised during three months ended June 30,2008 was US$0.13 million.
The total grant-date fair value of the options vested during the three months ended June 30, 2008
was US$0.13 million
Information about number of equity shares representing stock options outstanding as of June 30,2008:
Outstanding
Exercisable
Weighted
Weighted
Average
Weighted
Number of
Average
Number of
Exercise Price
Average
equity shares
Exercise Price
equity shares
Range of Exercise Price
(per equity
remaining
arising out of
(per equity
arising out of
(per equity share)
share)
contractual life
options
share)
options
Rs.2.00
$0.05
Rs.2.31
6.28 yrs
3,553,782
Rs.2.30
595,015
Rs.4.00
$0.09
$0.05
$1.05
Rs.61.49
$1.43
Rs.107.74
2.79 yrs
2,123,497
Rs.111.03
1,845,397
Rs.141.57
$3.30
$2.51
$2.59
Rs.141.58
$3.30
Rs.190.22
3.70 yrs
12,762,752
Rs.189.45
11,099,076
Rs.327.81
$7.64
$4.43
$4.41
Rs.327.82
$7.64
Rs.508.93
3.59 yrs
1,597,310
Rs.503.98
1,414,978
Rs.716.06
$16.68
$11.85
$11.74
The US$ numbers in the above tables have been translated using the closing exchange rate as of June
30, 2008 1US$= Rs 42.93
There
are no grants with the exercise price in the range of Rs.4.01- Rs 61.48 (US$0.10 - US$1.40).
Stock-based compensation
Satyam’s Consolidated Financial Statements from April 1, 2006 onwards reflect the impact of SFAS
123R. In accordance with the modified prospective transition method, Satyam’s Consolidated
Financial Statements for the prior periods have not been restated to reflect, and do not include,
the impact of SFAS 123R. As required by SFAS 123(R), management has made an estimate of expected
forfeitures and is recognizing compensation costs only for those equity awards expected to vest.
Upon adoption of SFAS 123R, Satyam had no cumulative adjustment on account of expected forfeitures
for stock-based awards granted prior to April 1, 2006. Satyam
Satyam Computer Services Limited Notes to the Consolidated Financial Statements
recorded stock-based compensation
related to stock options of US$ 3.9 million and US$5.9 million during the three months ended June30, 2008 and 2007 (unaudited) respectively and US$22.8 million during the year ended March 31, 2008
(unaudited), on graded vesting basis for all unvested options granted prior to and options granted
after the adoption of SFAS 123(R). As of June 30, 2008, there was US$15.5 million of unrecognized
compensation cost related to unvested options which is expected to be recognized over a weighted
average period of 2.31 years. Satyam issues new shares to satisfy share option exercise. Cash
received from option exercises amounted to US$ 9.2 million, US$1.1 million for the three months
June 30, 2008 and 2007 (unaudited) respectively and US$14.6 million for the year ended March 31,2008 (unaudited).
Fringe Benefit tax
Effective April 1, 2007, the Indian government enacted a fringe benefit tax (“FBT”) on the
intrinsic value of stock options as of the vesting date that is payable by Satyam at time of option
exercise. Satyam has elected to recover this cost from its associates as per the terms of its stock
option plans. Since Satyam is the primary obligor of this tax obligation, the Company records the
FBT as an operating expense and the recovery from the employee is recorded in additional paid-in
capital as proceeds from stock issuance.
In respect of options granted prior to April 1, 2007, the addition of reimbursement feature to the
exercise price will not result in an incremental value, thus, there is no additional compensation
cost. Satyam has estimated the future stock issuance proceeds including FBT at the time of grant
based on management’s estimates. For the three months ended June 30, 2008 Satyam recorded
stock-based FBT expense of US$2.2 million and US$4.9 million in fiscal 2008.
The fair value of each option award is estimated on the date of grant using the Black Scholes
option-pricing model. The following table gives the weighted-average assumptions used to determine
fair value:
Expected Term: The expected term represents the period that the Company’s stock-based awards are
expected to be outstanding and was determined based on historical experience of similar awards,
giving consideration to the contractual terms of the stock-based awards, vesting schedules and
expectations of future employee behavior.
Risk-Free Interest Rate: The risk-free interest rate is based on the applicable rates of government
securities in effect at the time of grant.
Expected Volatility: The fair values of stock-based payments were valued using a volatility factor
based on the Company’s historical stock prices.
Expected Dividend: The Black Scholes option-pricing model calls for a single expected dividend
yield as an input.
Estimated Pre-vesting Forfeitures: When estimating forfeitures, the Company considers voluntary
termination behavior. Estimated forfeiture rates are trued-up to actual forfeiture results as the
stock-based awards vest.
Stock based compensation plan of Satyam BPO
In April 2004, Satyam BPO established its Employee Stock Option Plan (the “ESOP”). As per the ESOP,
the options were granted at fair value as on the date of the grant and hence no compensation cost
has been recognized. These options vest starting with 33.33% at the end of the second year, 33.33%
at the end of the third year and remaining 33.34% at the end of the fourth year from the date of
grant.
Weighted average fair value of
options granted during the period
—
—
—
—
—
—
As of June 30, 2008 options vested and expected to vest are 639,750 with an aggregate grant date
intrinsic value of Nil.
15. Segmental Reporting
In accordance with SFAS 131 No., “Disclosures about Segments of an Enterprise and Related
Information”, the operating segments reported below are the segments of Satyam for which separate
financial information is available and for which operating profit/loss amounts are evaluated
regularly by executive management in deciding how to allocate resources and in assessing
performance. Management evaluates performance based on stand-alone revenues and net income for the
companies in Satyam. The executive management evaluates Satyam’s operating segments based on the
following two business groups:
—
IT services, providing a comprehensive range of services, including application development
and maintenance, consulting and enterprise business solutions, extended engineering solutions,
infrastructure management services. Satyam provides its customers the ability to meet all of
their information technology needs from one service provider. Satyam’s eBusiness services
include designing, developing integrating and maintaining Internet-based applications, such as
eCommerce websites, and implementing packaged software applications, such as customer or
supply chain management software applications. Satyam also assists its customers in making
their existing computing systems accessible over the Internet. The segment information
includes the results of Citisoft and Knowledge Dynamics which were acquired during last year
and Nitor acquired during the current year.
—
Business Process Outsourcing, providing BPO services covering HR, Finance & Accounting,
Customer Contact (Voice, Mail and Chat), and Transaction Processing (industry-specific
offerings).
Satyam’s operating segment information for the three months ended June 30, 2008 and 2007
(unaudited) and the year ended March 31, 2008 (unaudited) are as follows:
Business Segments
IT Services
BPO
Elimination
Consolidated totals
For the three months ended June, 2008 (unaudited)
Revenue — External customers
630.3
7.0
—
637.3
Revenue — Inter-segment
—
4.8
(4.8
)
—
Total Revenues
630.3
11.8
(4.8
)
637.3
Operating income / (loss)
138.7
(4.7
)
—
134.0
Equity in earnings/(losses) of associated
companies, net of taxes
On August 21, 2006, the shareholders of Satyam Computer Services approved for increase in
authorized capital of the Company from 375 million equity shares to 800 million equity shares.
Stock Split (in the form of stock dividend)
On August 21, 2006, the shareholders of Satyam Computer Services approved a two-for-one stock split
(in the form of stock dividend) which was effective on October 10, 2006. Consequently, Satyam
capitalized an amount of US$17.7 million from its retained earnings to common stock. All references
in the financial statements to number of shares, per share amounts, stock option data, and market
prices of Satyam Computer Services’ equity shares have been retroactively restated to reflect the
stock split unless otherwise noted.
Dividends
Final dividends proposed by the Board of Directors are payable when formally declared by the
shareholders, who have the right to decrease but not increase the amount of the dividend
recommended by the Board of Directors. The Board of Directors declares interim dividends without
the need for shareholders’ approval.
Dividends payable to equity shareholders are based on the net income available for distribution as
reported in Satyam Computer Services unconsolidated financial statements prepared in accordance
with Indian GAAP. As such, dividends are declared and paid in Indian Rupees. The net income in
accordance with U.S. GAAP may, in certain years, either not be fully available or will be
additionally available for distribution to equity shareholders. Under Indian GAAP the retained
earnings available for distribution to equity shareholders was US$ 1,473.8 million and US$1,158.1
million for the three months ended June 30, 2008 and 2007 (unaudited) respectively and US$1,505.8
million for the year ended March 31, 2008 (unaudited).
Under the Indian Companies Act, dividends may be paid out of the profits of a company in the year
in which the dividend is declared or out of the undistributed profits of previous fiscal years.
Before declaring a dividend greater than 10.0% of the par value of its equity shares, a company is
required to transfer to its reserves a minimum percentage of its profits for that year, ranging
from 2.5% to 10.0%, depending on the dividend percentage to be declared in such year.
Satyam Computer Services Limited Notes to the Consolidated Financial Statements
18. Contingencies and Commitments
a) Commitments relating to acquisition of businesses
For commitments relating to Nitor and Bridge refer note 3.
b) Bank guarantees
Bank guarantees outstanding are US$26.4 million and US$23.8 million as of June 30, 2008 and 2007
(unaudited) respectively and US$26.0 million as of March 31, 2008 (unaudited). Bank guarantees are
generally provided to government agencies, excise and customs authorities for the purposes of
maintaining a bonded warehouse. These guarantees may be revoked by the governmental agencies if
they suffer any losses or damage through the breach of any of the covenants contained in the
agreements.
c) Corporate guarantees
For corporate guarantees refer note 11.
d) Capital commitments
Contractual commitments for capital expenditure pending execution were US$ 116.2 million and
US$48.4 million for the three months ended June 30, 2008 and 2007 (unaudited) respectively and
US$101.0 million as of March 31, 2008 (unaudited). Contractual commitments for capital expenditures
are relating to acquisition of premises and equipment.
e) Operating leases
Satyam has certain operating leases for land, office premises and guesthouses. Rental expenses for
operating leases are accounted for on a straight line method. Rental expense amounted to US$11.5
million and US$6.9 million for the three months ended June 30, 2008 and 2007 (unaudited)
respectively and US$35.5 million for the year ended March 31, 2008 (unaudited).
Future minimum annual lease commitments for non-cancelable lease arrangements, including those
leases for which renewal options may be exercised as of June 30, 2008 are US$18.7 million in fiscal
2009, US$19.3 million in fiscal 2010, US$17.0 million in fiscal 2011, US$44.4 million in fiscal
2012 and thereafter.
f) Finance leases
Satyam has finance lease for furniture & fittings. Future minimum annual lease commitments for
non-cancelable lease arrangements are US$0.9 million in fiscal 2009, US$1.2 million in fiscal 2010,
US$1.2 million in fiscal 2011, US$3.5 million in fiscal 2012 and thereafter.
g) Venture Global Engineering LLC, USA
Satyam Computer Services entered into a joint venture agreement with Venture Global Engineering LLC
(“VGE”) to form Satyam Venture Engineering Services Pvt. Ltd (“SVES”) in India. As a result of
VGE’s breach of the agreement between the parties, Satyam Computer Services filed a request for
arbitration, naming VGE as respondent, with the London Court of International Arbitration (“LCIA”),
seeking, among other things, to purchase VGE’s 50% interest in SVES at the agreed upon book value
price of the shares. The LCIA Arbitrator issued an Award on April 3, 2006 in favour of Satyam
Computer Services which it successfully enforced in the United States District Court in Michigan.
During the enforcement proceedings in the US, VGE filed a petition challenging the Award before the
District Court, Secunderabad and made an appeal to the High Court of Andhra Pradesh, both of which
were rejected. Subsequently, in a special leave petition filed by VGE, the Supreme Court of India
set aside the orders of the District Court and the High Court and granted an interim stay of the
share transfer portion of the Award. The matter has been remanded back to the District Court,
Secunderabad for trial on merits. Satyam believes that this will not have an adverse effect on
results of operations, financial condition and cash flows.
Satyam Computer Services Limited Notes to the Consolidated Financial Statements
19. Concentration of Credit Risk
Accounts receivable balances are typically unsecured and are derived from revenues earned from
customers primarily located in the United States. Satyam monitors the creditworthiness of its
customers to which it grants credit terms in the normal course of business. The following table
gives details in respect of percentage of revenues generated from top two and top five customers:
Satyam Computer Services enters into foreign exchange forward and options contracts where the
counter party is generally a bank. Satyam Computer Services considers the risks of non-performance
by the counter party as not material.
The following tables give details in respect of our outstanding foreign exchange forward and
options contracts:
The carrying amounts reported in the balance sheet for cash and cash equivalents, trade and other
receivables, investments, amounts due to or from related parties, short-term debts, accounts
payable and other liabilities approximate their respective fair values due to their short maturity
and due to no change in the interest rates for bank deposits. The approximate fair value of
long-term debts, as determined by using current interest rates was US$22.9 million and US$25.6
million for the three months ended June 30, 2008 and 2007 (unaudited) respectively and US$27.3
million as of March 31, 2008 (unaudited) as compared to the
carrying amounts of US$23.1 million and
US$25.6 million for the three months ended June 30, 2008 and 2007 (unaudited) respectively and
US$27.2 million as of March 31, 2008 (unaudited).
The allowance for doubtful debt is established at amounts considered to be appropriate based
primarily upon Satyam’s past credit loss experience and an evaluation of potential losses on the
outstanding receivable balances.
c) Prepaid Expenses and Other Receivables
Prepaid expenses and other receivables consist of:
Prepaid expenses principally include the un-expired portion of annual rentals paid for use of
leased telecommunication lines, satellite link charges, and insurance premiums.
Others advances and receivables include the current portion of the restricted cash in the form of
deposits placed with banks to obtain bank guarantees amounted to US$2.0 million and US$1.1 million
for the three months ended June 30, 2008 and 2007 (unaudited) respectively and US$1.9 million as of
March 31, 2008 (unaudited).
Satyam Computer Services Limited Notes to the Consolidated Financial Statements
Others include the non-current portion of the restricted cash in the form of deposits placed with
banks to obtain bank guarantees amounted to US$ 0.65 million and US$0.7 million for the three
months ended June 30, 2008 and 2007 (unaudited) respectively and US$0.7 million as of March 31,2008 (unaudited). Telephone and other deposits are primarily attributable to deposits with
government organizations principally to obtain leased telephone lines and electricity supplies and
advance payments to vendors for the supply of goods and rendering of services.
e) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of:
