Patni_AR_2004

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02 Highlights 2004

03 Five-year Performance Highlights

04 Letter to Shareholders

08 Verticalisation for Growth

18 Customer Fulfilment

20 Board of Directors

21 Profile of Key Managers

22 Directors' Report

29 Corporate Governance Report

43 Standalone Financials under Indian GAAP

69 Management’s Discussion and Analysis of

the Consolidated Financials under Indian GAAP

75 Consolidated Financials under Indian GAAP

96 Management’s Discussion and Analysis of the

Consolidated Financials under US GAAP

101 Consolidated Financials under US GAAP

128 Subsidiary Information

Patni Computer Systems, Inc. and SubsidiaryPatni Computer Systems (U.K.) Limited

Patni Computer Systems GmbH

Cymbal Corporation and Subsidiaries

162 Risk Management

166 Patni World-wide

168 Corporate Information

Contents

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Creating new approaches to the

development, delivery and

management of IT – predicated on

greater value and less cost – will

challenge buyers and sellers of IT

to alter many of the accepted "rules

of the game." Only organisations

prepared to play "business

unusual," however, will successfullymake the transition to the next

stage of the IT industry's evolution.

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• Revenue increased by 30.1% from US$ 251.0 million in 2003 to

US$ 326.6 million in 2004.

• Net income increased by 34.1% from US$ 43.4 million in 2003 to


• 55 clients added, resulting in 46 million dollar clients at the close ofCY 2004 (26 in 2003) and 170 active client relationships

(115 at the close of CY 2003).

• 2570 people added to the Company in CY 2004, taking

the total people strength to 9661.

• Successful IPO in February 2004 over subscribed 22 times.

• Organised the first annual customer meet, PatniConnect, in June 2004.

• US$ 68 million acquisition of Cymbal Corporation, a U.S.- based telecom

industry-focused IT services provider, resulting in the integration of over

600 resources and 14 marquee customers into Patni.

• Significant infrastructure expansion in progress: Knowledge Parks at

Navi Mumbai (15,000 seats) and Chennai (10,000 seats), in addition to

220,000 sq. ft. space added across SEEPZ, Navi Mumbai, Bangalore

and Noida.

• Ranked among the ‘10 Best Companies to work for in India’ in a study

conducted jointly by HR-consulting firm Mercer and Business Today.

Highlights 2004

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Five-yearPerformance Highlights

00

101.2

142

.6188.3

251.30

326.6

01 02

Revenues US$ (mn)

03 04

CAGR 34.0%

00

25.0

31

.4

44.0 4

7.3

64.8

01 02

Operating Income US$ (mn)

03 04

CAGR 26.8%

00

22.2 2

6.3

36.0

43.4

5

8.2

01 02

Earnings after Tax US$ (mn)

03 04

CAGR 27.3%

00

0.24

0.25

0.27

0.42

0.47

01 02

Basic & DilutedEarnings per Share (US$)

03 04

CAGR 18.3%

00

0.51

0.78

1.14

1.56

2.43

01 02

Book Value per Share (US$)

03 04

CAGR 47.5%

00

3365

4900

5570

709

1

9661

01 02

Number of Employees

03 04

CAGR 30.2%

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2004 saw some significant milestones for Patni. The year started

with a highly successful IPO that was oversubscribed 22 times, and

we scaled to a market capitalisation of US$ 1 billion within six

months of listing. During the year we have delivered sustained

growth, living up to the expectations of our stakeholders. The task

ahead is to make sure that this robust performance is maintained

and improved.

We have delivered stable growth in the last fiscal year, with

continued business expansion initiatives, and we remain firmly

dedicated to creating opportunities for ongoing growth across the

organization. To achieve this, we have committed significant

investments in physical infrastructure across multiple locations,

extended domain capabilities, entered new verticals and improved

our client facing capabilities.

A number of initiatives were launched in 2004 to strengthen our

long-term growth potential. The acquisition of the US-based Cymbal

Corporation, the largest overseas acquisition ever by an Indian IT

Services company, has given us a head start into the US$ 60 billion

Telecom vertical. Cymbal delivered us 14 key clients in the Telecom

segment and also added over 600 employees and consultants to

our manpower base.

Patni is a strategic partner to several Fortune 1000 companies in

key areas of IT spending, with vertical capabilities, technical

strengths and innovative, flexible delivery. These advantages positionus favorably to capture the available growth opportunities and

translate them into ongoing value enhancement for our stakeholders.

Besides business success, social responsibility in the environment in

which we operate is also important. In the face of one of the worst

natural disasters in human history, I am pleased to say that we made

a combined company and employee contribution of over

Rs.10 million towards the Maharashtra Chief Minister’s Tsunami

Relief Fund.

CORPORATE

PERFORMANCE

The Company reported significant revenue growth of 30.1% from

US$ 251.0 million in 2003 to US$ 326.6 million in 2004. Gross

profit for the year increased to US$ 128.1 million, higher by 31.8%

over the previous year. Diluted EPS for the year was at US$ 0.5 per

share, up from US$ 0.4 per share in CY 2003.

In CY 2004, in line with our expectations we have outperformed the

industry while our margins have expanded appreciably over the

previous year. We have focused on strengthening our platform to

support further business expansion initiatives, while leveraging our

Letter to

Shareholders

C h a i r m a n ’ s R e v i e w

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existing investments and assets. We now enter the next fiscal year

with a much stronger run rate that gives us the confidence of

continuing to deliver growth.

INDUSTRY ENVIRONMENT

India continues to be best positioned as a leading outsourcingdestination. In 2005, the Indian IT services industry is likely to cross

the US$ 20 billion mark with exports likely to maintain the current

growth momentum.

There is a significant upside potential for the industry, at the same

time; the IT services sector in India is getting crowded. Some large

users of offshore IT services are establishing captives of their own in

India, whie the larger global IT services companies continue to

expand their delivery presence in India. Given customer preferences

and pricing pressures on the industry, it becomes essential for us to

enhance domain expertise in key verticals and to strengthen our front-

end capabilities to ensure strong and successful customer

relationships.

Going forward, the IT services Industry will see as many challenges as

opportunities. We will need to be quick, nimble and domain-strong to

make the best of the opportunities.

EXPANDED BUSINESS MODEL

Our expanded business model now has seven distinct practices. The

five industry practices are Insurance, Financial Services,

Manufacturing, Telecom, and Growth Industries (which includes

emerging practices in Retail, Media & Entertainment, Energy &

Utilities and Logistics & Transportation). The two technology practices

are Product Engineering Services and Independent Software Vendors

(ISVs). During 2004, we have realigned our existing Strategic

Business Units (SBUs) and National Integrated Sales Groups to

support these identified industry practices.

The Insurance, Financial Services & Manufacturing sectors have

continued to deliver strong growth through 2004, with significant new

client acquisitions and improved solutions capabilities. The newly

acquired Cymbal Corporation has been fully integrated into the

Company and now functions as the Telecom business unit.

Building on our success and leadership position in the Embedded

Technology Solutions space, we have repositioned this practice with

an expanded focus to provide end-to-end Product Engineering

Solutions. This practice services multiple industry sectors including

industrial automation, information storage, consumer electronics,

semiconductors and mobile & wireless solutions. We have seen

noteworthy success and growth in this sector over the last few years,

and are now positioned as a significant player in the high-end

WE HAVE COMMITTED SIGNIFICANT INVESTMENTS IN

PHYSICAL INFRASTRUCTURE ACROSS MULTIPLE

LOCATIONS, EXTENDED DOMAIN CAPABILITIES, ENTERED

NEW VERTICALS AND IMPROVED OUR CLIENT FACING

CAPABILITIES.

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technology services sector. Under the ISV practice, we have

now also identified software products development andsupport as a major opportunity area for the future.

In 2004, we have also continued to focus on restructuring

and strengthening our various service lines. Our Enterprise

Application Solutions business saw another year of strong

growth in 2004. It acquired several new customers and

obtained excellent reviews from industry analysts for its

capabilities and accomplishments, including the launch of our

RFID solution. Infrastructure Management Services also saw

significant growth in 2004. Going forward, our new state-of-

the-art NOC (Network Operations Centre) at Mumbai will

provide enhanced capabilities for delivering remote managed

services to our global customers.

Our Business Intelligence, eBusiness and Verification &

Validation services saw robust growth in 2004.

REGIONAL PERFORMANCE

In 2004, the US Sales region delivered good growth,

building on existing client revenues as well as adding

several new clients.

Our business in Europe and the United Kingdom (EUK)delivered excellent growth, over 70% in revenue terms, and

the region added significant new customers. In addition to

the UK, the Nordic countries show good growth promise, and

we have also added an office in Amsterdam to service the

Benelux region more effectively.

Our Japan and Asia Pacific business also delivered revenue

growth in excess of 50%. We have started implementing new

initiatives to strengthen our presence in Australia and to

increase our market share in this region.

INFRASTRUCTURE GROWTH

In keeping with our plans for expansion, we have continued

to increase our development facilities at a rapid pace. During

2004, we added 220,000 sq. ft. office space at four of our

locations: SEEPZ, Navi Mumbai, Bangalore and Noida.

The first phase of the Airoli Knowledge Park is expected to

become operational by October this year. We also acquired

20 acres of land in the Seruseri IT Park in Chennai for our

second Knowledge Park; this has a planned capacity of

10,000-employees. Phase 1 of the Seruseri campus is

operational from February 2005 with a capacity of1200 seats.

Additionally, we are looking at establishing development

facilities at other locations. As part of the Cymbal acquisition,

we have already added Hyderabad as our eighth location

in India.

Overseas, Patni has moved to new U.S. headquarters at

Cambridge, MA. The new facility has now integrated the

Company’s three offices in the Greater Boston area.

QUALITY, RESEARCH & TECHNOLOGY INITIATIVES

The Quality and Delivery Innovations (QDI) group successfully

completed a number of innovations in 2004, including a

solution for Automation of Engineering Processes and

Operating Systems (AESOP) that will substantially improve

the Company’s productivity, quality and cycle time.

We successfully launched our RFID initiative during 2004;

several new client engagements in this area have already

commenced during the year. As part of this initiative, we

have instituted alliances with two of the leading RFID systems

providers, Oat Systems and Manhattan Associates.

PEOPLE INITIATIVES

We continued to build our management team and globalize

our work force. Apart from the management team acquired

with Cymbal, a number of senior people joined us in 2004.

Overall, Patni added 2570 employees during 2004 and

closed the year with a headcount of 9,661.

e-Care, a web-based query addressal system launched in

2004, logged more than 9,000 queries by Patni employees,

proving the usefulness of the system.

Our Corporate Training division, PACE (Patni Academy for

Competency Enhancement), has continued to scale new

heights. Training person-days crossed the 100,000 mark.

The eLearning initiative now facilitates programs for

certifications such as MCAD from Microsoft, OCA from

Oracle and PMP from the Project Management Institute.

In collaboration with BITS, Pilani, PACE now also offers higher

education in software through 2-year and 4-year MS

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programmes. PACE’s web-based Learning Management System

(LMS), additionally facilitates the ultimate goal of anytime-anywherelearning.

BUILDING BRAND PATNI

2004 saw added momentum in enhancing Brand Patni through the

launch of several initiatives. Our first annual customer meet,

PatniConnect, in June 2004, was very successful. The event got a

positive response from our customers and will now become an

annual feature.

We extended our PR efforts globally, giving the Company high

visibility in international publications such as CIO, Fortune,The Boston Globe, and Information Week. We also continued our

focus on showcasing our thought leadership in the industry with

multiple speaking engagements and publications across our industry

and technology practices.

We were ranked among the “10 Best Companies to work for in India”

by international HR-consulting firm Mercer in association with Business

Today. The survey covered companies across 14 industries.

Additionally, our in-house magazine “FWD” received an award from

the Association of Business Communicators of India.

2005 AND BEYOND

While we have had significant success, we also have work cut out for

us. Going forward, we must continue to broad base our business

across multiple parameters - client concentration, industry focus,

diversification, geographical expansion, and improvements in our

operating efficiencies and productivities. Our goal is to continue to

delivery strong growth, ahead of industry growth targets, while

continuing to build the Company to an outstanding Indian multinational

software services provider.

Regards,

Narendra K. Patni

WE NOW ENTER THE NEXT FISCAL YEAR WITH A MUCH

STRONGER RUN RATE THAT GIVES US THE CONFIDENCE

OF CONTINUING TO DELIVER GROWTH.

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Verticalisation is a complex

phenomenon, a revolution

requiring various stages of

acquisition, upgradation and

retention of knowledge and

expertise in industry based

solutions, which a customer

could use to ensure its

business success.

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ENHANCING OUR BUSINESS MODEL

The year 2004 saw continued strong growth in demand for

IT services delivered through offshore outsourcing models.

India continues to remain the world’s leading destination for

offshore outsourcing of IT services. A look at the underlying

dynamics reveals a few significant trends.

Clients are increasingly seeking to leverage the offshore

delivery model for requirements beyond custom application

development and maintenance, to include their enterprise

applications, infrastructure management, business process

outsourcing and research & development needs.

Combined with this, customers are increasingly

implementing "active sourcing programs" to select and

manage a small and select set of best-of-breed IT Services

suppliers.

As these trends presage, global sourcing has become more

strategic and more pervasive in its impact. Strategic

suppliers need to focus on several core issues to continue

to drive success for the long term.

• Build stronger domain experience and skills.• Strengthen global delivery models with sharp focus on

enterprise-wide operational excellence.

• Strengthen the front-end sales and account management

capabilities to more effectively mine existing relationships

and win new strategic accounts.

• Strengthen solutions capabilities by building partnerships

with other IT solutions providers.

• Build multicultural organizations with a global workforce

and strong unifying values.

Over the last several years, Patni has taken several

significant steps to enhance its business model in these

directions. In particular, during 2004, we have augmented

our vertical focus to expand and deepen our expertise in

key industries. With our large and stable operations,

financial soundness, high levels of process maturity, robust

delivery, and our stronger industry focus, we feel confident

that Patni will continue to stand differentiated as a ‘vendor

of choice’ in the verticals in which we choose to compete.

Verticalisationfor Growth

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Leveraging knowledge.Focusing on key verticals.

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Through 2004, we have enhanced our business

model by further developing our skills and our

domain expertise in our key verticals of Insurance,Financial Services, Manufacturing and Telecom. We

have also sharpened our focus and developed

expertise in our technology practices in the areas of

Product Engineering (PE) and Independent Software

Vendors (ISV).

These key verticals currently account for nearly

76 % of our revenues. Under our Growth Industries

practice, we are also focusing on our emerging

practices in the Retail, Media & Entertainment,

Energy & Utilities, and Logistics & Transportationindustries.

Our chosen verticals represent some of the

industries with the highest IT spends, and with

significant opportunities for growth over the

foreseeable future. Presently, the BFSI (Banking,

Financial Services, Insurance), Manufacturing and

Telecom verticals account cumulatively for about

57 % of India’s IT services and software exports. ITspending among the US insurers is likely to

strengthen by 8.8 % in CY 2005 while IT spending by

the global manufacturing sector, estimated at US$

193 billion in CY 2003, is forecasted to grow at a

CAGR of 5 % through 2008.

Our journey in verticalisation has advanced over the

year. We have focused on strengthening our

domain expertise, with a thorough understanding of

diverse industry practices, even as we continue to

deliver technology solutions to our customers. Weare leveraging the knowledge acquired through our

various industry partnerships, our industry focused

pre-sales and sales teams, and our domain

specialists and solutions architects, to drive growth

across our key verticals.

Patni helped plan and implement a new critical illness

policy administration infrastructure for MetLife. Patni’s

quality focus and skill integrating complex operational

platforms enabled MetLife bring this new product to

market in record time, allowing them to capitalise on

the market opportunity in the critical illness space.successstory

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Climbing the value chain.Enhancing performance.

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As we move higher up the value-chain in the services

that we provide our clients, we see a transformationin our role as pure technology service providers, to

include a focus on IT consulting and business

process outsourcing capabilities. The focus on

deeper verticalisation has allowed us to strengthen

many of our capabilities in this regard, to be better

equipped to engage collaboratively with our clients

and develop solutions for their more complex

business problems.

In order to be a stronger full-service provider to our

strategic customers, we have also made significant

strides in strengthening our technology expertise,

our service lines and the solution offerings we take

to market. Our integrated service lines now includeapplication development, application maintenance

and support, packaged software implementation,

quality assurance, infrastructure management,

product engineering and business process

outsourcing.

With our industry and business process expertise,

global resources and proven track record, Patni is

able to mobilize the right combination of resources,

skills, process excellence and domain familiarity to

help clients improve their performance and to gain

competitive advantage.

Patni helped McCormick harmonize its business

processes to better align with its trading partners.

Leveraging our domain expertise and proven global

delivery model, we ensured cost-effective, deadline-

driven ERP rollouts.successstory

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Extending customer reach.Creating long-term relationships.

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Over the last few years, the customer acquisition

process has also witnessed a paradigm shift.

Customers increasingly want to be accessed andserviced through domain or vertical expertise, rather

than through pure horizontal or technical expertise;

they are demanding solutions based on domain

familiarity and extending beyond technology services.

During 2004, we have grown our business both by

better mining our existing strategic accounts and by

adding several new strategic customer relationships.

Industry experience, delivery excellence, the breadth

and depth of our services offerings, our

responsiveness and flexibility, and our experience

with innovative engagements models, have been ourkey differentiators. Additionally, as we strengthen our

relationship management and account management

capabilities, we are establishing higher-level, more

secure and deeper relationships with our clients.

Our customer-centric approach has helped us widen

our customer portfolio to more than 170 active and

concurrent relationships in 2004; 46 of these being

million-dollar accounts for the Company.

Patni’s proven global delivery model has heightened

Hitachi’s products success, yielding significant cost

savings, and improved quality and productivity. Patni

has been working closely with Hitachi in developing

various software products for deployment in mission

critical installations.successstory

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Expanding domain presence.Investing in strategic acquisitions.

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In addition to our strong organic growth initiatives,

we have selectively used strategic acquisitions to

gain access to newer markets and to strengthen ourvertical and horizontal capabilities. The acquisition of

The Reference Inc. – a Massachusetts-based

Financial Services focused IT solutions provider, in

April 2003, was the first step in this direction. In

November 2004, Patni acquired Cymbal Corporation

– a California-based Telecom industry focused IT

services provider. With this acquisition, we gained a

high level entry into the high-growth

Telecommunications outsourcing segment pegged at

US$ 65.7 billion globally, by 2007.

Our acquisition of Cymbal Corporation brought us a

Telecom industry focused services capability with

domain expertise, consulting skills and global

delivery that are in demand with Telecom operators

looking to establish strategic partnerships. We alsoacquired 14 key Telecom customers and 600

professionals. This acquisition, the biggest-ever

overseas one by an Indian IT Services company,

exemplifies our commitment to expand markets and

domain capabilities, and our ability to match

opportunities with the speed of execution.

Going ahead, we will continue to focus on right-sized

strategic acquisitions that can complement our

native capabilities, help us grow our presence in new

verticals, expand our industry and technicalexpertise, or improve our geographic coverage.

Patni's strategic IT services partnership helped Virgin

Mobile, the leading MVNO in the US, implement their

BSS systems in a joint collaborative approach

enabling a successful national launch in industry

record timing. Patni's continued partnership with

Virgin Mobile includes strategic IT support for

Virgin's explosive business growth and implementing

a Service Oriented Architecture for applications such

as CRM, Call Center Support, IVR, Enterprise

Integration and Billing.success

story

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Customer

Fulfilment

“We very much see the Patni team as an extension of the

Carphone Warehouse's IT department. It isn't a 'them and us'relationship. One year on, we have a very good management

relationship between our teams. The quality of the work is

consistently high, and it gives us the ability to take on more

projects for the business.”

Hitesh Patel, IT Director, Carphone Warehouse

“Since our relationship began in 2002, Patni has consistently

demonstrated project execution excellence and strong knowledge

of the insurance domain. Going forward, ROOM Solutions has

aggressive plans to grow its business, and we are experiencing

rapidly growing demand for our solutions. We see Patni as a key

partner to enable us to efficiently and effectively respond to the

evolving needs of our customers.”

Marcus Broome, Chairman, ROOM Solutions Ltd.

“Patni's ability to roll with change is bar none. We had complete

confidence in the team's technical decisions. They had a very

difficult task in building a fast app without impacting servers and

they accomplished this very well. The Patni team has truly been a

strength to us and to the success of the project.”

Brett Hurwitz, Vice President - Commercial Sales Initiatives,

NBC Universal

“We launched all IT systems for a prepaid phone company in an

unprecedented industry record timing. Patni’s teams managed

systems integration in a joint collaborative environment with us and

have served as a strategic services vendor to Virgin Mobile’s IT

systems since 2001. We believe that Patni has the advantage of

deep domain expertise and provides the industry’s best ROI for

communication service providers in need of IT services

partnerships”.

Michael G Parks, CIO, Virgin Mobile USA

“Patni has demonstrated a high degree of flexibility, scalability and

service orientation to enable us meet the strategic goals for some

of our largest IT initiatives. Their sheer commitment, execution

excellence and ability to work with us to envision our overall

program, has made a tremendous difference.”

Jeff Malat, Director, Process Solutions & ERP Implementation,

McCormick & Co Inc

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“ABN AMRO Services Company values the relationship we have

built with Patni over the last two years. Patni's personal approachand the support of its senior leadership team has been

instrumental in helping us grow our outsourcing efforts. Specifically

we value Patni's demonstrated flexibility and adaptability in working

within our environment while continuing to use its methodologies,

tools and best practices to bring benefits to the Bank. We look

forward to this relationship growing into a strong partnership over

the years.”

Bruce Jacobs, Executive Vice President, ABN AMRO Services Company Inc.

“We selected Patni for its world-class talent, robust project

management methodologies and relationship focus. Patni hasbeen and will continue to be a valuable partner for our technology

exploration. In order to expand our core technology competencies

and to increase our flexibility in the management of our resources,

Patni provides us immediate access to a large pool of knowledge

base experts allowing maximum flexibility in accelerating or de-

accelerating development efforts. We see this relationship

continuing to grow into a more rewarding partnership

over the years.”

David Flood, Vice President, St. Jude Medical, Inc.

“Patni exceeded our expectations with the quality of their peopleand their professionalism. The team managed to always meet the

compressed timelines of the project and helped us drive the desired

results by constantly adjusting the level of resources needed both

onsite and offshore. I would like to recognise Patni as an important

partner, and the fact that we have not hesitated to award Patni with

several subsequent projects speaks highly of the confidence we

developed in them in a short period of time.”

Votsis, Elpitha, CFO, Harman Music Group

“Patni has displayed great flexibility and dexterity transcending

cultural and language challenges, in taking over disparate business

systems across MetLife's operations in Asia Pacific and Latin

America. Their strong Insurance Industry knowledge coupled with a

sound technology leadership has emerged as a clear differentiating

factor. Their expertise in verification and validation in general, and

performance and stress testing in particular, has been key in aiding

MetLife execute its vision for a global common platform; our

cornerstone for success in the International insurance market.”

Stephen J. Bozzo, VP, Chief Information Officer, MetLife International

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Board of Directors

Mr. Narendra K Patni

Chairman and CEO

Mr. Gajendra K Patni

Executive Director

Mr. Ashok K Patni

Executive Director

Mr. William O Grabe

Director

Dr. Michael A CusumanoIndependent Director

Mr. Anupam P PuriIndependent Director

Mr. Arun DuggalIndependent Director

Mr. Pradip Shah

Independent Director

Mr. Louis Theodoor van den BoogIndependent Director

Mr. Ramesh Venkateswaran

Independent Director

Mr. Abhay Havaldar

Alternate Director to Mr.William O Grabe

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Mr. Narendra Patni, 63, Chairman and CEO, has a Master’s

degree in Electrical Engineering from the Massachusetts Institute

of Technology (MIT) and a Master’s degree in Management from

the Sloan School of Management at MIT. He is the founder

promoter of the Company and has over 35 years of experience

in the software industry.

Mr. Satish Joshi, 49, Executive Vice-President and Chief

Technology Officer, has a Bachelor’s degree in Electrical

Engineering from IIT, Mumbai, and a Master’s degree in

Computer Science. He has been employed with Patni for 22

years.

Mr. Vijay Khare, 47, Executive Vice-President and Global

Delivery Coordinator, has a Bachelor’s degree in Engineeringfrom the Regional Engineering College, Nagpur, and a Master’s

degree in Computer Science from IIT, Mumbai. He has been

employed with Patni for 24 years.

Mr. Mrinal Sattawala, 50, Executive Vice-President and Global

Sales and Marketing Coordinator, has a Bachelor’s degree in

Electrical Engineering from IIT, Mumbai, and a Master’s degree in

Business Administration from MacMaster University, Canada. He

has been employed with Patni for 19 years.

Mr. Deepak Sogani, 39, Chief Financial Officer, has a

Bachelor’s degree in Electrical Engineering from IIT, Delhi, and a

post graduate diploma in Management from IIM Ahmedabad. Heis a CFA charter holder from AIMR, USA. He has been employed

with Patni for seven years.

Mr. Lokesh Bhagwat, 46, Sr. Vice-President & Head, Growth

Industries business unit, has a Postgraduate degree in Science

from Pune University. He has 24 years of IT experience and has

been employed with Patni for over three years.

Mr. Harish Bhat, 48, Sr. Vice-President & Head, Independent

Software Vendors business unit, has a degree in Electronics

Engineering from Mumbai University. He has over 22 years of IT

experience and has been employed with Patni for over five years.

Mr. William Budde, 45, Sr. Vice-President & Head, Insurancebusiness unit, has a Bachelor’s degree in Political Science, Urban

Studies and Geography from Northwestern University, Evanston,

Illinois, and a Charter as a Property and Casualty Underwriter

from the Insurance Institute, Malvern, Pennsylvania. He has over

20 years of insurance industry experience.

Mr. Ajay Chamania, 42, Sr. Vice-President & Head, Product

Engineering Services, has a Bachelor’s degree in Electronics and

Telecommunications from REC, Bhopal. He has been employed

with Patni for 18 years.

Mr. Sunil Chitale, 41, Sr. Vice-President & Head, Manufacturing

business unit, has a Bachelor’s degree in Electronics Engineering

from the Institute of Technology, Benares Hindu University. He

has been employed with Patni for 19 years.

Mr. Douglas Fallon, 41, Sr. Vice-President & Head, Enterprise

Systems Management business unit, has a BS in Business

Administration from Plymouth State College. Douglas has over

17 years’ experience in IT consulting.

Mr. Neeraj Gupta, 37, Sr. Vice-President & Head, Telecom

business unit, has a Bachelor’s degree in Electronics &

Communications Engineering from PEC, India, and a Master’s

degree in E.E. from the University of Alabama, USA. He was CEO

of Cymbal Corporation prior to its acquisition by Patni and has14 years of technology consulting, marketing, and product

management experience.

Mr. Milind Jadhav, 46, Sr. Vice-President & Head, Human

Resources, is a Postgraduate in Personnel Management and

Industrial Relations from the Tata Institute of Social Sciences,

Mumbai. He has been employed with Patni for over three years.

Mr. Sanjiv Kapur, 45, Vice-President & Head, Business Process

Outsourcing, is a graduate from Mumbai University. Sanjiv has

more than 20 years of experience in the IT, Telecom and BPO

industries and has been with Patni for over three years.

Mr. Sumedh Mehta, 40, Sr. Vice-President & Head, Financial

Services business unit, has a Bachelor’s degree in Electronics

Engineering from Southampton University, UK; a Master’s degree

in Computer Science from Columbia University, NY; and an MBA

from Babson College, US. He was President and CEO of The

Reference, Inc., prior to its acquisition by Patni.

Mr. Sukumar Namjoshi, 56, Sr. Vice-President (Sales) & Head,

Europe and UK, has a Bachelor’s degree in Computer Science

from IIT, Mumbai and post-graduate qualifications in Business,

Industrial Management and International Marketing. His industry

experience spans over three decades.

Mr. Milind Padalkar, 47, Sr. Vice-President & Head, EnterpriseApplications Solutions business unit, has a Bachelor’s degree in

Engineering from IIT, Delhi, and a Postgraduate diploma in

management from IIM, Ahmedabad. He has been employed with

Patni for 16 years.

Mr. Kiran Patwardhan, 51, Sr. Vice-President (Sales) - Asia

Pacific, has a Bachelor’s degree in Chemical Engineering from

IIT, Mumbai, and a post-graduate diploma in Management from

IIM, Kolkata. He has been employed with Patni for over five

years.

Profile of Key Managers

8/7/2019 Patni_AR_2004


Directors’ Report

To,

The Members,

PATNI COMPUTER SYSTEMS LIMITED

Your Directors have pleasure in presenting their Twenty Seventh Annual Report together with Audited statements of

Accounts for the year ended 31st December 2004:

FINANCIAL RESULTS

31st Dec 2004 31st Dec 2003

(Rs. In Lacs) (Rs. In Lacs)

Sales 70,206.75 53,701.06

Resulting in Profit Before Tax 25,624.88 19,287.16

Profit After Tax 23,054.15 16,605.56

Profit available for appropriation after adding to it Previous Year’s Brought Forward. 72,073.53 52,088.25

Appropriated as under:

Transfer to General Reserve 2,305.42 1,660.56

Final Proposed Dividend on Equity Shares @ 100% (Previous Year 50 %) 2,499.94 1,248.36

Corporate Tax on above Dividend 326.71 159.95

Balance Carried to Balance Sheet 66,941.46 49,019.38

72,073.53 52,088.25

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BUSINESS PERFORMANCE

The performance of your Company during the year under

report has shown improvement over the previous year. Totalrevenue for the year ended December 31, 2004 amounted to

Rs. 70,206.75 lacs as against Rs. 53,701.06 lacs for the

corresponding period last year registering growth of 30.74%.

The Company has posted the Net profits after tax of

Rs. 23,054.15 lacs for the year ended December 31, 2004

as against Rs. 16,605.56 lacs for the corresponding period

last year registering growth of 38.83 %.

Dividend

Your Directors are pleased to recommend the payment of

dividend for the year ended December 31, 2004 at Rs. 2/- pershare (100% on face value of Rs. 2/-), subject to approval of

members at the ensuing Annual General Meeting. If approved,

the dividend will be payable to all the eligible shareholders

whose names appear on Register of Members on 9th June

2005.

BUSINESS OVERVIEW

Your Company is a leading provider of information technology

services. The Company delivers a comprehensive range of IT

services through globally integrated onsite and offshore

delivery locations primarily in India. Your Company addressesits clients’ needs with its global delivery model, through which

it allocates resources in a cost-efficient manner using a

combination of onsite client locations in USA, Europe, Japan,

Rest of Asia Pacific and Rest of the world and offshore

locations in India. Your Company believes that an integral to its

delivery competence is its domain expertise. Overall, your

Company derives significant strength from its focused industry

expertise, successful client relationships, extensive suite of IT

services, delivery and operational excellence, highly

experienced management team and dedicated and highly

skilled delivery professionals.

Business Segments

Your Company offers its services to customers through

industry practices in insurance, manufacturing, financial

services and telecommunications, as well as in other

industries. Your Company also has technology practices that

offer services in product engineering and for Independent

Software Vendors (ISVs). Both industry practices and

technology practices are complemented by service lines,

which are developed in response to client requirements and

technology life cycles. Your Company’s range of services

includes application development, application maintenance andsupport, packaged software implementation, infrastructure

management services, product engineering, business process

outsourcing and quality assurance services.

Customer Relationships

Your Company has always demonstrated the ability to build

and manage relationships with some of the world’s largest and

best known companies. While nurturing long-term relationships

with existing customers, your Company has continued to

expand its customer base. The Company added 55 clients

during 2004 and its active client base has increased

significantly from 82 clients as of December 31, 2002 to 170

clients as of December 31, 2004.

Sales and marketing initiatives

Your Company has further enhanced global verticalization

initiative. The Company has re-aligned its business unit

structures to create sharper focus on select industry and

technology practices. The North American sales organisation

has been re-aligned and integrated with the said industry and

technology practices. A majority of your Company’s sales and

marketing teams focus on specific industries and have

account managers to manage relationship with largecustomers. In addition to sales executives, there are industry

experts and solution architects who complement the sales

efforts by providing specific industry and service line

expertise. Your Company has opened four sales offices during

the year at Korea, Amsterdam, Fremont and New York.

Personnel and Performance

Your Company has established a work ethic based on values

that transcend across its global operations. The culture is

oriented to high growth and performance that allows the

Company to attract, motivate and retain high quality talent

worldwide. Abilities are recognized with rewards for high

performance.

Your Company uses its competitive recruitment program to

select talent from India’s premier engineering institutions. An

adaptive business model and mature management structure

allows aggressive scalability without compromising on

flexibility, responsiveness and reliability of services.

Your Company had 9,661 employees as of December 31,

2004, which represents an increase of 2,570 employees over

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the last year. The employee base included 8,583 software

professionals.

Facility Expansion

In view of the anticipated growth in the business and

expansion of the employee base, your Company is investing in

new high-tech facilities which are referred as “Knowledge

Parks” designed for expanding the Company’s operations and

training for employees. Development work has been initiated at

two such Knowledge Parks located at Navi Mumbai and

Chennai.

The Knowledge Park at Navi Mumbai, spreading across 50

acres, would accommodate around 15,000 employees when

all its planned phases are completed. In its first phase, which

is expected to be completed over the years 2005 and 2006at an investment of Rs. 2.5 billion, the facility would add

seating capacity for 4,500-5,000 employees.

The planned expansion at Chennai spreading across 18.75

acres will have a 10,000-employee seating capacity upon

completion, created with an investment of about Rs. 2.1 billion.

The 1,200-person, Rs. 600 million first building of Phase 1 is

expected to be operational in the first quarter of 2005.

During 2004, your Company also set up a 1,100-person

development center in Bangalore that is focused on some of

its largest clients and its Product Engineering and EnterpriseApplications practices. Along with the Cymbal acquisition, a

Hyderabad-based development center has been added to the

delivery resource base, the eighth city where your Company’s

offshore development facilities are now operational following

Mumbai, Navi Mumbai, Pune, Noida, Gandhinagar, Chennai and

Bangalore. Aggregate offshore development available to your

Company as of December 31, 2004 is over 850,000 sq. ft.

All of your Company’s development centers were assessed at

SEI-CMMI Level 5 by KPMG, India. Your Company had been

assessed at SEI-CMM Level 5 during 2000.

Acquisitions

In November 2004, your Company acquired Cymbal

Corporation through its wholly owned subsidiary, Patni

Computer Systems, Inc., to establish expertise and operations

in the provision of IT services to the telecommunications

industry. Through the acquisition of Cymbal, your Company

believes to have gained expertise and operations in the

provision of services to clients in the telecommunications

industry.

Accolades

Your Company received the Award for Excellence in

Electronics for the year 2002-03 from the Department of

Information Technology, Ministry of Communications &Information Technology, Government of India. The Company

was chosen as the top Company in the Computer Software

category. The Award recognises a Company's excellence in

the exports of electronics and computer software.

Your Company was also ranked amongst the 10 Best

Companies to work for in India in a study conducted by

international HR-consulting firm Mercer in association with

Business Today. Mercer worked with market research firm

TNS to survey companies in 14 industries.

PATNI ESOP 2003Your Company had introduced the Employees Stock Option

Plan known as ‘Patni ESOP 2003’. Under the Plan, the

Company is authorised to issue 11,142,085 equity shares of

Rs. 2 /- each upon the exercise of options granted to

employees and/or directors of the company and its

subsidiaries. Options granted under the Plan will vest over

period of 48 months.

The Plan is being administered by the Compensation

Committee of Directors constituted as per SEBI Regulations.

The Committee has been empowered to determine, inter alia,

the eligibility criterion, the quantum of options to be granted

per employee and in aggregate. The Committee takes into

consideration the various factors including but not limited to,

the number of years of service in the organization, position,

present and future potential contribution to the growth of the

organization. The appraisal process is done periodically

against set targets and assignments. Based on such periodic

assessment/appraisal, the Committee grants the options to

employees.

Pursuant to clause 12.1 of SEBI (Employee Stock Option

Scheme and Employee Stock Purchase Scheme) Guidelines

1999, the details of options granted under Patni ESOP 2003

for the year ended December 31, 2004 are given in the

Annexure.

SUBSIDIARY COMPANIES

During the year under review, excluding the acquired entity

Cymbal Corporation, the Company has four wholly owned

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subsidiaries viz. Patni Computer Systems (UK) Limited, Patni

Computer Systems GmbH, Patni Computer Systems, Inc. and

The Reference, Inc. (The Reference Inc. was acquired in 2003

by Patni Computer Systems, Inc. - your Company’s whollyowned subsidiary company)

During the year, Patni Computer Systems, Inc, a wholly owned

subsidiary of the Company, acquired Cymbal Corporation.

By virtue of provisions of Section 4 of the Companies Act,

1956, Cymbal Corporation and its subsidiaries namely Cymbal

Corporation Limited, Cymbal Information Services (P) Limited,

Cymbal Information Services (Thailand) Limited are also

subsidiaries of the Company, as Cymbal Corporation is wholly

owned by Patni Computer Systems, Inc.

The reports and accounts of the Subsidiary Companies(consolidated) along with the statement pursuant to Section

212 of the Companies Act, 1956 are annexed.

DIRECTORS

In accordance with the requirements of the Companies Act,

1956 and Articles of Association of the Company, Mr. William

O Grabe and Mr. Arun Duggal are liable to retire and eligible

for re-appointment.

Mr. Louis Theodoor van den Boog, an independent director,

was appointed as an Additional Director w.e.f. 15th March

2005 and he holds the office of the Director upto the date ofAnnual General Meeting. It is proposed to reappoint him as

director of the Company. Necessary resolutions are proposed

for his reappointment at the Annual General Meeting. Your

directors recommend the appointment.

CORPORATE GOVERNANCE

Your Company follows the principles of the effective corporate

governance practices. The Company has taken steps to

comply with the requirements of Clause 49 of the Listing

Agreement with the Stock Exchanges. A separate section on

Corporate Governance forming part of the Directors’ Reportand certificate from the Company’s Auditors confirming the

compliance of conditions on Corporate Governance as

stipulated in Clause 49 of the Listing Agreement is included in

the Annual Report.

PARTICULARS OF EMPLOYEES

Particulars of employees as required under the provisions of

Section 217 (2A) of the Companies Act, 1956 read with the

Companies (Particulars of Employees) Rules, 1975, as

amended, forms part of this report. However, in pursuance of

Section 219(1)(b)(iv) of the Companies Act, 1956, this report is

being sent to all the members of the Company excluding the

aforesaid information and the said particulars are made available

at the registered office of the Company. The members desirousof obtaining such particulars may write to the Company

Secretary at the registered office of the Company.

FIXED DEPOSITS

Your Company has not accepted any fixed deposits from the

public. As such, no amount of principal or interest is

outstanding as of the balance sheet date.

AUDITORS

M/s BSR & Co., (formerly M/s Bharat S. Raut & Co.) Chartered

Accountants, the present statutory auditors of the Companyholds office until the conclusion of the ensuing Annual General

Meeting. It is proposed to reappoint them as the statutory

auditors of the company until the conclusion of the next Annual

General Meeting. M/s BSR & Co. have, under section 224(1)

of the Companies Act, 1956, furnished the certificate of their

eligibility for re-appointment.

It is proposed to re-appoint M/s. Wallin & Wallberg, Chartered

Accountants, as auditors of Sweden branch of the Company,

at the ensuing Annual General Meeting.

DIRECTORS’ RESPONSIBILITY STATEMENT

Pursuant to Section 217(2AA) of the Companies (Amendment)

Act, 2000 the Directors, based on the representation received

from the Operating Management, confirm that:

(a) in the preparation of the annual accounts, the accounting

standards have been followed and that there are no

material departure;

(b) they have, in selection of accounting policies, consulted

the Statutory Auditors and have applied them consistently

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 as at December 31, 2004 and the

profit of the Company for the period January 1, 2004 to

December 31, 2004;

(c) they have taken proper and sufficient care, to their best of

knowledge and ability, for the maintenance of adequate

accounting records in accordance with the provisions of

the Companies Act, 1956 for safeguarding the assets of

the Company and for preventing and detecting fraud and

other irregularities;

8/7/2019 Patni_AR_2004


(d) they have prepared the annual accounts on a going

concern basis.

CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION

AND FOREIGN EXCHANGE EARNINGS/OUTGO:

A) Conservation of Energy

Your Company consumes electricity only for the operation of

its computers. Though the consumption of electricity is

negligible as compared to the total turnover of the Company,

your Company has taken effective steps at every stage to

reduce consumption of electricity.

B) Technology Absorption

This is not applicable to your Company as it has not

purchased or acquired any Technology for development of

software from any outside party.

C) Foreign Exchange Earnings/Outgo

(Rs. in Lacs)

Earnings in Foreign Currency on account of:

Export Sale 69,968.47

Others 1.19

Total Earnings 69,969.66

Expenditure in Foreign Currency on account of:

Stores & Spares 5.49

Capital Goods 2,541.09

Travelling Expenses 831.69

Overseas Employment Expenses 926.42

Professional Fees & Consultancy Charges 366.55

Subscription & Registration Fees 65.71

Other Matters 224.64

Total Expenditure 4,961.59

Net Earnings in Foreign Currency 65,008.07

ACKNOWLEDGEMENTS

Your Directors wish to convey their appreciation to all theCompany’s employees for their performance and continued

support. The Directors would also like to thank all the

shareholders, consultants, customers, vendors, banks, service

providers and governmental & statutory authorities for their

continued support.

For and on behalf of the Board of Directors

Narendra K Patni

26th April, 2005 Chairman & CEO

8/7/2019 Patni_AR_2004


ANNEXURE

Patni ESOP 2003

Details

5,594,032*

a) The Company was not listed as on date of initial grant of

2,743,400 options. Hence the market price was not

available. The Exercise Price was formulated by an

external independent agency.

b) For subsequent grants of 2,850,632 options price was

calculated pursuant to SEBI (Employee Stock Option

Scheme) Guidelines 1999.

635,206**

188,810

188,810

202,575***

Clause 5.6 amended****

Rs. 27,377,450

5,202,647

Please refer to Table 1

NIL

NIL

18.58

Description

(a) No. of options granted

(b) the pricing formula

(c) options vested

(d) options exercised

(e) the total number of shares arising as a result of exercise

of option

(f) options lapsed

(g) variation of terms of options

(h) money realised by exercise of options

(i) total number of options in force

(j) employee wise details of options granted during the

year 2003 to:

(i) senior managerial personnel;

(ii) any other employee who receives a grant in any one

year of option amounting to 5% or more of option

granted during that year;

(iii) identified employees who were granted option, during

any one year, equal to or exceeding 1% of the issued

capital (excluding outstanding warrants and conversions)

of the company at the time of grant;

(k) diluted Earnings Per Share (EPS) pursuant to issue of

shares on exercise of option calculated in accordance

with International Accounting Standard (IAS) 33

* Including options granted to employees, who have then separated.

** Net of lapsed options.

*** As per the Plan, in the event of resignation from employment, the option lapses for the individual employee. However the said options are available to the Companyfor reissue.

**** In accordance with the variation to the clause 5.6 of the Patni ESOP 2003, resigned employees are now been allowed 30 days from the last working day forexercising their vested options, as against 15 days from the date of resignation, which was previously allowed.

8/7/2019 Patni_AR_2004


Table 1

Employee Number of Options granted

Mr. Satish M Joshi 100,000

Mr. Vijay P Khare 100,000Mr. Mrinal R Sattawala* 100,000

Mr. Deepak Sogani 100,000

Mr. Sunil Chitale 61,000

Mr. C R Krishna Shastri 58,000

Mr. Lokesh Bhagwat 56,000

Mr. Ajay Chamania 55,000

Mr. Deepak Khosla 54,900

Mr. Milind S Padalkar 54,000

Mr. Milind Jadhav 52,000

Mr. Sumedh Mehta* 50,000

Mr. Harish Bhat* 45,000

Mr. Douglas W Fallon* 40,000Mr. Kiran Patwardhan 30,000

Mr. Sukumar D Namjoshi* 30,000Mr. William Budde* 22,000

Total 1,007,900

* Key managerial personnel of Subsidiaries.

Table 2

Impact of employee compensation cost calculated as diffference between Intrinsic Value and Fair Market Valuein accordance with SEBI Guidelines on ESOP, on Net Profit and EPS

Year ended Year ended Year endedDecember 31, 2002 December 31, 2003 December 31, 2004

(Amount in thousands of Indian Rupees except share data)

Net income, as reported 1,641,474 1,660,556 2,305,415

Less: Dividend on Preference Shares 7,952 – –Less: Dividend tax on above 811 – –Net income available for Equity Shareholders 1,632,711 1,660,556 2,305,415Add: Stock based Employee Compensation expense

included in reported Income – – –Less: Stock-based employee compensation expense

determined under fair value based method, net of tax effects – 7,252 57,505Pro forma net income 1,632,711 1,653,304 2,247,910Reported earnings per shareBasic 16.48 14.90 18.73Diluted 16.48 14.90 18.58Proforma earnings per shareBasic 16.48 14.84 18.27Diluted 16.48 14.84 18.24

Table 3

Assumptions used to calculate Fair Market Value in accordance with SEBI Guidelines on ESOP

Year ended Year ended Year endedDecember 31, 2002 December 31, 2003 December 31, 2004

Dividend yield – 0.41% 0.34% - 0.72%Expected life – 2-5 years 2-5 yearsRisk free interest rates – 4.75%-4.9% 5.16% - 6.46%Volatility – 0% 43% - 65%Market priceSept 2003 grant – – –July 2004 grant – – 254Oct 2004 grant – – 338

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Corporate Governance Report

Your company has complied in all material respects with features of Corporate Governance Code as per Clause 49 of the Listing

Agreement with the Stock Exchanges.

A report on the implementation of the Corporate Governance Code of the Listing Agreement by the Company is furnished below.

PHILOSOPHY ON CORPORATE GOVERNANCE

A good corporate governance process aims to achieve the balance between shareholders’ interest and corporate goals by

providing long-term vision of its business and establishing systems that help the Board in understanding and monitoring risk at

every stage of the corporate evolution process to enhance the trust and confidence of the stakeholder without compromising with

laws and regulations.

The company’s philosophy on corporate governance encompasses achieving the balance between individual interests and

corporate goals through the efficient conduct of its business and meeting its stakeholder obligations in a manner that is guided by

transparency, accountability and integrity. Accountability improves decision-making and transparency helps to explain the rationale

behind decisions and to build stakeholder confidence.

At Patni Computer Systems Limited, we are striving towards excellence through adoption of best governance and disclosure practices.

A. BOARD OF DIRECTORS

1. Composition of directors

The Board of Directors of the company (“the Board”) has an optimum combination of executive and non-executive directors. Inorder to ensure the independence of the Board, majority of the directors are Independent Directors.

At present the Board consists of ten members. The relevant details in respect of the existing composition of the Board are

furnished below.

Name of the director Position / Category Number of directorships in other companies

Mr. Narendra K Patni1

Chairman & CEO 5

Mr. Gajendra K Patni2

Executive Director 2

Mr. Ashok K Patni2

Executive Director 3

Mr. William O Grabe3

Non – executive Director 7

Mr. Anupam P Puri Independent Director 5

Mr. Arun Duggal Independent Director 5Mr. Pradip Shah Independent Director 16

Mr. Ramesh Venkateswaran Independent Director –

Mr. Michael A Cusumano Independent Director 1

Mr. Louis Theodoor van den Boog4

Independent Director 1

This includes directorships held in public limited companies, subsidiaries of public limited companies and foreign companies but

excludes directorships held in private limited companies.

1

Mr. Narendra K Patni is Promoter and Executive Chairman •2

Promoter •3

Mr. Abhay Havaldar acts as an alternate director to Mr. William O Grabe

•4

Was appointed as an additional director w.e.f. 15th March 2005

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Changes in composition of the Board during the period ended 31st March 2005.

• Ms. Susan Esserman resigned as a director w.e.f. 27th April 2004

• Mr. Michael A Cusumano was appointed as an Additional Director w.e.f. 5th April 2004.

• Mr. Louis Theodoor van den Boog was appointed as an Additional Director w.e.f. 15th March 2005.

2. Number of Board Committees of the Company and other companies on which directors are Member or Chairman

Name of the director Number of board Number of board Number of board committees Number of board committees

committees on committees on of other companies of other companies

which Member which Chairman on which Chairman on which Member

Mr. Narendra K Patni 1 NIL NIL NIL

Mr. Gajendra K Patni NIL NIL NIL 1

Mr. Ashok K Patni NIL NIL NIL 2

Mr. William O Grabe1

2 NIL NIL NIL

Mr. Anupam P Puri NIL 1 1 3

Mr. Arun Duggal NIL 2 1 2

Mr. Pradip Shah 1 NIL 4 6

Mr. Ramesh Venkateswaran 1 NIL NIL NIL

Mr. Michael A Cusumano NIL NIL NIL NIL

Mr. Louis Theodoor van den Boog 1 NIL NIL NIL

Note: For the purpose of considering the limit on memberships of the Committees, the Audit Committee, the Remuneration Committee and the Shareholders’/Investors

Grievance Committees are considered.

1

Mr. Abhay Havaldar acts as an alternate director to Mr. William O Grabe

3. Number of board meetings held and the dates on which such meetings were held

Five board meetings were held during the year ended 31st December 2004 with a time gap of not more than four months

between any two meetings and the required information as stipulated under clause 49 of the Listing Agreement was made

available to the members of the Board. The dates of such board meetings are 2nd March 2004, 27th April 2004, 27th July 2004,8th October 2004 and 28th October 2004.

4. Attendance of each director at the board meetings and the last AGM

Name of the director Total board Attended Attended Annual general

meetings held in person through video/ meeting on

tele conference 29th June 2004

Mr. Narendra K Patni 5 5 –

Mr. Gajendra K Patni 5 4 1

Mr. Ashok K Patni 5 4 1

Mr. William O Grabe 5 1 4

Mr. Anupam P Puri 5 2 1Mr. Arun Duggal 5 4 1

Mr. Pradip Shah 5 4 1

Mr. Michael A Cusumano* 5 1 2

Mr. Ramesh Venkateswaran 5 4 1

Mr. Louis Theodoor van den Boog** 5 NA NA NA

Mr. Abhay Havaldar (Alternate Director to Mr. William O Grabe) 5 4 –

* Was appointed as an additional director w.e.f. 5th April 2004

**Appointed as an additional director w.e.f. 15th March 2005

NA Not applicable since was not director on respective dates of all board meetings as well as on last AGM.

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5. Compensation to Directors

1. Details of compensation paid to Directors for the year ended 31st December 2004 as below:

Director Relationship with Business Loans & Sitting Remueration Commission

other directors relationship advances Fees (Rs.) (US$)

with the from the (Rs.)

Company Company

Mr. Narendra K Patni Brother of


and Mr. Ashok K Patni Promoter NIL NIL Refer note 3 NIL

Mr. Gajendra K Patni Brother of

Mr. Narendra K Patni

and Mr. Ashok K Patni Promoter NIL NIL 1,58,21,144 NIL

Mr. Ashok K Patni Brother of


and Mr. Narendra K Patni Promoter NIL NIL 1,54,94,974 NIL

Mr. William O Grabe No Nominee of NIL NIL NIL NILstrategic investor

Mr. Anupam P Puri No None NIL 40,000 NIL 18,000

Mr. Arun Duggal No None NIL 1,60,000 NIL 20,110

Mr. Pradip Shah No None NIL 1,60,000 NIL 20,110

Mr. Michael A Cusumano No None NIL 20,000 NIL 14,779

Mr. Ramesh Venkateswaran No None NIL 80,000 NIL 19,055

Mr. Louis Theodoor van den Boog No None NIL NIL NIL NIL

1. Sitting Fees: The Independent Directors are paid a sitting fee of Rs. 20,000, being the maximum amount permissible under the

present regulations, for attending the Board /Committee meetings.

2. The breakup of remuneration to the executive directors is as under:

(Amount in Rs.)

Salary, Allowances & Perquisites PF contribution Pension accrual Total

Mr. Gajendra K Patni 1,07,12,791 9,76,353 41,32,000 1,58,21,144

Mr. Ashok K Patni 1,03,86,621 9,76,353 41,32,000 1,54,94,974

3. Compensation to Mr. Narendra K Patni is paid by Patni Computer Systems, Inc., a wholly owned subsidiary of the Company.

The compensation is as described in footnote 28b of the financials.

Stock Options Grant

The Company had introduced PATNI ESOP 2003 for employees of the Company / subsidiaries including non-executive directors of the

Company in terms of SEBI Guidelines on ESOP. In pursuance of PATNI ESOP 2003, the Company issued 20,000 Options to each

Independent Director on 1st July 2004 as approved by the Compensation Committee at the exercise price of Rs. 254 per share.

The Board of Directors, at its meeting held on 26th April 2005, approved initial grant of 20,000 options to Mr. Louis Theodoor van

den Boog on joining the Board and 5,000 options each to other Independent Directors, at the Exercise Price of Rs.381 per share.

None of the options granted to Independent Directors as mentioned above have vested yet.

All options have been granted with an exercise price which has been arrived based on the then prevailing market price i.e. two

weeks average price or price prevailing on the stock exchanges on the date of grant of the option. All the options which have

been granted, vest in four equal annual instalments beginning one year from the date of grant. The options can be exercised

within five years from the date of vesting.

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B. AUDIT COMMITTEE

1. Brief description of terms of reference

The Audit Committee was initially set up on 19th December 2001 and reconstituted on 12th November 2003 in line with

corporate governance norms. Subsequently, the Audit Committee was reconstituted on 30th March 2005. The Audit Committee

has three non-executive members with all being independent. The chairman of the Committee is an independent director.

The Audit Committee was duly constituted on the following terms of reference:

a) Overview of the company’s financial reporting process and the disclosure of its financial information to ensure that the

financial statement is correct, sufficient and credible.

b) Recommending the appointment and removal of external auditor, fixation of audit fee and also approval of payment for any

other services.

c) Reviewing with management the annual financial statements before submission to the board, focusing primarily on:

• Any changes in accounting policies and practices.

• Major accounting entries based on exercise of judgment by management.

• Qualifications in draft audit report.• Significant adjustments arising out of audit.

• The going concern assumption.

• Compliance with accounting standards.

• Compliance with stock exchange and legal requirements concerning financial statements.

• Any related party transactions i.e. transactions of the company of material nature, with promoters or the management, their

subsidiaries or relatives etc. that may have potential conflict with the interests of the company at large.

d) Reviewing with the management, external and internal auditors, and the adequacy of internal control systems.

e) Reviewing the adequacy of the internal audit function, including the structure of the internal audit department, staffing and

seniority of the official heading the department, reporting structure coverage and frequency of internal audit.f) Discussion with internal auditors on any significant findings and follow up there on.

g) Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or

irregularity or a failure of internal control systems of a material nature and reporting the matter to the Board.

h) Discussion with external auditors before the audit commences, about the nature and scope of audit as well as post-audit

discussion to ascertain any area of concern.

i) Reviewing the company’s financial and risk management policies.

j) To look into the reasons for substantial defaults in payment to depositors, debenture holders, shareholders (in case of non-

payment of declared dividends) and creditors.

Powers assigned to the Audit CommitteeThe following powers are vested with the Audit Committee:

a. To investigate any activity within its terms of reference.

b. To seek information from any employee.

c. To obtain outside or other professional advice.

d. To secure attendance of outsiders with relevant expertise, if it considers necessary.

Review of information by the Audit Committee

As per the requirement of clause 49, the Audit Committee is responsible for reviewing the following information:

a. Financial statements and draft audit report, including quarterly / half-yearly financial information;

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3. Remuneration policy

The Remuneration Committee determines the policy on specific remuneration packages for executive directors.

D. SHAREHOLDERS’ / INVESTORS GRIEVANCE COMMITTEE

Shareholders’ / Investors’ Grievance Committee was set up on 12th November 2003. The committee consists of three directors,

the majority being non-executive directors. The Chairman of the committee is an independent director.

1. Name of non-executive director heading the committee:

Mr. Arun Duggal

Composition, names of the members and Chairman:

Name of member Designation Category

Mr. Arun Duggal Chairman Independent Director

Mr. N K Patni Member Chairman & CEO

Mr. William O Grabe* Member Non-executive Director

*Mr. Abhay Havaldar acts as an alternate director to Mr. William O Grabe.

2. Name and designation of Compliance Officer

Mr. Arun Kanakal, Company Secretary

Akruti Softech Park, MIDC Cross Road No. 21

MIDC, Andheri (East), Mumbai 400 093.

Tel: +91 22 5693 0500 • Fax: +91 22 2832 1750

E-mail: [email protected]

3. Details of investors’ queries / complaints received and resolved during the year ended 31st December 2004:

Has been provided under Shareholders’ Information

E. GENERAL BODY MEETINGS

1. Details of last three Annual General Meetings of the company:

Annual General Meetings for the last three years

Date 29th June 2004 30th June 2003 27th June 2002

Location Hotel Le Meridien, R.B.M.Road Registered office: Registered office:

Opposite Pune Railway Station S-1A, F-1, Irani Market Compound S-1A, F-1, Irani Market Compound

Pune 411 001. Yerawada, Pune 411 006. Yerawada, Pune 411 006.

Time 11.30 am 11.30 am 11.30 am

2. Whether any special resolution passed in the previous three AGMs?

Yes

3. Whether any special resolution passed last year through postal ballot – details of voting pattern?

Not applicable

4. Who conducted the postal ballot?

Not applicable

5. Whether any special resolution is proposed to be conducted through postal ballot?

Not required

6. Procedure for postal ballot?

Not applicable

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F. DISCLOSURES

1. Disclosures on materially significant related party transactions that may have potential conflict with the interests of

the company at large

These Disclosures have been made under Related Party Transactions in notes to financial statements of the Company, which form

part of this Annual Report.

2. Disclosure of accounting treatment, if different, from that prescribed in Accounting Standards with explanation

Not applicable

3. Details of non-compliance by the company, penalties, strictures imposed on the company by the stock exchange or

SEBI or any statutory authority, on any matter related to capital markets, during the last three years.

The shares of the company were listed on 25th February 2004. No penalties and strictures have been imposed on the company

by the stock exchange, SEBI or any statutory authority on any matter related to capital markets since listing as there was no non-

compliance by the company in general.

G. SHAREHOLDERS’ INFORMATION

Date, day and time of AGM : 14th June 2005, Tuesday at 11.30 a.m.

Venue : Hotel Le Meridien, R.B.M.Road, Opposite Pune Railway Station, Pune 411001.

Financial year : 1st January 2004 to 31st December 2004

Book closure dates : 9th June 2005 to 14th June 2005 (both days inclusive)

Registered office : S-1A, F-1, Irani Market Compound, Yerawada, Pune 411 006.

Dividend payment date : on or after 20th June 2005, but within the statutory time limit of 30 days

Compliance officer : Mr.Arun Kanakal, Company Secretary is the Compliance Officer of the company.

Website address : www.patni.com

Means of communication

The company’s website www.patni.com contains an Investor’s section containing financials, shareholding pattern, news about the

company and certain other shareholder information.

The company is registered with Electronic Data Information Filing and Retrieval System (EDIFAR) website maintained by National

Informatics Centre (NIC) Delhi. The company is sharing the relevant information in that website.

All the press releases and events can be accessed under the heading “News and Events” in Investors section on the company’s

website.

The quarterly and annual audited financial results are generally published in Economic Times, Business Standard, Free Press

Journal (the National newspapers) and NavShakti (Vernacular newspaper).

As on 31st December, 2004, there were 38,448 shareholders of our equity shares.

The company’s shares fall under category B1 of scrip in BSE and are listed on the following stock exchanges:

1. The Stock Exchange, Mumbai

Phiroze Jeejeebhoy Towers

Dalal Street, Fort, Mumbai 400 001.

Tel: +91 22 2272 1233/1234

Fax: +91 22 2272 3719


Website: www.bseindia.com

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2. National Stock Exchange of India Limited

Exchange Plaza, 5th FloorPlot No.C/1, G Block

Bandra Kurla Complex, Bandra (E)

Mumbai 400 051.

Tel: +91 22 2659 8235/36

Fax: +91 22 2659 8237/38


Website: www.nseindia.com

Listing fees for the year 2005-06 have been paid to both the stock exchanges where the company’s shares are listed.

Stock code:

BSE : 532517

NSE : PATNI

ISIN nos. in NSDL and CDSL : INE660F01012

Dematerialisation of equity shares

The company’s shares are under compulsory dematerialisation list and can be transferred through depository system. The

company has entered into a tripartite agreement with National Securities Depository Limited (NSDL) and Central Depository

Services (India) Limited (CDSL) to facilitate the dematerialisation of shares. As on 31st December 2004, 99.99 % shares are held

in electronic form.

Contact Details:

Kindly address your investor related queries to:

Karvy Computershare Private Limited

Unit: Patni Computer Systems Limited

Karvy House, 46, Avenue 4

Street No.1, Banjara Hills

Hyderabad 500 034.

Tel: +91 40 2331 2454

Fax: +91 40 2331 1968

E-mail: [email protected] OR [email protected]

www.karvycomputershare.com

OR

Ms.Vaishali Kariya

Manager-Investor Relations

Patni Computer Systems Limited

Akruti Softech Park, MIDC Cross Road No.21

Andheri (East), Mumbai 400 093.

Tel: +91 22 5693 0500

Fax: +91 22 2832 1750


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Dividend

The Board of Directors is pleased to recommend the payment of dividend for the year ended 31st December 2004 @ Rs. 2 pershare or 100% per cent. This dividend, if approved at the Annual General Meeting, shall be paid to all eligible members whose

names appear on the Register of Members on 9th June 2005.

Dividend through Electronic Clearing Service (ECS):

The company shall provide the facility of ECS to those shareholders residing in the following locations:

Ahmedabad, Bangalore, Bhubaneswar, Chandigarh, Chennai, Guwahati, Hyderabad, Jaipur, Kanpur, Kolkata, Mumbai, Nagpur, New

Delhi, Patna, Pune and Thiruvanthapuram.

In the balance locations, the company shall issue dividend warrants. These warrants will be valid for a period of 90 days i.e. upto

expiry of 18th September 2005. On the expiry of the validity period of the dividend warrants, these may be sent back to our

Registrars and Transfer Agents for issue of demand drafts in lieu of the same at:

Karvy Computershare Private Limited

Unit: Patni Computer Systems Limited

Karvy House, 46 Avenue 4, Street No. 1

Banjara Hills

Hyderabad 500 034.

Tel: +91 40 2331 2454

Fax: +91 40 2331 1968

Patni Insider Trading Policy:

The company has implemented an Insider Trading Policy to comply with all relevant Insider Trading Regulations. In accordance

with the policy, the company announces ‘quiet period’ for designated employees from time to time.

The company has a policy of observing a ‘quiet period’ from the last day of the end of the quarter till two trading days after the

financial results are published. The Company may also announce ‘quiet period’ during and after the occurence of certain events

mentioned in the Insider Trading Policy.

The company is strictly monitoring its Insider Trading Policy.

Details of queries/complaints received and resolved from 1st January 2004 to 31st December 2004:

Complaints Received Attended to Pending

Non Receipt of Refund Order 927 927 0

Non Receipt of Dividend Warrant 5 5 0Receipt of Refund Orders/Dividend warrants for corrections 126 126 0

Complaints Received from SEBI 8 8 0

Complaints Received from Stock Exchanges 38 38 0

Total 1104 1104 0

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Shareholding Pattern as on 31st December 2004

Category No.of Shares Held % of Holding

A Promoter`s Holding

1 Promoters

Indian Promoters 15,595,500 12.48

Foreign Promoters 20,364,198 16.29

2 Relatives of Promoters 28,033,104 22.43

Sub Total 63,992,802 51.20

B Non-Promoters Holding

I Institutional Investors

1 Mutual Funds 5,309,358 4.25

2 Banks Financial Institutions, Insurance

Companies (Central/ State Govt.

Institutions/Non-Govt. Institutions) 221,186 0.17

3 Foreign Institutional Investors 14,064,084 11.25

Sub Total 19,594,628 15.67

II Others

1 Private Corporate Bodies 464,462 0.37

2 Indian Public 2,845,910 2.28

3 NRIs/OCBs 34,476 0.03

4 Any Other :

a) Trust 100 0.00

b) Clearing Members 60,584 0.05

c) FCBs 38,004,047 30.40

Sub Total 41,409,579 33.13

Grand Total 124,997,009 100.00

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Historical Stock Market data from 25th February 2004 to 31st December 2004

Share price Sensex Share price S & P CNX Nifty

Month High Low High Low Volume Value High Low High Low Volume Value(Nos.Mn.) (Rs.Mn.) (Nos.Mn.) (Rs.Mn.)

Feb-04 305 232 5747 5552 15 3769 301 231 1834 1761 28 7002

Mar-04 260 200 5951 5325 14 3323 259 198 1899 1670 28 6460

Apr-04 243 202 5979 5599 8 1879 244 201 1912 1771 17 3888

May-04 272 186 5773 4228 11 2635 272 191 1838 1292 20 4916

Jun-04 265 236 5013 4614 4 1108 265 236 1567 1438 9 2170

Jul-04 304 231 5201 4723 5 1449 305 230 1639 1473 10 2822

Aug-04 330 288 5269 5022 3 1080 333 288 1659 1574 8 2484

Sep-04 337 296 5639 5179 3 905 337 257 1761 1620 7 2206

Oct-04 412 333 5804 5558 4 1326 413 333 1829 1738 8 2974

Nov-04 385 352 6248 5649 6 2041 385 300 1964 1777 4 1441

Dec-04 422 354 6617 6176 2 648 410 355 2088 1945 4 1686

Market movement

Stock market data relating to equity shares listed in India

Chart on Patni share price Vs. Sensex from 25th February 2004 to 31st December 2004

Market capitalisation

As on 31st December 2004, at The Stock Exchange, Mumbai (BSE), the closing price was Rs.383.65 and the market

capitalisation was Rs.47,955 million.

Outstanding ADR

We have entered into a Deposit Agreement dated 15th July 2002 with The Bank of New York, the Depositary. Pursuant to said

Deposit Agreement, we have deposited 20,161,868 equity shares of Rs. 2/- each with the Depositary. The Depositary has

executed and delivered to General Atlantic 20,161,868 ADRs representing such equity shares where each ADR represents one

equity share of par value Rs.2 per share.

The addresses of offices/locations are given elsewhere in this Annual Report

0

40

80

120

160

200

25 Feb

23 Mar

19 Apr

14 may

9 June

5 July

29 July

24 Aug

17 Sep

12 Oct

9 Nov

7 Dec

31 Dec

Patni price (BSE)

Sensex

Share price

Date

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Certificate of Compliance with the Corporate Governancerequirements under Clause 49 of the Listing Agreement

To the Members of Patni Computer Systems Limited

We have examined the compliance of the conditions of corporate governance by Patni Computer Systems Limited (“the

Company”) for the year ended on 31 December 2004 as stipulated in Clause 49 of the Listing Agreement of the Company with

the National Stock Exchange of India Limited and The Stock Exchange, Mumbai.

The compliance of conditions of corporate governance is the responsibility of the management. Our examination was limited to

the procedures and implementation thereof, adopted by the Company for ensuring the compliance of the conditions of corporate

governance referred to above. It is neither an audit nor an expression of opinion on the financial statements of the Company.

In our opinion, and to the best of our information and according to the explanations given to us, we certify that the Company has

complied with the conditions of corporate governance as stipulated in the above mentioned Listing Agreements.Based on confirmation received from the Company’s share transfer agent, and representations made by management, we report

that no investor grievance is pending for a period exceeding one month against the Company as per the records maintained by

the Share Transfer Agent/Investors Grievances Committee.

We further state that such compliance is neither an assurance as to the future viability of the Company nor the efficiency or

effectiveness with which the management has conducted the affairs of the Company.

For BSR & Co.

(formerly Bharat S Raut & Co.)

Chartered Accountants

Akeel Master

Partner

Membership No: 046768

Mumbai

16 May 2005

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RATIOS (AS PER US GAAP)

2002 2003 2004

consolidated consolidated consolidated

Ratios - growth

Revenues 32.1% 33.3% 30.1%Operating profit 40.1% 7.4% 37.0%

PAT 36.8% 29.6% 24.7%

Basic and Diluted EPS 8.0% 55.6% 11.9%

Ratios - financial performance

Cost of revenues / Revenues 55.8% 61.3% 60.8%

Selling, general and administrative expenses / Revenues 20.1% 19.8% 18.6%

Operating profit / Revenues 23.4% 18.8% 19.8%

PBT / Revenues 23.7% 20.5% 20.7%

Taxation / Revenues 4.6% 3.2% 2.9%

PAT / Revenues 19.1% 18.6% 17.8%

Return on capital employed (ROCE) (PBIT / Average Capital employed) 42.2% 34.1% 28.3%

Return on average networth (RONW) (PAT / Average Networth) 36.0% 31.1% 24.4%

Ratios - Balance Sheet

Debt Equity Ratio 0.0 0.0 0.0

Debtors Turnover (days) 90 82 80

Fixed assets turnover (days) 66 60 62

Current Ratio 4.3 4.5 5.7

Cash and Cash equivalents / Total Assets 42.7% 44.2% 44.7%

Cash and Cash equivalents / Revenues 36.2% 38.7% 49.8%

Per share data

Basic and Diluted EPS ($) 0.27 0.42 0.47

Book value per share ($) 1.14 1.56 2.43

No. of Employees 5570 7901 9661

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We, Narendra K Patni, Chairman & Chief Executive Officer and Deepak Sogani, Chief Financial Officer, of Patni

Computer Systems Limited, certify that:

(a) We have reviewed financial statements and the cash flow statement for the year and that to the best of our

knowledge and belief:

i. these statements do not contain any materially untrue statement or omit any material fact or contain

statements that might be misleading;

ii. these statements together present a true and fair view of the company’s affairs and are in compliance with

existing accounting standards, applicable laws and regulations.

(b) There are, to the best of our knowledge and belief, no transactions entered into by the company during the year

which are fraudulent, illegal or violative of the company’s code of conduct.

(c) We are responsible for establishing and maintaining internal controls and that we have evaluated the effectiveness

of the internal control systems of the Company and we have disclosed to the auditors and the Audit Committee,

deficiencies in the design or operation of internal controls, if any, of which we are aware and the steps we have

taken or propose to take to rectify these deficiencies.

(d) We have indicated to the auditors and the Audit committee:

(i) significant changes in internal control during the year;

(ii) significant changes in accounting policies during the year and that the same have been disclosed in the notes

to the financial statements; and

(iii) instances of significant fraud of which we have become aware and the involvement therein, if any, of the

management or an employee having a significant role in the Company’s internal control system.

Narendra K Patni Deepak Sogani

Chairman & Chief Executive Officer Chief Financial Officer

Place: Mumbai

Date: January 31, 2005

Certification by the Chief Executive Officer (CEO) and ChiefFinancial Officer (CFO) on Financial Statements of the Company

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We have audited the attached Balance Sheet of Patni Computer

Systems Limited (‘the Company’) as at 31 December 2004 and

also the Profit and Loss Account and the Cash Flow Statement

of the Company for the year ended on that date, annexed

thereto. These financial statements are the responsibility of the

Company’s management. Our responsibility is to express an

opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards

generally accepted in India. Those Standards require that weplan and perform the audit to obtain reasonable assurance about

whether the financial statements are free of material

misstatement. An audit includes examining, on a test basis,

evidence supporting the amounts and disclosures in the financial

statements. An audit also includes assessing the accounting

principles used and significant estimates made by management,

as well as evaluating the overall financial statement presentation.

We believe that our audit provides a reasonable basis for our

opinion.

As required by the Companies (Auditor’s Report) Order, 2003,

issued by the Central Government of India in terms of sub-section (4A) of Section 227 of the Companies Act, 1956, we

enclose in the Annexure a statement on the matters specified in

paragraphs 4 and 5 of the said Order.

Further to our comments in the Annexure referred to above, we

report that:

a) we have obtained all the information and explanations, which

to the best of our knowledge and belief were necessary for

the purposes of the audit;

b) in our opinion, proper books of account as required by law

have been kept by the Company so far as appears from our

examination of these books;

c) the Balance Sheet, Profit and Loss Account and Cash Flow

Statement dealt with by this report are in agreement with the

books of account;

d) in our opinion, the Balance Sheet, Profit and Loss Account

and Cash Flow Statement comply with the Accounting

Standards referred to in sub-section (3C) of Section 211 of

the Companies Act, 1956, to the extent applicable;

e) on the basis of written representations received from the

directors of the Company as at 31 December 2004 and

taken on record by the Board of Directors, we report that

none of the directors are disqualified as on 31 December

2004 from being appointed as a director under clause (g) ofsub-section (1) of Section 274 of the Companies Act, 1956;

and

f) in our opinion, and to the best of our information and

according to the explanations given to us, the said accounts,

give the information required by the Companies Act, 1956 in

the manner so required and give a true and fair view in

conformity with the accounting principles generally accepted

in India:

i) in case of the Balance Sheet, of the state of affairs of the

Company as at 31 December 2004;

ii) in case of the Profit and Loss Account, of the profit of the

Company for the year ended on that date; and

iii) in case of the Cash Flow Statement, of the cash flows for

the year ended on that date.

For BSR & Co.



Akeel Master

Mumbai Partner

Date: 31 January 2005 Membership No: 046768

STANDALONE FINANCIALS UNDER INDIAN GAAP

Auditors’ Report

To the Members of


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44

(i) (a) The Company has maintained proper records showing

full particulars, including quantitative details and

situation of fixed assets.

(b) The Company has a regular programme of physical

verification of its fixed assets. During the current year,

as part of a cyclical plan, the Company has carried out

physical verification of certain fixed assets. In our

opinion, the periodicity of physical verification is

reasonable having regard to the size of the Company

and the nature of its assets. No material discrepancies

were noticed on such verification.

(c) Fixed assets disposed off during the year were not

substantial, and therefore, do not affect the going

concern assumption.

(ii) The Company is a service company, primarily rendering IT

consulting and software development services.

Accordingly it does not hold any physical inventories. Thus,

paragraph 4(ii) of the Order is not applicable.

(iii) The Company has neither granted nor taken any loans,

secured or unsecured, to or from companies, firms or

other parties covered in the register maintained under

section 301 of the Companies Act, 1956.

(iv) In our opinion and according to the information and

explanations given to us, there is an adequate internal

control system commensurate with the size of the

Company and the nature of its business for purchase of

fixed assets and for the sale of services. The activities of

the Company do not involve purchase of inventory and the

sale of goods. During the course of our audit we have not

observed any continuing failure to correct major

weaknesses in internal controls.

(v) In our opinion, and according to the information and

explanations given to us, there are no contracts and

arrangements the particulars of which need to be entered

into the register maintained under section 301 of the

Companies Act, 1956.

(vi) The Company has not accepted any deposits from the

public.

(vii) In our opinion, the Company has an internal audit systemcommensurate with the size and nature of its business.

(viii) The Central Government has not prescribed the

maintenance of cost records under section 209(1)(d) of the

Companies Act, 1956 for any of the services rendered by

the Company.

(ix) (a) According to the information and explanations given to

us and on the basis of our examination of the records,

the Company is generally regular in depositing

undisputed statutory dues including Provident Fund,

Employees’ State Insurance, Income-tax, Sales tax,

Wealth tax, Customs duty, Cess and other material

statutory dues with the appropriate authorities. As

explained to us, the Company did not have any dues on

account of Investor Education and Protection Fund,

Excise duty and Service tax.

According to the information and explanations given to

us, no undisputed amounts payable in respect of

Provident Fund, Employees’ State Insurance, Income

Annexure to the Auditors’ report (Referred to in our report of even date)

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tax, Sales tax, Wealth tax, Customs duty, Cess and

other material statutory dues were in arrears as at 31

December 2004 for a period of more than six months

from the date they became payable.

(b) According to the information and explanations given to

us, there are no dues of Income tax, Sales tax, Wealth

tax, Customs duty, and Cess which have not been

deposited with the appropriate authorities on account of

any dispute.

(x) The Company does not have any accumulated losses at the

end of the financial year and has not incurred cash lossesin the financial year and in the immediately preceding

financial year.

(xi) The Company did not have any outstanding dues to any

financial institution, banks or debentureholders during the

year.

(xii) The Company has not granted any loans and advances on

the basis of security by way of pledge of shares,

debentures and other securities.

(xiii) In our opinion and according to the information and

explanations given to us, the Company is not a chit fund ora nidhi/mutual benefit fund/society.

(xiv) According to the information and explanations given to us,

the Company is not dealing or trading in shares, securities,

debentures and other investments.

(xv) In our opinion and according to the information and

explanations given to us, the terms and conditions on

which the company has given guarantees for loans taken

by others from banks or financial institutions are not

prejudicial to the interest of the company.

(xvi) The Company did not have any term loans outstanding

during the year.

(xvii) According to the information and explanations given to us,

and on an overall examination of the balance sheet of the

company, we report that no funds raised on short term

basis have been used for long term investment and vice

versa.

(xviii) The Company has not made any preferential allotment of

shares to companies/firms/parties covered in the register

maintained under Section 301 of the Companies Act,

1956.

(xix) The Company did not have any outstanding debentures

during the year.

(xx) We have verified the end-use of money raised by public

issue as disclosed in the notes to the financial statements.

(xxi) According to the information and explanations given to us,

no fraud on or by the Company has been noticed or

reported during the course of our audit.

For BSR & Co.



Akeel Master

Mumbai Partner

Date: 31 January 2005 Membership No: 046768

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46

Balance Sheet as at 31 December 2004

(Currency: in thousands of Indian Rupees except share data)

Note 2004 2003

SOURCES OF FUNDS

Shareholders’ funds

Share capital 3 254,032 222,842

Reserves and surplus 4 13,176,003 8,247,719

13,430,035 8,470,561

Loan funds

Secured loans 5 28,644 24,609

Deferred tax liability 17 115,071 88,150

13,573,750 8,583,320

APPLICATION OF FUNDS

Fixed assets

Gross block 6 3,664,601 2,978,497Less: Accumulated depreciation 1,599,183 1,189,069

Net block 2,065,418 1,789,428

Capital work-in-progress 241,368 43,566

2,306,786 1,832,994

Investments 7 6,820,740 4,221,159

Deferred tax asset, net 17 7,968 –

Current assets, loans and advances

Sundry debtors 8 5,036,648 3,154,149

Cash and bank balances 9 202,874 193,189

Costs and estimated earnings in excess of billings 128,776 116,543

Loans and advances 10 350,368 166,8195,718,666 3,630,700

Less: Current liabilities and provisions

Current liabilities 11 612,046 622,929

Provisions 12 668,364 478,604

1,280,410 1,101,533

Net current assets 4,438,256 2,529,167

13,573,750 8,583,320

The accompanying notes form an integral part of this Balance Sheet.

As per attached report of even date.

For BSR & Co. For and on behalf of the Board of Directors(formerly Bharat S Raut & Co.)


N K Patni G K Patni Arun Duggal Pradip Shah

Chairman and CEO Executive Director Director Director

Akeel Master

Partner Arun Kanakal

Membership No: 046768 Company Secretary

Mumbai Mumbai

31 January 2005 31 January 2005

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The accompanying notes form an integral part of this Profit and Loss Account.


For BSR & Co. For and on behalf of the Board of Directors(formerly Bharat S Raut & Co.)




Akeel Master

Partner Arun Kanakal

Membership No: 046768 Company Secretary

Mumbai Mumbai


Profit and Loss Account for the year ended 31 December 2004


Note 2004 2003

INCOME

Sales and service income 7,020,675 5,370,106

Other income 13 175,759 129,210

7,196,434 5,499,316

EXPENDITURE

Personnel costs 14 2,860,765 2,333,033

Selling, general and administration costs 15 1,255,550 844,123

Depreciation 6 470,077 392,219

Less: Transfer from revaluation reserve 4 81 81

Interest costs 16 1,453 1,306

Initial public offering related expenses 3 46,182 –

4,633,946 3,570,600Profit for the period before taxation 2,562,488 1,928,716

Provision for taxation 17 257,073 239,856

Prior period tax adjustment 17 – 28,304

Profit for the period after taxation 2,305,415 1,660,556

Profit and loss account, brought forward 4,901,938 3,548,269

Amount available for appropriation 7,207,353 5,208,825

Dividend on equity shares 249,994 124,836

Dividend tax 32,671 15,995

Transfer to general reserve 230,542 166,056

Profit and loss account, carried forward 6,694,146 4,901,938

Earnings per equity share of Rs 2 each– Basic 18.73 14.90

– Diluted 18.58 14.90

Weighted average number of equity shares outstanding during the year

– Basic 123,066,042 111,420,849

– Diluted 124,084,992 111,420,849

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Cash Flow Statement (Contd.) for the year ended 31 December 2004


2004 2003

Cash flows from financing activities

Issue of equity shares (net of shares issue expenses) 2,886,585 –

Share application money received pending allotment 4,038 –

Dividend paid, including dividend tax (140,739) (44,122)

Interest paid (1,453) (1,306)

Proceeds from finance lease obligations incurred 17,689 12,660

Finance lease obligations repaid (13,654) (7,748)

Net cash provided by/(used in) financing activities (C) 2,752,466 (40,516)

Net decrease in cash and cash equivalents during the year (A+B+C) 9,685 54,313

Cash and cash equivalents at the beginning of the year 193,189 138,876

Cash and cash equivalents at the end of the year 202,874 193,189

Notes to the Cash flow statement

Cash and cash equivalents consist of cash on hand and balances with banks.

Cash and cash equivalents included in the cash flow statements comprise

the following balance sheet amounts.

Cash in hand 4,707 6,771

Balance with banks:

– Current accounts 130,688 142,123

– Exchange earners foreign currency account 65,825 41,884

– Effect of changes in Exchange rate 1,654 2,411

202,874 193,189

For BSR & Co. For and on behalf of the Board of Directors





Akeel Master

Partner Arun KanakalMembership No: 046768 Company Secretary

Mumbai Mumbai


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50

Notes to the Financial Statements for the year ended 31 December 2004


1 Background

Patni Computer Systems Limited (‘Patni’ or ‘the Company’) was

incorporated on 10 February 1978 under the Indian Companies

Act, 1956. On 18 September 2003, the Company converted

itself from a Private Limited company into a Public Limited

company. In February 2004, Patni completed initial public offering

of its equity shares in India comprising fresh issue of 13,415,200

shares and sale of 5,324,000 equity shares by the existing

shareholders.

Patni owns 100% equity interest in Patni Computer Systems (UK)

Limited, a company incorporated in UK and Patni Computer

Systems GmbH, a company incorporated in Germany. In

November 2000, the Company acquired 25% equity in Patni

Computer Systems, Inc. USA. Subsequently, in September 2002,the Company acquired the balance 75% equity in Patni Computer

Systems,Inc. USA thereby making it a 100% subsidiary. In April

2003, Patni Computer Systems Inc. acquired 100% equity

interest in The Reference Inc, a company incorporated in USA.

Patni also has foreign branches offices in USA, Japan, Sweden

and Australia. In November 2004, Patni Computer Systems, Inc.

USA, acquired 100% equity in Cymbal Corporation, USA for

consideration in cash amounting to Rs. 1,140,982. Additionally in

connection with the acquisition the Company incurred

Rs 498,716 related to certain contract terminations/settlement

and acquisition costs of Cymbal Corporation, USA. Such costs

have been recognised by the Company as liabilities assumed at

the acquisition date resulting in additional goodwill.

Patni is primarily engaged in the business of IT consulting and

software development. Most of the business of Patni is

subcontracted from its subsidiary companies in the USA, UK and

Germany. The Company provides multiple service offerings to its

clients across various industries comprising financial services,

manufacturing companies and others such as energy and utilities,

telecom, retail and hospitality companies.The various service

offerings comprise application development and maintenance,

enterprise application systems, enterprise system management,

research and development services and business process

outsourcing services.

2 Principal accounting policies

2.1 Basis of preparation of financial statements

The accompanying financial statements have been prepared

under the historical cost convention with the exception of land and

buildings, which have been revalued, on the accrual basis of

accounting, in accordance with the relevant provisions of the

Companies Act,1956 and comply with the Accounting standards

(‘AS’) issued by the Institute of Chartered Accountants of India

(‘ICAI’), to the extent applicable.

The preparation of the financial statements in accordance with

generally accepted accounting principles requires that

management makes estimates and assumptions that affect thereported amount of assets and liabilities and disclosure of

contingent liabilities as of the date of financial statements and the

reported amounts of revenue and expenses during the reporting

period. Management believes that the estimates used in the

preparation of the financial statements are prudent and

reasonable. Actual results could differ from these estimates. Any

revision to accounting estimates is recognised prospectively in

current and future periods.

2.2 Fixed assets and depreciation

Fixed assets are stated at cost less accumulated depreciation,

except for items of land and buildings which were revalued in

March 1995. Cost includes inward freight, duties, taxes andincidental expenses related to acquisition and installation of the

asset. Depreciation is provided on the Straight Line Method (SLM)

based on the estimated useful lives of the assets as determined

by the management. For additions and disposals, depreciation is

provided pro-rata for the period of use.

The rates of depreciation based on the estimated useful lives of

fixed assets are higher than those prescribed under Schedule XIV

to the Companies Act, 1956. The useful lives of fixed assets are

stated below:

Asset Useful life (in years)

Leasehold land and Over the lease period

improvements or the useful life of the

assets, which ever is shorter

Buildings 40

Electrical installations 8

Computers, computer software

and other service equipments 3

Furniture and fixtures 8

Office equipments 5

Vehicles 5

2.3 Leases

In accordance with Accounting Standard 19 “Accounting for

leases” issued by the ICAI, assets acquired on finance leases,

have been recognised as an asset and a liability at the inception

of the lease, at an amount equal to the lower of the fair value of

the leased asset or the present value of the future minimum lease

payments. Such leased assets are depreciated over the lease

term or its estimated useful life, whichever is shorter. Further, the

payment of minimum lease payments have been apportioned

between finance charges, which are debited to the profit and loss

account, and reduction in lease obligations recorded at the

inception of the lease.

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Notes to the Financial Statements (Contd.) for the year ended 31 December 2004


2.4 Revenue and cost recognition

The Company derives its revenues primarily from softwaredevelopment activities. Revenue from time-and-material contracts

is recognised as related services are rendered. Revenue from

fixed-price contracts is recognised on a percentage of completion

basis, measured by the percentage of costs incurred to-date to

estimated total costs for each contract. This method is used

because management considers costs to be the best available

measure of progress on these contracts.

Contract costs include all direct costs such as direct labour and

those indirect costs related to contract performance, such as

depreciation and satellite link costs. Selling, general, and

administrative costs are charged to expense as incurred.Provision for estimated losses on uncompleted contracts are

made in the period in which such losses are determined. Changes

in job performance, job conditions, estimated profitability and final

contract settlements may result in revision to costs and income

and are recognised in the period in which the revisions are

determined.

The asset “Cost and estimated earnings in excess of billings”

represents revenues recognised in excess of amounts billed.

These amounts are billed after the milestones specified in the

agreement are achieved and the customer acceptance for the

same is received. The liability “Billings in excess of costs and

estimated earnings” represents billings in excess of revenues

recognised. Warranty costs on sale of services are accrued

based on management’s estimates and historical data at the time

related revenues are recorded.

Direct and incremental contract origination and set up costs

incurred in connection with support/maintenance service

arrangements are charged to expense as incurred. These costs

are deferred only in situations where there is a contractual

arrangement establishing a customer relationship for a specified

period. The costs to be deferred are limited to the extent of future

contractual revenues. Further, revenue attributable to set up

activities is deferred and recognised systematically over the

periods that the related revenues are earned, as services

performed during set up period do not result in the culmination of

a separate earnings process.

Revenue on maintenance contracts is recognised on a straight-

line basis over the period of the contract.

Revenue recognition is postponed in instances wherein the

conditions for revenue recognition are not met. Related costs are

also deferred in such instances, subject to management’s

assessment of realisability.

Dividend income is recognised when the Company’s right to

receive dividend is established. Interest income is recognised onthe time proportion basis.

2.5 Employee retirement and other benefits

Contributions to the provident fund, which is a defined

contribution scheme, are charged to the profit and loss account

in the period in which the contributions are incurred.

Gratuity, pension and leave encashment costs, which are defined

benefits, are based on actuarial valuations carried out by an

independent actuary at the balance sheet date.

The Company provides compensatory-offs to its employees,

which entitle the employees to avail paid leave in future periods

for services already rendered. These entitlements are not

encashable by the employees. The Company makes provision for

such compensatory absences by estimating the likely salary

payable to the employees availing such leave based on historical

data of such entitlements availed in the past.

2.6 Foreign currency transactions

India Operations

Transactions in foreign currency are recorded at the exchange

rate prevailing on the date of the transaction. Foreign currencies

denominated monetary assets and monetary liabilities at the

balance sheet date are translated at the exchange rate prevailing

on the date of the balance sheet. Exchange rate differences

resulting from foreign exchange transactions settled during the

year, including year-end translation of current assets and liabilities

are recognised in the profit and loss account other than those

exchange differences arising in relation to liabilities incurred for

acquisition of fixed assets, which are adjusted to the carrying

value of the underlying fixed assets.

The Company has entered into forward exchange contracts for a

portion of its foreign exchange receivables. The difference

between the forward rate and the exchange rate at the inception

of the forward exchange contracts is recognised as

income/expense over the life of the contract.

Foreign branch office operations

Revenue items other than depreciation costs are translated intothe reporting currency at monthly average exchange rates.

Foreign currency denominated monetary assets and monetary

liabilities at balance sheet date are translated at exchange rates

prevailing on the date of the balance sheet. Fixed assets are

translated at exchange rates on the date of the transaction and

depreciation on fixed assets is translated at the exchange rates

used for translation of the underlying fixed assets.

Net exchange difference resulting from translation of items in the

financial statements of the foreign branches is recognised in the

profit and loss account.

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52



2.7 Investments

Long-term investments are stated at cost, and provision is made

when in the management’s opinion there is a decline, other than

temporary, in the carrying value of such investments.

Current investments are carried at lower of cost and fair value, and

provision is made to recognise any decline in the carrying value.

2.8 Taxation

AS-22 “Accounting for Taxes on Income” issued by the ICAI is

mandatory for the Company in respect of accounting periods

commencing on or after 1 April 2002. The Company adopted this

standard in the year 2003. In accordance with para 33 on

transitional provisions of AS 22, the net deferred tax liability

aggregating Rs 19,023 that accumulated prior to the adoption of

this standard as at 1 January 2003 was charged to generalreserves (Refer note 4).

Income tax expense comprises current tax expense and deferred

tax expense or credit. Provision for current taxes is recognised

under the taxes payable method based on the estimated tax

liability computed after taking credit for allowances and

exemptions in accordance with the Indian Income-tax Act,1961. In

case of matters under appeal, full provision is made in the

financial statements when the Company accepts the liabilities.

Deferred tax assets and liabilities are recognised for the future

tax consequences attributable to timing differences that result

between the profits offered for income taxes and the profits asper the financial statements of the Company. Deferred tax assets

and liabilities are measured using the tax rates and the tax laws

that have been enacted or substantively enacted by the balance

sheet date. The effect on deferred tax assets and liabilities of a

change in tax rates is recognised only to the extent that there is

virtual certainty that sufficient future taxable income will be

available against which such deferred tax assets can be realised.

Other deferred tax assets are recognised only if there is a

reasonable certainity that sufficient future taxable income will be

available against which such deferred tax assets can be realised.

Deferred tax assets are reviewed as at each balance sheet date

and written down or written-up to reflect the amount that is

reasonably/virtually certain (as the case may be) to be realised.

Substantial portion of the profits of the Company are exempted

from income tax, being profits from undertakings situated at

Software Technology Parks. Under the tax holiday the Company

can utilise exemption of profits from income taxes for a period of

ten consecutive years. The Company has opted for this

exemption and these exemptions expire on various dates

between years 2005 and 2010. In this regard, the Company

recognises deferred taxes in respect of those originating timing

differences, which reverse after the tax holiday period resulting in

tax consequences. Timing differences, which originate and

reverse within the tax holiday period do not result in taxconsequence and therefore no deferred taxes are recognised in

respect of the same. For this purpose, the timing differences,

which originate first are considered to reverse first.

2.9 Earnings per share

The basic earnings per share is computed by dividing the net

profit attributable to the equity shareholders for the year by the

weighted average number of equity shares outstanding during the

year. Diluted earnings per share is computed using the weighted

average number of equity shares and also the weighted average

number of equity shares that could have been issued on the

conversion of all dilutive potential equity shares. The dilutive

potential equity shares are adjusted for the proceeds receivable,had the shares been actually issued at fair value. Dilutive potential

equity shares are deemed converted as of the beginning of the

year, unless they have been issued at a later date. The number of

shares and potentially dilutive equity shares are adjusted for stock

splits and bonus shares, as appropriate.

2.10 Contingencies

Loss contingencies arising from claims, litigations, assessment,

fines, penalty etc are provided for when it is probable that a liability

may be incurred, and the amount can be reasonably estimated.

3 Share capital

2004 2003

Authorised

250,000,000 (2003:250,000,000) equity shares of Rs 2 each 500,000 500,000

Issued, subscribed and paid - up

124,997,009 (2003: 111,420,849) equity shares of Rs 2 each fu lly paid 249,994 222,842

Share application money (Refer note below) 4,038 –

254,032 222,842

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4 Reserves and surplus

2004 2003

Land revaluation reserve

– Balance carried forward 7,935 7,935

Building revaluation reserve

– Balance brought forward 1,677 1,758

– Transfer to profit and loss account (81) (81)

1,596 1,677Capital redemption reserve

– Balance carried forward 253,301 253,301

253,301 253,301

Share premium

– Balance brought forward 2,426,148 2,500,429

– Share premium received on issue of equity shares (Refer note 3) 3,081,683 –

-- Share premium utilized in connection with share issue expenses

incurred during the period (Refer note 3) (176,068) –

– Share premium utilised for issue of fully paid bonus shares (Refer note 3) – (74,281)

5,331,763 2,426,148

General reserve

– Balance brought forward 656,720 509,687

– Transfer from profit and loss account 230,542 166,056– Adjustment on account of deferred tax liability as at January 1 2003 (Refer note 2.8) – (19,023)

887,262 656,720

Profit and loss account, balance carried forward 6,694,146 4,901,938

13,176,003 8,247,719

5 Secured loans

2004 2003

Lease obligation in relation to vehicles acquired under finance lease (Refer note 22) 28,644 24,609

Nature of security

Finance lease obligations are secured against the vehicles acquired on lease.

Of the above, 14,500,000 equity shares of Rs 2 each were

allotted as fully paid bonus shares in March 1995 by capitalisation

of general reserve aggregating Rs 29,000.

In June 2001, Patni’s Board of Directors approved a sub division of

existing equity shares of Rs10 each into 5 equity shares of Rs2 each.

The above also includes 46,867,500 equity shares of Rs 2 each

allotted as fully paid bonus shares in August 2001 by

capitalisation of share premium aggregating Rs 93,735.

In September 2002, Patni made a private placement of its

unregistered American Depository Receipt (‘ADRs’) to

international investors representing 13,441,245 equity shares

having face value of Rs 2 each. The equity shares represented by

ADRs carry equivalent rights with respect to dividends and voting

as the other equity shares (Refer note 23 for commitment).

In December 2002, in pursuance of section 77A of the IndianCompanies Act, 1956, Patni completed buyback of 1,650,679

equity shares by utilising the share premium account. In this

regard, an amount equivalent to the nominal value of the share

capital bought back by the Company aggregating Rs 3,301, has

been transferred from general reserve to capital redemption

reserve (Refer note 4).

In August 2003, the Company allotted 37,140,283 equity shares

of Rs 2 each as fully paid bonus shares by capitalization of share

premium aggregating Rs 74,281.

In February 2004, Patni completed initial public offering (‘IPO’) of

its equity shares in India comprising fresh issue of 13,415,200

shares and sale of 5,324,000 equity shares by the existing

shareholders. In this regard equity shares of Rs 2 each were

issued at a premium of Rs 228 aggregating Rs 3,085,496. In

respect of above, the Company incurred IPO related expenditure

aggregating Rs 225,274. Proportionate variable IPO related

expenditure pertaining to the shares sold by the existing

shareholders has been debited to the profit and loss account and

the balance has been adjusted against share premium in

accordance with section 78 of the Companies Act, 1956.

Amount received from employees on exercise of stock options

pending allotment of shares is shown as share application money.

Refer note 24 for employee stock compensation plans.

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54



7 Investments

Notes:

1. In respect of leasehold land rights aggregating Rs 40,011, the Company is required to complete construction activities within a period of five

years from 23 July 2001. In absence of this covenant being achieved by the Company, the transferor has an option to revoke the transfer

of such rights. On a fresh assessment of expected realisation on disposal of this land, instead of utilising for building construction, the

Company has provided Rs 14,043 towards impairment in the value of this land in December 2002.2. Gross block of computers, computer software and other service equipments at 31 December 2004 includes exchange gain capitalised during

the year aggregating Rs 2,946 (2003: 271).

3. Gross block of vehicles as of 31 December 2004 includes assets acquired on lease, refer note 22.

4. Leasehold land includes amounts aggregating Rs 111,015 (2003: 71,685) in respect of which necessary formalities relating to the transfer

of lease hold land rights are in the process of being completed.

6 Fixed assets

Land Land Buildings Computer Computers, Electrical Office Furniture Vehicles Total as at Total as at

(Freehold) (Leasehold) and software and other installations equipments and 31 December 31 December

leasehold service fixtures 2004 2003

improvements equipments

Gross block

As at 1 January 2004 9,019 119,990 799,701 389,696 790,431 191,543 227,166 376,098 74,853 2,978,497 2,414,707

Additions during the year – 83,031 60,184 196,233 272,354 28,044 67,857 59,841 20,299 787,843 593,383

Deletions during the year – – 12,356 – 16,885 14,354 7,787 37,617 12,740 101,739 29,593

As at

31 December 2004 9,019 203,021 847,529 585,929 1,045,900 205,233 287,236 398,322 82,412 3,664,601 2,978,497

Accumulated

depreciation

As at 1 January 2004 – 15,890 61,325 118,802 652,143 55,164 108,047 143,854 33,844 1,189,069 822,777

Charge for the year – 1,753 37,573 109,203 167,785 31,738 47,683 57,002 17,340 470,077 392,219

Deletions during the year – – 3,201 – 16,685 5,831 4,127 21,752 8,367 59,963 25,927

As at 31

December 2004 – 17,643 95,697 228,005 803,243 81,071 151,603 179,104 42,817 1,599,183 1,189,069

Net block as at

31 December 2004 9,019 185,378 751,832 357,924 242,657 124,162 135,633 219,218 39,595 2,065,418 1,789,428

Net block as at

31 December 2003 9,019 104,100 738,376 270,894 138,288 136,379 119,119 232,244 41,009 1,789,428

2004 2003

Long term (at cost)

Trade

Unquoted

Investment in Subsidiary companies

50,000 (2003: 50,000) equity shares of 1 pound each fully paid of

Patni Computer Systems (UK) Limited 2,409 2,409

Contribution of Euro 150,000 (2003: Euro 150,000) towards Capital of

Patni Computer Systems GmbH 6,076 6,076

7,500 (2003: 5,000) equity shares fully paid of

Patni Computer Systems, Inc. (no par value) 3,571,561 1,972,599

3,580,046 1,981,084

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7 Investments (contd.)

2004 2003Short term (at lower of cost or fair value)

Non-trade

Quoted

35,518,398 units (2003: Nil) Birla Cash Plus - Institutional Premium Dividend Plan Weekly 355,987 –

48,835,265 units (2003: Nil) of Deutsche Insta Cash Plus fund – Institutional Monthly Dividend 488,489 –

5,442,680 units (2003: Nil) of GCCW Grindlays Cash Fund – Inst Fund C weekly Dividend 54,436 –

5,000,000 units (2003: Nil) of G40 Grindlays Fixed Maturity – 3rd plan - Dividend 50,000 –

23,000,000 units (2003: Nil ) J 120 JM Fixed Maturity Plan-YSW-Growth Option 230,000 –

26,835,640 units (2003: Nil) of Kotak Liquid (Institutional Premium) – Weekly Dividend 269,079 –

15,000,000 units (2003: Nil) of Reliance Fixed Term Scheme Annual Plan - Growth Option 150,000 –

12,000,000 units (2003: Nil) Principal Deposit Fund (FMP-6) 371 days plan growth 120,000 –

141,841 units (2003: Nil) of Templeton India treasury Management Account-Weekly Dividend

Reinvestment 141,954 –

52,422,054 units (2003: Nil) of OCIMD HSBC Cash Fund - Institutional Monthly Dividend 524,162 –

6,788,420 units (2003: Nil) of S31 Tata Liquid Super High Investment Funds- Weekly Dividend 76,104 –

12,004,290 units (2003: Nil) of HDFC Fixed Investment Plan - June 2004-Growth 120,043 –

10,000,000 units (2003: Nil) of HDFC Fixed Investment Plan - July 2004-Growth 100,000 –

4,983,105 units (2003: 6,458,490) of D50 DSP Merill Lynch Liquidity Fund – Weekly Dividend 61,798 80,096

7,525,628 units (2003: 11,012,097) of HDFC Cash Management - Saving Plan -

Weekly Dividend Reinvestment Option 79,976 117,032

41,873,527 units (2003: 6,528,127) of Principal Cash Management Fund Liquid Option –

Institutional Premium Plan Weekly Dividend 418,721 65,294

Nil units (2003:15,219,500) of Kotak Mahindra Liquid Institut ional Plan – Dividend Option – 152,547

Nil units (2003: 18,274,796) of GCBW Grindlays Cash Fund – Inst Fund B weekly Dividend – 188,247

Nil units (2003: 12,644,139) of HDFC Liquid Fund Premium Plus Plan-Dividend – 151,188

Nil units (2003: 34,065,827) of J59 JM Short Term Fund – Institutional Plan-Dividend. – 342,133

Nil units (2003: 27,255,940) Templeton India Liquid fund – Weekly Dividend – 272,596

Nil units (2003: 25,312,838) Deutsche Short Maturity Fund – Monthly Dividend Plan – 258,490

Nil units (2003: 23,936,505) of HSBC Income Fund – Short term – 251,510

Nil units (2003: 17,536,330) of P 23 Inf Prudential ICICI Institutional

Short term Plan-Fortnightly – 188,246

Nil units (2003: 9,112,525) of Principal Income fund –Short term Instalment plan –

Dividend Reinvestments – Monthly – 91,557

Nil units (2003: 7,526,912) of HDFC Short term Plan Premium Plus – Fortnightly – 81,457

3,240,749 2,240,393Less: Provision for decline in the fair value of investments (55) (318)

Total 6,820,740 4,221,159

Aggregate value of quoted investments (market value Rs 3,261,633; 2003: Rs 2,244,567) 3,240,694 2,240,075

Aggregate value of unquoted investments 3,580,046 1,981,084

Refer note 26 for summary of investments purchased and sold during the year and note 30 for unutilised money raised through initial public

offering.

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8 Sundry debtors (Unsecured)

2004 2003

Debts outstanding for a period exceeding six months

– considered good 1,530,858 377,035

– considered doubtful 24,301 22,503

1,555,159 399,538

Other debts

– considered good 3,505,790 2,777,114

– considered doubtful – –

3,505,790 2,777,114

Less: Provision for doubtful debts 24,301 22,503

5,036,648 3,154,149

Of the above, debts due from companies under the same management as defined under Section 370(1)(B) of the Companies Act, 1956aggregate Rs. 4,875,055 (2003: Rs. 2,989,498). This consists of debts due from Patni Computer Systems, Inc. aggregating Rs. 4,588,026

(2003: Rs. 2,854,999), Patni Computer Systems (UK) Limited aggregating Rs. 224,411 (2003: Rs. 101,858), Patni Computer Systems GmbH

aggregating Rs. 62,123 (2003: Rs. 32,641) and Cymbal Information Services (P) Ltd Rs. 495 (2003: Nil)

9 Cash and bank balances

2004 2003

Cash on hand 4,707 6,771

Balances with scheduled banks in current account 121,693 134,174

Balances with non scheduled banks in current account (Refer note 27) 76,474 52,244

202,874 193,189

10 Loans and advances (Unsecured)

2004 2003

Advances recoverable in cash or in kind or for value to be received 91,189 82,484

Advances to companies under the same management

PCS Technology Limited 10 10

(Maximum amount of outstanding during the year; Rs 13: 2003: Rs 19)

Ashoka Computer Systems Private Limited – 47


PCS Cullinet Private Limited – 45


PCS Finance Limited – 43(Maximum amount of outstanding during the year; Rs 43: 2003: Rs 43)

10 145

Security deposits with companies under the same management

Ashoka Computer Systems Private Limited 3,336 3,336

(Maximum amount of outstanding during the year; Rs 3,336: 2003:Rs 3,336)

PCS Cullinet Private Limited 3,334 3,334

(Maximum amount of outstanding during the year; Rs 3,334: 2003: Rs 3,334)

PCS Finance Limited 3,303 3,303

(Maximum amount of outstanding during the year; Rs 3,303: 2003: Rs 3,330)

9,973 9,973

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10 Loans and advances (contd.)

2004 2003

Other deposits 246,671 71,721

Loan to employees 3,060 3,773

Others – 183

350,903 168,279

Less: Provision for doubtful loans and advances 535 1,460

350,368 166,819

11 Current liabilities

2004 2003

Sundry creditors 73,687 49,689

Payable to subsidiary companies 24,071 93,556

Billings in excess of cost and estimated earnings 1,185 14,614

Advance from customers 2,226 248Unclaimed dividend * 92 –

Other liabilities 510,785 464,822

612,046 622,929

* There is no amount due and outstanding to be credited to Investor Education and Protection Fund.

12 Provisions

2004 2003

Provision for taxation (net of advance tax: Rs 779,769; 2003: Rs 503,434) 50,826 89,040

Provision for retirement benefits 334,873 248,733



668,364 478,604

The amount of proposed dividend in year 2003 includes dividend of Rs 13,415 on 13,415,200 shares issued by the Company in February 2004

on completion of its initial public offering.

13 Other income

2004 2003

Dividend on non-trade investments 156,815 59,042

Dividend from subsidiary 825 –

Profit on sale of non-trade investments, net 6,544 59,485

Interest from:

– Loan to employees 322 474

– Bank deposits (tax deducted at source; Rs 47; 2003: Rs Nil) 340 108

– Others 1,758 1,679Miscellaneous income 9,155 8,422

175,759 129,210

14 Personnel costs

2004 2003

Salaries, bonus and allowances, including overseas employee expenses 2,449,313 1,997,277

Contribution to provident and other funds 132,429 88,937

Staff welfare 124,755 99,035

Pension, gratuity and leave encashment costs 154,268 147,784

2,860,765 2,333,033

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18 Auditors remuneration

2004 2003

Remuneration to auditors consists of the following:

Audit fees 4,700 2,000

Other services 341 7,100

Out of pocket expenses 184 361

5,225 9,461

Note 1: In respect of year 2003, other services includes amounts aggregating Rs 1,300 incurred in connection with the proposed listing of

equity shares of the Company, which have been included under loans and advances in the financial statements.

19 Segmental information

In accordance with paragraph 4 of Accounting standard 17 “Segment Reporting” issued by the ICAI, the Company has presented

segmental information only on the basis of the consolidated financial statements (refer note 19 of the consolidated financial

statements)

20 Related party transactions

(a) Names of related parties and nature of relationship where control exists

Sr. No. Category of related parties Names

1 Subsidiaries 1) Patni Computer Systems,Inc.,USA

2) Patni Computer Systems (UK) Ltd

3) Patni Computer Systems GmbH

4) The Reference Inc

5) Cymbal Corporation (w.e.f 3 November 2004)

6) Cymbal Information Services (P) Ltd (w.e.f 3 November 2004)

7) Cymbal Corporation Limited (w.e.f 3 November 2004)

8) Cymbal Information services (Thailand) Limited (w.e.f 3 November 2004)

2 Affiliates 1) PCS Technology Limited (formerly known as PCS Industries Ltd)

2) Ashoka Computer Systems Private Ltd.

3) PCS Cullinet Private Ltd.

4) PCS Finance Ltd.

5) Ravi & Ashok Enterprises.

6) iSolutions Inc.

3 Key management personnel 1) Mr N. K. Patni

2) Mr A. K. Patni

3) Mr G. K. Patni

4 Parties with substantial interest 1) Members of Patni family and their relatives

2) General Atlantic Mauritius Limited (‘GA’)

5 Others 1) Ravindra Patni Family Trust

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60



20 Related party transactions (contd.)

(b) Transactions and balances with related parties

Nature of the transaction Subsidiaries Affiliates Key Parties with Others

management substantial

personnel interest

Transactions during the year ended 31 December 2004

Remuneration – – 124,437 – –

Sales and service income 6,050,545 – – – –

Professional fees 9,000 – – – –

Reimbursement of expenses by subsidiaries/affiliates 304,280 36 – – –

Rent and other expenses – 13,467 – 241 –

Donations – – – – 2,500

Dividend income 825 – – – –

Amounts incurred by subsidiary on behalf of the Company 176,119 – – – –Investments in subsidiary 1,598,962 – – – –

Amounts repaid to subsidiary 244,498 – – – –

Balances at 31 December 2004

Investments 3,580,046 – – –

Security deposits – 9,973 – 3,000 –

Debtors 4,875,055 – – – –

Amounts recoverable – 10 – – –

Amounts payable 24,071 1,732 – 193 –

Proposed dividend – 36,511 35,409 118,610 –

Remuneration payable to the directors – – 1,029 – –

Provision for pension benefits – – 289,188 – –

Guarantees given – 150,000 – – –Transactions during the year ended 31 December 2003

Remuneration – – 83,129 – –

Sales and service income 4,642,345 – – – –

Professional fees 9,268 – – – –

Reimbursement of expenses by subsidiaries/affiliates 169,694 154 – – –

Rent and other expenses – 11,869 – 193 –

Donations – – – – 2,500

Amounts incurred by subsidiary on behalf of the Company 286,702 – – – –

Amounts repaid to subsidiary 333,132 – – – –


Investments 1,981,084 – – – –

Security deposits – 9,973 – 3,000 –Debtors 2,989,498 – – – –

Amounts recoverable – 145 – – –

Amounts payable 93,556 – – – –

Proposed dividend – 18,255 20,262 60,847 –

Remuneration payable to the directors – – 930 – –

Cost and estimated earnings in excess of billing 14,817 – – – –

Provision for pension benefits – – 229,287 – –

Guarantees given – 150,000 – – –

Refer note 28 for Managerial remuneration

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21 Reconciliation of basic and diluted shares used in computing earnings per share

22 Leases

The Company has acquired certain vehicles under finance lease for a non-cancellable period of 4 years. At the inception of the lease, fair value of

such vehicles has been recorded as an asset under gross block of vehicles with a corresponding lease obligation recorded under secured loans.

As per the lease agreement, the ownership of these vehicles would not transfer to the Company, however it contains a renewal clause. Fixed assets

include the following amounts in relation to the above leased assets:

2004 2003

Number of shares considered as basic weighted average shares outstanding 123,066,042 111,420,849

Add: Effect of dilutive issues of stock options 1,018,950 –

Number of shares considered as weighted average shares and

potential shares outstanding 124,084,992 111,420,849

23 Capital and other commitments

2004 2003

Estimated amount of contracts remaining to be executed on capital account

and not provided for 1,111,437 19,829

Corporate guarantee 150,000 150,000

Outstanding forward contracts 4,491,830 3,486,870

Unamortised income in respect of forward contracts 4,917 6,459

Bank guarantees 15,504 11,384

Letters of credit 2,503 –

5,776,191 3,674,542

As at 2004 2003

Gross block of vehicles 46,610 34,041

Less: Accumulated depreciation 18,066 9,726

Net block 28,544 24,315

As at 2004 2003

Amount due within one year from the balance sheet date 191,895 60,875

Amount due in the period between one year and five years 325,628 13,904

517,523 74,779

Rent expense for all operating leases for the year ended 31 December 2004 aggregated Rs156,480 (2003:Rs 95,632)

Future minimum lease payments in respect of the above assets as at 31 December 2004 are summarised below:

Minimum lease Finance charge Present value of

payments minimum lease payments

Amount due within one year from the balance sheet date 12,626 1,015 11,611

Amount due in the period between one year and five years 17,700 667 17,033

30,326 1,682 28,644

The Company has operating lease agreements, primarily for leasing office space and residential premises for its employees. Most of the lease

agreements provide for cancellation by either party with a notice period ranging from 30 days to 120 days and also contain a clause for renewalof the lease agreement at the option of the Company. Additionally, the Company has taken certain office premises under non-cancelable operating

lease arrangements, which are renewable at the option of the Company.

The future minimum lease payments in respect of such non-cancelable operating leases as at 31 December 2004 are summarised below:

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62

24 Employee stock compensation plans

On 30 June 2003, Patni established the ‘Patni ESOP 2003’ plan (‘the plan’). Under the plan, the Company is authorized to issue up to

11,142,085 equity shares to eligible employees. Employees covered by the Plan are granted an option to purchase shares of the Company

subject to the requirements of vesting. A compensation committee constituted by the Board of directors of the Company administers the plan.

The exercise price of the grant approximated the fair value of the underlying equity shares at the date of the grant.

Stock options activity under the plan is as follows:

25 Amounts due to small scale industrial undertakings

Based on the information and records available with the Company, no amounts are payable to small scale industrial undertakings at 31 December

2004 which are outstanding for more than 30 days (2003: Nil)

Year ended 31 December 2004

Shares arising Range of Weightage average remaining

out of options exercise prices contractual life (months)

Outstanding at the beginning of the year 2,733,700 145 86

Granted during the year 100,000 254 90

Granted during the year 2,750,632 338 90

Forfeited during the year (192,875) 145 –

Exercised during the year (188,810) 145 –

Outstanding at the end of the year 2,352,015 145 75

100,000 254 84

2,750,632 338 87

Exercisable at the end of the year 446,396 145 56

The Company has issued equity shares to GE Capital Mauritius Equity Investment and General Atlantic Mauritius Limited, which contained certain

exit options and commitments in the event the IPO did not occur within the period stipulated in the shareholders agreement. In February 2004, Patni

completed its IPO and accordingly these exit options and commitments have lapsed.

Certain other income tax related legal proceedings are pending against the company. Potential liabilities, if any, have been adequately provided for,

and the company does not currently estimate any incremental liability in respect of these proceedings.




Shares arising Exercise price Weightage average remaining

out of options contractual life (months)

Outstanding at the beginning of the year – – –


Forfeited during the year (9,700) 145 –Outstanding at the end of the year 2,733,700 145 86

Exercisable at the end of the year – – –

23 Capital and other commitments (Contd.)

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26 Summary of investments purchased and sold during the period

Investments purchased during the year ended 31 December 2004 (non-trade)


Units Cost of purchase

Liquidity Fund

A45 Alliance Cash Manager - IP - Weekly Dividend 60,532,828 605,448

Birla Cash Plus Monthly Dividend - Reinvestment 10,328,222 103,326

Birla Cash Plus - Institutional Premium Dividend Plan Weekly 35,518,398 355,987

D50 DSP Merrill Lynch Liquidity Fund - Weekly Dividend 43,253,716 536,429

Deutsche Insta Cash Plus Fund - Regular Dividend Plan 116,982,539 1,178,338

GCBW Grindlays Cash Fund - Inst Fund B - Weekly Dividend 163,160 1,680

GCCW Grindlays Cash Fund -Super Inst Plan C - Weekly Dividend 38,923,527 389,304

HDFC Cash Management Fund - Savings Plan - Weekly - Dividend Reinvestment 85,022,986 903,846

HDFC Liquid Fund - Premium Plus Plan - Dividend 44,837 537I107 ING Vysya Liquid Fund - Weekly Dividend Option 87,862,355 914,708

J56 JM High Liquidity Fund - Institutional Plan - Dividend 14,545,719 145,737

Kotak Liquid Institutional Plan - Dividend 181,214 1,815

Kotak Liquid (Institutional Premium) - Weekly Dividend 50,763,896 509,023

Magnum Insta Cash Fund 28,815,658 303,539

M 44 ABN Amro Cash Fund - Institutional Daily Dividend 11,074,470 110,745

OCIMD HSBC Cash Fund-Institutional-Monthly Dividend 114,157,442 1,165,836

Principal Cash Management Fund Liquid Option - Instl. Plan -

Dividend Reinvestment - Monthly 34,538,320 345,527


Dividend Reinvestment - Weekly 57,034,079 570,300

P32INF Prudential ICICI Institutional Short Term Plan-DR-Fortn ightly 5,783,946 62,668Templeton India Liquid Fund- Weekly Dividend 149,256 1,493

T LSW Tata Liquid Super high Inv Fund - Weekly Dividend 16,141,374 180,958

Deutsche Short Maturity Fund - Monthly Dividend Plan 198,605 1,944

HDFC Short Term Plan - Premium Plus Plan - Fortnightly Dividend Reinvestments 39,644 429

J59 JM Short Term Fund - Institutional Plan - Dividend 119,482 1,205

Oisid HSBC Income Fund - Short Term Institutional - Fortn ightly Dividend 95,039 998

P23Inf Prudential Icici Institutional Short Term Plan -Dr-Fortnightly 92,379 1,000

Principal Income Fund - Short Term Instl.Plan - Dividend Reinvestments - Monthly 32,330 323

RLF - Treasury Plan - Institut ional Option - Weekly Dividend Option 43,354,394 661,750

S 133 Sundaram Money fund Institutional Fund Weekly Dividend 10,394,277 104,756

S31 Sundaram Money Fund - Dividend Reinvest Quarter 20,252,849 203,561

Templeton India Treasury Management Account - Weekly Dividend Reinvestment 925,090 989,874

887,322,031 10,353,084

HDFC Fixed Investment Plan - June 2004 - Growth 12,004,290 120,043

HDFC Fixed investment Plan- JULY (2) - Growth 10,000,000 100,000

Reliance Fixed Term Scheme - Annual Plan- 4 - Growth Option 15,000,000 150,000

J120 JM Fixed Maturity Plan -YSW - Growth Option 23,000,000 230,000

Principal deposit fund (FMP - 6) 371 Days Plan - Growth 12,000,000 120,000

G 40 Grindlays Fixed Maturity - 3rd Plan - Dividend 5,000,000 50,000

77,004,290 770,043

Total 964,326,321 11,123,127

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64



26 Summary of investments purchased and sold during the period (contd.)

Investments sold during the year ended 31 December 2004 (non-trade)


Units Sale Value Cost of purchase

Liquidity Fund

A45 Alliance Cash Manager - IP - Weekly Dividend 60,532,828 605,596 605,448

Birla Cash Plus Monthly Dividend - Reinvestment 10,328,222 103,340 103,326

D50 DSP Merrill Lynch Liquidity Fund - Weekly Dividend 44,729,101 555,000 554,727

Deutsche Insta Cash Plus Fund - Regular Dividend Plan 68,147,274 691,057 689,849

GCBW Grindlays Cash Fund - Inst Fund B - Weekly Dividend 18,437,956 189,965 189,927

GCCW Grindlays Cash Fund -Super Inst Plan C - Weekly Dividend 33,480,847 335,000 334,868

HDFC Cash Management Fund - Savings Plan - Weekly -

Dividend Reinvestment 88,509,455 941,000 940,902

HDFC Liquid Fund - Premium Plus Plan - Dividend 12,688,976 152,044 151,725

I107 ING Vysya Liquid Fund - Weekly Dividend Option 87,862,355 916,068 914,708

J56 JM High Liquidity Fund - Institut ional Plan - Dividend 14,545,719 145,769 145,737

Kotak Liquid Institutional Plan - Dividend 15,400,714 154,434 154,362

Kotak Liquid Institutional Premium - Weekly Dividend 23,928,256 240,000 239,944

Magnum Insta Cash Fund 28,815,658 303,763 303,539

M 44 ABN Amro Cash Fund - Institutional Daily Dividend 11,074,470 110,745 110,745

OCIMD HSBC Cash Fund-Institutional-Monthly Dividend 61,735,388 642,415 641,674


Dividend Reinvestment - Weekly 21,688,679 217,048 216,873


Dividend Reinvestment - Monthly 34,538,320 345,559 345,527

P32INF Prudential ICICI Institutional Short Term Plan-DR-Fortnightly 5,783,946 60,101 62,668

Templeton India Liquid Fund- Weekly Dividend 27,405,196 274,142 274,089

T LSW Tata Liquid Super high Inv Fund - Weekly Dividend 9,352,954 105,000 104,854

678,986,314 7,088,046 7,085,492

Deutsche Short Maturi ty Fund - Monthly Dividend Plan 25,511,443 260,483 260,434

HDFC Short Term Plan - Premium Plus Plan - Fortnightly dividend 7,566,556 81,857 81,886

J59 JM Short Term Fund - Institutional Plan - Dividend 34,185,309 345,140 343,338

Oisid Hsbc Income Fund - Short Term Institutional - Fortnightly Dividend 24,031,544 252,589 252,508

P23Inf Prudential Icici Institutional Short Term Plan -Dr-Fortnightly 17,628,709 189,113 189,246

Principal Income Fund - Short Term Instl. Plan -

Dividend Reinvestments - Monthly 9,144,855 91,665 91,880

RLF - Treasury Plan - Institutional Option - Weekly Dividend Option 43,354,394 662,673 661,750S 133 Sundaram Money Fund Institutional Fund Weekly Dividend 10,394,277 104,987 104,756

S31 Sundaram Money Fund - Dividend Reinvest Quarter 20,252,849 204,608 203,561

Templeton India Treasury Management Account -

Weekly Dividend Reinvestment 783,249 848,154 847,920

192,853,185 3,041,269 3,037,279

Total 871,839,499 10,129,315 10,122,771

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27 Names of non-scheduled banks, balances at period end and maximum amount of outstanding during the period

2004 2003

Fleet Bank, Boston, USA (formerly Bank Boston - USA) 2,655 416

(Maximum balance outstanding during the year: Rs 72,651; 2003: Rs 188,392)

Bank of Tokyo Mitsubishi Limited - Japan 16,795 18,915

(Maximum balance outstanding during the year: Rs 17,329; 2003: Rs 48,082)

ANZ Bank Australia - Australia 013-030-1982-72801 2,795 849

(Maximum balance outstanding during the year Rs 3,324; 2003: Rs 4,066)

ANZ Bank Australia - Australia013-030-1982-72828 27,686 28,127


Handels Bank - Kista Sweden 585-341-338 1,815 1,534


Handels Bank - Kista Sweden 585-130-558 24,728 2,403

(Maximum balance outstanding during the year Rs 26,635; 2003:7,262)76,474 52,244

28 Supplementary statutory information

(i) Managerial remuneration

(a) Provisions for gratuity and leave encashment in respect of Directors are not included above, as actuarial valuation is done on an overall Company basis.

(b) Managerial remuneration includes Rs 92,998 (including Provision for Pension Rs. 60,588) paid/accrued to manager by the subsidiary

company during the year ended 31 December 2004.

(c) Computation of net profit in accordance with Section 349 of the Companies Act,1956 has not been given, as commission by way of

percentage of profits is not payable for the year to the Directors.

(d) Sitting fees paid to non-executive directors not included above aggregated Rs 540 (2003: Rs Nil) during the year ended 31 December 2004.

Further commission payable to non-executive directors not included above aggregated Rs 4,691 (2003: Nil)

2004 2003

Salaries and allowances 50,590 46,632

Perquisites 3,042 2,551

Contribution to provident fund 1,953 1,775

Provision for pension fund 68,852 32,171

124,437 83,129

(iii) Value of imports calculated on C.I.F. basis:

2004 2003

Capital goods 254,109 105,785

Software consumables 549 2,188

Others 353 4,094

255,011 112,067

(ii) Value of imported and indigenous software consumables

2004 2003

Imported 2.45% 549 13.10% 2,188

Indigenous 97.55% 21,830 86.90% 14,523

100.00% 22,379 100.00% 16,711

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66



28 Supplementary statutory information (contd.)

(iv) Expenditure in foreign currency

30 Prior period comparatives

Previous year figures have been appropriately reclassified to conform to the current year’s presentations.

2004 2003

Overseas employee expenses 92,642 149,075

Travelling 83,169 64,933

Professional fees and consultancy charges 36,655 20,787

Subscription and registration fees 6,571 1,722

Others 23,013 25,017

242,050 261,534

29 Statement of Utilisation of IPO Funds as of 31 December 2004

No of shares Price Amount

Amount raised through IPO 13,415,200 230 3,085,496

Share issue expenses 225,274

Net proceeds 2,860,222

Deployment:

1 General Corporate Purposes

Capital Expenditure for Office facilities 764,163

2 Stategic Initiatives

Investments in Subsidiary Company to acquire Cymbal Corporation 1,598,962

3 Held under Short term Investments pending utilisation 497,097

Net proceeds 2,860,222

Period to which dividend relates 1 January 2003 to 1 January 2002 to

31 December 2003 31 December 2002

– Final dividend 62,469 17,537

(v) Earnings in foreign currency

Sales and services income (on FOB basis) 6,996,847 5,347,443

Others 119 5,784

6,996,966 5,353,227

(vi) Dividend remitted in foreign currency

Number of non-resident shareholders 9 5

Number of equity shares held on which dividend was due (paid up value of Rs 2 each) 62,468,545 29,227,585

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31 Balance Sheet Abstract and Company’s General Business Profile

Public issue

2 0 1 2 7

2 6 8 3 0

Right issue

N I L

Bonus issue

N I L

Private placement

N I L

3 1 1 2

Registration No. State Code

Balance Sheet Date

Date Month Year

I. Registration Details

II. Capital raised during the year

Total liabilities

1 3 5 7 3 7 5 0

Total assets

1 3 5 7 3 7 5 0

Paid-up capital

2 5 4 0 3 2

Reserves and surplus

1 3 1 7 6 0 0 3

Secured loans

2 8 6 4 4

Deferred Tax Liability

1 1 5 0 7 1

Unsecured loans

N I L

III. Position of mobilisation and deployment of funds

Turnover

Item no ITC code Product description

7 1 9 6 4 3 4

Total expenditure

4 6 3 3 9 4 6

Profit before tax+ / –

2 5 6 2 4 8 8

NIL Computer Software and Services

++ / –

+

Profit after tax

2 3 0 5 4 1 5

Earning per share in Rs

1 8 . 7 3

Dividend @ %

1 0 0 %

IV. Performance of Company

V. Generic names of three principal products/services of Company (As per monetary terms)

Sources of funds

Net fixed assets

2 3 0 6 7 8 6

Investments

Net current assets

4 4 3 8 2 5 6Accumulated losses

N I L

Deferred Tax Assets

7 9 6 8Miscellaneous expenditure

N I L

Application of funds

2 0 0 4

1 1

6 8 2 0 7 4 0

For and on behalf of the Board of Directors



Arun Kanakal

Company Secretary

Mumbai

31 January 2005

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Management’s Discussion and Analysisof the Consolidated Financials under Indian GAAP

INDUSTRY STRUCTURE AND DEVELOPMENTS

Please refer to our discussions under the sections titled

‘Verticalisation for Growth’ of this report.

OPPORTUNITIES AND THREATS

Please refer to our discussion under the section titled ‘Risk

Management' of this report.

SEGMENT-WISE OR PRODUCT-WISE PERFORMANCE

Please refer to section ‘Segmental Information’ in the Notes to

Consolidated Financial Statements of this report.

OUTLOOK

Please refer to our discussions under the sections titled

‘Verticalisation for Growth’ and ‘Risk Management’ of this report.

RISKS AND CONCERNS



INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY



DISCUSSION ON FINANCIAL PERFORMANCE

Financial Condition

Share capital (Rs. in thousands)

Y.E. Dec 31, Y.E. Dec 31,

2004 2003

Balance at the

beginning of the year 222,842 148,561

Shares issued during the year

Initial public offering 26,830

ESOP plan 322

Bonus shares issued by

capitalization of share premium 74,281

Balance at the close of the year 249,994 222,842

In February 2004, the Company completed the initial public

offering (IPO) of its equity shares in India comprising fresh issue

of 13,415,200 shares and sale of 5,324,000 equity shares by

the existing shareholders. Equity shares of face value Rs 2 each

were issued at a premium of Rs 228 aggregating Rs 3085.50

million.

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Fixed assets (Rs in thousands)

Year ended Year ended

31 December 2004 31 December 2003 Increase %

Gross block

Land – freehold 9,019 9,019 –

– leasehold 203,021 119,990 69.2

Buildings and leasehold improvements 868,342 823,427 5.5Computers, software and other service equipment 1,866,270 1,348,888 38.4

Electrical installations 205,234 191,543 7.1

Office equipments 319,677 247,836 28.9

Furniture and fixtures 438,372 418,761 4.7

Vehicles 91,382 82,415 10.9

Total 4,001,317 3,241,879 23.4

Less: Accumulated depreciation 1,810,460 1,357,099 33.4

Add: Capital work-in-progress 246,602 43,566 466.0

Net fixed assets 2,437,459 1,928,346 26.4

The Company has established the 'Patni ESOP 2003' plan,

under which it issued 160,960 shares to 200 employees

during the year. The Company is authorized to issue up to

11,142,085 equity shares to eligible employees under its

ESOP plan.

Following these issuances of the Company’s equity shares

during the year, the issued, subscribed and paid-up share capital

increased by 13,576,160 shares to 124,997,009 shares.

In addition, an amount of Rs 4.0 million received from

employees on exercise of stock options pending allotment of

shares is shown as share application money and included in

the share capital of the Company.

Reserves and surplus

The issuance of equity shares through the Company’s IPO and

ESOP plan, as mentioned above, resulted in an addition of Rs

3,081.7 million to the share premium account. Share issue

expenses of Rs 176.1 million were incurred during the period,

which have been adjusted from the share premium account.

The Company transferred an amount of Rs 230.5 million from

its profit for the year to the general reserve, while Rs 2,063.8

million was retained in the profit and loss account.

Secured loans

The Company acquires vehicles under finance lease for a non-

cancellable period of four years. The lease rental obligation in

relation to vehicles acquired under finance lease is recorded

under secured loans. As per the lease agreement, the

ownership of these vehicles would not transfer to the

Company.

Net deferred tax liability

The Company recorded cumulative net deferred tax liability of

Rs 120.1 million as of 31 December 2004. The deferred tax

liability represents timing differences arising out of U.S. branch

profit taxes and costs and estimated earnings in excess of

billings.

Goodwill

The excess of cost to the parent company of its investment in

subsidiaries over the parent company’s portion of equity in the

subsidiaries, at the respective dates on which investments in

subsidiaries were made, is recognised in the consolidated

financial statements as goodwill. Goodwill recorded in the

consolidated financial statements has not been amortized, but

evaluated for impairment.

The aggregate goodwill recorded in the financial statements

comprises the following:

Y.E. Dec 31, Y.E. Dec 31,

2004 2003

Balance at the beginning

of the year 1,398,941 1,263,767

Goodwill arising on acquisition

of 100 % equity interest in

The Reference Inc. – 135,174

Goodwill arising on acquisition

of 100% equity interest inCymbal USA 1,288,774 –

Balance at the end of the year 2,687,715 1,398,941

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During 2004, the Company added Rs 903.4 million to its gross

block of assets of which Rs 52.6 million was on account of

fixed assets added through the acquisition of Cymbal. During

the year, the Company invested Rs 83.0 million on acquisition

of land at Airoli (Navi Mumbai), Chennai and Pune , for its

software development centers.

The Company set up a 1,100-person development center in

Bangalore and added a new delivery location at Hyderabad

with the acquisition of Cymbal during the year. With these

additions the Company’s offshore delivery resource base

extends across eight cities – Mumbai, Navi Mumbai, Pune,

Noida, Gandhinagar, Chennai, Bangalore and Hyderabad. The

Company also inaugurated its new U.S. headquarters at

Cambridge, MA and integrated its three offices in the Greater

Boston area at the new location. Overall, during 2004, the

Company made net investments in building and leasehold

improvements, computers and other service equipments,

software, office equipment and furniture and fixtures

aggregating Rs 684.5 million.

The capital work-in-progress as at December 31, 2004 and

2003 represents advances paid towards acquisition of fixed

assets and the cost of assets yet to be put to use. The

ongoing development work at Patni’s ‘Knowledge Parks’ at

Navi Mumbai and Chennai led to the accretion of Rs. 246.6

million to capital work-in-progress during 2004, compared to

Rs. 43.6 million in 2003.

Investments

Surplus cash generated from operations are invested in short-

term money market instruments. Investments in short term and

liquid mutual funds increased to Rs 3,714.8 million as of

December 31, 2004 compared to Rs 2,240.1 million as of

December 31, 2003. During the year, the Company’s corpus

of investments increased following the IPO funds inflows and

cash generation from operations.

Deferred tax asset (net)

The Company recorded cumulative deferred tax asset (net) ofRs 304.5 million as of December 31, 2004. This relates to the

subsidiary companies, Patni USA and Patni Computer Systems

(UK) Limited and Cymbal Corporation. The deferred tax asset

represents timing differences arising out of provisions for

retirement benefits, provision for bad and doubtful debts,

depreciation, deferred revenues , billings in excess of cost and

estimated earnings and carry forward losses

Sundry debtors

Sundry debtors of Rs 3,135.3 million (net of provision for

doubtful debts amounting to Rs 146.5 million) represents 21.2

per cent of revenues for the year ended December 31, 2004.

During the year, the debts outstanding for a period exceeding

six months reduced further to 5.9 per cent of gross debtorscompared to 7.5 per cent in the previous year. Provision for

doubtful debts as a percentage of sundry debtors also reduced

to 4.5 per cent from 5.4 per cent in the previous year.

The age profile of debtors is given below:

Period in days Year ended Year ended

31 December 2004 31 December 2003

0-180 94.1% 92.5%

More than 180 5.9% 7.5%

Total 100.0% 100.0%

Cash and bank balances

The Company recorded cash and bank balances of Rs 3,364.2

million and Rs 2,184.2 million as of December 31, 2004 and

2003, respectively. Bank balances include balances maintained

both in India and overseas. Bank balances in India include both

rupee accounts and foreign currency accounts.

As of December 31, 2004 and 2003, the Company had cash

and cash equivalents (cash and bank balances including short

term investments) of Rs 7,079.0 million and Rs 4,424.3

million, respectively. Cash and cash equivalents represent 41.6per cent and 39.4 per cent of total assets as of 31 December

2004 and 2003, respectively.

Cost and estimated earnings in excess of billings

Costs and estimated earnings in excess of billings represent

revenues recognised by the Company in excess of amounts

billed. These amounts are billed after the milestones specified

in the agreement are achieved and once customer acceptance

is received. Cost and estimated earnings in excess of billings

increased to Rs 667.4 million during the year ended December

31, 2004 compared to Rs 265.8 million in the year endedDecember 31, 2003 due to increase in some of the fixed price

projects executed by the Company.

Loans and advances

During the year ended December 31, 2004 advances

recoverable in cash or kind increased to Rs 292.3 million from

Rs 170.9 million in the year ended December 31, 2003. This

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increase was primarily on account of exchange gain on forward

contracts relating to receivables from subsidiaries by Rs 93

million. Advances recoverable in cash or kind also include

advances for services to be received in future.Security deposits increased to Rs 310.1 million for the year

ended December 31, 2004 from Rs 94.8 million in the year

ended December 31, 2003 primarily on account of increase in

rental deposits placed for office premises in India.

Loan to the Company’s employees were higher at Rs 77.3

million for the year ended December 31, 2004 from Rs 35.9

million in the year ended December 31, 2003.

Current liabilities

Current liabilities primarily include creditors for goods and

expenses of Rs 178.6 million, which represent amountspayable to vendors for goods or services rendered. Billings in

excess of cost and estimated earnings of Rs 124.1 million

denotes billings in excess of revenues recognised. Advances

received from customers of Rs 6.0 million include amounts

received from customers for the delivery of future services.

Deferred revenues of Rs 98.5 million relate to revenues for set

up activities that are deferred and recognised over the period

in which the fees are earned. Related costs are also deferred

in such instances and are grouped under ‘advances

recoverable in cash or kind’. Other liabilities of Rs 1,181.6

million include increased provisions for employee related andother costs.

Provisions

Provision for taxation represents estimated income tax

liabilities, both in India and overseas. Provision for taxation as

of December 31, 2004 was Rs 83.3 million, net of advance

tax of Rs 799.0 million.

As of December 31, 2004, provision for retirement benefits

increased to Rs 707.7 million from Rs 571.3 million as of

December 31, 2003 primarily on account of increase in

salaries and an increase in manpower.

Dividend on equity shares of Rs 250.0 million represents

dividend payable to shareholders of the Company

recommended by the Board of Directors and will be paid on

approval by the shareholders at the annual general meeting.

Dividend tax denotes taxes payable on the proposed dividend

for 2004.

RESULTS OF OPERATIONS

The following table sets forth certain financial information for the year ended December 31, 2004 as a percentage of Total

Income, calculated from the consolidated financial statements:

(Rs in thousands)

Amount % of total income

Sales and service income 14,765,175 98.6%

Other income 208,025 1.4%

Total Income 14,973,200 100%

Personnel Cost 8,422,664 56.3%

Selling, general and administration cost 2,992,700 20.0%

Depreciation 516,315 3.4%Transfer from revaluation reserves 81 –

Interest costs 1,688 –

Initial public offering related expenses 46,182 0.3%

Total expenses 11,979,468 80.0%

Profit before taxation 2,993,732 20.0%

Provision for taxation 416,687 2.8%

Net profit 2,577,045 17.2%

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Income

The Company’s sales and service income was Rs 14,765.2

million 2004 from Rs 11,648.5 million in 2003. Clients from

the insurance, manufacturing, and financial services industries

contribute a large proportion of our sales and service income.

In 2004, revenues from these clients together contributed

80.3 per cent of our revenues. We also significantly expanded

operations in the telecommunications vertical with the

acquisition of Cymbal.

The Company derives a significant proportion of its revenues

from clients located in the United States. In 2004, Patni

derived 87.8 per cent of its revenues, from clients located in

the United States. However, strong revenue growth was

achieved in other regions and the business achieved a greater

element of geographical diversification. The Company added

55 new clients during 2004.

Other income was Rs 208.0 million in 2004 from Rs 142.1million in 2003. During 2004, other income comprised interest

and dividend income of Rs 191.3 million, gain of Rs 6.5 million

on the sale of investments and other miscellaneous income of

Rs 10.2 million.

Personnel costs

Personnel costs were Rs 8,422.7 million and Rs 6,812.0

million in 2004 and 2003, respectively. These costs represent

56.3 per cent and 57.8 per cent of the Company’s total

income in 2004 and 2003, respectively. Personnel costs

comprise salaries paid to employees in India and overseas

staff expenses. In 2004, there was an increase in offshore

salaries with effect from April 2004. The Company aims to

maintain salaries as per industry trends and benchmarks. The

Company added 2,570 employees during 2004.

Selling, general and administration expenses

The Company incurred selling, general and administration

expenses of Rs 2,992.7 million and Rs 2,267.1 million,

representing and 20.0 per cent and 19.2 per cent of total

income in 2004 and 2003, respectively. Selling, general and

administration expenses include costs such as, subcontractor

costs, traveling expenses, communication expenses, officeexpenses, legal and other professional fees, advertisement and

publicity, and other miscellaneous selling and administrative

costs.

Depreciation

The Company provided Rs 516.3 million and Rs 430.1 million

towards depreciation for 2004 and 2003, respectively.

Depreciation as a percentage of gross block of fixed assets

was 12.9 per cent and 13.3 per cent for 2004 and 2003,

respectively.

Interest

The Company incurred interest costs of Rs 1.7 million each in

2004 and 2003, respectively. These costs mainly comprise

interest on finance lease obligations relating to vehicles

acquired by the Company.

Initial public offering (IPO) related expensesThe Company completed the initial public offering of its equity

shares in India, as a part of which 13,415,200 fresh equity

shares were issued aggregating Rs 3,085.5 million. In this

respect, proportionate variable expenses pertaining to the

shares sold by existing shareholders have been debited to the

profit and loss account.

Provision for taxation

The Company provided for its tax liability both in India and

overseas. The details of provision for taxes are as follows:

Provision for tax expense consists of the following:Current taxes (Rs. in thousands)

- Indian 6,990 21,273

- Foreign 383,300 407,740

390,290 429,013

Deferred tax expense / (credit)

- Indian (17,131) 15,732

- Foreign 43,528 (7,922)

26,397 7,810

416,687 436,823

The Company benefits from a tax holiday given by the

Government of India for the export of information technology

services from specially designated software technology parks

and special economic zones located in India. As a result of these

tax incentives, a substantial portion of the Company’s pre-tax

income has not been subject to significant tax in recent years.

The Finance Act, 2000 phases out the 10-year tax holiday over a

10-year period from 2000 through 2009. Accordingly, facilities

set up in India on or before 31 March 2000 have a 10-year tax

holiday, new facilities set up on or before 31 March 2001 have a

nine -year tax holiday and so forth until 31 March 2009. As per

the prevailing tax laws, the tax holiday will no longer be available

to new facilities after 31 March 2009. Patni’s current tax

holidays expire in stages by 2009.

The Company recorded net deferred tax expense of Rs 26.4

million and Rs 7.8 million for 2004 and 2003, respectively.

Net Profit

Net profit was Rs 2,577.0 million and Rs 1,842.9 million in 2004

and 2003, respectively. Net profit as a percentage of total

income was 17.2 per cent and 15.6 per cent in 2004 and 2003,

respectively.

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1. Income taxesThis represents deferred tax impact of significantdifferences between Indian GAAP and US GAAP.

2. Fixed assets and depreciationUnder Indian GAAP, certain indirect expenses incurred during

the construction period are capitalized, whereas such costsare expensed as incurred under US GAAP. Further, underIndian GAAP, borrowing costs have been capitalised to fixed

assets, only effective April 1 2001, when the AS 16“Borrowing Costs” issued by ICAI became mandatory.These differences in carrying value of fixed assets have

consequently resulted in differences in depreciation charge,which has been reflected above, as a reconciling item.

3. Foreign currency differencesUnder Indian GAAP, net exchange difference resulting fromtranslation of financial statements of foreign subsidiaries is

recognised in the consolidated income statement. Under USGAAP, this exchange difference is reported in the statementof shareholders’ equity and other comprehensive income.

Additionally, the Company had booked forward foreignexchange contracts to hedge its export proceeds. Under

Indian GAAP, premium on forward contract is recognised asincome or expenditure over the life of the related contract.Whereas, under US GAAP, the same is marked-to-market as

on the reporting date and the resultant gain/loss isrecognised immediately in the income statement. Theseforeign currency differences are reported above, as a

reconciling item.

4. Employee retirement benefitsThis represents difference in recording pension, gratuity,and leave encashment costs.

5. Provision for decline in fair value of investmentsUnder Indian GAAP, current investments are carried at the

lower of cost and fair value, and provision is made in theincome statement to recognize any decline in the carryingvalue of such investments. Under US GAAP, such

investments are designated as available for sale and arecarried at fair value with unrealized gains or losses beingseparately reported in the statement of shareholders’ equity

and other comprehensive income.

6. Business acquisition

Under US GAAP, the assets and liabilities acquired onacquisition of The Reference Inc. and Cymbal Corporationhave been recorded at fair values assigned to them,

whereas under Indian GAAP these have been recorded atrespective book values.

Further, under US GAAP, a portion of the purchaseconsideration has been allocated to intangible assetsmeeting the criteria for being recognised as an asset apart

from goodwill. These intangible assets are being amortisedover its useful life in proportion to the economic benefitsconsumed during each reporting period. Under Indian GAAP,

the entire difference between the purchase considerationand the book value of assets acquired has been recorded asgoodwill, which is subject to impairment testing.

Notes:

Reconciliation of significant differences between consolidated net income determined in accordance with Indian Generally

Accepted Accounting Principles (‘Indian GAAP’) and consolidated net income determined in accordance with US Generally

Accepted Accounting Principles (‘US GAAP’)

(Rs in Thousands)

Particulars Notes Year ended Year ended

December 31, 2004 December 31, 2003Consolidated net income as per Indian GAAP 2,577,045 1,842,917

Income taxes 1 (12,317) 34,114

Fixed assets and depreciation 2 2,037 2,995

Foreign currency differences 3 29,820 49,162

Employee retirement benefits 4 30,532 (1,735)

Short provision for branch profit taxes in

earlier years under Indian GAAP – 28,304

Provision for decline in fair value of investment 5 (261) 318

Business acquisition 6 8,150 2,443

Total 57,961 115,601

Consolidated net income as per USGAAP 2,635,006 1,958,518

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PATNI COMPUTER SYSTEMS LIMITED AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIALS UNDER INDIAN GAAP

Auditors’ report

To the Board of Directors

Patni Computer Systems Limited on the Consolidated financial statements of Patni Computer Systems Limited and its subsidiaries.

We have audited the attached Consolidated Balance Sheet of

Patni Computer Systems Limited (“Patni” or “the Company” or

“the Parent Company”) and its subsidiaries (as per the list

appearing in Note 2.2 to the consolidated financial statements)

[collectively referred to as the “Patni Group” or “the Group”] asat 31 December 2004, and also the Consolidated Profit and

Loss Account and the Consolidated Cash Flow Statement for the

year ended on that date annexed thereto.

These financial statements are the responsibility of the


opinion on these financial statements based on our audit. We

conducted our audit in accordance with the auditing standards

generally accepted in India. Those standards require that we

plan and perform the audit to obtain reasonable assurance about

whether the financial statements are free of material

misstatement. An audit includes, examining on a test basis,

evidence supporting the amounts and disclosures in the financial

statements. An audit also includes assessing the accounting

principles used and significant estimates made by management,

as well as evaluating the overall financial statement presentation.

We believe that our audit provide a reasonable basis for our

opinion.

We report that the consolidated financial statements have been

prepared by the Company’s management in accordance with the

requirements of Accounting Standard 21 - ‘Consolidated

Financial Statements’ issued by the Institute of Chartered

Accountants of India (‘ICAI’).

In our opinion and on the basis of information and explanation

given to us, the consolidated financial statements give a true andfair view in conformity with the accounting principles generally

accepted in India:

i. in the case of the Consolidated Balance Sheet, of the state

of affairs of the Patni Group as at 31 December 2004;

ii. in the case of the Consolidated Profit and Loss Account, of

the profit for the year ended on that date; and

iii. the case of the Consolidated Cash Flow statement, of the

cash flows for the year ended on that date.

For BSR & Co.



Akeel Master

Partner


Mumbai

Date: 31 January 2005

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The accompanying notes form an integral part of this consolidated profit and loss account.


For BSR & Co. For Patni Computer Systems Limited and its subsidiaries(formerly Bharat S Raut & Co.)


Akeel Master N K Patni G K Patni Arun Duggal

Partner Chairman and CEO Executive Director Director


Pradip Shah Arun Kanakal

Director Company Secretary

Mumbai Mumbai


Consolidated Profit and Loss Account for the year ended 31 December 2004


Note 2004 2003

INCOME

Sales and service income 14,765,175 11,648,493

Other income 13 208,025 142,090

14,973,200 11,790,583

EXPENDITURE

Personnel costs 14 8,422,664 6,812,033

Selling, general and administration costs 15 2,992,700 2,267,074

Depreciation 6 516,315 430,122

Less: Transfer from revaluation reserve 4 81 81

Interest costs 16 1,688 1,695

Initial public offering related expenses 3 46,182 –

11,979,468 9,510,843

Profit for the period before taxation 2,993,732 2,279,740

Provision for taxation 17 416,687 408,519

Prior period tax adjustment – 28,304


Profit and loss account, brought forward 5,416,178 3,679,087

Add: Adjustment on account of deferred tax asset as at 1 January 2003 2.11 – 203,763

Amount available for appropriation 7,993,223 5,725,767

Proposed dividend on equity shares 249,994 124,836

Dividend tax 32,671 15,995Dividend on equity shares of subsidiary -- 2,702

Transfer to general reserve 230,542 166,056

Profit and loss account, carried forward 7,480,016 5,416,178

Earnings per equity share of Rs 2 each 21

– Basic 20.94 16.52

– Diluted 20.77 16.52

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78

Consolidated Cash Flow Statement for the year ended 31 December 2004


2004 2003

Cash flows from operating activities

Profit before taxation 2,993,732 2,279,740

Adjustments:

Depreciation 516,234 430,041

Loss on sale of fixed assets, net 27,120 346

Profit on sale of investments, net (6,544) (59,485)

Provision for decline in the fair value of investment (263) 318

Dividend income (156,815) (59,042)

Interest income (34,448) (14,220)

Interest expense 1,688 1,695

Provision for doubtful debts and advances 22,513 14,531

Initial public offering related expenses 46,182 –

Unrealised foreign exchange gain (101,586) (13,704)

Operating cash flows before working capital changes 3,307,813 2,580,220

Increase in sundry debtors (461,664) (434,991)

Increase in cost and estimated earnings in excess of billings (237,633) (112,177)

Increase in loans and advances (238,960) (142,378)

Increase in billings in excess of cost and estimated earnings 26,752 35,121

(Decrease)/increase in sundry creditors 850 4,132

(Decrease)/increase in advance from customers (6,600) 11,676

Increase in other liabilities 54,267 169,860

Increase in provision for retirement benefits 162,472 160,451

Cash generated from operations 2,607,297 2,271,914

Income taxes paid (566,984) (459,862)

Net cash provided by operating activities (A) 2,040,313 1,812,052

Cash flows from investing activities

Purchase of fixed assets (1,034,954) (657,670)

Sale of fixed assets 26,235 3,321

Purchase of non trade investments (11,559,770) (7,160,459)

Investment in subsidiary,net of cash acquired (1,475,504) (143,855)

Sale of non trade investments 10,129,413 6,643,569Dividend received 156,815 59,042

Interest received 54,679 15,188

Incentive on investment received – 73

Net cash used in investing activities (B) (3,703,086) (1,240,791)

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Consolidated Cash Flow Statement (Contd.) for the year ended 31 December 2004


2004 2003

Cash flows from financing activities

Issue of equity shares (net of shares issue expenses) 2,886,585 –

Share application money received pending allotment 4,038 –

Dividend paid, including dividend tax (140,739) (44,122)

Interest paid (1,688) (1,695)

Dividend on equity shares of subsidiary – (2,702)

Proceeds from finance lease obligations incurred 17,689 12,660

Finance lease obligations repaid (13,654) (7,748)

Net cash provided by/(used in) financing activities (C) 2,752,231 (43,607)

Effect of changes in exchange rates (D) 90,576 82,723

Net decrease in cash and cash equivalents during the year (A+B+C+D) 1,180,034 610,377Cash and cash equivalents at the beginning of the year 2,184,212 1,573,835

Cash and cash equivalents at the end of the year 3,364,246 2,184,212

Notes to the Consolidated Cash flow statement

Cash and cash equivalents consist of cash on hand and balances with

banks. Cash and cash equivalents included in the cash flow statements

comprise the following balance sheet amounts

Cash and cheques in hand 4,890 6,841

Balance with banks:

– Current accounts 3,291,877 2,133,076

– Exchange earners foreign currency account 65,825 41,884– Effect of changes in Exchange rate 1,654 2,411

3,364,246 2,184,212

For BSR & Co. For Patni Computer Systems Limited and its subsidiaries



Akeel Master N K Patni G K Patni Arun Duggal

Partner Chairman and CEO Executive Director Director Membership No: 046768

Pradip Shah Arun Kanakal

Director Company Secretary

Mumbai Mumbai


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80

Notes to the Consolidated financial statements for the year ended 31 December 2004


1 Background

Patni Computer Systems Limited (‘Patni’ or ‘the Company’ or ‘theParent Company’) was incorporated on 10 February 1978 under

the Indian Companies Act, 1956. On 18 September 2003, the

Company converted itself from a Private Limited company into a

Public Limited company. In February 2004, Patni completed initial

public offering of its equity shares in India comprising fresh issue

of 13,415,200 shares and sale of 5,324,000 equity shares by the

existing shareholders.

Patni owns 100% of equity in Patni Computer Systems (UK) Limited

(‘Patni UK’), a company incorporated in UK and Patni Computer

Systems GmbH, (‘Patni GmbH’), a company incorporated in

Germany. In November 2000, Patni acquired 25% equity in Patni

Computer Systems, Inc., USA, (‘Patni USA’, formerly known as

‘Data Conversion Inc’). In September 2002, Patni acquired the

balance 75% equity in Patni USA thereby making it a 100%

subsidiary. In April 2003, Patni USA, acquired 100% equity in The

Reference Inc. (‘TRI’), a company incorporated in Massachusetts,

USA, for consideration in cash. In November 2004, Patni Computer

Systems, Inc. USA, acquired 100% equity in Cymbal Corporation.

USA for consideration in cash.These companies are collectively

referred to as ‘the Patni Group’ or ‘the Group’. Further, Patni also

has foreign branch offices in USA, Japan, Sweden and Australia.

The Group is engaged in IT consulting and software development.

The Group provides multiple service offerings to its clients across

various industries comprising financial services, insurance

services, manufacturing companies and others such as energy and

utilities, telecom, retail and hospitality companies. The various

service offerings comprise application development and

maintenance, enterprise application systems, enterprise system

management, research and development services and businessprocess outsourcing services.

2 Principal accounting policies

2.1 Basis of preparation of consolidated financial statements

These consolidated financial statements of the Group have been

prepared under the historical cost convention with the exception of

certain land and buildings of Patni which have been revalued, on the

accrual basis of accounting and comply with the Accounting

Standards (‘AS’) issued by the Institute of Chartered Accountants

of India (‘ICAI’), to the extent applicable.

The preparation of the consolidated financial statements in

accordance with generally accepted accounting principles requires

that management makes estimates and assumptions that affect

the reported amount of assets and liabilities and disclosure of

contingent liabilities as of the date of the consolidated financial

statements and the reported amounts of revenue and expenses

during the reporting period. Management believes that the

estimates used in the preparation of the consolidated financial

statements are prudent and reasonable. Actual results could differ

from these estimates. Any revision to accounting estimates is

recognised prospectively in current and future periods.

2.2 Basis of consolidation

These consolidated financial statements include the financial

statements of Patni Computer Systems Limited and its

subsidiaries. The subsidiaries considered in the consolidated

financial statements as at 31 December 2004 are summarized

below:

These consolidated financial statements are prepared in

accordance with the principles and procedures prescribed by AS

21-“Consolidated Financial Statements” (‘AS-21’) issued by the

ICAI for the purpose of preparation and presentation of

consolidated financial statements.

The financial statements of the Parent Company and its

subsidiaries have been combined on a line-by-line basis by adding

together the book values of like items of assets, liabilities, income

and expenses after eliminating intra-group balances/transactions

and resulting unrealized profits in full. Unrealized losses resulting

Name of the subsidiary Country of incorporation % shareholding

Patni Computer Systems, Inc. USA USA 100

Patni Computer Systems (UK) Limited UK 100

Patni Computer Systems GmbH Germany 100

The Reference Inc. USA 100

Cymbal Corporation USA 100

Cymbal Information Services Private Limited India 100

Cymbal Corporation Limited UK 100

Cymbal Information Services (Thailand) Limited Thailand 100

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Notes to the Consolidated financial statements (Contd.) for the year ended 31 December 2004


from intra-group transactions have also been eliminated unless cost

cannot be recovered in full. The amounts shown in respect ofaccumulated reserves comprises the amount of the relevant

reserves as per the balance sheet of the Parent Company and its

share in the post acquisition increase/decrease in the relevant

reserves/accumulated deficit of its subsidiaries. Investments in

associates are accounted under the equity method as per AS 23-

“Accounting for Investments in associates in Consolidated Financial

Statements”.

Consolidated financial statements are prepared using uniform

accounting policies across the Group.

2.3 Fixed assets and depreciation

Fixed assets are stated at cost less accumulated depreciation,

except for items of land and buildings of Patni, which were revalued

in March 1995. Cost includes inward freight, duties, taxes and

incidental expenses related to acquisition and installation of the

asset. Depreciation is provided on the Straight Line Method (SLM)

based on the estimated useful lives of the assets as determined by

the management. For additions and disposals, depreciation is

provided pro-rata for the period of use.

The rates of depreciation based on the estimated useful lives of

fixed assets are higher than those prescribed under Schedule XIV

to the Companies Act, 1956. The useful lives of fixed assets are

stated below:

Asset Useful life (in years)

Leasehold land and Over the lease period or the

improvements useful life of the assets,

which ever is shorter

Buildings 40

Electrical installations 8

Computers, computer software and

other service equipments 3

Furniture and fixtures 3-8

Office equipments 5

Vehicles 4-5

2.4 Goodwill

The excess of cost to the Holding Company of its investment in

subsidiaries over the Holding Company’s portion of equity in the

subsidiaries, at the respective dates on which investments in

subsidiaries were made, is recognised in the consolidated financial

statements as goodwill. The Holding Company’s portion of equity

in the subsidiaries is determined on the basis of the book value of

assets and liabilities as per the financial statements of the

subsidiaries as on the date of investment.

The goodwill recorded in these consolidated financial statements

has not been amortised, but instead evaluated for impairment. The

Group evaluates the carrying amount of its goodwill wheneverevents or changes in circumstances indicate that its carrying

amount may be impaired.

2.5 Leases

Assets acquired on finance leases, have been recognised as an

asset and a liability at the inception of the lease, at an amount

equal to the lower of the fair value of the leased asset or the

present value of the future minimum lease payments. Such leased

assets are depreciated over the lease term or its estimated useful

life, whichever is shorter. Further, the payment of minimum lease

payments have been apportioned between finance charges, which

are debited to the consolidated profit and loss account, and

reduction in lease obligations recorded at the inception of the

lease.

2.6 Revenue and cost recognition

The Group derives its revenues primarily from software

development activities. Revenue from time-and-material contracts

is recognised as related services are rendered. Revenue from

fixed-price contracts is recognised on a percentage of completion

basis, measured by the percentage of costs incurred to-date to

estimated total costs for each contract. This method is used

because management considers costs to be the best available

measure of progress on these contracts.

Contract costs include all direct costs such as direct labour andthose indirect costs related to contract performance, such as

depreciation and satellite link costs. Selling, general, and

administrative costs are charged to expense as incurred.

Provisions for estimated losses on uncompleted contracts are

made in the period in which such losses are determined. Changes

in job performance, job conditions, estimated profitability and final

contract settlements may result in revision to costs and income

and are recognised in the period in which the revisions are

determined.

The asset “Cost and estimated earnings in excess of billings”

represents revenues recognised in excess of amounts billed.

These amounts are billed after the milestones specified in theagreement are achieved and the customer acceptance for the

same is received. The liability “Billings in excess of costs and


recognised.

Warranty costs on sale of services are accrued based on

management’s estimates and historical data at the time related

revenues are recorded.

Revenue from maintenance contracts is recognised on a straight-

line basis over the period of the contract.

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82



Direct and incremental contract origination and set up costsincurred in connection with support/maintenance service

arrangements are charged to expense as incurred. These costs

are deferred only in situations where there is a contractual

arrangement establishing a customer relationship for a specified

period. The costs to be deferred are limited to the extent of future

contractual revenues. Further, revenue attributable to set up

activities is deferred and recognised systematically over the

periods that the related fees are earned, as services performed

during set up period do not result in the culmination of a separate

earnings process.

The Group grants volume discounts to customers in the form of

free services in future. The Group accounts for such volume

discounts by allocating a portion of the revenue on the related

transactions to the service that will be delivered in future. Further,

other volume discounts and rebates are also deducted from

revenue.

Dividend income is recognised when the Group’s right to receive

dividend is established. Interest income is recognised on the time

proportion basis.

2.7 Employee retirement and other benefits

Provident fund

In accordance with Indian regulations, all employees of Patnireceive benefits from a provident fund, which is a defined

contribution retirement plan. Contributions to the provident fund

are charged to the consolidated profit and loss account in the

period in which the contributions are incurred.

Gratuity

In accordance with the Payment of Gratuity Act, 1972, Patni

provides for gratuity, a defined retirement plan covering all

employees. The plan provides a lump sum payment to vested

employees at retirement or termination of employment based on

the respective employee’s defined portion of last salary and the

years of employment with the Company. Patni contributes each

year to a gratuity fund administered by Patni through a trust set upfor the purpose. The liability for gratuity at the end of each financial

year is determined based on valuation carried out by an

independent actuary. The difference between such actuarially

determined liability and contributions made to the fund is

recognised as an asset/liability, as the case may be.

Pension

Certain directors of the Group are entitled to receive pension

benefit upon retirement or on termination from employment at the

rate 50% of their last drawn monthly salary. The pension is payable

from the time the eligible director reaches the age of sixty-five and

is payable to the director or the surviving spouse. The liability forpension is actuarially determined by an independent actuary at the

end of each financial year and periodically recognised by Patni in

the consolidated financial statements. The plan is not funded.

Others

Patni USA adopted a 401(k) salary deferral profit sharing plan,

which enables employees to make pre-tax contributions. Patni USA

does not match employee contributions to the plan.

Patni provides compensatory-offs to its employees, which entitle

the employees to avail paid leave in future periods for services

already rendered. These entitlements are not encashable by the

employees. Patni makes provision for such compensatedabsences by estimating the likely salary payable to the employees

availing such leave based on historical data of such entitlements

availed in the past.

Provision for leave encashment costs is based on actuarial

valuations carried out by an independent actuary at the balance

sheet date.

2.8 Foreign currency transactions

Transactions in foreign currency are recorded at the exchange

rate prevailing on the date of the transaction. Foreign currency

denominated monetary assets and monetary liabilities at the year-

end are translated at the year-end exchange rate. Exchange rate

differences resulting from foreign exchange transactions settled

during the year, including year-end translation of current assets

and liabilities are recognised in the consolidated profit and loss

account other than those exchange differences arising in relation

to liabilities incurred for acquisition of fixed assets, which are

adjusted to the carrying value of the underlying fixed assets.

Patni has entered into forward exchange contracts for a portion of

its foreign exchange receivables. The difference between the

forward rate and the exchange rate at the inception of the forward

exchange contracts has been recognised as income/expense over

the life of the contract.

2.9 Foreign currency translation

The consolidated financial statements are reported in Indian rupees.

The translation of the local currency of each foreign subsidiary and

foreign branches within the Group into Indian rupees is performed in

respect of assets and liabilities other than fixed assets using the

exchange rate in effect at the balance sheet date and for revenue

and expense items other than depreciation costs using a monthly

simple average exchange rate for the period. Fixed Assets are

translated at the exchange rates on the date of transaction and

depreciation on fixed assets is translated at the exchange rates

used for translation of the underlying fixed assets.

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Net exchange difference resulting from the above translation of

financial statements of foreign subsidiaries and foreign branches

is recognised in the consolidated profit and loss account.

2.10 Investments

Long-term investments are stated at cost, and provision is made

when in the management’s opinion there is a decline, other than

temporary, in the carrying value of such investments.

Current investments are carried at lower of cost and fair value,

and provision is made to recognise any decline in the carrying

value.

2.11 Taxation

Accounting Standard-22 “Accounting for Taxes on Income” (“AS-

22”) issued by the ICAI is mandatory for the Company in respect

of accounting periods commencing on or after 1 April 2002. The

Company adopted this standard in preparing the consolidated

financial statements effective 1 January 2003. In accordance

with paragraph 33 on transitional provisions of AS 22, the net

deferred tax liability of Patni aggregating Rs 19,023 that

accumulated prior to adoption of this standard as at 1 January

2003 had been charged to general reserves (Refer note 4). In

case of Patni USA and Patni UK, deferred tax asset aggregating

Rs 203,763 that accumulated prior to adoption of this standard

had been recorded as a credit to the profit and loss account

brought forward, as these entities did not have a separategeneral reserves account.

Provision for current income tax is recognised under the taxes

payable method for each company within the Group, based on

the estimated tax liability computed after taking credit for

allowances and exemptions in accordance with the local tax laws

existing in the respective countries. In case of matters under

appeal, full provision is made in the financial statements when the

Company accepts the liabilities.

Deferred tax assets and liabilities are recognised for the future

tax consequences attributable to timing differences that result

between the profits offered for income taxes and the profits as

per the financial statements. Deferred tax assets and liabilitiesare measured using the tax rates and the tax laws that have been

enacted or substantively enacted by the balance sheet date. The

effect on deferred tax assets and liabilities of a change in tax rate

is recognised in the period that includes the enactment date.

Deferred tax assets in respect of carry forward losses are

recognised only to the extent that there is virtual certainty that

sufficient future taxable income will be available against which

such deferred tax assets can be realised. Other deferred tax

assets are recognised only if there is a reasonable certainty that

sufficient future taxable income will be available against which

such deferred tax assets can be realised. Deferred tax assets

are reviewed as at each balance sheet date and are written down

or written-up to reflect the amount that is reasonably/virtually

certain (as the case may be) to be realised.

The deferred tax asset/liability and tax expense are determined

seperately for parent and each subsidiary and then aggregated.

Substantial portion of the profits of Patni are exempted from

income tax, being profits from undertakings situated at Software

Technology Parks. Under the tax holiday, Patni can utilise

exemption of profits from income taxes for a period of tenconsecutive years. Patni has opted for this exemption for its

undertakings situated in Software Technology Parks and these

exemptions expire on various dates between years 2005 and

2010. In this regard, Patni recognizes deferred taxes in respect

of those originating timing differences, which reverse after the

tax holiday period resulting in tax consequences. Timing

differences, which originate and reverse within the tax holiday

period do not result in tax consequence and therefore no

deferred taxes are recognised in respect of the same. For the

above purposes, the timing differences, which originate first, are

considered to reverse first.

2.12 Earnings per share

The basic earnings per share is computed by dividing the net

profit attributable to the equity shareholders for the period by the

weighted average number of equity shares outstanding during

the year. Diluted earnings per share is computed using the

weighted average number of equity shares and also the weighted

average number of equity shares that could have been issued on

the conversion of all dilutive potential equity shares. The dilutive

potential equity shares are adjusted for the proceeds receivable,

had the shares been actually issued at fair value. Dilutive potential

equity shares are deemed converted as of the beginning of the

year, unless they have been issued at a later date. The number

of shares and potentially dilutive equity shares are adjusted for

stock splits and bonus shares, as appropriate.

2.13 Contingencies

Loss contingencies arising from claims, litigations, assessment,

fines, penalty etc are provided for when it is probable that a

liability may be incurred, and the amount can be reasonably

estimated.

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Of the above, 14,500,000 equity shares of Rs 2 each were allotted

as fully paid bonus shares in March 1995 by capitalisation of general

reserve aggregating Rs 29,000.

In June 2001, Patni’s Board of Directors approved a sub division of

existing equity shares of Rs 10 each into 5 equity shares of Rs 2each.

The above also includes 46,867,500 equity shares of Rs 2 each

allotted as fully paid bonus shares in August 2001 by capitalisation of

share premium aggregating Rs 93,735.

In September 2002, Patni made a private placement of its

unregistered American Depository Receipt (‘ADRs’) to international

investors representing 13,441,245 equity shares having face value of

Rs 2 each. The equity shares represented by ADRs carry equivalent

rights with respect to dividends and voting as the other equity shares.

(Refer note 23 for commitment).

In December 2002, in pursuance of section 77A of the Indian

Companies Act, 1956, Patni completed buyback of 1,650,679 equity

shares by utilising the share premium account. In this regard, an

amount equivalent to the nominal value of the share capital bought

back by the Company aggregating Rs 3,301 was transferred from

general reserve to capital redemption reserve (Refer note 4).

In August 2003, the Company allotted 37,140,283 equity shares of

Rs 2 each as fully paid bonus shares by capitalization of share

premium aggregating Rs 74,281.In February 2004, Patni completed initial public offering (‘IPO’) of its

equity shares in India comprising fresh issue of 13,415,200 shares

and sale of 5,324,000 equity shares by the existing shareholders. In

this regard equity shares of Rs 2 each were issued at premium of

Rs 228 aggregating Rs 3,085,496. In respect of above, the Company

incurred IPO related expenditure aggregating Rs 225,274.

Proportionate variable IPO related expenditure pertaining to the

shares sold by the existing shareholders has been debited to the

profit and loss account and the balance has been adjusted against

share premium in accordance with section 78 of the Companies Act,

1956.

Amount received from employees on exercise of stock optionspending allotment of shares is shown as share application money.

Refer note 24 for employee stock compensation plans.

2004 2003

Authorised

250,000,000 (2003:250,000,000) equity shares of Rs 2 each 500,000 500,000

Issued, subscribed and paid - up

124,997,009 (2003: 111,420,849) equity shares of Rs 2 each ful ly paid 249,994 222,842

Share application money (Refer note below) 4,038 –

254,032 222,842

3 Share capital

2004 2003

Land revaluation reserve

Balance carried forward 7,935 7,935

Building revaluation reserve

Balance brought forward 1,677 1,758

Transfer to profit and loss account (81) (81)

1,596 1,677

Capital redemption reserve

Balance carried forward 253,301 253,301

253,301 253,301

Share premium

Balance brought forward 2,426,148 2,500,429

Share premium received on issue of equity shares (Refer note 3) 3,081,683 –

Share premium utilized in connection with share issue expenses incurred

during the period (Refer note 3). (176,068) –

Share premium utilised for issue of fully paid bonus shares (Refer note 3). – (74,281)

5,331,763 2,426,148

4 Reserves and surplus

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2004 2003

Short term (at lower of cost or fair value)Non-trade

Unquoted

3,649,636 shares (2003:Nil) of Series B-3 Preferred stock of Visage Mobile Inc. 34,103 –

321,888 shares (2003: Nil) of Series B Preferred stock of Speedera Networks, Inc. 3,410 –

Quoted

35,518,398 units (2003:Nil) Birla Cash Plus - Institutional Premium Dividend Plan Weekly 355,987 –

48,835,265 units (2003: Nil) of Deustsche Insta Cash Plus fund – Institutional Monthly Dividend 488,489 –

5,442,680 units (2003: Nil) of GCCW Grindlays Cash Fund – Inst Fund C weekly Dividend 54,436 –

5,000,000 units (2003: Nil) of G40 Grindlays Fixed Maturity – 3rd plan - Dividend 50,000 –

23,000,000 units(2003:Nil) J 120 JM Fixed Maturity Plan-YSW-Growth Option 230,000 –

26,835,640 units (2003:Nil) of Kotak Liquid (Institutional Premium) – Weekly Dividend 269,079 –

15,000,000 units (2003: Nil) of Reliance Fixed Term Scheme Annual Plan - Growth Option 150,000 –

12,000,000 units (2003: Nil) Principal Deposit Fund(FMP-6) 371 days plan growth 120,000 –

141,841 units (2003:Nil) of Templeton India treasury Management Account-Weekly

Dividend Reinvestment 141,954 –

52,422,054 units (2003: Nil) of OCIMD HSBC Cash Fund - Institutional Monthly Dividend 524,162 –

6,788,420 units (2003: Nil) of S31 Tata Liquid Super High Investment Funds- Weekly Dividend 76,104 –

12,004,290 units (2003:Nil) of HDFC Fixed Investment Plan -June 2004-Growth 120,043 –

10,000,000 units (2003:Nil) of HDFC Fixed Investment Plan -July 2004-Growth 100,000 –

4,983,105 units (2003: 6,458,490) of D50 DSP Merrill Lynch Liquidity Fund –Weekly Dividend 61,798 80,096

7,525,628 units (2003:11,012,097) of HDFC Cash Management - Saving Plan - WeeklyDividend Reinvestment Option 79,976 117,032

41,873,527 units (2003: 6,528,127) of Principal Cash Management Fund Liquid Option –

Institutional Premium Plan Weekly Dividend 418,721 65,294

Merrill Lynch Cash Management account 436,544 –

Nil units (2003:15,219,500) of Kotak Mahindra Liquid Institutional Plan –Dividend Option – 152,547

Nil units (2003: 18,274,796) of GCBW Grindlays Cash Fund –Inst Fund B weekly Dividend – 188,247

Nil units (2003: 12,644,139) of HDFC Liquid Fund Premium Plus Plan-Dividend – 151,188

Nil units (2003: 34,065,827) of J59 JM Short Term Fund –Institutional Plan-Dividend. – 342,133

Nil units (2003: 27,255,940) Templeton India Liquid fund – Weekly Dividend – 272,596

Nil units (2003: 25,312,838) Deutsche Short Maturity Fund – Monthly Dividend Plan – 258,490

Nil units (2003: 23,936,505) of HSBC Income Fund –Short term – 251,510

Nil units (2003: 17,536,330) of P 23 Inf Prudential ICICI Institutional Short term Plan-Fortnightly – 188,246

Nil units (2003: 9,112,525) of Principal Income fund –Short term Instalment plan –

Dividend Reinvestments –Monthly – 91,557

Nil units (2003: 7,526,912) of HDFC Short term Plan Premium Plus –Fortnightly – 81,457

3,714,806 2,240,393

Less: Provision for decline in the fair value of investments (55) (318)

Total 3,714,751 2,240,075

Market value of quoted investments 3,261,633 2,244,567

7 Investments

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2004 2003

Debts outstanding for a period exceeding six months– considered good 46,186 58,894

– considered doubtful 146,038 146,205

192,224 205,099

Other debts

– considered good 3,089,132 2,529,589

– considered doubtful 445 768

3,089,577 2,530,357

Less: Provision for doubtful debts 146,483 146,973

3,135,318 2,588,483

8 Sundry debtors (Unsecured)

2004 2003

Cash on hand 1,904 6,841

Cheques in hand 2,986 –

Balances with scheduled banks in current account 132,682 134,914

Balances with non scheduled banks in current account 3,226,674 2,042,457

3,364,246 2,184,212

9 Cash and bank balances

2004 2003

Advances recoverable in cash or in kind or for value to be received (Refer note below) 292,344 170,861

Advance tax (Net of provision for tax: Rs 509,594; 2003: Nil) 11,148 –

Security deposits 310,086 94,844

Certificates of deposit with foreign banks 4,397 25,960

Loan to employees 77,316 35,859

Others 23,491 25,209

718,782 352,733

Less: Provision for doubtful loans and advances 2,841 3,758

715,941 348,975

Advances recoverable in cash or in kind or for value to be received at 31 December 2003 includes auditors’ remuneration of Rs 3,986 incurred

in connection with proposed listing of equity shares of the Company.

10 Loans and advances (Unsecured)

2004 2003

Sundry creditors 178,558 90,174


Advance from customers 6,020 12,147

Deferred revenue 98,525 123,572

Unclaimed dividend 92 –

Other liabilities 1,181,646 867,430

1,588,972 1,189,315

11 Current liabilities

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2004 2003

Provision for taxation (net of advance tax: Rs 799,021; 2003: Rs 753,167) 83,331 217,561Provision for retirement benefits 707,718 571,300



1,073,714 929,692

The amount of proposed dividend includes dividend of Rs 13,415 on 13,415,200 shares issued by the Company in February 2004 on

completion of its initial public offering.

12 Provisions

2004 2003

Dividend on non-trade investments 156,815 59,042

Profit on sale of non-trade investments, net 6,544 59,485

Interest from:

– Loan to employees 322 474

– Bank deposits 32,343 12,001

– Others 1,783 1,745

Miscellaneous income 10,218 9,343

208,025 142,090

13 Other income

2004 2003

Salaries, bonus and allowances, including overseas employee expenses 7,635,181 6,228,049

Contribution to provident and other funds 154,697 115,011

Staff welfare 286,238 216,247

Pension, gratuity and leave encashment costs 346,548 252,726

8,422,664 6,812,033

14 Personnel costs

2004 2003

Outsourced service charges 544,232 492,885

Travel and conveyance 636,545 424,169

Legal and professional fees 324,151 364,503

Postage and communication 309,178 255,578

Rent 317,457 182,613

Foreign exchange loss, net 113,303 32,399

Electricity 105,849 82,474Rates and taxes 27,036 20,149

Software consumables 18,202 16,844

Advertisement and publicity 74,250 50,004

Insurance 73,601 41,993

Recruitment charges 33,596 27,916

Repairs and maintenance

– computers 79,805 43,313

– building 16,094 15,635

– others 34,930 18,463

Printing and stationery 38,285 23,153

15 Selling, general and administration costs

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2004 2003

Provision for tax expense consists of the following:

Current taxes

– Indian 6,990 21,273

– Foreign (Refer note 1 below) 383,300 407,740

390,290 429,013

Deferred tax expense/(credit)

– Indian (17,131) 15,732

– Foreign 43,528 (7,922)

26,397 7,810

416,687 436,823

The significant components of deferred tax asset and liability consists of the following:

Provision for retirement benefits 206,086 161,740

Provision for bad and doubtful debts 45,130 48,255

Deferred revenue, net 22,462 46,819


Accrued expenses 64,765 45,750

Carry forward loss 46,433 –

Others 12,643 5,952

Total deferred tax asset 417,256 334,502Cost and estimated earnings in excess of billings 32,353 35,143


US branch profit taxes 115,071 78,988

Others 25,152 –

Total deferred tax liability 232,841 160,921

17 Taxes

2004 2003

Provision for decline in the fair value of investment (263) 318

Provision for doubtful debts and advances 22,513 14,531

Training fees 24,307 14,422

Commission 25,954 35,253

Subscription, registration and license fee 14,915 5,475

Auditors’ remuneration (Refer note below) 21,285 17,138

Loss on sale of fixed assets 27,120 346

Miscellaneous expenses 110,355 87,500

2,992,700 2,267,074

Note: Auditors’ remuneration includes remuneration of subsidiary companies’ auditors.

15 Selling, general and administration costs (contd.)

2004 2003

Interest on finance lease obligations 1,453 1,277Interest on loans from banks and financial institutions 235 418

1,688 1,695

16 Interest costs

Note:

1. In respect of year 2003, prior period tax adjustment of Rs 28,304 represents short provision of foreign current taxes in respect of earlier years .

2. Upon acquisition of Cymbal Corporation, the Company is entitled to utilise tax benefits on carry forward business losses of Cymbal

Corporation. The Company has recognised a deferred tax asset on such carry forward losses only to the extent that it has timing differences,

the reversal of which will result in sufficient income. Since there is no virtual certainity for realisation of deferred tax asset for the remaining

carry forward losses, no deferred tax asset has been created on such amounts.

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18 Business acquisitionsPursuant to the shareholders agreement dated 28 September

2000 entered into between Patni, the promoter shareholders of the

Company and GE Capital Mauritius Equity Investment (GE) on

24 November 2000, the Company acquired 25% equity interest in

Patni USA for cash purchase consideration aggregating

Rs. 480,455 (equivalent to US$10,250).

The equity of Patni USA on the date of investment, representing the

proportionate residual interest in the assets of Patni USA after

deducting the liabilities, aggregated Rs. 142,858. The Company’s

cost of investment in Patni USA in excess of Patni USA’s equity on

the date of investment aggregating Rs.337,597 has been classified

as goodwill in the consolidated financials statements. The goodwill

arising on the above-mentioned investment has been determined as

follows:

Purchase consideration 480,455

Less:

Fixed assets, net 4,499

Net current assets 138,359

142,858

Goodwill 337,597

On 9 September 2002, the Company acquired the balance 75%

equity interest in Patni USA for cash purchase consideration

aggregating Rs 1,492,144 (equivalent of US$30,750). As a result

of this acquisition, Patni USA became a wholly owned subsidiary of

the Company. The equity of Patni USA on this date representing the

Company’s proportionate residual interest aggregated

Rs. 565,974. The goodwill arising on this acquisition has been

determined as follows:

Purchase consideration 1,492,144

Less:


Cash and bank balances 719,054

Net current liabilities (195,775)565,974

Goodwill 926,170

AS-23 – “Accounting for Investment in Associates in Consolidated

Financial Statements” issued by the ICAI was applicable in respect

of accounting period beginning on or after 1 April 2002 and hence

was not applicable for preparation of the consolidated financial

statements for the year ended 31 December 2002. Accordingly,

the Parent Company’s share in the profits of Patni USA for the

period following the acquisition of 25% equity interest until the date

Patni USA became a wholly owned subsidiary, aggregatingRs 45,800 has been credited to revenue reserves in the

consolidated financial statements for the year ended 31 December

2002.

In April 2003 Patni USA acquired 100% equity interest in TRI, which

is engaged in providing IT services to clients in the financial

services sector. These consolidated financial statements include

the operating results of TRI from the date of acquisition. The

purchase price of Rs 288,467 (including direct expenses of

Rs 7,978) has been paid in cash. Further, the purchase agreement

provides for payment of additional consideration not exceeding

Rs 68,625 (equivalent of US$1,500) in cash through 30 April 2005

which is contingent upon achievement of specified parameters with

respect to the acquired business as specified in the agreement.

The payment of the contingent consideration will increase the

amount of goodwill recorded in the financial statements.

The equity of TRI on the date of investment, representing the

proportionate residual interest in the assets of TRI after deducting

the liabilities aggregated Rs 153,293. Patni USA’s cost of

investment in TRI in excess of TRI’s equity on the date of investment

aggregating Rs 135,174 has been classified as goodwill in the

consolidated financials statements. The goodwill arising on the

above-mentioned investment has been determined as follows:

Purchase consideration 288,467

Less



Deferred tax asset 7,480

Net current liabilities (26,642)

153,293

Goodwill 135,174

On 3 November 2004, Patni USA acquired 100% equity interest in

Cymbal corporation which is engaged in providing IT services to

clients in the telecom sector. These consolidated financialstatements include the operating results of Cymbal Corporation

from the date of acquisition. The purchase price of Rs 1,140,982

(including direct expenses of Rs. 59,618) has been paid in cash.

Additionally in connection with the acquisition the Company incurred

Rs. 498,716 related to certain contract terminations/ settlement

and acquisition costs of Cymbal Corporation, USA. Such costs have

been recognised by the Company as liabilities assumed at the

acquisition date resulting in additional goodwill.

The equity of Cymbal on the date of investment, representing the

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18 Business acquisitions (contd.)

Business segments

As at 31 December 2004 and for the year then ended

proportionate residual interest in the assets of Cymbal after

deducting the liabilities aggregated Rs. (147,792). Patni USA’s

cost of investment in Cymbal in excess of Cymbal’s equity on the

date of investment aggregating Rs 1,288,774 has been classified

as goodwill in the consolidated financial statements. The goodwill

arising on the above-mentioned investment has been determined as

follows:

Purchase consideration 1,140,982

Less


Fixed assets, net 39,699Deferred tax asset 49,197

Net current liabilities (375,894)

(including contract termination/settlement

and acquisition related liabilities)

(147,792)

Goodwill 1,288,774

The aggregate goodwill recorded in these consolidated financial

statements comprise the following:

Total

Goodwill arising on acquisition of 25%

equity interest in Patni USA 337,597

Goodwill arising on acquisition of balance

75% equity interest in Patni USA 926,170


equity interest in TRI. 135,174


equity interest in Cymbal USA 1,288,774

Balance as at 31 December 2004 2,687,715

19 Segmental information

The Group’s operations relate to providing IT services and

solutions, delivered to customers, operating in various industry

segments. Accordingly, revenues represented along industry

classes comprise the primary basis of segmental information set

out in these consolidated financial statements. Secondary

segmental reporting is performed on the basis of the geographical

segmentation.

Industry segments of the Group comprise customers providing

financial services, insurance services, manufacturing companies,

telecommunications, technology services (comprising independent

software vendors and product engineering) and others such as

energy and utilities, retail and hospitality companies.The Group evaluates segment performance and allocates

resources based on revenue growth. Revenue in relation to

segments is categorized based on items that are individually

identifiable to that segment. Costs are not specifically allocable to

individual segments as the underlying resources and services are

used interchangeably. Fixed assets used in Group’s business or

liabilities contracted have not been identified to any of the

reportable segments, as the fixed assets and services are used

interchangeably between segments.

The Group’s geographic segmentation is based on location of the

customers and comprises United States of America, Europe, Japan

and Others, which include Rest of Asia Pacific and Rest of the

World. Revenue in relation to geographic segments is categorized

based on the location of the specific customer entity for which

services are performed irrespective of the customer entity that is

billed for the services and includes both onsite and offshore

services. Categorization of customer related assets and liabilities in

relation to geographical segments is based on the location of the

specific customer entity which is billed for the services.

The accounting policies consistently used in the preparation of the

consolidated financial statements are also consistently applied to

individual segment information. There are no inter-segment sales.

Particulars Financial Insurance Manufacturing Telecom Independent Product Others Total

services services Software Engineering

Vendor Services

Sales and service income 2,836,254 4,840,050 4,178,433 377,361 884,478 682,399 966,200 14,765,175

Sundry debtors 378,391 837,080 1,080,696 269,921 159,473 145,817 263,940 3,135,318

Cost and est imated earnings in excess of b il lings 87,834 52,456 198,590 86,901 89,935 77,103 74,571 667,390

Bil lings in excess of cost and estimated earnings (2,406) (41,272) (36,245) (4,335) (1,203) (20,836) (17,834) (124,131)

Advance from customers – (2,910) (942) – (2,055) – (113) (6,020)

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(a) Names of related parties and nature of relationship where control exists

Sr. No. Category of related parties Names

1 Affiliates 1) PCS Technology Ltd. (formerly known as PCS Industries Ltd)

2) Ashoka Computer Systems Private Ltd.

3) PCS Cullinet Private Ltd.

4) PCS Finance Ltd.

5) Ravi & Ashok Enterprises.

6) iSolutions Inc.

2 Key management personnel 1) Mr N. K. Patni

2) Mr A. K. Patni

3) Mr G. K. Patni

4) Mr Sukumar Namjoshi

5) Mr Russell Boekenkroeger (upto 31 December 2003)

6) Mr Mrinal Sattawala

3 Parties with substantial interest 1) Members of Patni family and their relatives

2) General Atlantic Mauritius Limited (‘GA’)

4 Others 1) Ravindra Patni Family Trust

Geographic segments


Particulars USA Europe Japan Others TotalSales and service income 12,969,948 1,161,832 499,999 133,396 14,765,175

Sundry debtors 2,701,399 367,797 16,004 50,118 3,135,318

Cost and estimated earnings in excess of billings 456,294 100,267 96,187 14,642 667,390

Billings in excess of cost and estimated earnings (122,385) (1,236) (123) (387) (124,131)

Advance from customers – (5,775) (245) – (6,020)


Particulars USA Europe Japan Others Total

Sales and service income 10,332,470 859,658 332,500 123,865 11,648,493

Sundry debtors 2,209,573 321,720 1,754 55,436 2,588,483

Cost and estimated earnings in excess of billings 153,759 42,909 62,944 6,192 265,804

Billings in excess of cost and estimated earnings (81,700) (6,473) (4,498) (3,321) (95,992)

Advance from customers (6,904) (3,823) – (1,420) (12,147)

19 Segmental information (Contd.)



services services Software Engineering

Vendor Services

Sales and service income 2,141,435 3,876,853 3,958,167 15,634 794,374 261,458 600,572 11,648,493

Sundry debtors 432,180 632,525 1,045,288 2,439 191,023 67,029 217,999 2,588,483

Cost and estimated earnings in excess of billings 20,220 42,153 88,819 – 74,186 7,639 32,787 265,804

Billings in excess of cost and estimated earnings (7,136) (21,096) (37,577) – (8,285) – (21,898) (95,992)

Advance from customers (11,229) – (670) – – – (248) (12,147)

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Nature of the transaction Affiliates Key management Parties with Others

personnel substantial interest

Transactions during the year ended 31 December 2004

Remuneration (Refer note below) – 160,720 – –

Donations – – – 2,500

Reimbursement of expenses by affiliates 36 – – –

Rent and other expenses 13,467 – 241 –


Security deposits 9,973 – 3,000 –

Amounts recoverable 10 – – –

Proposed dividend 36,511 35,409 118,610 –

Amounts payable 1,732 – – –

Remuneration payable to directors – 3,840 – –

Provision for pension benefits – 289,188 – –

Guarantees given 150,000 – – –Transactions during the year ended 31 December 2003

Remuneration (Refer note below) – 117,793 – –

Donations – – – 2,500

Reimbursement of expenses by affiliates 154 – – –

Rent and other expenses 11,869 – 193 –

Dividend on equity shares of subsidiary – 883 677 1,142

Balances at December 31 2003

Security deposits 9,973 – 3,000 –

Amounts recoverable 145 –

Proposed dividend 18,255 20,262 60,847 –

Remuneration payable to directors – 1,675 – –

Provision for pension benefits – 229,287 – –

Guarantees given 150,000 – – –

Note: Remuneration does not include provisions for gratuity and leave encashment in respect of Directors, as actuarial valuation is done on an

overall Company basis.

(b) Transactions and balances with related parties

Particulars 2004 2003


Less: Dividend on equity shares of subsidiary – 2,702

Profit available for equity share holders 2,577,045 1,840,215

Weighted average number of equity used in computing earnings per equity share.

– Basic 123,066,042 111,420,849

– Diluted 124,084,992 111,420,849

Earnings per equity share of Rs 2 each

– Basic 20.94 16.52

– Diluted 20.77 16.52

Face value per share (Rs) 2.00 2.00

21 Earnings per share

22 Leases

Patni has acquired certain vehicles under finance lease for a non-cancellable period of four years. At the inception of the lease, fair value of such

vehicles has been recorded as an asset under gross block of vehicles with a corresponding lease rental obligation recorded under secured loans.

As per the lease agreement, the ownership of these vehicles would not transfer to Patni. However, it contains a renewal clause.

Fixed assets include the following amounts in relation to the above leased vehicles:

As at 2004 2003

Gross block of vehicles 46,610 34,041

Less: Accumulated depreciation 18,066 9,726

Net block 28,544 24,315

20 Related party transactions (Contd.)

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(Currency: in thousands of Indian Rupees except share data)22 Leases (contd.)

Patni has operating lease agreements, primarily for leasing office space and residential premises for its employees. Most of the lease

agreements provide for cancellation by either party with a notice period ranging from 30 days to 120 days and also contain a clause for renewal

of the lease agreement at the option of the Company.

Patni USA has operating lease agreements, primarily for leasing office space, that expire over the next 1-5 years. These leases generally require

Patni USA to pay certain executory costs such as taxes, maintenance and insurance.

Rent expense for all operating leases for the year ended 31 December 2004 aggregated Rs 317,457 (2003: Rs 182,613) respectively.

TRI has entered into certain non-cancellable operating lease agreements for leasing office space, which expire through December 2005. The

lease agreements do not give any option for renewal.

The future minimum lease payments in respect of such non-cancellable operating leases are summarised below:

Minimum lease Finance charge Present value of minimumpayments lease payments

Amount due within one year from the balance sheet date 12,626 1,015 11,611

Amount due in the period between one year and five years 17,700 667 17,033

30,326 1,682 28,644

Future minimum lease payments in respect of the above assets as at 31 December 2004 are summarised below:

As at 2004 2003

Amount due within one year from the balance sheet date 299,689 170,785

Amount due in the period between one year and five years 641,830 104,237

941,519 275,022

2004 2003

Estimated amount of contracts remaining to be executed on

capital account and not provided for 1,111,437 19,829

Corporate guarantees 150,000 150,000

Outstanding forward contracts 4,491,830 3,486,870

Unamortised income in respect of forward contracts 4,917 6,459

Bank guarantees 15,504 11,384

Letters of credit 2,503 –

5,776,191 3,674,542

TRI has also entered into agreements to sub-lease part of its office premises, which expire through December 31, 2005. These agreements do

not provide for renewal option. Future minimum rentals to be received by TRI under such non-cancellable

sub-leases as at 31 December 2004 are summarised below:

2004

Amount due within one year from the balance sheet date 11,931

Amount due in the period between one year and five years 1,744

13,675

Sub lease income recognised in the statement of profit and loss for the year ended 31December 2004 aggregated Rs 18,508 (2003:Rs 15,009)

23 Capital commitments and contingent liabilities

The Company has issued equity shares to GE Capital Mauritius Equity Investment and General Atlantic Mauritius Limited, which contained certain

exit options and commitments in the event the IPO did not occur within the period stipulated in the shareholders agreement. In February 2004,

Patni completed its IPO and accordingly these exit options and commitments have lapsed.

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Certain income tax related legal proceedings are pending against the Group. Potential liabilities, if any, have been adequately provided for, and

the Group does not currently estimate any incremental liability in respect of these proceedings. Additionally, the Group is also involved in lawsuitsand claims which arise in ordinary course of business. There are no such matters pending that the Group expects to be material in relation to

its business.


On 30 June 2003 Patni established the ‘Patni ESOP 2003’ plan (‘the plan’). Under the plan, the Company is authorized to issue up to 11,142,085

equity shares to eligible employees. Employees covered by the Plan are granted an option to purchase shares of the Company subject to the

requirements of vesting. The options vest in a graded manner over four years with 25 percent of the options vesting at the end of each year.

The options can be exercised within five years from the date of vesting. A compensation committee constituted by the Board of Directors of the

Company administers the plan.

The exercise price of the grant approximated the fair value of the underlying equity shares at the date of the grant.

Stock options activity under the plan is as follows:

Year ended 31 December 2004 Shares arising Range of Weightage average

out of options exercise prices remaining contractual

life (months)

Outstanding at the beginning of the year 2,733,700 145 86

Granted during the year 100,000 254 90



Exercised during the year (188,810) 145 –


100,000 254 84

2,750,632 338 87

Exercisable at the end of the year 446,396 145 56

25 Prior period comparatives

Previous year’s figures have been appropriately reclassified to conform to the current year’s presentations.

Year ended 31 December 2003 Shares arising Exercise prices Weightage average

out of options remaining contractual

life (months)

Outstanding at the beginning of the year – – –



Exercised during the year – – –


23 Capital commitments and contingent liabilities (Contd.)

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Management’s Discussion and Analysisof the Consolidated Financials under US GAAP

OVERVIEW

We are a leading provider of information technology services.

We deliver a comprehensive range of IT services through

globally integrated onsite and offshore delivery locations

primarily in India that constitute our global delivery model. We

offer our services to customers through industry-focused

practices, including insurance, manufacturing, financial

services and telecommunications. We have also developed

technology practices that offer research, design and

development services for product engineering and to

independent software vendors, or ISVs. Within these practices,

our service lines include application development, application

maintenance and support, packaged software implementation,

infrastructure management services, product engineering

services, business process outsourcing and quality assurance

services.

Our revenues grew from $142.6 million in 2001 to $326.6

million in 2004, representing a compound annual growth rate

of 31.8%. Our net income grew from $26.3 million in 2001 to

$58.2 million in 2004, representing a compound annual growth

rate of 30.3%. Our total number of employees was 9,661 as

of December 31, 2004.

In light of this growth, we are investing in new high-tech

facilities, which we refer to as ‘‘knowledge parks,” designed

for expanding our operations and training our employees. As of

December 31, 2004 we had 159 sales and marketing

personnel supported by dedicated industry specialists in 26

sales offices around the globe, including North America,

Europe, Japan and the rest of the Asia-Pacific region.

RESULTS OF OPERATIONS

Our financial statements for 2002, 2003 and 2004 have been

prepared on a consolidated basis in accordance with

accounting practices generally accepted in the U.S.

The following table sets forth certain financial information as a

percentage of revenues, calculated from our consolidated

financial statements under U.S. GAAP:

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YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR

ENDED DECEMBER 31, 2003

Revenues

In 2004, our revenues were US$ 326.6 million, representing

an increase of 30.1% compared to US$ 251.0 million in 2003.

While the organic business operations grew due to an increase

in business from new and existing customers, revenues were

further augmented by the consolidation of the recently

acquired Cymbal Corporation effective November 3, 2004.

During 2004, billable volumes (measured in terms of man-

months billed) from work performed at both our offshore and

onsite locations were higher compared to the previous year.

On an overall basis, the proportionate work volume contribution

from our India-based offshore delivery locations increased

during 2004. Also, average offshore billing rates per man-

month improved marginally.

During 2004, we added 55 new clients and as a result our

active client relationships increased to 170. In addition, the

number of clients contributing revenues of over a million

dollars annually increased to 46 in the year ended December

31 2004 from 26 in the year ended December 31 2003.

Our software services contracts are structured either on fixed

price or time and material (T&M) basis. During 2004, revenues

from T&M projects increased by 44.0% over 2003, while

revenues from fixed price contracts and fixed price SLA

contracts were higher by 15.2%. Revenue contribution from

T&M projects during 2004 was higher at 57.4% compared to

51.9% in the previous year.

During 2004, our client concentration reduced significantly –

with the top client GE contributing 31.7% of revenues

compared to 41.2% in 2003. GE revenues in 2004 remained

at close to the previous year’s levels, while the revenues from

all our other clients grew by 51.1%. Our top 10 clients

(excluding GE) contributed 37.3% of the revenues during 2004

compared to 38.3% in 2003. Revenues from clients outside

the top 10 grew by 97.3% in 2004 compared to 2003.

We derive a large proportion of our revenues from financial

services, insurance and manufacturing verticals. During 2004,

our revenues from the insurance, manufacturing and financial

services verticals were higher by 28.4%, 8.2% and 34.6%

respectively compared to the previous year and contributed

32.8%, 28.3% and 19.2% respectively to overall revenues. We

Year ended December 31 2002 2003 2004(restated)

Revenues 100.0% 100.0% 100.0%

Cost of revenues 55.8% 61.3% 60.8%

Gross profit 44.2% 38.7% 39.2%

Selling, general and administrative expenses 20.1% 19.8% 18.6%

Provision for doubtful debts and advances 0.9% 0.1% 0.2%

Foreign exchange gain (loss), net (0.2%) – 0.6%

Operating income 23.4% 18.8% 19.8%

Interest and dividend income 0.4% 0.6% 1.3%

Interest expense (0.3%) (0.0%) (0.0%)

Gain on sale of investments, net 0.2% 0.5% 0.0%

Other income/(expense), net 0.0% 0.1% (0.4%)

Change in fair value of put option – 0.5% –

Income before income taxes 23.7% 20.5% 20.7%

Income taxes 4.6% 3.2% 2.9%

Cumulative effect due to adoption of new accounting principle (SFAS 150) – 1.3% –

Net income 19.1% 18.6% 17.8%

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also significantly expanded operations in our

telecommunication practice with the acquisition of Cymbal. We

expect the level of vertical diversification of our revenues toincrease further with the telecom business accruing for the

entire year in future. Our other industry practices contributed

6.6% and 5.1% of our revenues in 2004 and 2003. Our ISV

practice contributed 5.9% and 6.8% of our revenues in 2004

and 2003 and our product engineering practice contributed

4.6% and 2.2% of our revenues in 2004 and 2003.

During 2004, we continued to derive a significant part of our

revenues from clients located in the U.S. In 2004 and 2003,

we derived 87.8% and 88.8% of our revenues from clients

located in the U.S. Our U.S. based revenues grew by 28.6% in2004 whereas revenues from other regions grew by 41.9%,

further adding to the level of revenue diversification.

Cost of revenues

In 2004, our cost of revenues increased to US$ 198.5 million,

representing an increase of 29.0% compared to US$ 153.9

million in 2003.

During 2004, cost of revenues was higher due to the addition

of 2,570 employees and the implementation of annual salary

revisions in April 2004. This resulted in an increase of US$

27.9 million from salaries of billable employees. Other

incidental expenditure towards travel, insurance and employee

transportation increased by US$ 6.0 million during 2004.

The expansion of physical infrastructure at Bangalore, Pune,

Mumbai, Navi Mumbai, Chennai and Noida led to higher rental

charges and related expenditure on the set-up, operation and

maintenance of these centers. Such expenses were higher by


Cost of revenues also increased by US$ 5.5 million due to

costs associated with our operation of Cymbal.

The increase in our cost of revenues was partially offset by the

fact that a larger proportion of our employees were located in

India during 2004 and offshore resource utilization also saw

some improvement. In addition, we rationalized the use of sub-

contractors and external consultants on project delivery

outside India and thereby sub-contractor costs (excluding

Cymbal’s sub-contractor costs) were lower by US$ 2.1 million.

Deferred costs related to unbilled contracts, mainly pertaining

to fixed-price billing contracts, as per SAB 101 increased by

US$ 1.30 million.

Depreciation charged on delivery-related assets increased by31.3% or US$ 2.3 million during 2004. The infrastructure at

several of our development locations was augmented, and

therefore the depreciation charge was higher. We added two

new delivery locations – Bangalore and Hyderabad – during

2004 and expect to inaugurate ‘Knowledge Parks’ at Navi

Mumbai and Chennai over the next few months. As the existing

Chennai center is due to shift to its new location, accelerated

depreciation has been charged on the existing asset base in

the second half of 2004. The gross block of our fixed assets

increased by about US$ 24.6 million.

Gross profit

Gross profit during 2004 increased to US$ 128.1 million from

US$ 97.2 million in 2003, representing an increase of 31.8%.

Gross margins in 2004 were higher at 39.2% compared to

38.7% in 2003. We have effectively managed cost of delivery

by creating greater operational efficiency, increasing offshore

contribution and keeping sharp control over resource utilization

levels. These initiatives have had a positive impact on gross

margins.

SG&A expenses

During 2004, our selling, general and administrative (SG&A)

expenses were at US$ 60.7 million, representing an increase

of 22.0% compared to US$ 49.8 million in 2003. In 2004,

SG&A expenses as a percentage of our revenues decreased to

18.6% from 19.8% in 2003, as we leveraged our established

customer facing strengths to expand our business.

During 2004, our sales and marketing expenses were US$

23.2 million, representing an increase of 12.4% from US$

20.7 million in 2003. We continued to invest in sales and

marketing resources in key markets, adding 29 sales and

marketing personnel in 2004. Focused brand building initiatives

were also accelerated. We believe that our investment in

selling and marketing expenses has contributed to the growth

and diversification of our client revenues.

Our general and administrative (G&A) expenses were at US$

37.5 million in 2004, representing an increase of 28.6% from

US$ 29.1 million in 2003. This increase was due to higher

8/7/2019 Patni_AR_2004


compensation costs associated with our expansion and the

Cymbal acquisition, and costs relating to the consolidation of

our offices in the U.S.

Overall, the increase of US$ 10.9 million in SG&A expenses

during 2004 resulted from an increase of US$ 2.2million in

compensation paid to employees and Directors; US$ 2.5

million in organizational / administrative expenses; US$ 1.1

million in consulting fees; and US$ 0.7 million in branding and

sales promotion expenses. In addition, there was a one-time

expense of US$ 1.0 million for termination of lease premises

and additional expenses of US$ 1.7 million from Cymbal.

The depreciation charge on indirect assets was US$ 2.3

million in 2004, representing an increase of 5.1% from US$2.2 million in 2003, as we tightly managed our non-billing

assets and leveraged our existing resources to create

opportunities for growth.

Provision for doubtful debts

During 2004, the provision for bad and doubtful debts was

US$ 0.5 million compared to US$ 0.3 million in 2003. This

provision was at 0.7% of average debtors in 2004 compared

to 0.5% in 2003.

Foreign exchange gain/loss

During 2004, the continued depreciation of the U.S. dollar

relative to the Indian rupee caused us to revalue our

receivables and in turn resulted in forex losses of US$ 2.1

million compared to gains of US$ 0.2 million in 2003. In the

fourth quarter of 2004, anticipating further weakness in the

value of the dollar relative to the rupee, we significantly

increased our forward foreign exchange contracts coverage to

mitigate the effects of further depreciation.

Operating incomeOur operating income was US$ 64.8 million in 2004,

representing an increase of 37.0% from US$ 47.3 million in

2003. Operating margins improved to 19.8% in 2004

compared to 18.8% in 2003. Our operating income has been

adversely affected by the appreciation of the rupee, which

moved from Rs. 45.6 against the U.S. dollar as of December

31, 2003 to Rs. 43.3 as of December 31, 2004. A substantial

portion of our revenues is in dollars, which was not affected by

the appreciation of the rupee. However, the cost of revenues

and SG&A expenses incurred in India increased due to the

exchange rate impact. This increase was partially offset by our

income from forward foreign exchange contracts.

Other income

Other income (including net interest and dividend income,

profit/loss on sale of investments and other income) was

US$ 2.9 million during 2004, representing a decrease of 3.3%

compared to 2003. During 2004, funds under management

increased significantly following the inflow from our IPO and we

continued to generate positive cash flows from operations.

However, other income was impacted due to the lower yields

on fixed income investments made by the Company. In

addition, the Cymbal acquisition resulted in a cash outflow of

US$ 32.5 million towards the close of 2004.

Change in fair value of put option

Arrangements entered into with two investors in our equity

shares gave such investors the right to sell their shares to us if

we did not publicly list our shares within a specified period. A

change in accounting principle (SFAS 150) characterized this

right as a put right which requires separate accounting for

changes in value to be accounted through the income

statement. This change was $1.2 million in 2003, whichreflects the movement in fair value of the put option between

July 1, 2003 (the adoption date of FASB 150) and December

31, 2003. The value of the put option has been determined

using the binomial model and taking into account factors such

as volatility, expected life of the option and discount rate.

Upon completion of our initial public offering in February 2004,

the fair value of the put option was reduced to zero. See Note

3 to our consolidated financial statements.

Income before income taxesOur income before income taxes (EBT) in 2004 was US$ 67.7

million compared to US$ 51.4 million in 2003, representing an

increase of 31.5%. EBT margin was higher at 20.7% in 2004

from 20.5% in the previous year.

Income taxes

We provided US$ 9.5 million for income taxes in 2004,

representing an increase of 17.8% compared to US$ 8.0

million in 2003. The effective tax rate was lower at 14.0% in

8/7/2019 Patni_AR_2004


2004 compared to 15.6% in 2003, primarily due to an

increase in the percentage of work performed offshore. This in-turn increased the proportion of profits earned from the Indian

operations that enjoy greater tax benefits.

Cumulative effect due to adoption of new accounting

principle

As required by the new accounting principle (SFAS 150)

discussed above, the cumulative effect of movement in value

of the put option from the date of issue of the put option to

the date of adoption of the accounting principle in the amount

of $3.3 million has been recognised as a cumulative change in

accounting principle through our 2003 statement of income.

See Note 3 to our consolidated financial statements.

Net income

Net income during 2004 was US$ 58.2 million, representing

an increase of 24.7% compared to US$ 46.7 million in the

previous year. As a percentage of our revenues, income

before cumulative effect of change in accounting principle

increased to 17.8% in 2004 from 17.3% in 2003. Net margin

was at 17.8% in 2004 compared to 18.6% in 2003.

Liquidity and capital resources

Our operations and our growth have been financed by cash

generated from operations and from the proceeds of sales of

equity shares. We received net proceeds of $64.3 million from

our initial public offering in India in 2004. Prior to 2004, we

received net proceeds of $61.3 million from our sale of equity

shares to General Electric and General Atlantic.

As of December 31, 2004 our liquid assets stood at US$

162.8 million, which included cash and cash equivalents of

US$ 77.1 million, investments in liquid mutual fund units of

US$ 55.4 million and investment in debt mutual funds in Indiaof US$ 30.3 million. Our working capital as of December 31,

2004 stood at US$ 57.2 million and we had no outstanding

bank borrowings or long-term debt on that date.

Net cash provided by operating activities during 2004 was

US$ 49.7 million compared to US$ 41.4 million in 2003. This

variance was primarily due to increase in net income by US$

11.5 million in 2004. In addition, during 2004, depreciation

was higher by US$ 2.4 million; deferred taxes increased by

US$ 1.5 million; other provisions increased by US$ 2.8 million;

increase on account of SFAS 150 $4.5 million. Other liabilitiesincluding current liabilities also reduced by US$ 3.1 million.

These gains in operating cash generation were partly offset by

the increase in accounts receivable by US$ 0.8 million;

increase of US$ 2.5 million in costs and estimated earnings in

excess of billings on uncompleted contracts; and increases in

other assets by US$ 2.4 million, taxes payable by US$ 2.7

million and accrued expenses by US$ 3.2 million.

Net cash used in investing activities during 2004 and 2003

was US$ 86.7 million and US$ 28.1 million. The principal

components of this variance were the increased investment inproperty, plant and machinery by US$ 8.4 million; increase in

the net purchases of investment securities by US$ 12.4

million; and increase in the net investments in liquid mutual

fund units by US$ 8.5 million. In addition, the initial cash

consideration paid for the acquisition of Cymbal Corporation

resulted in a net cash outflow of US$ 32.5 million during 2004.

During 2003, there had been a net cash outflow of US$ 3.0

million paid towards the acquisition of The Reference Inc.

Net cash provided by financing activities during 2004 was US$

60.8 million compared to net cash of US$ 0.9 million used in2003. This variance was primarily due to the receipt of the

proceeds from our IPO & ESOPs exercised, which amounted to

US$ 64.8 million. This was however partly offset by the

dividend pay-out of US$ 4.1 million on the increased share

capital in 2004 compared to US$ 1.0 million paid out in the

previous year.

Our capital expenditures in 2004, 2003 and 2002 were $22.9

million, $14.0 million and $12.8 million. These capital

expenditures were primarily to finance the expansion of our

existing facilities as well as the construction of new facilities in

India. We anticipate capital expenditures of between

approximately $225 million to $275 million from 2005 through

2007, principally to finance construction of our new knowledge

park facilities in Navi Mumbai and Chennai and other facilities

and physical infrastructure in India. We believe that existing

cash and cash equivalents, funds generated from operations

and the proceeds of our planned American Depository

Receipts (ADR) offering will be sufficient to meet these

requirements.

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CONSOLIDATED FINANCIALS UNDER US GAAP

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders


As of December 31, 2003 and 2004 and for the years ended December 31, 2002, 2003 and 2004

We have audited the accompanying consolidated balance sheets

of Patni Computer Systems Limited and subsidiaries (‘the

Company’) as of December 31, 2004 and 2003, and the related

consolidated statements of income, shareholders’ equity and

comprehensive income, and cash flows for each of the years in

the three-year period ended December 31, 2004. These

consolidated financial statements are the responsibility of the


opinion on these consolidated financial statements based on our

audits.

We conducted our audits in accordance with the standards of

the Public Company Accounting Oversight Board (United States).

Those standards require that we plan and perform the audit to

obtain reasonable assurance about whether the financial

statements are free of material misstatement. An audit includes

examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements. An audit also

includes assessing the accounting principles used and

significant estimates made by management, as well as

evaluating the overall financial statement presentation. We

believe that our audits provide a reasonable basis for our

opinion.

In our opinion, the consolidated financial statements referred to

above present fairly, in all material respects, the financial

position of Patni Computer Systems Limited and subsidiaries asof December 31, 2004 and 2003, and the results of their

operations and their cash flows for each of the years in the

three-year period ended December 31, 2004, in conformity with

U.S. generally accepted accounting principles.

As discussed in note 3, the Company has restated its 2003

financial statements and consolidated statement of

shareholder’s equity and comprehensive income in its 2004

financial statements.

KPMG

Mumbai, India

January 31, 2005, except as to notes 3 which is as of April 12,

2005

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102

Consolidated Balance Sheet

As at December 31, 2003 2004(Restated) (Restated)

ASSETS

Current assets

Cash and cash equivalents $ 47,939,550 $ 77,143,498

Investments in liquid mutual fund units 22,539,753 55,372,919

Investment in securities 26,704,810 30,249,800

Accounts receivable, net 56,614,716 72,004,913

Costs and estimated earnings in excess of billings on uncompleted contracts 5,827,345 15,233,440

Deferred income taxes 5,450,560 5,951,315

Other current assets 5,829,569 10,575,425

Total current assets 170,906,303 266,531,310

Deferred income taxes 1,064,950 –

Other assets 3,201,358 5,987,387

Property, plant and equipment, net 41,505,305 55,074,565

Intangible assets, net 780,499 11,987,830

Goodwill 2,594,374 24,677,771

Total assets $ 220,052,789 $ 364,258,863

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities

Capital lease obligation $ 182,470 $ 266,242

Trade accounts payable 1,986,378 3,673,205

Billings in excess of costs and estimated earnings on uncompleted contracts 2,100,982 2,846,346

Income taxes payable 4,887,715 2,401,948

Deferred income taxes – 115,659

Accrued expenses 15,213,627 20,779,367

Other current liabilities 13,661,117 16,531,146

Total current liabilities 38,032,289 46,613,913

Capital lease obligations excluding current instalments 357,448 390,586

Other liabilities 5,327,272 6,210,119

Deferred income taxes 2,669,160 7,343,266

Total liabilities 46,386,169 60,557,884

Shareholders’ Equity

Common shares Rs. 2 par value; Authorized 250,000,000 shares(Issued and outstanding; 111,420,849 shares and 124,997,009 shares

as of December 31, 2003 and 2004 respectively). 4,942,505 5,542,301

Additional paid-in capital 116,722,000 180,906,859

Retained earnings 53,527,459 108,653,365

Accumulated other comprehensive income/(loss) (1,525,344) 8,598,454

Total Shareholders’ Equity 173,666,620 303,700,979

Total liabilities and Shareholders’ Equity $ 220,052,789 $ 364,258,863

See accompanying notes to the consolidated financial statements.

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104

Consolidated Statements of Stockholders’ Equity and Comprehensive Income

(in $ except share data)

Common shares Additional Retained Comprehensive Accumulated ShareholdersPaid-In-Capital Earnin]gs Income Oher Equity

Comprehensive

Shares Par value IncomeBalance as at January 1, 2002 84,375,000 $2,883,160 $557,438 $59,424,104 ($8,102,390) $54,762,312Cash dividend on common shares ($850,173) ($850,173)Accretion of redeemable common shares ($9,752,506) ($9,752,506)Reclassification of redeemable commonshares sold by promoter shareholderssubject to a put (14,103,680) (376,098) (39,496,678) (39,872,776)Reclassification of redeemable commonshares acquired by promoter shareholdersnot subject to a put 2,108,802 14,059 5,947,775 5,961,834Distribution to promoter shareholders onacquisition of Patni Computer Systems Inc. (30,746,250) (30,746,250)Acquisition and retirement of commonshares from promoter shareholders (2,476,019) (264,485) (6,735,515) (7,000,000)Comprehensive incomeNet income 36,011,877 36,011,877 36,011,877Other comprehensive income:

Translation adjustment 607,266 607,266Unrealised gain on investments,net of tax of $263,068 542,842 542,842Minimum pension liability,net of tax of $9,676 (165,850) (165,850)Comprehensive income 36,996,135 984,258Balance as at December 31, 2002 69,904,103 $2,256,636 $6,505,213 $7,854,859 ($7,118,132) $9,498,576

Common shares Additional Retained Comprehensive Accumulated ShareholdersPaid-In-Capital Earnings Income Other Equity

ComprehensiveShares Par value Income

(Restated)

Balance as at December 31, 2002 69,904,103 $2,256,636 $6,505,213 $7,854,859 ($7,118,132) $9,498,576

Cash dividend on common shares (998,623) (998,623)Stock Dividend 1,016,861 (1,016,861)

Reclassification of redeemable commonshares on adoption of SFAS No. 150 41,516,746 1,669,008 115,703,768 117,372,776Transition adjustment on adoptionof SFAS No. 150

For net carrying amount ofput option (Note 3) (4,470,120) (4,470,120)

Comprehensive incomeNet income 46,671,223 46,671,223 46,671,223Other comprehensive income:

Translation adjustment 6,456,104 6,456,104Unrealised loss on investments, netof tax of $204,656 (356,228) (356,228)Minimum pension liability, netof tax of $338,425 (507,088) (507,088)Comprehensive income 52,264,011 5,592,788

Balance as at December 31, 2003 111,420,849 $4,942,505 $116,722,000 $53,527,459 ($1,525,344) $173,666,620Common shares issued through an Initial

Public Offering, net of expenses 13,415,200 592,675 63,675,676 64,268,351Issuance of equity shares onexercise of options 160,960 7,121 509,183 516,304Cash dividend on common shares (3,061,551) (3,061,551)Comprehensive income

Net income 58,187,457 58,187,457 58,187,457Other comprehensive income:

Translation adjustment 9,549,971 9,549,971Unrealised gain on investments,net of tax of $142,362 241,535 241,535Minimum pension liability,net of tax of $153,253 332,292 332,292

Comprehensive income 68,311,255 10,123,798Balance as at December 31, 2004 124,997,009 5,542,301 180,906,859 108,653,365 8,598,454 303,700,979

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Consolidated Statements of Cash Flows

Year ended December 31, 2002 2003 2004(Restated)

Operating activities

Net income $36,011,877 $46,671,223 $58,187,457

Adjustments to reconcile net income to net cash

provided by operating activities

Depreciation and amortization 6,457,986 9,127,418 11,543,775

Deferred taxes (1,838,087) (659,546) 835,383

Provision for doubtful debts and advances 1,747,877 305,201 495,618

Cumulative effect of a change in accounting principle – (3,273,960) –

Others (394,614) (1,281,843) 1,474,292

Change in fair value of put option – (1,186,160) –

Changes in assets and liabilities

Accounts receivable (14,735,721) (9,580,494) (10,400,590)

Costs and estimated earnings in excess of

billings on uncompleted contracts (613,226) (2,558,554) (5,032,911)

Other current assets 7,238,362 (3,800,150) (3,445,375)

Other assets (770,509) (292,911) (2,714,988)

Trade accounts payable 447,496 200,994 18,445

Billings in excess of costs and estimated earnings on

uncompleted contracts 1,095,958 692,262 634,645

Taxes payable 6,298,724 (1,147,543) (3,806,110)

Accrued expenses 4,219,751 2,638,374 (569,178)

Other current liabilities 3,705,620 3,602,235 1,647,144

Other liabilities 1,287,499 1,925,431 817,726

Net cash provided by operating activities $50,158,993 $41,381,977 $49,685,333

Investing activities

Purchase of property, plant and equipment (12,848,621) (14,014,277) (22,851,274)

Proceeds from sales of property, plant and equipment 17,619 70,105 509,570

Purchase of investment securities (62,650,383) (84,218,119) (68,507,215)

Proceeds from sale of investment securities 29,245,538 95,256,878 67,149,337

Purchase of investments in liquid mutual fund units (13,453,068) (69,622,903) (187,094,707)

Proceeds from sale of investments in liquid mutual fund units 13,576,994 47,478,842 156,499,620

Payments for acquisition, net of cash acquired – (3,038,154) (32,450,060)

Net cash used in investing activities $(46,111,921) $(28,087,628) $(86,744,729)


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106

Consolidated Statements of Cash Flows (Contd.)

Year ended December 31, 2002 2003 2004(Restated)

Financing activities:Repayment of short-term borrowings from banks, net (5,761,281) – –

Proceeds from capital lease obligations incurred 298,890 272,016 390,561

Capital lease obligations repaid (2,165,070) (166,479) (301,474)

Repayment of long term debt (5,942,383) – –

Dividend on common shares (850,173) (998,623) (4,082,647)

Proceeds from issuance of redeemable common shares, net 55,535,250 – –

Repurchase of common shares from promoter shareholders (7,000,000) – –

Distribution to promoter shareholders on acquisition of

Patni Computer Systems Inc. (30,746,250) – –

Proceeds from common shares issued, net of expenses – – 64,784,655Net cash provided by/(used in) financing activities $3,368,983 $(893,086) $60,791,095

Effect of exchange rates changes on cash and cash equivalents (270,434) 2,737,437 5,472,249

Net increase in cash and cash equivalents 7,416,055 12,401,263 23,731,699

Cash and cash equivalents at the beginning of the period 25,655,229 32,800,850 47,939,550

Cash and cash equivalents at end of the period $ 32,800,850 $ 47,939,550 $ 77,143,498

Supplemental disclosure of cash flow information

Interest paid $581,018 $36,295 $35,152

Income taxes paid $3,751,080 $9,741,716 $12,536,145

Non cash investing and financing activities:

Additions to property, plant and equipment, represented bycapital lease obligations $369,425 $275,080 $393,184

Stock dividend – $1,016,861 –


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Notes to the consolidated financial statements

1 Organization and nature of business

1.1.1 Patni Computer Systems Limited (“Patni”) is a companyincorporated in India under the Indian Companies Act, 1956.

On September 18, 2003, Patni converted itself from a private

limited company into a public limited company and changed its

name from Patni Computer Systems (P) Limited to Patni

Computer Systems Limited. In February 2004, Patni completed

initial public offering of its equity shares in India.

1.1.2 Patni Computers Systems (UK) Limited (“PatniUK”, a company

incorporated in UK) and Patni Computer Systems GmbH (“Patni

GmbH”, a company incorporated in Germany) are 100%

subsidiaries of Patni. Patni Computer Systems, Inc. (“Patni

USA” formerly known as Data Conversion Inc “DCI”), is a

company incorporated in Massachusetts, USA. In September2002, Patni acquired the remaining 75% in Patni USA from its

controlling shareholders, Patni family. Prior to its acquisition of

Patni USA, the financial statements were presented on a

combined basis, as Patni and Patni USA were entities under

common control. In April 2003, Patni USA acquired 100%

equity in The Reference Inc. (“TRI”) a company incorporated in

Massachusetts, USA for consideration in cash. On November

3, 2004, Patni USA, acquired 100% equity in Cymbal

Corporation ("Cymbal") a company incorporated in California,

USA, together with its subsidiaries in India, UK & Thailand, for

consideration in cash. Further, Patni also has foreign branch

offices in USA, Japan, Sweden and Australia.

1.1.3 Patni together with its subsidiaries (collectively, "Patni Group"

or "the Company") is engaged in IT consulting, software

development and Business Process Outsourcing ("BPO"). The

Company provides multiple service offerings to its clients

across various industries comprising financial services,

insurance services, telecommunications services,

manufacturing, and technology services (comprising

independent software vendors and product engineering) and

other industries such as energy and utilities, retail, logistics

and transportation, and media and entertainment. The various

service offerings comprise application development,

application maintenance and support, packaged software

implementation, infrastructure management services, productengineering services, quality assurance services and BPO

services.

1.1.4 These financial statements are prepared on a consolidated

basis for all the years presented. As previously mentioned,

Patni acquired the remaining 75% in Patni USA in September

2002. The initial 25% was acquired in October 2000. All these

acquisition transactions over and above the book value of the

net assets acquired were reflected as distribution to the

shareholders with a corresponding charge to the retained

earnings.

2 Summary of significant accounting policies

Basis of preparation of financial statements2.1.1 The accompanying consolidated financial statements have

been prepared in accordance with accounting principles

generally accepted in the United States.

Principles of consolidation

2.1.2 The consolidated financial statements include the financial

statements of Patni and all of its subsidiaries, which are more

than 50% owned and controlled. All material inter-company

accounts and transactions are eliminated on consolidation. The

Company accounts for investments by the equity method

where its investment in the voting stock gives it the ability to

exercise significant influence over the investee. In addition, the

Company will consolidate any Variable Interest Entity if it is

determined to be a primary beneficiary in accordance with

FASB interpretation 46(R), "Consolidation of Variable Interest

Entities".

Accounting estimates

2.1.3 The preparation of financial statements in conformity with US

GAAP requires that management makes estimates and

assumptions that affect the reported amount of assets and

liabilities and disclosures of contingent assets and liabilities as

of the date of the financial statements and the reported

amounts of revenue and expenses during the reporting period.

Management believes that the estimates used in thepreparation of the consolidated financial statements are

prudent and reasonable. The actual results could differ from

these estimates.

Revenue and cost recognition

2.1.4 The Company derives its revenues primarily from software

services and to a lesser extent from BPO services. Software

services are provided either on a fixed price, fixed time frame

or on a time and material basis. Revenue with respect to time-

and-material contracts is recognised as related services are

performed. Revenue with respect to fixed-price contracts is

recognised on a percentage of completion basis. In measuring

the progress towards completion, the Company has used input(costs expended) method as there is a direct relationship

between input and productivity. Guidance has been drawn from

paragraph 95 of Statement of Position (“SOP”) 97-2,

"Software Revenue Recognition" to account for revenue from

fixed price arrangements for software development and related

services in conformity with SOP-81-1. The input method has

been used because management considers this to be the best

available measure of progress on these contracts as there is a

direct relationship between input and productivity.

2.1.5 The asset, “Cost and estimated earnings in excess of billings

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108

Notes to the consolidated financial statements (Contd.)

on uncompleted contracts”, represents revenues recognised

in excess of amounts billed. These amounts are billed after themilestones specified in the agreement are achieved and the

customer acceptance for the same is received. The liability,

“Billings in excess of costs and estimated earnings on

uncompleted contracts”, represents billings in excess of

revenues recognised.

2.1.6 Direct and incremental contract origination and set up costs

incurred in connection with support/maintenance service

arrangements are charged to expense as incurred. These

costs are deferred only in situations where there is a

contractual arrangement establishing a customer relationship

for a specified period. The costs to be deferred are limited to

the extent of future contractual revenues. Further, revenue

attributable to set up activities is deferred and recognised

systematically over the periods that the related fees are

earned, as services performed during such period do not result

in the culmination of a separate earnings process.

2.1.7 Warranty costs on sale of services are accrued based on

managements’ estimates and historical data at the time related

revenues are recorded.

2.1.8 The Company grants volume discounts to customers in the

form of free services in future. The Company accounts for such

volume discounts by allocating a portion of the revenue on the

related transactions to the service that will be delivered in

future in accordance with EITF 01-9 "Accounting forConsideration Given by a Vendor to a Customer (including a

Reseller of the Vendor's Products)". Reimbursement of out of

pocket expenses received from customers have been included

as part of revenues in accordance with EITF 01-14 “Income

Statement Characterization of Reimbursements Received for

‘Out of Pocket’ Expenses Incurred”.

2.1.9 Revenue from BPO is recognised on proportionate

performance method.

Cash and cash equivalents

2.1.10 The Company considers investments in highly liquid

investments with an original maturity of three months or less tobe cash equivalents. Cash and cash equivalents comprise cash

and cash on deposit with banks.

Investments

2.1.11 Management determines the appropriate classification of

investment securities at the time of purchase and re-evaluates

such designation at each balance sheet date. At December 31,

2003 and 2004, all investment securities were classified as

available-for-sale and consisted of units of mutual funds.

2.1.12 Available-for-sale securities are carried at fair market value with

unrealized gains and losses, net of deferred income taxes,

reported as a separate component of other comprehensiveincome in the statement of shareholders’ equity and

comprehensive income. Realized gains and losses, and decline

in value judged to be other than temporary on available-for-sale

securities are included in the consolidated statements of

income. The cost of securities sold or disposed is determined

on ‘first in first out’ basis.

Business combinations, goodwill and intangible assets

2.1.13 In June 2001, the Financial Accounting Standards Board (FASB)

issued SFAS No. 141, “Business Combinations” and SFAS No.

142, “Goodwill and Other Intangible Assets”. SFAS No. 141

requires that the purchase method of accounting be used for

all business combinations. SFAS No. 141 specifies criteria thatintangible assets acquired in a business combination must be

recognised and reported separately from goodwill. In

accordance with SFAS No. 142, all assets and liabilities of the

acquired businesses including goodwill are assigned to

reporting units.

2.1.14 On the date of adoption of SFAS No. 142, the Company did not

have any goodwill or intangible assets.

2.1.15 Goodwill represents the cost of the acquired businesses in

excess of the fair value of identifiable tangible and intangible

net assets purchased. Goodwill is not amortized but is tested

for impairment on an annual basis, relying on a number of

factors including operating results, business plans and future

cash flows. Recoverability of goodwill is evaluated using a two-

step process. The first step involves a comparison of the fair

value of a reporting unit with its carrying value. If the carrying

amount of the reporting unit exceeds its fair value, the second

step of the process involves a comparison of the fair value and

carrying value of the goodwill of that reporting unit. If the

carrying value of the goodwill of a reporting unit exceeds the

fair value of that goodwill, an impairment loss is recognised in

an amount equal to the excess. Goodwill of a reporting unit will

be tested for impairment between annual tests if an event

occurs or circumstances change that would more likely than

not reduce the fair value of the reporting unit below its carryingamount.

2.1.16 Intangible assets are amortized over their respective individual

estimated useful lives in proportion to the economic benefits

consumed in each period. Intangible assets comprise

customer related intangibles and are being amortized over a

period up to 15 years. The estimated useful life of an

identifiable intangible asset is based on a number of factors

including the effects of obsolescence, demand, competition

and other economic factors (such as the stability of the

industry, and known technological advances) and the level of

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maintenance expenditures required to obtain the expected

future cash flows from the asset.2.1.17 Intangible assets are evaluated for recoverability whenever

events or changes in circumstances indicate that their carrying

amounts may not be recoverable. Recoverability of assets to

be held and used is measured by a comparison of the carrying

amount of an asset to future undiscounted net cash flows

expected to be generated by the asset. If such assets are

considered to be impaired, the impairment to be recognised is

measured by the amount by which the carrying value of the

assets exceeds the fair value of the assets.

Property, plant and equipment

2.1.18 Property, plant and equipment are stated at cost lessaccumulated depreciation and amortization. Gains and losses

on disposals are included in the consolidated statements of

income at amounts equal to the difference between the net

book value of the disposed assets and the net proceeds

received upon disposal. Expenditures for replacements and

improvements are capitalized, whereas the cost of

maintenance and repairs is charged to income when incurred.

2.1.19 Property, plant and equipment are depreciated over the

estimated useful life of the asset using the straight-line method,

once the asset is ready for its intended use. The cost of

software obtained for internal use is capitalized and amortized

over the estimated useful life of the software. The estimated

useful lives of assets are as follows:

Buildings 40 years

Leasehold premises Over the lease period or the

and improvements useful lives of the assets,

whichever is shorter

Computer – Hardware 3 years

and software and other

service equipments

Furniture and fixtures 3-8 years

Other equipment 3-8 years

Vehicles 4-5 years

Impairment of long-lived assets and long-lived assets to

be disposed

2.1.20 Long-lived assets and certain identifiable intangibles are

reviewed for impairment whenever an event or changes in

circumstances indicate that the carrying amount of such

assets may not be recoverable. Recoverability of assets to be

held and used is measured by a comparison of the carrying

amount of an asset to future net undiscounted cash flows

expected to be generated by the asset. If such assets are

considered to be impaired, the impairment to be recognised ismeasured by the amount by which the carrying amount of the

assets exceeds the fair value of assets. Assets to be disposed

of are reported at the lower of the carrying amount or fair value

less cost to sell.

Functional and Foreign currency translation

2.1.21 The functional currency of Patni and its branches in the US,

Japan, Sweden and Australia is the Indian Rupee. The functional

currencies of Patni's subsidiaries are the applicable local

currencies.

2.1.22 The accompanying consolidated financial statements are

reported in US Dollars. The translation is performed for balance

sheet accounts using the exchange rate in effect at the balance

sheet date and for revenue and expense accounts using an

appropriate monthly weighted average exchange rate for the

respective periods. In respect of subsidiaries the respective

functional currencies are first translated into Indian Rupees and

then into US Dollars. The gains or losses resulting from such

translation are reported in other comprehensive income in the

statement of shareholders’ equity and comprehensive income.

Foreign currency transactions

2.1.23 Transactions in foreign currencies are translated into the

functional currency at the rates of exchange prevailing at the

date of the transaction. Resulting gains or losses from

settlement of such foreign currency transactions are included

in the consolidated statements of income. Unsettled monetary

assets and liabilities denominated in foreign currencies are

translated into the functional currency at the rates of exchange

prevailing at the balance sheet date. Transaction gain or loss

arising from change in exchange rates between the date of

transaction and period end exchange rates are included in the

consolidated statements of income.

Income taxes

2.1.24 Income taxes are accounted for under the asset and liability

method. Deferred tax assets and liabilities are recognised for

the future tax consequences attributable to differences

between the financial statement carrying amounts of existing

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 changes in tax rates is

recognised in results of operations in the period that includes

the enactment date. The measurement of deferred tax assets

is reduced, if necessary, by a valuation allowance for tax

benefits of which future realisation is not more likely than not.

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110


Concentration of credit risk

2.1.25 Financial instruments that potentially subject Patni to

concentration of credit risks consist principally of cash, cash

equivalents, investments and accounts receivables. Cash andcash equivalents are invested with corporations, financial

institutions and banks with investment grade credit ratings. To

reduce credit risk, investments are made in a diversified

portfolio of mutual funds, which are periodically reviewed. To

reduce its credit risk on accounts receivables, Patni performs

ongoing credit evaluations of customers.

Retirement benefits to employees

2.1.26 Contributions to defined contribution plans are charged to

income in the period in which they accrue. Current services

costs for defined benefit plans are accrued in the period to

which they relate, based on actuarial valuation performed by an

independent actuary in accordance with SFAS No. 87,"Employers' Accounting for Pensions". Prior service costs, if

any, resulting from amendments to the plans are recognised

and amortized over the remaining period of service of the

employees.

Stock-based compensation

2.1.27 The Company uses the intrinsic value based method of

accounting prescribed by APB Opinion No. 25, "Accounting for

Stock Issued to Employees", and related interpretation includingFASB interpretation 44, "Accounting for Certain Transactions

involving Stock Compensation an interpretation of APB Opinion

No. 25", issued in March 2000, to account for its employee

stock based compensation plans. Under this method,

compensation expense is recorded on the date of the grant, only

if the current fair value of the underlying stock exceeds the

exercise price. SFAS No. 123, "Accounting for Stock-Based

Compensation", established accounting and disclosure

requirements using a fair value-based employee compensation

plans. As allowed by SFAS No. 123, the Company has elected to

continue to apply the intrinsic value-based method of accounting

described above, and has adopted the disclosure requirements

of SFAS No. 148, "Accounting for Stock-Based Compensation –

Transition and Disclosure", an amendment of FASB Statement

No. 123. All stock options issued to date have been accounted

for as fixed awards.

2.1.28 Had compensation cost been determined in a manner consistent with the fair value approach described in SFAS No. 123, the Company’s net

income and earnings per share as reported would have been reduced to the pro forma amounts indicated below:

Year ended December 31, 2002 2003 2004

(Restated)

Net income, as reported $36,011,877 $46,671,223 $58,187,457

Add: Stock based employee compensation expense

included in reported income – – –

Less: Stock based employee compensation expense

determined under fair value based method, net of tax effects – 158,232 1,253,513

Pro forma net income $36,011,877 $46,512,991 $56,933,944

Reported earnings per share

Basic $0.27 $0.42 $0.47

Diluted $0.27 $0.42 $0.47

Pro forma earnings per share

Basic $0.27 $0.42 $0.46

Diluted $0.27 $0.42 $0.46


2.1.29 The fair value of each option is estimated on the date of grant using the Black-Scholes model with the following assumptions.

Dividend yield – 0.41% 0.34% - 0.72%

Expected life – 2-5 years 2-5 years

Risk free interest rates – 4.75% - 4.9% 5.16% - 6.46%

Volatility – 0% 43% - 65%

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112


The changes attributable to the restatement are as follows:

Previously Restated

reported

Year ended December 31, 2003

Income statement

Change in fair value

of put option – $1,186,160

Cummulative effect of

change in accounting

principle – 3,273,960

Net Income 42,211,103 46,671,223

Earning Per Share $0.38 $0.42

Balance Sheet

Redeemable Shares $123,499,996 –

Shareholder's Equity:

Additional Paid in Capital 5,488,352 116,722,000

Retained Earnings 43,212,457 53,527,459

Total Shareholder's Equity 50,176,624 173,666,620


Balance sheet

Additional paid-in- capital $191,231,861 $180,906,859

Retained earnings 98,338,363 108,653,365

The restatement did not have an impact on cash flows from

operating activities, investing or financing activities.

The Company has determined that the put option held by the two

investors was required to be classified as a liability upon adoption of

SFAS No. 150 on July 1, 2003. Pursuant to the guidance in SFAS

No. 150, the put option liability is recorded at its fair value at eachreporting period, based on the valuation of an independent expert,

with changes in fair value reported in earnings. Accordingly, the

previously issued consolidated financial statements as of and for the

year ended December 31, 2003 and 2004 have been restated to

account for the put option in accordance with SFAS No. 150.

The following adjustments were recorded in the restated

consolidated financial statements upon adoption of SFAS No. 150:

the $117,372,776 amount presented as redeemable common

shares (representing the cash redemption amount payable upon

exercise of the put option held by the two investors) was reclassified

to shareholders' equity, a $1,196,160 liability was recorded for the

put option based on its fair value at July 1, 2003, a $4,470,120reduction of shareholders' equity was recorded based on the fair

value of the put option upon its issuance in September 2002, and

the $3,273,960 difference between the put option's fair value upon

adoption of SFAS No. 150 and its fair value at issuance was

recorded in the restated consolidated income statement as the

cumulative effect of a change in accounting principle. At December

31, 2003, the put option liability has been recorded at its fair value

of $10,000 and the reduction in the liability balance from July 1,

2003 through December 31, 2003 of $1,186,160 is classified in

the 2003 restated consolidated statement of income.

4 Acquisitions

TRI

4.1.1 On April 17, 2003, Patni USA, acquired 100% equity interest in TRI

which is engaged in providing IT services to clients in the financial

services sector. The consolidated financial statements include the

operating results of TRI from the date of acquisition. The purchase

price of $6,093,526 (including direct expenses of $113,516) has

been paid in cash. Further, the purchase agreement provides for

payment of additional consideration not exceeding $1,500,000 in

cash upto April 30, 2005, which is contingent upon achievement

of specified parameters with respect to the acquired business as

specified in the agreement. The Company has followed the

consensus reached in EITF 95-8, "Accounting for Contingent

Consideration Paid to the Shareholders of an Acquired Enterprise

in a Purchase Business Combination" and accordingly will record

the contingent payments as goodwill in the periods in which thecontingency is resolved.

4.1.2 This transaction has been accounted using the purchase method

of accounting as required by SFAS No. 141. The purchase price

has been allocated to the acquired assets and liabilities based on

management’s estimates and independent appraisals as follows:

Cash and cash equivalents $3,055,332

Net tangible liabilities (396,180)

Customer related intangibles 840,000

Goodwill 2,594,374

Total $6,093,526

The Company believes that the acquisition resulted in recognition

of goodwill primarily because of the acquired company's market

position in financial services, skilled employees, management

strength and potential to serve as a platform for enhancing

business opportunities in the financial services sector.

4.1.3 As at December 31, 2004, the Company has tested this goodwill

for impairment and has concluded that there is no impairment in

its carrying value.

Cymbal

4.1.4 On November 3, 2004, Patni USA acquired 100% equity interest

in Cymbal which is engaged in providing IT services to clients in

the telecom sector. The primary purpose for the acquisition was

to establish presence in the Telecom IT services sector. The

consolidated financial statements include the operating results of

Cymbal from the date of acquisition. The purchase price of

$25,093,065 (including direct expenses of $1,311,150) has

been paid in cash. Additionally, in connection with the acquisition,

the Company incurred $10,968,029 of costs relating to certain

contract terminations/settlements and acquisition costs of

Cymbal. Such costs have been recognised by the Company as

liabilities assumed at the acquisition date resulting in additional

goodwill.

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The terms of the purchase also provide for payment of contingent

consideration to all the selling shareholders, payable over three

years, and calculated based on the achievement of specified

revenue and margin targets. The contingent consideration ispayable in cash and cannot exceed $33,000,000, inclusive of

payments under an incentive plan for certain employees as

described below. The Company has followed the consensus

reached in EITF 95-8, "Accounting for Contingent Consideration

Paid to the Shareholders of an Acquired Enterprise in a Purchase

Business Combination" and accordingly will record the contingent

payments, other than payments to certain employees under the

incentive plan, as goodwill in the periods in which the contingency

is resolved.

Further, as a part of the acquisition, the Company initiated an

incentive plan linked to revenues and margins, for certain specificemployees of Cymbal. The incentive payments under this plan will

not exceed $3,400,000 over the next three years. Since, the

incentive payments are linked to continuing employment, the

payments under the plan will be recorded as compensation for post

acquisition services.

4.1.5 This transaction has been accounted using the purchase method

of accounting as required by SFAS No. 141. The purchase price

has been allocated, on a preliminary basis and reasonable

changes are expected as additional information (including final

independent appraisal reports) become available. This allocation

is summarised below:

Cash and cash equivalents $3,061,034

Property, Plant and Equipment 935,159

Other assets, net 2,689,444Contract termination/settlement and

acquisition related liabilities (10,968,029)

Deferred taxes (4,126,140)

Customer related intangibles 11,418,200

Goodwill 22,083,397

Total $25,093,065

Pro forma information (Unaudited)

4.1.6 The unaudited pro forma consolidated results of operations, as if

the acquisition of Cymbal had been made at the beginning of

periods presented below is as follows:

2003 2004

Revenues $278,594,146 $359,191,717Net income 46,970,098 59,073,113

Earnings per share:

Basic 0.42 0.48

Diluted 0.42 0.48

The pro forma consolidated results of operations include

adjustments to give effect to amortization of acquired intangible

assets other than goodwill, together with related income tax

effects. The unaudited pro forma information is not necessarily

indicative of the results of operations that would have occurred

had the purchase been made at the beginning of the periods

presented or the future results of the combined operations.

5 Investments

5.1.1 Investment securities consist of the following:

Carrying value Gross unrealized Gross unrealised Fair value

holding gains holding losses

As at December 31, 2003

Available for sale:

Mutual fund units $49,153,013 $98,511 ($6,961) $49,244,563

$49,153,013 $98,511 ($6,961) $49,244,563

Less: Amount reported as investment

in liquid mutual fund units 22,539,753

Amount reported as investment securities $26,704,810

As at December 31, 2004

Available for sale:

Mutual fund units $85,147,272 $480,117 ($4,670) $85,622,719

$85,147,272 $480,117 ($4,670) $85,622,719

Less: Amount reported as investment

in liquid mutual fund units 55,372,919

Amount reported as investment securities $30,249,800

5.1.2 Dividends from securities available for sale, during the year ended

December 31, 2002, 2003 and 2004 were $131,772, $1,268,498

and $3,460,351 respectively. Gross realized gains on sale of

securities, available for sale was $473,750, $1,488,087 and

$221,562 and gross realised losses on sale of securities, available

for sale was $82,881, $271,535 and $77,080 for the year ended

December 31, 2002, 2003 and 2004 respectively.

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6 Accounts receivable

6.1.1 Accounts receivable consist of the following:

As at December 31, 2003 2004

Receivables $59,839,210 $75,440,233

Less: Allowances for

doubtful accounts 3,224,494 3,435,320

$56,614,716 $72,004,913

6.1.2 The activity in the allowance for doubtful accounts receivable for

the years ended December 31, 2003 and 2004 is as follows:

Year ended December 31, 2003 2004

Allowance for doubtful

accounts as at beginning

of the period $3,241,990 $3,224,494

Additions charged

(net of recoveries) to

bad debt expense

during the period 296,391 496,804

Write-downs charged

against the allowance

during the period (313,887) (285,978)


accounts at end of

the period $3,224,494 $3,435,320

7 Costs and estimated earnings in excess of billings and

billings in excess of costs and estimated earnings on

uncompleted contracts


Cost incurred on

uncompleted contracts $9,193,211 $20,109,850

Estimated earnings 12,338,473 18,665,927

21,531,684 38,775,777

Less: Bil lings t il l date 17,805,321 26,388,683

$3,726,363 $12,387,094

Included in the

accompanying balance

sheet under the following

captions:

Costs and estimated

earnings in excess of

billings on uncompleted

contracts 5,827,345 15,233,440

Billings in excess of costs

and estimated earnings on

uncompleted contracts (2,100,982) (2,846,346)

$3,726,363 $12,387,094

8. Other assets

8.1.1 Other assets consist of the following:


Advances $264,313 $1,143,792Prepaid expenses and

gratuity costs 1,476,338 2,424,912

Deposits 2,657,716 7,143,512

Deferral of cost in respect

of revenue arrangements 1,731,034 1,624,507

Due from employees 762,314 1,245,840

Others 2,139,212 $2,980,249

$9,030,927 $16,562,812

Less: Current Assets ($5,829,569) ($10,575,425)

Other Assets $3,201,358 $5,987,387

9 Property, plant and equipment9.1.1 Property, plant and equipment consists of the following:


Land $2,347,890 $4,357,900

Building 15,814,456 17,289,733

Leasehold improvements 2,073,588 2,181,133

Computer – Hardware and

other service equipment 18,550,125 26,670,735

Computer – Software 9,256,422 14,122,711

Furniture and fixtures 9,040,252 9,847,027

Other equipment 10,202,618 12,519,355

Vehicles 1,803,884 2,067,660

Capital work- in-progress 490,908 4,534,364Capital advances 464,905 1,077,756

70,045,048 94,668,374

Less: Accumulated

depreciation and

amortization 28,539,743 39,593,809

$41,505,305 $55,074,565

9.1.2 Depreciation and amortization expense on property, plant and

equipment was $6,457,986, $9,067,917 and $11,332,906 for

the years ended December 31, 2002, 2003 and 2004

respectively. This includes amortization for computer software

of $1,079,378, $1,955,588 and $2,586,273 respectively.Additions to computer software amounted to $3,096,406 and

$4,507,225 during the years ended December 31, 2003 and

2004 respectively. Accumulated amortization on computer

software as at December 31, 2003 and 2004 amounted to

$5,489,966 and $8,428,763 respectively.

9.1.3 Leasehold land as of December 31, 2003 and 2004 includes

amount aggregating $1,572,729 and $2,545,632 in respect of

which formalities relating to the transfer of leasehold rights are

in the process of being completed.

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10 Goodwill and intangible assets

10.1.1 Intangible assets as at December 31, 2003 and 2004 consists

of the following:


Customer related

intangibles $840,000 $12,258,200

Less: Accumulated

amortisation 59,501 270,370

$780,499 $11,987,830

10.1.2 Amortisation for the years ended December 31, 2002, 2003

and 2004 amounted to Nil, $59,501 and $210,869

respectively. The estimated amortisation for the intangible

assets, for the next five years would be $845,210 per year.

10.1.3 The movement in goodwill balance is given below:

2003 2004

Balance at beginning

of the year – $2,594,374

Goodwill relating to

acquisition consummated

during the year 2,594,374 22,083,397

Balance at end of

the year $2,594,374 $24,677,771

10.1.4 Goodwill as of December 31, 2003 and 2004 has been

allocated to the following reportable segments:

Segment 2003 2004

Financial services $2,594,374 $2,594,374

Telecom services – 22,083,397Total $2,594,374 $24,677,771

11 Accrued expenses

11.1.1 Accrued expenses consist of the following:


Employee costs $10,999,883 $13,372,040

Others 4,213,744 7,407,327

$15,213,627 $20,779,367

12 Other liabilities

12.1.1 Other liabilities consist of the following:


Taxes payable $1,015,450 $1,855,197

Deferred revenue 2,711,122 2,259,263

Provision for leave

encashment 7,273,006 9,326,509

Provision for pension

benefits 4,991,641 6,033,433

Others 2,997,170 3,266,863

$18,988,389 $22,741,265

Less: Current liabilities ($13,661,117) ($16,531,146)

Other liabilities $5,327,272 $6,210,119

13 Leases

13.1.1 Patni has acquired certain vehicles under capital lease for a non-

cancelable period of 4 years. The gross amount recorded

under such capital lease is $777,228 with accumulateddepreciation of $223,284 as at December 31, 2003. The

gross amount recorded under such capital lease is $1,068,788

with accumulated depreciation of $449,855 as at December

31, 2004. The depreciation expense in respect of these assets

aggregated $137,034, $147,079 and $254,201 for the years

ended December 31, 2002, 2003 and 2004 respectively.

13.1.2 Patni USA has operating lease agreements, primarily for leasing

office space, that expire over the next 1-5 years. These leases

generally require Patni USA to pay certain executory costs such

as taxes, maintenance and insurance.

13.1.3 Patni has operating lease agreements, primarily for leasing

office and residential premises. These agreements provide forcancellation by either party with a notice period ranging from 30

days to 120 days, after the initial lock-in period, if any. Some

leases contain a clause for renewal of the lease agreements.

Some leases provide for annual renewal of the lease payments.

13.1.4 TRI has operating lease agreements for leasing office space,

which expire through December 2005. The lease agreements

do not give any option for renewal.

13.1.5 Cymbal and its subsidiaries have operating leases for office

space, that expire over the next 1-6 years. These agreements

provide for cancellation by either party with a notice period

ranging from 30 days to 120 days, after the initial lock-in

period, if any.

13.1.6 Future minimum lease payments under non-cancelable

operating leases (with initial or remaining lease terms in excess

of one year) and future capital lease payments at December 31,

2004 are as follows:

As at Capital Operating

December 31, 2004 leases leases

2005 $289,512 $6,872,019

2006 221,630 6,141,093

2007 142,934 4,456,894

2008 41,306 1,356,466

Beyond 2008 – 2,763,058

Total minimum

lease payments 695,382 $21,589,530

Less: Amount

representing interest 38,554

Present value of net minimum

capital lease payments 656,828

Less: Current installments of

obligations under capital leases 266,242

Obligations under capital leases,

excluding current installments $390,586

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Companies Act, is determined by its distributable profits as

shown by its statutory accounts. When Patni wishes to declare

dividends, it is required as per the Companies Act, to transfer

upto 10% of its net income (after the deduction of any

accumulated deficit) computed in accordance with local

regulations to a general reserve before a dividend can be

declared. Also, Indian law on foreign exchange governs the

remittance of dividends outside India.

Stock Split

15.1.7 On August 30, 2003, Patni has effected a one for two stock

split in the form of a stock dividend. In line with legal

requirements, the stock dividend has been recorded by

capitalizing $1,016,861 from additional paid-in-capitalrepresenting the par value of shares issued as stock dividend.

15.1.8 All references in the consolidated financial statements to the

number of shares and per share amounts of Patni’s common

shares have been retroactively restated to reflect the stock

split.

16 Redeemable common shares

16.1.1 In October 2000, the Company issued 3,735,000 common

shares aggregating $5,970,073. Further, the promoter

shareholders of the Company also sold 5,625,000 common

shares to the same investor aggregating to $9,000,000.Pursuant to the then shareholders’ agreement dated

September 2000, Patni was to become a publicly listed

company on a recognised stock exchange within a period of 18

months from the date of allotment of shares to the investor. In

the event the IPO did not occur within such period, the investor

had a right to put these shares back to the Company for a

physical settlement as per the terms specified in the agreement

(2000 agreement). Other than the right to put these shares

back to the Company, these common shares are of the same

class as the other equity shares of the Company. The Company

determined that this provision in the 2000 agreement

constituted a written put option on the Company's own shares

that was subject to the provisions of EITF 00-19. The Company

determined that the written put option met the criteria for equity

classification in EITF 00-19; however, excercise of the put

option would require the Company to deliver cash as part of

physical settlement. Accordingly, an amount equal to the cash

redemption amount for shares held by this investor was

transferred to temporary equity.

16.1.2 The terms of 2000 agreement contained the method of

ascertaining the redemption amount with a floor amount, to

guarantee a minimum return to the investor if the Company was

13.1.7 Rental expense for all operating leases for the years ended

December 31, 2002, 2003 and 2004 was $2,754,214,

$3,827,294 and $6,801,506 respectively.

14 Derivatives financial instruments

14.1.1 The following table presents the aggregate contracted principal

amounts of the Company’s derivative contracts outstanding:

Currency 2003 2004

Forward

contracts (sel l) USD 76,500,000 103,000,000

15 Shareholders’ equity

Common shares

15.1.1 The Company has only one class of equity shares. For all

matters submitted to vote in the shareholders’ meeting, every

holder of equity shares, as reflected in the records of the

Company on the date of the shareholders meeting shall have

one vote in respect of each share held. In the event of

liquidation of the affairs of the Company, all preferential

amounts, if any, shall be discharged by the Company. The

remaining assets of the Company after such discharge shall be

distributed to the holders of equity shares in proportion to the

number of shares held by them.

15.1.2 In February 2004, pursuant to an Initial Public Offering in India

(‘IPO’), the Company has issued 13,415,200 common shares

for a net proceeds of $64,268,351 (after adjusting for direct

expenses relating to IPO of $3,889,281).

15.1.3 Up to September 2002, the Company has issued its common

shares to various investors and certain of these shares

contained redemption provisions if the Company did not

become a publicly listed company within a stipulated time. The

Company in accordance with Accounting Series Release (ASR)

268 classified those shares subject to redemption outside of

shareholders' equity at their initial fair value (see Note 16).

15.1.4 In 2002, the Company bought back 2,476,019 common shares

for an amount of $7,000,000.

Retained earnings and dividends

15.1.5 Retained earnings as of December 31, 2003 and 2004 include

profits aggregating $5,214,971, which are not distributable as

dividends under Indian Companies Act, 1956 (Companies Act).

These relate to earmarking of profits on redemption of

preference shares and repurchase of common shares by Patni

from promoter shareholders.

15.1.6 The ability of Patni to declare and pay dividend under the

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not a publicly listed company within 18 months. As a result, the

Company accreted the minimum amount on these shares with a

corresponding charge to the retained earnings and increased

the carrying value of the redeemable common shares.

Subsequently in September 2002, Patni issued 20,161,868

common shares to a new investor for $57,000,000.

At the same time, the promoter shareholders sold 14,103,680

common shares to this new investor for an amount of

$39,872,776. In addition, the promoter shareholders bought

back 2,108,802 common shares from the investor who

acquired redeemable common shares in September 2000 to

the extent of 9,360,000 common shares. As a result of this buy

back of shares by the promoter shareholders, shares to thatextent are no longer redeemable and the Company reclassified

accreted amount pertaining to these shares into the

shareholders' equity.

16.1.3 At the time of investment by the new investor the Company

entered into a new shareholders agreement (“2002

agreement”) with the two investors and the promoter

shareholders. In accordance with the 2002 agreement, the

Company was required to be publicly listed within a period of 36

months from the date of issue of shares to the new investor. In

the event an IPO did not occur within such period, the two

investors had a right to put all the shares (whether acquired

from the Company or the promoter shareholders) back to the

Company for a physical settlement at an amount which would be

determined by the Board of Directors of the Company at the

time of redemption, but would not be less than the amount paid

by the new investor. The Company determined that this

provision in the 2002 agreement constituted a written put

option on the Company's own shares that was subject to the

provisions of EITF 00-19. The Company determined that the

written put option met the criteria for equity classification in EITF

00-19; however, exercise of the put option would require the

Company to deliver cash as part of physical settlement.

Accordingly, an amount equal to the cash redemption amount

for shares held by these two investors was transferred to

temporary equity. The amount reported in temporary equity was

not subsequently re-measured because the minimum

redemption amount was fixed at the per share amount paid by

the new investor. Other than the fact that the amount shall not

be less than the amount that was paid by the new investor, the

2002 agreement did not contain any defined measurement

method for calculating the amount of buy back, should that be

necessitated.

The activity in redeemable common shares for the year ended

December 31, 2002 is as follows:

Shares Value

Balance as at

January 1, 2002 9,360,000 $18,174,078

Redeemable common

shares issued 20,161,868 57,000,000

Accretion of redeemable

common shares – 8,287,756

Reclassification of

redeemable common

shares sold by promoter

shareholders subject to a put 14,103,680 39,872,776

Reclassification ofredeemable common

shares acquired by

promoter shareholders

not subject to a put (2,108,802) (5,961,834)

Balance as at

December 31, 2002 41,516,746 117,372,776

On July 1, 2003, the Company adopted the provisions of SFAS

No. 150. The Company determined that the put option held by

the two investors was required to be classified as a liability upon

adoption of that Statement. Pursuant to the guidance in SFAS

No. 150, the put option liability is recorded at its fair value at

each reporting period, based on the valuation of an independent

expert, with changes in fair value reported in earnings. Upon

adoption, the $117,372,776 amount presented in temporary

equity (representing the cash redemption amount payable upon

exercise of the put option held by the two investors) was

reclassified to permanent equity, a $1,196,160 liability was

recorded for the put option based on its fair value at July 1,

2003, a $4,470,120 reduction of permanent equity was

recorded based on the fair value of the put option upon its

issuance in September 2002, and the $3,273,960 difference

between the put option’s fair value upon adoption of SFAS No.

150 and its fair value at issuance was recorded in the restated

consolidated statement of income as the cumulative effect of a

change in accounting principle. At December 31, 2003, the put

option liability has been recorded at its fair value of $10,000

and the reduction in the liability balance from July 1, 2003

through December 31, 2003 of $1,186,160 is classified in the

2003 restated consolidated statement of income. As

discussed above, the Company completed its IPO in February

2004. Accordingly, the put option was terminated and its value

reduced to zero.

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17.1.1 On June 30 2003, Patni established the ‘Patni ESOP 2003’

plan (‘the plan’). Under the plan, the Company is authorized to

issue up to 11,142,085 equity shares to eligible employees.

Employees covered by the Plan are granted an option to

purchase shares of the Company subject to the requirements of

vesting. The options vest in a graded manner over four years

with 25% of the options vesting at the end of each year. The

options can be exercised within five years from the date of

vesting. A compensation committee constituted by the Board of

Directors of the Company administers the plan.

17.1.2 Patni has applied APB No. 25, "Accounting for Stock issued to

Employees", to account for the employee stock based

compensation plan. Accordingly, since the exercise price

approximated the fair value of the underlying equity shares at

the date of grant, no compensation cost has been recorded in

these financial statements.

17.1.3 Weighted average grant date fair value of options during the

years ended December 31, 2003 was $0.44. The weighted

average grant date fair values of options during the years ended

December 31, 2004 were $2.61 and $2.67.

17.1.4 Stock options activity under the plan is as follows:

Share arising Exercise Weighted average

out of options price remaining contractual

life (months)


Outstanding at the beginning of the period – – –

Granted during the period 2,743,400 3.16 90

Forfeited during the period (9,700) 3.16 –

Exercised during the period – – –

Outstanding at the end of the period 2,733,700 3.16 86

Exercisable at the end of the period – – –


Outstanding at the beginning of the period 2,733,700 3.16 86

Granted during the period 2,850,632 5.51-7.37 90

Forfeited during the period (192,875) 3.16 –

Exercised during the period (188,810) 3.16 –Outstanding at the end of the period 5,202,647 3.16-7.37 75-87

Exercisable at the end of the period 446,396 3.16 56

17.1.5 During the year ended December 31,2004 the Company granted 100,000 and 2,750,632 stock options at an exercise price of $5.51 and

$7.37 respectively. The exercise price and weighted average remaining contractual life of stock options outstanding at the end of the period

are as follows:


Share arising out of options Exercise price Weighted average remaining

contractual life (months)

2,352,015 3.16 75

100,000 5.51 84

2,750,632 7.37 875,202,647

18 Income Tax

18.1.1 Total income tax for the year ended December 2002, 2003 and 2004 were allocated as follows:

For the years ended December 31, 2002 2003 2004

Income from continuing operations $8,588,856 $8,044,855 $9,475,712

Shareholders' equity, for

– unrealized holding gain/loss on investment securities 263,068 (204,656) 142,362

– minimum pension liability (9,676) (338,425) 153,253

Total $8,842,248 $7,501,774 $9,771,327

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18.1.2 Income tax expense attributable to income from continuing operations consists of the following:

For the years ended December 31, 2002 2003 2004

Current taxes

Domestic $1,093,733 $457,022 $148,501

Foreign 9,333,210 8,247,379 8,491,828

$10,426,943 $8,704,401 $8,640,329

Deferred taxes

Domestic 214,332 344,748 (303,711)

Foreign (2,052,419) (1,004,294) 1,139,094

($1,838,087) ($659,546) $835,383

Total $8,588,856 $8,044,855 $9,475,712

18.1.3 The tax effect of temporary differences that give rise to

significant portion of deferred tax assets and liabilities are

presented below:

Deferred tax assets: 2003 2004

Accrued expenses and

provisions $4,851,819 $6,235,305

Accounts receivable 1,038,399 1,013,919

Deferred revenue 674,560 484,727

Carry forward business losses 78,156 3,342,260

Minimum pension liability 348,101 194,840

Others 154,934 23,633

Gross deferred assets 7,145,969 11,294,684

Less: Valuation allowance 142,857 2,985,990

Total deferred tax assets $7,003,112 $8,308,694

Deferred tax liabilities:

Costs and estimated earnings

in excess of billings on

uncompleted contracts ($200,898) ($327,705)

Property, plant and equipment (875,765) (1,305,569)

Undistributed earnings of

US branch (1,732,944) (2,638,645)

Unrealised gain on available

for sale securities (32,848) (175,211)Intangible assets (314,307) ( 4,792,416)

Others – (576,758)

Total deferred tax liabilities ($3,156,762) ($9,816,304)

Classified as

Deferred tax assets

Current $5,450,560 $5,951,315

Non current $1,064,950 –

Deferred tax liabilities

Current – $115,659

Non current $2,669,160 $7,343,266

18.1.4 In assessing the realisabilit y of deferred tax assets,

management considers whether it is more likely than not, that

some portion, or all, of the deferred tax assets will not be

realised. The ultimate realisation of deferred tax assets is

dependent upon the generation of future taxable income during

the periods in which the temporary differences and loss

carryforwards are deductible. Management considers the

reversal of taxable temporary differences, the projected future

taxable income, tax planning strategies and impact of tax

exemptions currently available to the company, in making this

assessment. Based on the level of historical taxable incomes

over the periods in which the deferred tax assets are

deductible, management believes that it is more likely than not,

the Company will realise the benefits of those deductible

differences, net of existing valuation allowances. Taxable

income for the years 2002, 2003 and 2004 aggregated

$13,704,460, $14,337,576 and $9,223,889 respectively.

18.1.5 Deferred tax liability in respect of undistributed earnings of

Patni’s foreign subsidiaries as at 2003 and 2004 aggregating

$563,457 and $703,652 respectively has not been recognised

in the financial statements, as such earnings are considered to

be indefinitely re-invested.

18.1.6 The net change in valuation allowance during the year 2003 is

attributable to additional valuation allowance on business losses

aggregating $ 81,765, which has been partly offset by the tax

benefits of losses utilised aggregating $ 12,909. The net

change in the year 2004 is attributable to valuation allowance

on carry forward losses of Cymbal (which was acquired during

the year 2004) aggregating $ 2,924,898. This has been partly

offset by tax benefits of losses utilised during the year

aggregating $ 81,765.

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18.1.7 The reported income tax expense attributable to income from continuing operations differed from amounts computed by applying the enacted

tax rate to income from continuing operations before income-taxes as a result of the following:

2002 2003 2004

(Restated)Income before income taxes $44,600,733 $51,442,118 $67,663,169

Weighted average enacted tax rate in India 36.49% 36.10% 36.41%

Computed expected income tax expense $16,274,807 $18,570,605 $24,636,160

Effect of:

Income exempt from tax in India (13,070,268) (14,605,462) (21,826,422)

Change in fair value of put option not chargeable to tax – (428,204) –

Changes in valuation allowance 61,843 68,856 (81,765)

Income from India operations charged at other

than statutory tax rate 44,842 – –

Non deductible expenses 275,742 70,627 340,063

US State taxes, net of federal tax benefit 298,063 503,652 453,816

US branch taxes 4,852,712 4,358,663 5,900,066Foreign income taxed at lower rates (157,557) (212,138) (216,542)

Change in statutory tax rate on deferred taxes 9,822 101 2,057

Others (1,150) (281,845) 268,279

Reported income tax expenses $8,588,856 $8,044,855 $9,475,712

18.1.8 Upon acquisition of Cymbal, the Company is entitled to utilize

tax benefits on carry forward business losses of Cymbal. Based

on preliminary projections of future taxable income and tax

planning strategies, management currently believes that there

exists sufficient uncertainty regarding realization of tax benefits

on the carry forward losses. Consequently, the Company hasrecorded a valuation allowance for the carry forward business

losses of Cymbal. The Company is further evaluating the

expected realisation of such carry forward losses and available

tax planning strategies and will finalise the level of valuation

allowance prior to November 3, 2005. Reversal, if any, of the

valuation allowance would be recorded as a reduction of

goodwill arising from the acquisition of Cymbal.

18.1.9 A substantial portion of profits of the group’s India operations is

exempt from Indian income tax, being profit from undertakings

situated at Software Technology Parks. Under the tax holiday,

the tax payer can utilize exemption of profits from income taxes

for a period of ten consecutive years. The Company has optedfor this exemption for undertakings situated in Software

Technology Parks and these exemptions expire on various

dates between years 2005 and 2010. The Company also avails

benefit for Income tax for their export operations. This

exemption relating to export operations expires in a phased

manner over a period of five financial years commencing from

April 1, 2000. The aggregate effect on net income of the tax

holiday and export incentive scheme were $13,508,394,

$15,012,027 and $20,572,502 for 2002, 2003 and 2004

respectively. Further, the per share effect was $0.14, $0.14

and $0.17 for 2002, 2003 and 2004 respectively.

19 Retirement benefits to employees

Gratuity benefits19.1.1 In accordance with the Payment of Gratuity Act, 1972, Patni

provides for gratuity, a defined retirement plan covering all

employees. The plan provides a lump sum payment to vested

employees at retirement or termination of employment based

on the respective employee’s defined portion of last salary and

the years of employment with the Company.

19.1.2 Patni contributes each year to a gratuity fund based upon

actuarial valuations performed by an actuary. The fund is

administered by Patni through a trust set up for the purpose. All

assets of the plan are owned by the trust and comprise of

approved debt and other securities and deposits with banks. Bystatute, the trust is required to invest a minimum of 25% of its

corpus in Central Government securities, 15% in State

Government securities and 30% in Public Sector/Financial

Institutions/Bank bonds. The trust can invest the remaining 30%

of its corpus in any of the above specified categories. Further,

10% of its corpus can be invested in private sector/bond

securities which are rated investment grade from atleast two

rating agencies.

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19.1.3 With regard to Patni’s Gratuity Plan, the following table sets forth the plan’s funded status and amounts recognised in the Company’s

consolidated balance sheets. Measurement dates used to make up fair value of plan assets and benefit obligation is December 31.

At December 31, 2003 2004

Change in benefit obligation

Projected benefit obligation (“PBO”) at January 1, $1,632,812 $2,804,669

Service cost 395,880 633,771

Interest cost 122,193 190,714

Exchange loss 111,626 181,474

Actuarial loss 620,642 615,648

Benefits paid (78,484) (186,248)

PBO at December 31, 2,804,669 4,240,028

Fair value of plan assets as at January 1, 1,295,935 2,402,751

Actual return on plan assets 372,791 (115,265)

Employer contributions 723,028 1,371,623

Benefits paid (78,484) (186,248)

Exchange gain 89,481 156,969

Plan assets at December 31, 2,402,751 3,629,830

Funded status (401,918) (610,198)

Unrecognized actuarial loss 772,785 1,711,850

Unrecognized transition obligation 9,834 –

Net amount recognised 380,701 1,101,652

Accumulated benefit obligation 1,383,767 2,062,867

Amounts recognised in the consolidated balance sheets consists of:

Prepaid benefit cost (included in ‘other current assets”) ($380,701) (1,101,652)

19.1.4 Key assumptions used to determine the benefit obligation were as follows:

2002 2003 2004Discount rate 7.5% 7% 7.5%

Expected return on assets 7% 6.50% 7%

For the actuarial valuation at December 31, 2004 compensation

levels have been assumed to increase at 20% per annum for the

first year, 15% per annum for the next year, 10% per annum for

next three years and 7% per annum thereafter. For the valuation as

on December 2003, compensation levels have been assumed to

increase at 15% per annum for the first 2 years, 10% per annum

for next 3 years and 6.5% per annum thereafter. For valuation as

on December 2002, compensation levels were assumed to

increase at 15% per annum for the first year, 10% for next two

years and 7% per annum thereafter.

The expected rate of return on assets in future is considered to be

7%. This is based on the expectation of the average long-term rate

of return to prevail over the next 15 to 20 years on the type of

investments prescribed as per the statutory pattern of investments.

19.1.5 The composition of plan assets is detailed below:

As at December 31, 2003 % 2004 %

Central Government Securities $170,519 7.1 $156,499 4.3

Investment in Government Securities based funds 963,668 40.1 2,248,545 61.9

State Government Securities 156,130 6.5 49,733 1.4

Public Sector/Financials Institutions/Bank bonds 759,339 31.6 1,023,234 28.2

Others 353,095 14.7 151,819 4.2

Total $2,402,751 100 3,629,830 100

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19.1.6 Net periodic gratuity cost included the following components:


Service cost $264,237 $395,880 $633,771

Interest cost 105,647 122,193 190,714

Expected return on assets (83,369) (100,778) (179,505)

Amortization 28,313 26,641 49,607

Net gratuity cost $314,828 $443,936 $694,587

19.1.7 Key assumptions used to determine the net periodic gratuity cost were as follows:

2002 2003 2004

Discount rate 10.5% 7.5% 7%

Expected return on assets 10% 7% 6.5%

For determining the net periodic cost for the year ended December 31, 2004 compensation levels have been assumed to increase at 15%

per annum for first two years, 10% per annum for next three years and 7% per annum thereafter. For the year ended December 2003,

compensation levels have been assumed to increase at 15% per annum for the first year, 10% per annum for next 2 years and 7% perannum thereafter. For year ended December 31, 2002, compensation levels were assumed to increase at 10% per annum for all future

valuation.

19.1.8 Patni's expected contribution to gratuity fund for the calendar year 2005 is $1,146,526. The expected benefit payments for next five years

are as follows:

Pension benefits

19.1.9 Certain directors of Patni and Patni USA are entitled to receive pension benefits upon retirement or on termination from employment @ 50%

of their last drawn monthly salary. The pension is payable from the time the eligible director reaches the age of sixty five and is payable to

the directors or the surviving spouse. The liability for pension is actuarially determined and periodically recognised. The plan is not funded.19.1.10 With regard to Patni’s Pension Plan, the following table sets forth the plan’s funded status and amounts recognised in the Company’s

consolidated balance sheet. The pension plan of Patni is not funded. Measurement dates used to make up benefit obligation is

December 31.

2005 2006 2007 2008 2009

Expected benefit payments $413,827 $529,191 $583,926 $721,945 $889,154

At December 31, 2003 2004

Change in benefit obligation

Projected benefit obligation ("PBO") at January 1, $1,172,295 $1,628,521

Service cost 48,534 63,594


Exchange loss/(gain) 69,650 79,606

Actuarial loss/(gain) 247,419 (108,943)

PBO at December 31, 1,628,521 1,778,033

Funded status (1,628,521) (1,778,033)

Unrecognized transition obligation 276,920 –

Unrecognized actuarial loss 429,969 185,347

Net amount recognised (921,632) (1,592,686)

Amount recognised in the consolidated balance sheets are as follows:

Accrued benefit liability (included in 'Other liabilities') 1,370,491 1,645,930

Intangible assets (included in 'Other assets') (276,920) (129,351)

Other comprehensive income (171,939) (53,249)

Net amount recognised 921,632 1,463,330

Accumulated benefit obligation $1,370,491 1,645,930

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19.1.17 Assumptions used to determine net periodic pension cost were as follows:

19.1.18 As the assumed rates for the above defined benefit plans

have a significant effect on the amounts reported, the

management has assessed these rates as comparable with

prevalent industry standards and its projected long-term plans

of growth.

Provident fund

19.1.19 All employees of Patni receive provident fund benefits through

a defined contribution plan in which both the employee and

employer make monthly contributions to the plan @ 12% each

of the covered employee’s defined portion of salary. The

Company has no further obligations under the plan beyondmonthly contribution. Patni contributes to the Provident Fund

Plan maintained by the Government of India.

19.1.20 Patni contributed $1,129,145, $1,682,111 and $1,765,281

to the Provident Fund Plan in 2002, 2003 and 2004

respectively.

20 Segment Information

20.1.1 SFAS No. 131, “Disclosures about Segments of an

Enterprise and Related Information”, establishes standards

for the way enterprises report information about operating

segments and related disclosures about products and

services, geographic areas and major customers. The

Company’s operations relate to providing IT services and

solutions, delivered to customers operating in various

industry segments. Accordingly, revenues represented along

industry classes comprise the principal basis of segmental

information set out in these consolidated financial statements.

Secondary segmental reporting is performed on the basis of

the geographical location of the customers. The accounting

policies consistently used in the preparation of the

consolidated financial statements are also consistently

applied to individual segment information, and are set out in

the summary of significant accounting policies.

20.1.2 Industry segments of the Company comprise financial

services, insurance services, manufacturing companies,

telecommunications, technology services (comprising

Independent Software Vendors and Product Engineering) and

others such as energy and utilities, retail, logistics and

transportation and media and entertainment. The Company

evaluates segment performance and allocates resources

based on revenue growth. Revenue in relation to segments is

categorized based on items that are individually identifiable to

that segment. Costs are not specifically allocable to individual

segment as the underlying resources and services are used

interchangeably. Fixed assets used in the Company’s

business or liabilities contracted have not been identified to

any of the reportable segments, as the fixed assets and

services are used interchangeably between segments.

20.1.3 Patni’s geographic segmentation is based on location of

customers and comprises United States of America (‘USA’),

Europe, Japan and Others, which include Rest of Asia Pacific

and Rest of the World. Revenue in relation to geographicsegments is categorized based on the location of the specific

customer entity for which services are performed irrespective

of the customer entity that is billed for the services and

whether the services are delivered onsite or offshore.

Categorization of customer related assets and liabilities in

relation to geographic segments is based on the location of

the specific customer entity which is billed for the services.

2002 2003 2004

Discount rate 10.5% per annum 7.5% per annum 5% per annum

Increase in compensation levels 10% per annum 10% per annum 10% per annum

19.1.16 Net periodic pension cost of Patni USA included the following components:


Service cost $62,214 $104,201 $139,182

Interest cost 175,799 236,161 217,259

Amortization 308,205 555,468 948,731

Net pension cost $546,218 $895,830 $1,305,172

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services Software Engineering

VendorDecember 31, 2002

Revenue $31,106,139 $70,996,835 $62,340,409 132,927 12,875,709 3,008,775 $7,812,968 $188,273,762

Accounts receivables 11,633,127 10,776,013 16,676,174 64,687 2,388,515 499,417 4,173,754 46,211,687

Billings in excess of cost

and estimated earnings (228,561) (104,681) (729,795) – (30,856) – (297,590) (1,391,483)

Advance from customers (2,309) (2,309)

Cost and estimated

earnings in excess of billings 218,092 188,495 1,255,947 1,320,060 103,900 254,549 3,341,043

December 31, 2003

Revenue $46,593,044 $83,354,549 $85,427,348 336,789 17,096,775 5,622,316 $12,612,587 $251,043,408

Accounts receivables 9,457,057 13,833,091 22,870,818 53,510 4,190,940 1,470,574 4,738,726 56,614,716

Billings in excess of costand estimated earnings (156,555) (457,802) (824,427) (181,759) – (480,439) ( 2,100,982)

Advance from customers (246,356) (14,700) (5,439) (266,495)

Cost and estimated

earnings in excess of billings 443,615 920,753 1,948,642 1,627,590 167,586 719,159 5,827,345

December 31, 2004

Revenue $62,707,961 $107,001,559 $92,417,807 $8,491,468 $19,344,147 $15,110,938 $21,507,744 $326,581,624

Accounts receivables 8,689,913 19,223,898 24,818,665 6,198,845 3,662,373 3,348,753 6,062,466 72,004,913

Billings in excess of cost

and estimated earnings (55,182) (946,385) (831,123) (99,408) (27,576) (477,791) (408,881) (2,846,346)

Advance from customers (66,734) (21,605) (47,130) (2,570) (138,039)

Cost and estimated

earnings in excess of billings 2,014,083 1,202,844 4,553,774 1,992,678 2,062,245 1,768,014 1,639,802 15,233,440

Industry and Technology segments

Particulars USA Europe Japan Others Total

December 31, 2002

Revenue $164,891,166 $13,588,710 $6,704,769 $3,089,117 $188,273,762

Accounts receivables 40,062,425 4,593,792 109,598 1,445,872 46,211,687

Billings in excess of cost and estimated earnings (1,201,276) (142,281) (27,860) (20,066) (1,391,483)

Advance from customers – – – (2,309) (2,309)

Cost and estimated earnings in excess of billings 1,773,845 561,071 113,335 892,792 3,341,043

December 31, 2003

Revenue $222,948,060 $18,217,653 $7,209,171 $2,668,524 $251,043,408

Accounts receivables 48,301,639 7,058,362 38,487 1,216,228 56,614,716Billings in excess of cost and estimated earnings (1,787,435) (142,014) (98,674) (72,859) (2,100,982)

Advance from customers (151,476) (83,873) – (31,146) (266,495)

Cost and estimated earnings in excess of billings 3,369,320 941,398 1,380,961 135,666 5,827,345

December 31, 2004

Revenue $286,720,168 $25,690,385 $11,029,442 $3,141,629 $326,581,624

Accounts receivables 62,053,958 8,433,786 366,978 1,150,191 72,004,913

Billings in excess of cost and estimated earnings (2,806,346) (28,339) (2,813) (8,848) (2,846,346)

Advance from customers – (132,431) – (5,608) (138,039)

Cost and estimated earnings in excess of billings 10,463,077 2,245,047 2,205,617 319,699 15,233,440

Geographic segments

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126


Years ended December 31, 2002 2003 2004

(Restated)

Income before change in accounting principle $36,011,877 $43,397,263 $58,187,457

Less: Accretion in relation to redeemable common shares 9,752,506 – –

Income available to common and redeemable common

share holders before change in accounting principle 26,259,371 43,397,263 58,187,457

Cumulative effect of a change in accounting principle – 3,273,960 –

Income available to common and redeemablecommon share holders 26,259,371 46,671,223 58,187,457

Equity shares

Weighted average number of shares outstanding 99,059,168 111,420,849 123,066,042

Effect of dilutive equivalent shares-stock options outstanding – – 1,018,950

Weighted average number of equity shares and equivalent

share outstanding 99,059,168 111,420,849 124,084,992

20.1.4 One customer accounted for 51%, 41% and 32% of the total revenues for the year ended December 31, 2002, 2003 and 2004

respectively. Receivables from this customer as at December 31, 2003 and 2004 amounted to 46% and 37% of the total receivables

respectively. The revenues from this customer were across all the industry segments of the Company. Another customer in the Insuranceindustry segment accounted for 16%, 17% and 15% of the total revenues for the years ended December 31, 2002, 2003 and 2004

respectively. Receivables for this customer as at December 31, 2003 and 2004 amounted to 8% and 6% of the total receivables.

21.1.1 In accordance with SFAS No. 128, the accretion recorded

through retained earnings due to the existence of the put

option on the redeemable common shares, has been

deducted from the net income to compute the income

available to the common and redeemable common

shareholders.


22.1.1 Patni has various transactions with related parties, such asPCS Technology Ltd. (‘PCSTL’), formerly known as PCSIndustries Ltd., PCS Cullinet, PCS Finance, Ashoka Computers,(affiliates), various companies of the GE group (‘GE’) which is ashareholder in Patni, directors of Patni and their relatives.

Revenues

22.1.2 Patni USA sells computer hardware to PCSTL. Such sales

during the years ended December 31, 2002, 2003 and

2004 amounted to $64,242, $37,729 and $8,974

respectively.

Expenses

22.1.3 Patni has taken certain residential properties under operating

leases from certain affiliates and the Patni family. The rentals

and other incidental charges paid for the same were

$273,636, $259,138 and $289,964 for the years ended

December 31, 2002, 2003 and 2004 respectively. Amounts

outstanding as at December 31, 2003 and 2004 is $Nil and

$39,708 respectively. Outstanding security deposits under

the operating leases placed by Patni with affiliates and the

Patni family at December 31, 2003 and 2004 were

$284,651 and $297,510 respectively.

22.1.4 Patni has given donations to a public charitable trust, thetrustees of which include a Director of the Company and theirrelatives. The donations paid during the years ended 2002,2003 and 2004 were $51,536, $53,712 and $55,199respectively.

22.1.5 Patni has incurred $Nil, $3,192 and $8,438 for the yearsended December 31, 2002, 2003 and 2004 respectivelytowards rental and other incidental charges on behalf of thePCSTL, Ashoka Computers, PCS Cullinet and PCS Finance,which would be subsequently reimbursed. The amountoutstanding as of December 31, 2003 and 2004 is $3,192and $226 respectively.

Due from affiliates

22.1.6 Patni placed two deposits with PCSTL during 1999aggregating $921,234 and $643,363 carrying interest at therate of 18% and 12% per annum respectively. During the year2001, an additional deposit of $208,117 was placed withPCSTL carrying interest at the rate of 12% per annum.

Interest earned on these deposits amounted to $133,557during the year ended December 31, 2002. In December2002, PCSTL has repaid these amounts in full together withaccrued interest.

22.1.7 During the year 2000, Patni USA lent a sum of $4,700,000to two of its shareholders secured by promissory notes.Interest on both loans accrued at 6.21%. The terms of theloan required repayment of principal and accrued interest onDecember 31, 2002. However, in September 2002, theseloans were repaid in full to Patni USA together with accruedinterest. Interest earned on these notes amounted to$212,362 during the year ended December 31, 2002.

21 Earnings per share

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Due from employees

22.1.8 Patni grants personal loans to employees and officers. Such

loans are repayable in equal installments over periods rangingfrom 6 - 60 months. Interest on these loans is charged at

7.5% - 9%. Loans outstanding at December 31, 2003 and

2004 were $101,904 and $86,453 respectively.

22.1.9 Patni USA, Patni UK, Patni GmbH and Cymbal and itssubsidiaries grant personal loans to employees as well asadvances to meet initial conveyance and living expenses.Such loans and advances are repayable over periods rangingupto 60 months and 6 months respectively. Interest chargedon these loans and advances ranged from 0% to 10%.Balance outstanding of such loans and advances atDecember 31, 2003 and 2004 were $660,411 and$1,159,387 respectively.

22.1.10 Patni has given an interest-free advance for educational

purposes to an employee who is a shareholders’ son. Patni

was amortizing this advance by the straight-line method over

the period of five years. The advance outstanding as at

December 31, 2003 and 2004 was $Nil. The amortizations in

this regard amounted to $16,868 and $Nil for the years

ended December 31, 2003 and 2004 respectively.

Transactions with General Electric ("GE")

22.1.11 Patni USA, Patni UK and Patni GmbH sell software services to

various companies of the GE group. Sales to GE during the

years ended December 31, 2002, 2003 and 2004 amounted

to $95,857,692, $103,402,102 and $103,440,511

respectively. This amounts to 51%, 41% and 32% of the totalrevenue for the years ended December 31, 2002, 2003 and

2004 respectively. Receivables from various GE companies

as at December 31, 2003 and 2004 amounted to

$26,174,095 and $26,429,295 respectively. This amounted

to 46% and 37% of the total receivables as at December 31,

2003 and 2004 respectively.

22.1.12 GE charges Patni and Patni USA for data link connections.

Data link charges for the years ended December 31, 2002,

2003 and 2004 amounted to $543,558, $615,587 and

$1,165,610 respectively. Outstanding to GE at December

31, 2003 and 2004 on account of data link charges

amounted to $168,139 and $247,165 respectively.

Guarantees

22.1.13 Patni has issued a counter guarantee on behalf of PCSTL

aggregating Rs. 150,000,000 ($3,439,578) to a bank. The

guarantee was issued on August 30, 1997 and is a continuing

guarantee for the credit limits allowed by the bank to PCSTL.

The amounts under this guarantee are payable on demand.Further, the guarantee provides that until the bank has been

repaid all amounts due therein, Patni will take no steps to

enforce any right or claim against PCSTL for any

reimbursement in respect of amounts paid by Patni to the

bank.

23 Line of Credit

23.1.1 The Company has a Line of Credit of Rs.140,000,000

($3,210,273) from its bankers for export credit requirementssuch as Packing Credit, Export Bill Discounting or Post

Shipment Loan which have a maximum tenor of 180 days.

This includes an inner limit of Rs.40,000,000 ($917,221) for

working capital requirements such as Overdraft or Working

Capital Demand Loan, which has a tenor of 365 days for

loans and 1 day for Overdraft. The Company also has a limit

for issuance of Bonds and Guarantees of Rs.70,000,000

($1,605,136) for financial guarantees favoring the

Government of India and other authorities which have a tenor

of 36 months (including claim period). This limit is

interchangeable with Letters of Credit, which have a tenor of

365 days. The line of credit bears interest as negotiated with

the bank from time to time. The facilities are secured by book

debts of the company and contain financial covenants and

restrictions on indebtedness.

24 Commitments and contingent liabilities

24.1.1 The Company is obliged under a number of contracts relating

to capital expenditure. Estimated amounts remaining to be

executed on such contracts (net of advances), aggregated

$435,043 and $25,483,547 at December 31, 2003 and

2004.

24.1.2 Guarantees given by a bank on behalf of Patni amounted

$249,755 and $355,507 as at December 31, 2003 and 2004

and letter of credit issued by bank was $Nil and $57,389 as at

December 31, 2003 and 2004.24.1.3 Certain income tax related legal proceedings are pending

against the Company. Potential liabilities, if any, have been

adequately provided for, and the Company does not currently

estimate any incremental liability in respect of these

proceedings. Additionally, the Company is also involved in

lawsuits and claims which arise in ordinary course of

business. There are no such matters pending that Patni

expects to be material in relation to its business.

25 Fair value of financial instruments

25.1.1 The fair value of Patni’s current assets and current liabilities

approximate their carrying values because of their short-term

maturity. Such financial instruments are classified as currentand are expected to be liquidated within the next twelve

months. The fair value of capital lease obligations has been

estimated by discounting cash flows based on current rate

available to the Company for similar types of borrowing

arrangements. The fair value and carrying value of capital

lease obligations is set out below:

Capital lease obligations Fair Value Carrying value

At December 31, 2003 $530,978 $539,918

At December 31, 2004 $629,140 $656,828

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PATNI COMPUTER SYSTEMS, INC. AND SUBSIDIARY (The Reference, Inc.)

128

Director’s Report

The directors are pleased to submit their report together with the

Financial Statement for the year ended December 31, 2004. During the

year under review your company has undergone various changes with

respect to share capital, internal structure and acquisitions.

Accounting PolicyYour Company is consistently using the accrual basis of accounting for

the revenues, expenditure, Assets and liabilities.

Revenue

The Consolidated revenue for Patni Computer Systems, Inc. including

The Reference, Inc. (a wholly-owned subsidiary) but excluding Cymbal

Corporation (a wholly-owned subsidiary) was $280,484,543 for 2004 as

compared to $221,790,446 for 2003. This shows an increase in the

consolidated revenue by 26%.

Profit Before Tax

Consolidated profit before tax for Patni Computer Systems, Inc.,

including The Reference, Inc. (a wholly-owned subsidiary) but excludingCymbal Corporation (a wholly-owned subsidiary) was $8,221,410 for

2004 as against $7,855,795 for 2003, an increase of 4.7%.

Closing Headcount

Consolidated headcount for Patni Computer system, Inc., including The

Reference, Inc. (a wholly-owned subsidiary) but excluding Cymbal

Corporation (a wholly-owned subsidiary) was 1694 at December 31,

2004. (1,599 at December 31, 2003)

Internal Structure

Patni Computer Systems, Inc has verticalised its services into FS,

insurance, telecom. PES domains during the year under review in tune

with the industry trends. This change will have a positive impact on the

revenue of the company in future.

Acquisition

On November 3, 2004, Patni Computer Systems, Inc. acquired Cymbal

Corporation and all its wholly-owned subsidiaries. The acquisition is

made in order to establish a position in telecommunication service

sector.

Equity Changes

During 2004, Patni Computer Systems, Inc. increased its authorized

common stock from 5000 to 10,000 shares. Subsequent to this event,

Patni Computer Systems, Ltd. purchased 2,500 shares for

$35,000,000.

The directors thank all the shareholders, employees and other business

associates of the company for their continued support.

For and on behalf of Board of Directors,

Narendra K. Patni

Chairman

Cambridge, MA

Dear shareholders

Corporate Information

The Board of Directors Secretary Registered Office Auditors

N K Patni John Ganick 238 Main Street, Gerald T Reilly & Company

John Ganick Cambridge, MA 02142 Certified Public Accountants, Inc

Mrinal Sattawala USA 424 Adams Street, Milton, MA 02186-4358

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Independent Auditors’ ReportBoard of Directors

Patni Computer Systems, Inc.

We have audited the accompanying consolidated balance sheets of Patni

Computer Systems, Inc. and one of its two wholly-owned subsidiaries,

The Reference, Inc., as of December 31, 2004 and 2003, and the

related consolidated statements of income, changes in stockholders’

equity and comprehensive income, and cash flows for the years then

ended. These financial statements are the responsibility of the

Company’s management. Our responsibility is to express an opinion on

these financial statements based on our audits.

We conducted our audits in accordance with auditing standards

generally accepted in the United States of America. Those standards

require that we plan and perform the audit to obtain reasonable

assurance about whether the financial statements are free of material

misstatement. An audit includes examining, on a test basis, evidence

supporting the amounts and disclosures in the financial statements. An

audit also includes assessing the accounting principles used and

significant estimates made by management, as well as evaluating the

overall financial statement presentation. We believe that our audits

provide a reasonable basis for our opinion.

The accompanying financial statements of Patni Computer Systems, Inc.

have been prepared on a consolidated basis with one of its two wholly-

owned subsidiaries, The Reference, Inc. The financial statements of the

Company’s other wholly-owned subsidiary, Cymbal Corporation, have

not been included in the accompanying financial statements so that

management could present the financial position, results of operations

and cash flows solely of Patni Computer Systems, Inc. and The

Reference, Inc. The Company’s investment in the unconsolidated

subsidiary has been reported at cost. Accounting principles generally

accepted in the United States of America require that the financial

statements of all wholly-owned subsidiaries be consolidated with those

of the parent company, and that any intercompany transactions and

balances be eliminated in the consolidation. The Company has prepared,

in a separate report, such consolidated financial statements. Note 12 to

the financial statements depicts the effects of this departure from

generally accepted accounting principles.

In our opinion, because the accompanying financial statements are not

prepared on a consolidated basis with all of the Company’s wholly-

owned subsidiaries, as discussed in the preceding paragraph, the

financial statements referred to above do not present fairly, in

conformity with accounting principles generally accepted in the United

States of America, the consolidated financial position of Patni Computer

Systems, Inc. and its subsidiaries at December 31, 2004 and 2003, and

the consolidated results of its operations and cash flows for the years

then ended.

G. T. Reilly & Company

Milton, MassachusettsJanuary 20, 2005


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Consolidated Statements of Income (Excluding subsidiary Cymbal Corporation - See Notes 1 & 12)

For the Year ended December 31 2004 2003

REVENUES $ 280,484,543 $ 221,790,446

Cost of Revenues (Note 6) 241,180,888 187,648,545

Gross Profit 39,303,655 34,141,901

Other Costs (Income) and Expenses

Selling, general and administrative 30,262,138 26,185,835

Losses on Leases of facilities (Note 4) 1,196,146 –

Bad debts, net of recoveries 276,498 329,717

Interest income, net (652,537) (229,446)

31,082,245 26,286,106

Income Before Taxes 8,221,410 7,855,795

Income Taxes (Credits) (Notes 1 & 3)

Current 3,130,324 4,882,327

Deferred (17,998) (1,721,568)3,112,326 3,160,759

NET INCOME $ 5,109,084 $ 4,695,036

The accompanying notes are an integral part of these financial statements.

Consolidated Statements of Changes in Stockholders’ Equity andComprehensive Income (Excluding subsidiary Cymbal Corporation - See Notes 1 & 12)

For the years ended December 31, 2004 and 2003

Accum. OtherComprehensive Common Stock Retained Comprehensive Total

Income Shares Amount Earnings Income (Loss), Net

Balance as at December 31, 2002 5,000 $ 5,000 $ 19,902,049 $ – $ 19,907,049

Comprehensive income

Net income $ 4,695,036 4,695,036 4,695,036

Minimum pension liability adjustment,

net of tax of $341,932 (Notes 1 & 7) (507,168) (507,168) (507,168)

Comprehensive income $ 4,187,868

Balance as at December 31, 2003 5,000 5,000 24,597,085 (507,168) $ 24,094,917

Shares issued 2,500 35,000,000 35,000,000

Comprehensive incomeNet income $ 5,109,084 5,109,084 5,109,084

Minimum pension liability adjustment,

net of tax of $142,120 (Notes 1 & 7) 217,817 217,817 217,817

Unrealized loss on investments (Notes 1 & 2) (3,401) (3,401) (3,401)

Comprehensive income $ 5,323,500

Balance as at December 31, 2004 7,500 $ 35,005,000 $ 29,706,169 $ (292,752) $ 64,418,417


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132

Consolidated Statement of Cash Flows (Excluding subsidiary Cymbal Corporation - See Notes 1 & 12)

For the Year ended December 31 2004 2003

Cash Flows from operating Activities

Net income $ 5,109,084 $ 4,695,036

Adjustments to reconcile net income to net cash from operations:


Amortisation 84,000 59,500

Pension cost 1,305,173 965,573

Deferred income taxes (credits) 132,254 (1,721,568)

Loss on disposals of equip. & automobiles, net 294,395 1,250

Changes in operating assets and liabilities

Accounts receivable, trade (12,038,884) (9,571,242)

Allowance for doubtful accounts (113,483) (117,534)

Accounts receivable, related parties 1,280,719 1,076,795

Due from employees (792,806) (71,990)

Costs and estimated earnings in excess of billings on uncompleted contracts (624,589) (2,602,437)

Prepaid expenses and other advances (168,022) 229,601

Prepaid income taxes (261,198) 49,414

Other current assets (371,670) 262,904

Deposits and other noncurrent assets 489,103 (3,156)

Accounts payable, related party 41,557,996 34,474,281

Other accounts payable & accrued expenses (13,384,145) 1,914,424

Billings in excess of costs and estimated earnings on uncompleted contracts 1,194,608 227,116

Sales and payroll taxes payable (21,947) 42,822

Income taxes payable (2,576,128) 1,090,389

Other long-term liabilities 109,283 (83,021)

Net Cash Provided from Operating Activities 21,917,348 31,654,771

Cash Flows used in Investing Activities

Purchase of investments (10,657,877) –

Additions to property and equipment, net (906,852) (794,190)

Business acquisitions, net of cash acquired (Note 9) (22,032,031) (3,038,194)

Net Cash used in Investing activities (33,596,760) (3,832,384)

Cash Flows from Financing Activities

Issuance of common stock 35,000,000 –

Dividends paid – (75,000)

Net Cash Provided from (used in) Financing Activities 35,000,000 (75,000)

Resulting in a Net Increase in Cash 23,320,588 27,747,387

Cash and Cash Equivalents at Beginning of Year 40,235,911 12,488,524

Cash and Cash Equivalents at end of year $ 63,556,499 $ 40,235,911


8/7/2019 Patni_AR_2004



Notes to the Consolidated financial statements (Excluding subsidiary Cymbal Corporation)

December 31, 2004

Note 1 - Business Activities and Significant Accounting Policies

Business Activities – Patni Computer Systems, Inc. provides

consulting, software development, maintenance and data conversion

services to a variety of industries and customers located in North

America, primarily in the United States.

In April of 2003, The Reference, Inc. (TRI) was acquired by the Company.

TRI’s principal business activity is to provide consulting and information

technology services to a variety of clients in the financial services

industry (see Note 9).

Reporting Entity and Basis of Presentation – The accompanying

financial statements contain the accounts of Patni Computer Systems,

Inc. and one of its two wholly-owned subsidiaries, The Reference, Inc. All

significant intercompany transactions and balances between theCompany and TRI have been eliminated in the consolidation.

The Company’s investment in the unconsolidated subsidiary, Cymbal

Corporation (Note 9), is reported in the accompanying financial

statements under the cost method of accounting. Under this method of

accounting, the Company records its investment in the stock of Cymbal

at initial cost, plus any additional cash investments in the subsidiary. The

unconsolidated subsidiary’s net income or loss for the period is not

reported in the Company’s financial statements. Dividends from the

subsidiary, if any, are recorded as investment income.

The purpose of the accompanying financial statements is to present the

financial position, results of operations and cash flows solely of PatniComputer Systems, Inc. and The Reference, Inc. In a separate report,

the Company has presented its financial statements in consolidation with

all wholly-owned subsidiaries as required by accounting principles

generally accepted in the United States of America. The effects of this

departure from generally accepted accounting principles are presented

in Note 12.

Accounting Estimates – The preparation of financial statements in

conformity with accounting principles generally accepted in the United

States of America requires management to make estimates and

assumptions that affect certain reported amounts and disclosures.

Material estimates that are particularly susceptible to change in the near

term are the determination of the allowance for doubtful accounts, costsand estimated earnings on uncompleted contracts reported under the

percentage of completion method of accounting. Actual results could

differ from these estimates.

Comprehensive Income – FAS No. 130 defines “comprehensive

income” as the change in equity during a period due to transactions,

events and circumstances arising from non-owner sources.

“Comprehensive income” includes net income under accounting

principles generally accepted in the United States of America, as well as

“other comprehensive income”, which consists of items that are excluded

from net income and reported as changes in separate components of

equity as required by other accounting standards. The Company’s “other

comprehensive income” consists of minimum pension liability

adjustments as required by FAS 87, “Employees’ Accounting for

Pensions” (see Note 7), and unrecognized gains and losses on

marketable securities (Note 2).

Under FAS No. 130, all of the components of “comprehensive income”

are required to be reported in a basic financial statement. The Company

presents the components of “comprehensive income” in a

“consolidated statement of changes in stockholders’ equity and

comprehensive income” (see Note 11).Reclassifications – Certain amounts in the 2003 financial statements

have been reclassified to conform with current year classifications.

These reclassifications had no effect on the amounts of stockholders’

equity or net income as previously reported for 2003.

Revenue Recognition – Revenues on long-term fixed price contracts

are recognised on the percentage of completion method of accounting.

Profits are recorded on the basis of management’s estimate of the

percentage of completion, when progress reaches a point where

experience is sufficient to estimate final results with reasonable

accuracy, measured by the percentage of man-days of service incurred

to date to the estimated total man-days of service for each contract.

Since long-term contracts usually extend over more than one reporting

period, revisions in cost and profit estimates during the course of the

work are reflected in the accounting period in which the facts that

require the revision become known. Provisions for estimated losses on

uncompleted contracts are made in the period in which such losses are

estimated

The asset, “Costs and estimated earnings in excess of billings”

represents revenues recognised in excess of amounts billed on

uncompleted contracts. The liability, “Billings in excess of costs and


recognised on uncompleted contracts (see Note 5).

Revenues from long-term service or maintenance contracts arerecognised evenly over the course of the contract. When necessary, a

liability is recognised to reflect the amount of billings in excess of

revenue recognised. At December 31, 2004 and 2003, this liability

approximated $1,310,000 and $1,065,000, respectively, and is

included in “Billings in excess of costs and estimated earnings”.

Revenues from arrangements with multiple deliverables are considered a

single revenue stream with revenues and associated costs being

recognised evenly over the course of the project. The costs that are

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134

Notes to the Consolidated financial statements (Contd.) (Excluding subsidiary Cymbal Corporation)

December 31, 2004

deferred do not exceed the amount of future revenues. When necessary,an asset or liability is recognised to reflect the amount of gross revenues

or costs recognised. At December 31, 2004 and 2003, the asset

approximated $505,000 and $240,000, respectively, and is included in

“Costs and estimated earnings in excess of billings”. The liability

approximated $980,000 and $427,000, respectively, and is included in

“Billings in excess of costs and estimated earnings”.

The Company defers revenue recognition and the associated costs in

circumstances where all the requirements for revenue recognition have

not been met. In these circumstances, the deferred costs are included

in the asset, “Costs and Earnings in Excess of Billings on Uncompleted

Contracts”. At December 31, 2004 and 2003, approximately $830,000

and $1,880,000 of costs have been deferred. Revenue has not been

recognised in the financial statements on these contracts.

Revenue from time and material contracts is recognised as the services

are performed.

Cash and Cash Equivalents – For purposes of balance sheet

classification and reporting the statement of cash flows, the Company

considers all highly-liquid deposits and investments with original maturities

of three months or less to be cash equivalents.

Investments – The Company reports its investments in marketable

securities in accordance with Statement of Financial Accounting

Standards (FAS) No. 115, “Accounting for Certain Investments in Debt

and Equity Securities”. Debt securities that the Company has the

positive intent and ability to hold to maturity are classified as “held to

maturity” and reported at cost, adjusted for the amortization of

premiums and accretion of discounts. Debt and marketable equity

securities which are not classified as “held to maturity” or as “trading

securities” are classified as “available-for-sale” and reported at fair

value, with unrealized gains and losses excluded from the determination

of net income and reported as “other comprehensive income” in the

consolidated statement of changes in stockholders’ equity and

comprehensive income, and as “accumulated other comprehensive

income” in the stockholders’ equity section of the consolidated balance

sheet. The Company has not classified any securities as “trading

securities”. Declines in the values of investment securities that are

deemed to be other than temporary would be reflected in earnings when

identified.

Accounts Receivable – Accounts receivable are stated at face value.

An allowance for doubtful accounts is also reported on the face of the

Company’s consolidated balance sheet. The allowance is established via

a provision for bad debts charged to operations. On a periodic basis,

management evaluates its accounts receivable and establishes or

adjusts its allowance to an amount that it believes will be adequate to

absorb possible losses on accounts that may become uncollectible,

based on evaluations of the coIlectibility of individual accounts, theCompany’s history of prior loss experience and on current economic

conditions. Accounts are written-off and charged against the allowance

when management believes that the collectibility of the specific account

is unlikely.

Property and Equipment – Property and equipment are stated at cost.

Expenditures for renewals and improvements that significantly extend

the useful life of an asset are capitalized. Expenditures for maintenance

and repairs are charged to income as incurred.

Depreciation is recorded on a straight-line basis. The following is a

summary of the depreciation periods which approximate the estimated

useful lives of the property and equipment:Assets Estimated Useful Lives

Furniture, fixtures and equipment 3- 8 years

Motor vehicles 5 years

Intangible Assets – Under Statement of Financial Accounting Standards

No. 142, “Goodwill and Other Intangible Assets” (FAS 142), the excess

of cost over the fair value of identifiable net assets obtained in business

acquisitions is carried at cost (unamortized). Such goodwill is tested for

impairment at least annually, or more frequently upon the occurrence of

an event or when circumstances indicate that a “reporting unit” carrying

amount is greater than its fair value. Impairment testing involves a two-

step process that begins with the estimation of the fair value of therelated “reporting unit”, which is defined as an operating segment, and

results in the measurement of the amount of impairment by the

allocation of the fair value to the identifiable assets of the reporting unit.

Management has determined that there has been no impairment of

goodwill and, accordingly, no loss has been recognised as of December

31, 2004. Other intangible assets consist of customer contracts and

relationships acquired in a business acquisition, which are being

amortized on a straight-line basis over their estimated useful lives of 10

years (see Note 9).

Impairment of Long-Lived Assets – The Company reviews its long-lived

assets, including property and equipment and other intangibles, for

impairment and determines whether an event or change in facts and

circumstances indicates that the carrying amount may not be recoverable

under the standards established in FAS No. 144, “Accounting for the

Impairment or Disposal of Long-Lived Assets”. Management believes that

there has been no material impairment of long-lived existing assets and,

accordingly, no loss has been recognised during the reporting periods.

Advertising Costs – The cost of advertising is charged to expense as

incurred. Advertising expense for the years ended December 31, 2004

and 2003 amounted to approximately $120,000 and $80,000,

respectively.

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December 31, 2004

Income Taxes - The Company provides for deferred income taxesbased on temporary differences between the financial statement

amounts and the tax bases of assets and liabilities that will result in

taxable or deductible amounts in the future, based on enacted tax laws

and rates applicable to the periods in which the differences are expected

to affect taxable income. Valuation allowances are established whennecessary to reduce deferred tax assets to the amount expected to be

realized. Income tax expense is the tax payable or refundable for the

period plus or minus the change during the period in deferred tax assets

and liabilities (see Note 3).

Note 2 – Investments

Investments in marketable securities consist of the following at December 31,2004:

Note 3 - Income Taxes

The tax effects of principal temporary differences are shown in the

following table at December 31:

Deferred Tax Asset (Liability)

2004 2003

Deferred tax assets

Accrued expenses $ 4,739,148 $ 4,841,229


accounts 922,804 977,282

Revenue recognition 195,438 –

Minimum pension liability

adjustment 192,900 341,932

Accumulated depreciation – 34,754

6,050,290 6,195,197

Deferred tax liabilities

Intangible assets (275,884) (158,304)

Revenue recognition – (270,197)

Accumulated depreciation (139,964) –(415,848) (428,501)

$ 5,634,442 $ 5,766,696

The provisions for income taxes consist of the following:

Current

Federal $ 2,509,605 $ 3,696,617

State 620,719 1,185,710

3,130,324 4,882,327

Deferred (17,998) (1,721,568)

$ 3,112,326 $ 3,160,759

Amortized Cost Unrealized Losses Fair Value Carrying Value

Available-for-sale

Corporate and municipal bonds $ 8,100,624 $ (3,401) $ 8,097,223 $ 8,097,223

Money Market Fund 1,909,549 – 1,909,549 1,909,549Held-to-maturity

Certificates of deposit 647,704 – 647,704 647,704

$ 10,657,877 $ (3,401) $ 10,654,476 $ 10,654,476

All corporate and municipal bonds are scheduled to mature prior to December 31, 2005.

Note 4 - Lease Commitments

The Company conducts its business from leased facilities under

agreements expiring at various dates through 2011. The Company is

required to pay normal maintenance and a portion of any real estate

taxes. The rentals are reported under the operating method of

accounting for leases. Total rent expense for the years endedDecember 31, 2004 and 2003 was $2,949,833 and $1,816,945,

respectively.

A summary of the future minimum lease payments required under

noncancellable lease agreements is as follows:

Years Ending December 31

2005 $ 1,347,607

2006 1,418,541

2007 1,274,403

2008 1,166,296

2009 1,189,294

Thereafter 1,573,763

$ 7,969,904

The Company subleases certain office space to various parties.

Sublease income was approximately $467,000 in the year ended

December 31, 2004 and $365,000 in the year ended December 31,

2003. A summary of the future minimum payments to be received by

the Company under noncancellable operating subleases is as follows:

Year ending December 31, 2005 $ 273,586

Year ending December 31, 2006 3 39,990

$ 313,576

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136


December 31, 2004

Note 5 - Costs and Estimated Earnings on Uncompleted Contracts

The following is a summary of costs and estimated earnings on

uncompleted contracts in comparison to related billings at

December 31:

2004 2003

Costs and estimated

earnings on uncompleted

contracts $ 51,627,447 $ 41,639,955

Billings to date (49,599,420) (40,851,595)Revenue deferment (2,717,873) (1,675,094)

Cost deferment 1,334,803 2,123,242

Provisions for unbilled

receivables (155 083) (176,615)

Net $ 489,874 $ 1,059,893

The above amounts are reflected in the accompanying consolidated

balance sheets as follows:

2004 2003

Costs and estimated

earnings in excess of

billings on uncompleted

contracts $ 4,775,326 $ 4,150,737

Billings in excess of costs

and estimated earnings on

uncompleted contracts (4,285,452) (3,090,844)

$ 489,874 $ 1,059,893

The amount of revenue to be realized from work yet to be performed on

uncompleted contracts approximates $8,500,000 at December 31,

2004.

Note 6 - Related Party Transactions

The Company is a wholly-owned subsidiary of Patni Computer SystemsLtd., a foreign corporation located in India. The Company purchases a

significant amount of software development services from the parent. A

summary of such transactions for the years ended December 31 is as

follows:

2004 2003

Software development

charges $ 131,523,409 $ 98,186,224

At December 31, 2004, $103,311,588 of accounts payable is due to

Patni Computer Systems Ltd. ($62,953,761 at December 31, 2003).

The Company also owes the unconsolidated subsidiary, Cymbal

Corporation, amounts in connection with a loan the Company assumed

from Cymbal's former stockholder at the acquisition. At December 31,

2004, the balance owed to Cymbal was approximately $1,200,000 and

it is included in the line item “accounts payable, related party”.

During the normal course of business, the Company provides certain

services for other Patni Computer Systems, Ltd. subsidiaries, including

the unconsolidated subsidiary, Cymbal. A summary of these sales is as

follows:

2004 2003

Sales to unconsolidated

subsidiary $ 16,189 $ –

Other related party sales 618,599 404,498

$ 634,788 $ 404,498

The Company has also made cash advances to other Patni Computer

Systems Ltd. subsidiaries. At December 31, 2004, $674,101 is

receivable from these related companies ($1,954,820 at December 31,

2003).

During the year ended December 31, 2004, the Company terminated anoperating lease under an agreement requiring a payment of

approximately $1,020,000. The payment was charged to operations,

net of approximately $280,000 of previously accrued liabilities on the

acquisition of The Reference, Inc. (Note 9). In connection with the lease

termination, the Company disposed of property and equipment with an

approximate net book value of $205,000. The net change to 2004

operations as a result of this facilities lease termination and disposal

approximated $945,000.

The Company makes provisions for the difference between rental

income to be received on subleases and the minimum lease payments

due on the office space subleased. During the year ended December

31, 2004, the Company accrued an additional $260,000 via a charge

to operations. At December 31, 2004, there remains approximately

$265,000 of liabilities accrued on the balance sheet.

Note 4 - Lease Commitments (Contd.)

Note 7 - Employee Benefit Plans

The Company adopted a 401(k) salary deferral profit sharing plan, which

enables employees to make pre-tax contributions. The Company does

not match employee contributions to the plan.

During the year 2000, the Company committed to a retirement benefit

to its president. The benefit payable to the president or his surviving

spouse will equal 50% of his last annual base salary. The benefit will be

paid commencing when the president reaches the age of 65.

The following schedule reflects an independent actuarial estimate of the

changes in benefit obligations, amounts recognised in the financial

statements at December 31 (the most recent valuation date), and the

assumptions to derive these amounts:

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December 31, 2004

Note 7 - Employee Benefit Plans (Contd.)

December 31 2004 2003Change in benefit

obligation

Projected benefit obligation

(PBO) at beginning of year $ 4,302,962 $ 3,055,348

Service cost 137,763 104,201


Actuarial (gain) loss (121,075) 724,348

Foreign currency

exchange rate changes 191,947 182,904

Projected benefit obligation

(PBO) at end of year $ 4,726,641 $ 4,302,962

Plan assets at beginningand end of year $ – $ –

Funded status (4,726,641) (4,302,962)

Unrecognized prior

service cost 822,150 1,530,912

Unrecognized

actuarial loss 276,355 593,155

Net amount recognised $ (3,628,136) $ (2,178,895)

Amounts recognised in the balance sheet are as follows:

Accrued pension liability $ (4,387,502) $ (3,621,150)

Intangible pension asset 277,115 593,155

Accumulated other

comprehensive income,

before taxes 482,251 849,100

Net amount recognised $ (3,628,136) $ (2,178,895)

Assumptions used to derive these amounts:

Discount rate 5% 5%

Increase in

compensation level 10% 10%

The following schedule reflects the net periodic pension cost recorded

by the Company:

Year ended December 31 2004 2003

Service cost $ 142,000 $ 103,000


Amortization of prior

year cost 328,000 317,000

Amortization of (gain)/loss 615,000 228,000

$ 1,305,000 $ 882,000

Note 8 - Financial Instruments and Concentrations of Credit Risk

The Company’s financial instruments that are potentially exposed to

concentrations of credit risk consist primarily of cash, cash equivalents

and trade accounts receivable.

The Company’s cash and cash equivalents are placed with high-quality

financial institutions. Based on bank balances at December 31, 2004,

approximately $52,000,000 of deposits were in excess of the federal

insured limit.

The Company’s largest customer, which is composed of several

divisions, accounted for approximately 34% of the Company’s revenue

for the year ended December 31, 2004 (43% of revenues for the year

ended December 31, 2003). In addition, the same customer accounted

for 39% of the Company’s accounts receivable at December 31, 2004

(45% of accounts receivable at December 31, 2003).

The Company’s second largest customer accounted for approximately

17% of revenue for the year ended December 31, 2004 (20% of

revenues for the year ended December 31, 2003) and 7% of accounts

receivable at December 31, 2004 (9% of accounts receivable at

December 31, 2003).

The Company closely monitors the extension of credit to new and

existing customers. The Company has not experienced significant

losses relating to accounts receivable from an individual or group of

customers, or from groups of customers in any one industry or

geographic location.

In addition, the Company purchases a significant amount of its software

development services from Patni Computer Systems Ltd. (a foreign

affiliate) (see Note 6).

Note 9 - Business Acquisitions

Unconsolidated Subsidiary – On November 3, 2004, the Company

purchased all of the outstanding shares of Cymbal Corporation (Cymbal)

and its wholly-owned subsidiaries, Cymbal Ltd. UK and Cymbal

Information Services Private Ltd. (India) for $25,093,065 (including

direct acquisition costs of approximately $1,311,150). In connection

with the acquisition, the Company assumed $10,968,131 of obligations

relating to certain contract terminations/settlements. The Company has

recorded this investment at the total original cost of $36,061,196 (see

Notes 1 and 12). The acquisition was made in order to establish a

position in the telecommunications service sector. The Company fundedthis acquisition with proceeds from the issuance of 2,500 additional

shares of common stock to its parent company, Patni Computer

Systems Ltd.

The terms of the purchase also provide for payment of contingent

consideration to all the selling shareholders, payable over three years,

and calculated based on the achievement of specified revenue and

margin targets. The contingent consideration is payable in cash and

cannot exceed $33,000,000. The Company has followed the consensus

reached in EITF No. 95-8, “Accounting for Contingent Consideration

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138


December 31, 2004

Paid to the Shareholders of an Acquired Enterprise in a PurchaseBusiness Combination” and, accordingly, will increase the investment

account for any contingent payments in the period(s) in which the

contingency is resolved.

Further, as part of the acquisition, the Company initiated an incentive

plan linked to revenues and margins, for certain specific employees of

Cymbal. The incentive payments under this plan will not exceed

$3,400,000 over the next three years. Since the incentive payments are

linked to continuing employment, the payments under the plan will be

recorded as compensation for post-acquisition services.

Consolidated Subsidiary - On April 17, 2003, Patni Computer

Systems, Inc. purchased all of the outstanding shares of The Reference,

Inc. (TRI) for $6,093,516 (including direct acquisition costs ofapproximately $114,000). The purchase agreement calls for contingent

payments, not to exceed $1,500,000, based on operating performance

goals for the period from acquisition through December 31, 2005. The

acquisition was made in order to expand the Company’s financial

services business unit.

As of the balance sheet dates, no contingent payments have been

incurred.

The acquisition of TRl has been reported under the purchase method in

accordance with SFAS No. 141, “Business Combinations”. The results

of TRI’s operations have been included in the Company’s consolidated

financial statements since the acquisition date. The purchase price was

allocated as follows:Cash and equivalents $ 3,055,322

Customer contracts and

relationships, amortizable 840,000

Goodwill 2,594,373

Liabilities related to contract

terminations/settlements –

Other tangible assets and liabilities, net (396,179)

$ 6,093,516

Related intangible assets consist of the following at December 31,

2004:

Customer contracts and relationships $ 840,000

Less accumulated amortization (143,500)696,500

Goodwill – excess of cost over

net assets acquired 2,594,373

$ 3,290,873

Amortization expense related to intangible assets for the years ended

December 31, 2004 and 2003 was $84,000 and $59,500,

respectively. Goodwill is not expected to be deductible for tax

purposes.

Note 9 - Business Acquisitions (Contd.)

Note 10 - Supplemental Cash Flow Information

The following summarizes required supplemental cash f low disclosures:

2004 2003

Cash paid for income taxes $ 5,943,854 $ 4,099,157

Annual amortization of customer contracts and relationshipsapproximate the following:

Years Ending December 31

2005 $ 84,000

2006 84,000

2007 84,000

2008 84,000

2009 84,000

Thereafter 276 500

$ 696 500

Note 11 - Accumulated Other comprehensive Income (Loss)

Accumulated other comprehensive income (loss) as reflected in the

stockholders’ equity section of the consolidated balance sheets

consists of the following at December 31:

2004 2003

Minimum pension liabilityadjustment, net of income

taxes of $192,900 in

2004 and $341,932 in

2003 (Note 7) $ (289,351) $ (507,168)

Unrealized net loss on

investments (Notes 1 & 2) (3,401) –

$ (292,752) $ (507,168)

Note 12 - Consolidated Financial Information with All Subsidiaries

As discussed in Note 1, the accompanying financial statements of theCompany are consolidated with one of the Company’s two wholly-owned

subsidiaries, The Reference, Inc. The Company’s investment in its other

wholly-owned subsidiary, Cymbal Corporation, is reported in the

accompanying financial statements under the cost method. Accounting

principles generally accepted in the United States of America require the

consolidation of all wholly-owned subsidiaries in parent company

financial statements. In a separate report, the Company has prepared

and presented such consolidated financial statements.

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December 31, 2004

Note 12 - Consolidated Financial Information with All Subsidiaries (Contd.)

The effects of this departure from generally accepted accounting principles on the accompanying financial statements are presented in the

following pro-forma presentation as of and for the year ended December 31, 2004:

Accompanying Pro forma Full

Financial Statements Adjustments Consolidation

Condensed Balance Sheets

Assets:

Current assets $ 149,102,550 $ 6,698,206 $ 155,800,756

Property and equipment, net 1,625,338 861,398 2,486,736

Intangible assets 39,629,184 (2,686,363) 36,942,821

Other noncurrent assets 432,782 1,100,034 1,532,816

$ 190,789,854 $ 5,973,275 $ 196,763,129

Liabilities and Stockholders’ Equity:

Current liabilities $ 121,594,457 $ 5,293,778 $ 126,888,235

Accrued pension liability 4,387,502 – 4,387,502

Other liabilities 389,478 35,158 424,636

Total liabilities 126,371,437 5,328,936 131,700,373

Stockholders’ Equity 64,418,417 644,339 65,062,756

$ 190,789,854 $ 5,973,275 $ 196,763,129

Condensed Statements of Income

Revenues $ 280,484,543 $ 8,207,079 $ 288,691,622

Cost of revenues 241,180,888 5,483,540 246,664,428

Gross profit 39,303,655 2,723,539 42,027,194

Other costs, income and expenses, net 31,082,245 1,862,096 32,944,341

Income before taxes 8,221,410 861,443 9,082,853

Income taxes 3,112,326 329,285 3,441,611

Net Income $ 5,109,084 $ 532,158 $ 5,641,242

For the purpose of the full consolidation, the purchase price of the 2004 acquisition of Cymbal Corporation was recorded under the purchase

method and allocated as follows:

Cash and equivalents $ 3,061,034

Customer contracts and relationships, amortizable 11,418,200

Goodwill 22,083,501

Liabilities related to contract terminations/settlements (10,968,029)

Other tangible assets and liabilities, net (501,641)$ 25,093,065

Related intangible assets consist of the following at December 31, 2004:

Customer contracts and relationships $ 12,258,200

Less accumulated amortization (270,368)

11,987,832

Goodwill – excess of costs over net assets acquired 22,083,500

$ 34,071,332

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PATNI COMPUTER SYSTEMS (UK) LIMITED

140

Directors’ Report Year ended December 31, 2004


The directors have pleasure in presenting their report and the financial

statements of the company for the year ended 31st December 2004.

Principal activities and business review

The principal activity of the company during the year was that of

providing IT services.

During the year the company increased its efforts on sales and

increased its sales organisation. The company also increased its focus

on sales to other European countries.

The increasing focus on sales and business development is likely to

result in a healthy revenue growth rate in future.

Results and dividends

The trading results for the period and the company's financial position at

the end of the period are shown in the attached financial statements.

The directors have not recommended a dividend.

DirectorsThe directors who served the company during the year were as follows:

P.J. Kutar

A.K. Patni

S.G. Namjoshi

M. Sattawala (Appointed 5th November 2004)

R.B. Pady (Resigned 5th November 2004)

The company is a wholly owned subsidiary and the interests of the group

directors are disclosed in the financial statements of the parent

company.

Registered off ice: Signed on behalf of the directors

Vistacentre

50 Salisbury Road

Hounslow

Middlesex

TW4 6JQ S.G. Namjoshi

Director

Approved by the directors on January 27, 2005

Statement of Directors’ Responsibilities Year ended December 31, 2004

Company law requires the directors to prepare financial statements for

each financial year which give a true and fair view of the state of affairs

of the company at the end of the year and of the profit or loss for the

year then ended. In preparing those financial statements, the directors

are required to:

select suitable accounting policies, as described on page 143, and

then apply them consistently;

make judgements and estimates that are reasonable and prudent;

and

prepare the financial statements on the going concern basis unless

it is inappropriate to presume that the company will continue in

business.

The directors are responsible for keeping proper accounting records

which disclose with reasonable accuracy at any time the financial

position of the company and to enable them to ensure that the financial

statements comply with the Companies Act 1985. The directors are also

responsible for safeguarding the assets of the company and hence for

taking reasonable steps for the prevention and detection of fraud and

other irregularities.

The Board of Directors Secretary Registered Office Auditors

P J Kutar Rahul Vijay Vistacentre Woolford & Co. LLP

A K Patni 50 Salisbury Road Hounslow Chartered Accountants & Registered Auditors

S G Namjoshi Middlesex Hillbrow House Hillbrow Road

M Sattawala TW4 6JQ Esher, Surrey KT10 9NW, UK

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Independent Auditors’ ReportTo the Shareholders Year ended December 31, 2004

We have audited the financial statements of Patni Computer Systems

(U.K.) Limited for the Year ended 31st December 2004 on pages 142 to

145 which have been prepared under the historical cost convention and

the accounting policies set out on page 143.

This report is made solely to the company's shareholders, as a body, in

accordance with Section 235 of the Companies Act 1985. Our audit

work has been undertaken so that we might state to the company's

shareholders those matters we are required to state to them in an

auditors' report and for no other purpose. To the fullest extent permitted

by law, we do not accept or assume responsibility to anyone other than

the company and the company's shareholders as a body, for our audit

work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditors

As described in the Statement of Directors' Responsibilities the

company's directors are responsible for the preparation of the financial

statements in accordance with applicable law and United Kingdom

Accounting Standards.

Our responsibility is to audit the financial statements in accordance with

relevant legal and regulatory requirements and United Kingdom Auditing

Standards.

We report to you our opinion as to whether the financial statements give

a true and fair view and are properly prepared in accordance with the

Companies Act 1985. We also report to you if, in our opinion, theDirectors' Report is not consistent with the financial statements, if the

company has not kept proper accounting records, if we have not

received all the information and explanations we require for our audit, or

if information specified by law regarding directors' remuneration and

transactions with the company is not disclosed.

We read the Directors' Report and consider the implications for our

report if we become aware of any apparent misstatements within it.

Basis of audit opinion

We conducted our audit in accordance with United Kingdom Auditing

Standards issued by the Auditing Practices Board. An audit includes

examination, on a test basis, of evidence relevant to the amounts and

disclosures in the financial statements. It also includes an assessment of

the significant estimates and judgements made by the directors in the

preparation of the financial statements, and of whether the accounting

policies are appropriate to the company's circumstances, consistently

applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information

and explanations which we considered necessary in order to provide uswith sufficient evidence to give reasonable assurance that the financial

statements are free from material misstatement, whether caused by

fraud or other irregularity or error. In forming our opinion we also

evaluated the overall adequacy of the presentation of information in the

financial statements.

Opinion

In our opinion the financial statements give a true and fair view of the

state of the company's affairs as at 31st December 2004 and of its

profit for the year then ended, and have been properly prepared in

accordance with the Companies Act 1985.

Hillbrow House WOOLFORD & CO. LLP

Hillbrow Road Chartered Accountants

Esher, Surrey & Registered Auditors

KT10 9NW

Dated : January 30, 2005

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8/7/2019 Patni_AR_2004



Notes to the Financial Statements Year ended 31 December 2004

1. Accounting policies

Basis of accounting

The financial statements have been prepared under the historical

cost convention.

Cash flow statement

The directors have taken advantage of the exemption in Financial

Reporting Standard No 1 (Revised 1996) from including a cash flow

statement in the financial statements on the grounds that the

company is wholly owned and its parent publishes a consolidated

cash flow statement.

Turnover

The company derives its revenues primarily from software services.

Revenue with respect to time-and-material contracts is recognised

as related costs are incurred. Revenue with respect to fixed-price

contracts is recognised on a percentage of completion basis,measured by the percentage of costs incurred to date to estimated

total costs for each contract.

Fixed assets

All fixed assets are initially recorded at cost.

Depreciation

Depreciation is calculated so as to write off the cost of an asset,

less its estimated residual value, over the useful economic life of

that asset as follows:

Computer Equipment – 25% straight line

Motor Vehicles – 25% straight lineForeign currencies

Assets and liabilities in foreign currencies are translated into sterling

at the rates of exchange ruling at the balance sheet date.

Transactions in foreign currencies are translated into sterling at the

rate of exchange ruling at the date of the transaction. Exchange

differences are taken into account in arriving at the operating profit.

2. Turnover

The turnover and profit before tax are attributable to the one

principal activity of the company.

An analysis of turnover is given below:

3. Operating profit

Operating profit is stated after charging/(crediting):

2004 2003£ £

United Kingdom 7,684,846 4,627,744

European Union 482,071 545,002

Other European 679,623 1,803,066

Other 321,085 613,877

9,167,625 7,589,689

2004 2003£ £

Depreciation of owned

fixed assets 64,206 34,218

Profit on disposal of

fixed assets (2,693) –

Auditors' remuneration

– as auditors 14,042 15,000

– for other services 34,800 65,050

4. Particulars of employees

The average number of staff employed by the company during the

financial period amounted to:

2004 2003

No No

Number of production staff 110 58

Number of administrative

staff 7 7

Number of management

staff 2 2

Number of marketing staff 15 12

134 79

5. Directors' emoluments

The directors' aggregate emoluments in respect of qualifying

services were:

2004 2003

£ £

Emoluments receivable 159,947 131,670

6. Interest payable and similar charges

2004 2003

£ £

Interest payable on

bank borrowing – 4,971

The aggregate payroll costs of the above were:

2004 2003£ £

Wages and salaries 3,712,857 2,856,562

Social security costs 272,593 229,999

3,985,450 3,086,561

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144

Notes to the Financial Statements Year ended December 31, 2004

9. Debtors

2004 2003

£ £

Trade debtors 2,718,494 2,031,069

Amounts owed by groupundertakings 606,302 557,124

Amounts recoverable on

contracts 129,720 101,925

Other debtors 45,634 7,973

Prepayments and accrued

income 744,650 172,546

4,244,800 2,870,637

10. Creditors: Amounts falling due within one year

2004 2003

£ £

Bank loans and overdrafts – 6,801

Trade creditors 69,774 26,554Amounts owed to group

undertakings 2,769,703 1,241,740

Other creditors including

taxation and social security:

Corporation tax 30,885 131,433

Other taxation and social security 526,520 332,407

Other creditors 45,203 155,973

3,442,085 1,894,908

Accruals and deferred income 656,508 614,453

4,098,593 2,509,361

7. Taxation on ordinary activities

2004 2003

£ £(a) Analysis of charge in the year

Current tax:

UK Corporation tax based on the results for the year at 30% (2003 - 30%) 144,635 131,433

Over/under provision in prior year 1,559 –

Total current tax 146,194 131,433

(b) Factors affecting current tax charge

The tax assessed on the profit on ordinary activities for the year is higher

than the standard rate of corporation tax in the UK of 30% (2003 - 30%).

Profit on ordinary activities before taxation 446,259 453,704

Profit/(loss)on ordinary activities by rate of tax 133,882 134,516

Disallowable expenses 5,959 1,924

Capital allowances for period in excess of depreciation 4,794 (5,007)

Prior period adjustment 1,559 –Total current tax (note 7(a)) 146,194 131,433

8. Tangible fixed assets

Computer Equipment Motor Vehicles Total

£ £ £

Cost

At 1st January 2004 222,878 14,720 237,598

Additions 39,369 23,718 63,087

Disposals – (14,720) (14,720)

At 31st December 2004 262,247 23,718 285,965

Depreciation

At 1st January 2004 53,219 12,267 65,486Charge for the year 57,119 7,087 64,206

On disposals – (14,413) (14,413)

At 31st December 2004 110,338 4,941 115,279

Net book value

At 31st December 2004 151,909 18,777 170,686

At 31st December 2003 169,659 2,453 172,112

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Notes to the Financial Statements Year ended December 31, 2004

11. Share capital

Authorised share capital:

2004 2003

£ £

50,000 Ordinary shares

of £1 each 50,000 50,000

12. Profit and loss account

2004 2003

£ £

Balance brought forward 1,886,761 1,564,490

Retained profit for the

financial year 300,065 322,271

Balance carried forward 2,186,826 1,886,761

13. Reconciliation of movements in shareholders' funds

2004 2003

£ £

Profit for the financial year 300,065 322,271

Opening shareholders'

equity funds 1,936,761 1,614,490

Closing shareholders'equity funds 2,236,826 1,936,761

Allotted, called up and fully paid:

2004 2003

No £ No £

Ordinary shares

of £1 each 50,000 50,000 50,000 50,000

14. Ultimate parent company

The company's ultimate parent company, controlling party and

ultimate controlling party during both periods was Patni ComputerSystems Limited, a company incorporated in India.

During the year Patni Computer Systems Limited invoiced Patni

Computer Systems (U.K.) Limited for costs totalling £3,385,014

(2003: £3,064,851).

The total amount owed by Patni Computer Systems (U.K.) Limited

to group companies at 31st December 2004 was £2,769,703

(2003: £1,241,740), and owed by group companies to Patni

Computer Systems (U.K.) Limited was £606,302 (2003:

£557,124).

GE Capital Mauritius Equity Investment is a minority shareholder in

Patni Computer Systems Limited. During the year Patni Computer

Systems (U.K.) Limited made sales of £2,673,254 (2003:

£3,542,782) to GE Capital Mauritius Equity Investment and its

associated companies, and as at 31st December 2004 was owed

£530,745 (2003: £699,349) by that group.

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PATNI COMPUTER SYSTEMS GmbH

146

Directors’ Report Year ended December 31, 2004


Audit opinionWe have audited the financial statements including the accounting of

Patni Computer Systems GmbH, Stuttgart, for the financial year from

January 1 to December 31, 2004. The legal representatives of the

Company are responsible for the accounting and preparation of the

financial statements in compliance with German commercial law. Our

responsibility is to express an opinion, based on our audit, on the

financial statements, including the accounting. Because of its

classification as a small company the company has pursuant to sec. 264

HGB not to prepare a management report.

We conducted our audit of the financial statements pursuant to sec. 317

HGB and in compliance with the German generally accepted auditing

principles set down by the Institut der Wirtschaftsprüfer (IDW). Thosestandards require that we plan and perform the audit to obtain

reasonable assurance that inaccuracies and violations are recognised

which significantly affect the presentation of the assets, liabilities,

financial position and results of the Company as conveyed by the

financial statements, in compliance with generally accepted accounting

principles. The scope of the audit was planned taking into account our

understanding of business operations, the Company’s economic and

legal environment, and any potential errors anticipated. In the course of

the audit, the effectiveness of the system of internal controls, so far

related to the financial accounting system, has been assessed, and the

disclosures made in the accounting and the financial statements have

been verified, mainly on the basis of spot checks. The audit also includes

assessing the accounting principles used and significant estimates

made by the legal representatives, as well as evaluating the overall

presentation of the financial statements. We believe that our audit

provides a reasonable basis for our opinion.

Our audit did not give any cause for qualification.

In our opinion, the financial statements are in compliance with generally

accepted accounting principles and present a true and fair view of theassets, liabilities, financial position and results of the Company.

Munich, January 25, 2005

audicon AG

Wirtschaftsprüfungsgesellschaft

Philipp Ullherr

Auditor

The directors have pleasure in presenting their report and the financial

statements of the company for the year ended 31st December 2004.

Principal activities and business review

The principal activity of the company during the year was that of

providing IT services.

During the year the company increased its effort on sales.

The increasing focus on sales and business development is likely to

result in a healthy revenue growth rate in future.

Results and dividends

The trading results for the period and the company’s financial position

at the end of the period are shown in the attached financial statements.

On account to losses, the directors were unable to recommended

dividend.

Directors

The directors who served the company during the year were as follows:

P.J. Kutar

S.G. Namjoshi

The company is a wholly woned subsidiary and the interests of the group

directors are disclosed in the financial statements of the parent

company.

Registered off ice: Signed on behalf of the directors

Curiestrasse 2

D-70563, Stuttgart

Germany S.G. Namjoshi

Director

Approved by the directors on

January 24, 2005

The Board of Directors Registered Office Auditors

P J Kutar Curiestrasse 2 Audicon AG

S G Namjoshi D-70563, Stuttgart Richard-Strauss-Strasse 69Germany 81677 Muenchen

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148

Income statement for the period from 01.01.2004 to 31.12.2004

business year 31.12.2003

Euro Euro Euro

1. Sales 3,640,990.99 2,573,374.03

2. Inventory increase/decrase 201,879.93 111,278.32

3. Other operating income 62,651.41 38,791.43

4. Cost of materials

a) Cost of purchased services 1,591,579.21 857,796.74

5. Personnel expenses

a) Wages and salaries 1,535,491.68 1,430,285.06

b) Social security, pension and other benefit costs 250,513.73 1,786,005.41 214,687.01

6. Depreciation

a) on intangible assets, and plant and equipment and on start-up

and business expansion costs capitalized 1,819.89 2,075.00

7. Other operating expenses 415,437.26 403,508.71

8. Other interest and similar income 467.78 944.22

9. Personal Income/Income Tax 0.00 0.0010. Profit/Loss 111,148.34 (183,964.52)

Balance Sheet-details as of December 31, 2004


Account Description Euro Euro Euro

I. Other equipment, operational and office equipment

0690 Other factory & office equipment 1,505.00 1,021.00

II. Inventories

1095 Contracts in prog. 164,348.62

1096 Contracts in prog. Fixed price 148,809.63 313,158.25 111,278.32

III. Accounts receivable, trade

1200 Trade debitors 821,642.64

1246 Specific Allowance f.doubtful rec. 0.00

1248 General Allowance f. doubtful rec. (7,500.00)

1249 Valuation adjustment (34,499.20) 779,643.44 1,178,870.79

IV. Other assets

1300 Other assets 326.35 3,616.34

1340 Due from emplyees 16,605.73 900.00

1355 Deposits 3,999.12 3,999.12

1434 Input VAT deductible in following y. 0.00 812.18

1461 Visa Card 2,181.24

1462 Master Card 3,544.16 26,656.60

V. Cash on hand and cash in banks

1800 Deutsche Bank # 4942512 00 1,247,028.19 208,857.11

1810 Deutsche Bank # 4942512 01 117.80 234.60

1820 Deutsche Bank # 4949012 00 61,975.15 47,307.36

1830 Deutsche Bank # 4942512 20 34,541.58 1,343,662.72 34,221.81

VI. Deferred charges and prepaid expenses

1900 Prepayments & deferred charges 680.00 680.00 603.00

VII. Capital deficit

Capital deficit 0.00 58,929.42

2,465,306.01 1,650,651.05

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Balance Sheet-details as of December 31, 2004



I. Capital subscribed

2900 Capital subscribed 150,000.00 150,000.00II. Net Loss/Net income

0000 loss/profit 111,148.34 (183,964.52)

III. Accumulated deficit, beginning of year

2979 Accumulated deficit, beginning of year (208,929.42) (24,964.90)

IV. Capital

Capital 52,218.92 58,929.42

V. Other reserves and accrued liabilities

3070 Other accrued expenses 76,318.12 149,614.46

3071 Provision f. term. allowance 12,016.05

3072 Bonus Provision 21,000.003073 Provision f. leave days 84,988.00

3074 Salary increment provision 16,431.60

3075 Accrual for travel expenses 11,225.60

3095 Accrual for year- end & audit fees 28,045.00 250,024.37 7,700.00

VI. Accounts payables, trade

3300 Trade creditors 274,047.06

3349 Valuation Adjustment 0 274,047.06 142,576.20

VII. Accounts due to affiliated companies

3400 Amounts due to rel. companies

(UK) 674,264.95 674,264.953401 Amounts due to rel. companies

(India) 1,119,824.11 1,794,089.06 582,844.10

VIII. Other liabilities

1401 Offsetable input VAT 7% (78.29) (118.94)

1405 Offsetable input VAT 16% (19,227.99) (17,956.14)

1409 Offsetable input VAT § 13 b 16% (257,181.27)

3720 Liabilities for wages & salaries 2,161.00 2,043.28

3736 Liabilities for travel expenses 2,198.89

3739 Liabilities for travel expenses 2,442.47

3730 Liabilities for wage & church taxes 27,647.72 41,805.63

3740 Liabs for social security charges 25,376.35 28,421.50

3805 Turnover tax 16% 301,213.43 341,161.24

3836 Turnover tax § 13 b 16 % 257,181.27

3820 Input VAT advance payments (212,768.01)

3830 Input VAT advance payments 1/11 (29,371.00) (29,573.00)

3840 Input VAT current year (276,669.27)

3841 Input VAT prior year (26.61) 94,926.60 (104.32)

2,465,306.01 1,650,651.05

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150




Sales

4200 Revenues 0% VAT 1,758,407.23 438,459.83

4400 Revenues 16% VAT 1,882,583.76 3,640,990.99 2,134,914.20

Stock change

4818 Contracts in prog. 53,070.30

4819 Contracts in prog. Fixed price 148,809.63 201,879.93 111,278.32

Other operating income

4920 Inc from red of gen prov n for bad debts 3,400.00 6,020.00

4923 Inc. on red. of spec. allow. doubtful debts 8,428.34

4930 Inc. from reversal of accr. expenses 0.00 545.74

4960 Prior period income (not extraord.) 0.00 17,192.73

4840 Foreign exchange gains 50,823.07 62,651.41 15,032.96

Cost of purchased services

5900 Cost of services Subcontractors (221,030.00) (27,328.60)

5909 Cost of services Patni U.K. (239,978.74) (67,500.37)

5910 Cost of services India (1,130,570.47) (1,591,579.21) (762,967.77)

Wages and salaries

6010 Wages (1,452,005.60) (1,428,918.06)

6015 Termination Allowance (25,231.92)

6016 Bonus (28,484.00)

6020 Leave Encashment (28,621.63)

6045 Visa permit charges (1,148.53) (1,535,491.68) (1,367.00)

Social security, pension and other benefit costs

6110 Social security charges (177,455.75) (200,461.37)

6112 Social security medical insurance (66,545.03)

6130 Vol. soc. Expense income tax free (204.00)

6120 Contribution for accident insurance (6,308.95) (250,513.73) (14,225.64)

Depreciation on intangible assets, and plant and

equipment and on start-up and business

expansion costs capitalized

6220 Deprn. of property, plant & equipment (1,520.00) (2,075.00)6260 Imm. Deprn. of low value assets (299.89) (1,819.89)

Office cost

6310 Rent (12,458.25) (15,556.65)

6330 Cleaning 0.00 (12,458.25) 0.00

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Insurance, and other costs

6400 Insurance (971.96) 0.00

6420 Contribution (168.00) (5,162.89)

6436 Tax ded. late pay & fine (461.20) (1,601.16) (1,818.60)

Advertising and Travel expenses

6600 Advertising expense (8,891.01) 0.0

6610 Gifts valued up to € 40,00 (60.00) (50.80)

6630 Representative expenses (252.90)

6640 Entertainment expenses (16% VAT) (1,505.43) (1,396.61)

6641 Entertainment expenses (employees) 0.00 (1,735.03)

6644 Non-deductible entertmt expenses (707.17) (1,213.26)

6650 Employee travel expenses (84,771.49) (96,188.00) (69,358.68)Other operating expenses

6470 Repair of office equipment (362.42)

6740 Freight out 0.00 (59.39)

6770 Commission /Rebate (56,835.76) (23,687.76)

6300 Business Services (11,947.91) (11,285.96)

6800 Mailing expense (154.70) (333.55)

6805 Telephone (9,986.32) (11,116.91)

6815 Office supplies (1,174.42) (3,629.74)

6816 Online service (1,419.91) (1,440.53)

6820 Magazines, books (420.31) 0.006822 Voluntary social contributions 0.00 (1,259.75)

6825 Legal & consulting costs (42,519.03) (8,231.75)

6821 Training Expenses (690.00) 0.00

6827 Closing & audit fees (8,475.50) (28,666.90)

6830 Accounting expenses (38,764.71) (17,132.71)

6855 Bank charges (3,988.70) (2,987.68)

6880 Foreign exchange losses (128,450.16) (176,178.66)

6920 Increase in general prov 0.00 (10,120.00)

6923 Trans.to spec. All doubtful debts 0.00 (8,428.34)

6935 Losses f. debts (standard rate) 0.00 (305,189.85) (2,656.56)Other interest and similar income

7100 Other interest and similar income 467.78 563.72

7105 Int.inc. § 233a AO business taxes 0.00 380.50

7310 Interest expense for s-t liabilities 0.00 0.00

7630 Withholding tax 0.00 0.00

7633 Tax sur.cr.tax inc rec`d on capex 0.00 467.78 0.00

Profit/Loss

0000 Profit 111,148.34 (183,964.52)

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152

D) Notes to the financial statementsfor the Period from January 1, 2004 to December 31, 2004

General Disclosures

Patni Computer Systems GmbH, Stuttgart is a small corporation as

defined by sec. 267 (1) HGB. The Company did not make use of the

exemptions granted in accordance with sec. 276 HGB when preparing

the income statement.

The annual financial statements of Patni Computer Systems GmbH,

Stuttgart, for the abbreviated fiscal year from Jan 1, 2004 to December

31, 2004 were prepared in accordance with the provisions of the third

book of the German Commercial Code (HGB) and the Limited Liability

Companies Law (GmbHG).

The income statement was prepared using the cost summary method.

Accounting and valuation Principles

Property, plant and equipment are valued at acquisition ormanufacturing cost, less scheduled depreciation. Scheduled

depreciation is calculated using the straight-line method based on the

tax-allowed depreciation rates.

Low value assets with an acquisition cost of up to EUR 410.00 are fully

expensed in the year of acquisition and treated as additions and

disposals.

The valuation is on a basis of productions costs

Receivables and other assets are stated at nominal value. A valuation

adjustment on the base of the Euro Exchange reference as on

31 December 2004 rates is shown separately. A general allowance for

doubtful accounts not covered by specific allowances is recorded inrecognition of the general credit risk.

Other accruals are created on the basis of prudent commercial

judgment to cover all potential losses from pending transactions and

contingent liabilities as of the balance sheet date.

Liabilities are accounted for at their repayment amount.

Principles of currency translation

Foreign currency receivables and liabilities are translated at the Euro

foreign exchange reference rates respectively prevailing on the date

they originated or at the less favorable exchange rate at the balance

sheet date.

Explanations to the Balance Sheet

(1) Property, plant and equipment

Because of the very low value the development of the company´s fixed

assets was not shown separately.

31.12.2004

EUR

Trade receivables 779,643.44

– of which to aff il iated companies (227,975.14)

Other assets 26,656.60

– of which with a residual term

of more than one year (0)

806,300.04

(2) Receivables and other assets

(3) Cash and cash equivalents

This item relates to bank balances and cash on hand.

(4) Capital

Because of the profit of EUR 111,148.34 in 2004 and the

accumulated deficit beginning of the year EUR 208,929.42 thecompany shows a capital equity of EUR 52,218.92.

(5) Other accruals

Other accruals primarily contain accruals for vacation and bonus

accrued but not yet taken, termination allowance and outstanding

invoices

31.12.2004 Less than 1 to 5 More than

Total 1 year years 5 years

EUR EUR EUR EUR

Trade payables 274,047.06 274,047.06 0 0

– of which to affiliated companies (239,978.74) (239,978.74) (0) (0)

Liabilities to affiliated companies 1,794,089.06 1,794,089.06 0 0

– of which to shareholders (1,119,824.11) (1,119,824.11) (0) (0)

Other liabilities 94,926.60 94,926.60 0 0

– of which are taxes (67,389.25) (67,389.25) (0) (0)

– of which related to social security (25,376.35) (25,376.35) (0) (0)

2,163,062.72 2,163,062.72 0 0

(6) Liabilities

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CYMBAL CORPORATION AND SUBSIDIARIES

154

Independent Accountant’s Review ReportTo the Board of Directors of

Cymbal Corporation and Subsidiaries

We have reviewed the accompanying consolidated balance sheet of

Cymbal Corporation and subsidiaries as of December 31, 2004, and the

related consolidated statements of income, shareholders’ equity and

cash flows for the six months then ended, in accordance with

Statements on Standard for Accounting and Review Services issued by

the American Institute of Certified Public Accountants. All information

included in these financial statements is the representation of the

management of Cymbal Corporation. We did not review the financial

statements of Cymbal Limited in UK and Cymbal Information Services

Private Limited in India, a consolidated subsidiaries, whose statements

reflect total assets and revenues constituting 30% and 8%, respectively,

of the related consolidated totals. These statements were reviewed by

other auditors whose reports thereon have been furnished to us, and the

results of our review expressed herein, insofar as it relates to the

amounts included for Cymbal Limited and Cymbal Information Services

Private Limited, is based solely upon the report of the other auditors.

A review consists principally of inquiries of Company personnel and

analytical procedures applied to financial data. It is substantially less in

scope than an audit in accordance with generally accepted auditing

standards, the objective of which is the expression of an opinion

regarding the financial statements taken as a whole. Accordingly, we do

not express such an opinion.

Based on our review, we are not aware of any material modifications that

should be made to the accompanying financial statements in order for

them to be in conformity with generally accepted accounting principles.

Our review was made for the purpose of expressing limited assurance

that there are no material modifications that should be made to the

consolidated financial statements in order for them to be in conformity

with generally accepted accounting principles. The information included

in the accompanying schedules of costs of sales, selling and marketing

expenses, and general and administrative expenses is presented only for

supplementary analysis purposes. Such information has been subjected

to the inquiry and analytical procedures applied in the review of the basic

financial statements, and we are not aware of any material modifications

that should be made thereto.

The Chugh Firm

April 15, 2005

Dear Shareholders,

Your directors are pleased to submit their report for the period ended

December 31, 2004.

Acquisition – On November 3, 2004, Patni Computer Systems, Inc.

acquired Cymbal Corporation on the specific terms and conditions as

laid down in the Stock Purchase Agreement entered between the

companies. The acquisition will enable your company to scale up

operations in the telecommunication service sector.

Change in the Financial Year – In order to synchronize with the

Financial Year end of the Holding company, your company’s books have

been closed on the 31st of December, 2004. Consequently this report

is for the six months period ending on that date.

Equity Changes – In consequence of acquisition, Patni Inc., the wholly

owned American subsidiary of Patni Computer Systems owns 100%

stock of Cymbal Corporation on and from November 3, 2004.

Revenue – The Consolidated revenue for Cymbal Corporation including

its subsidiaries was $24,749,091 for the six months ended December

31, 2004.

Profit Before Tax – Consolidated profit before tax for Cymbal

Corporation, Inc., including its subsidiaries was $1,293,716 for the six

months ended December 31, 2004.

Accounting Policies – Your company is consistently using the accrual

basis of accounting for the revenues, expenditure, Assets and liabilities.

Corporate Governance – All tax and corporate compliances have been

effectively discharged of your company to the best of our knowledge.

Auditors – Since Cymbal Corporation has been a closely held private

company it was not required to be audited. However, Chugh Firm has

reviewed the accounts for the six months ended December 31, 2004.

Change in Directorship – Mr. Neeraj Gupta and Mr. Surjeet Singh have

submitted their resignations and have ceased to be Directors with effect

from November 3, 2004. The Board likes to record its deep

appreciation for their services during their tenure as directors of your

company. Mr. N. K. Patni, Mr. Mrinal Sattawala and Mr. John Ganick have

joined the Board of Directors on November 3, 2004.

Narendra K. Patni

Date: April 15, 2005 Director

Directors’ Report

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Consolidated Balance Sheet as of December 31, 2004

As of December 31 2004

ASSETS

Current Assets

Cash and cash equivalents $ 2,455,922

Accounts Receivable, net of allowance for doubtful accounts $76,380 8,037,417

Due from Employees 188,586

Due from Parent Corporation 1,200,169

Prepaid Expenses 211,850

Deferred Tax Assets 79,649

Total Current Assets 12,173,592

Property & Equipment, at cost

Software 87,184

Machinery & Equipment 1,017,520

Furniture and Fixtures 32,707

Total 1,137,411

Less: Accumulated Depreciation (247,983)

Total Property and Equipment, net 889,428

Other Assets

Intangible Asset 300,000

Investments 825,000

Deposits & Other Assets 788,845

Total Other Assets 1,913,845

Total Assets $ 14,976,865

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities

Accounts Payable & Accrued Expenses $ 5,136,270

Due to Parent Corporation 10,979,333

Other Taxes Payable 514,601

Income taxes Payable 1,004,859

Deferred Liabilities 99,408

Total Current Liabilities 17,734,471

Long Term Liabilities

Deferred Rent 35,158

Total Liabilities 17,769,629

Stockholders’ Equity

Preferred Stock, $0.01 par value; 5,000,000 shares authorized –

Common Stock, no par value; 50,000,000 shares authorized 430,733

Additional Paid in Capital 1,132,699Accumulated Other Comprehensive Income 493,226

Retained Earning (4,799,422)

Treasury Stock (50,000)

Total Stockholder’s Equity (2,792,764)

Total Liabilities & Stockholders’ Equity $ 14,976,865

See independent accountant’s review report and accompanying notes to financial statements

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156

Consolidated Statement of Cash Flows For the six months ended December 31,

2004

Cash flows from operating activities

Net Income $ 1,123,801

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation 87,344

Provision for bad and doubtful accounts 10,000

Foreign currency translation adjustments 206,860

Adjustment (12,238,168)

Changes in operating assets and liabilities

Accounts receivable (1,995,877)

Prepaid expenses (7,463)

Deposits (86,768)

Accounts payable 919,296

Accrued liabilities 1,267,767

Accrued liabilities - Acquisition 10,968,029

Income tax payable 132,862

Other Taxes Payable 139,257

Deferred tax liabilities (1,121,369)

Net cash provided by (used in) operating activities (594,429)


Consolidated Statement of Income For the six months period ended December 31, 2004

2004

Revenue

Consulting Income $ 24,749,091

Cost of Sales

See Schedule 1-Analysis of Cost of Sale 17,503,493

Gross Profit 7,245,598

Operating Expenses

Selling and marketing expenses See Schedule 2 - Analysis of Selling and Marketing Expense 2,837,129

General and administrative expenses See Schedule 3 - Analysis of General & Administrative Expenses 3,102,184

Total Operating Expense 5,939,313

Income from Operations 1,306,285

Other Income (Loss)/Expense (9,205)

Interest Expense (3,364)

Income before Provision for Income Taxes 1,293,716

Provision for Income Taxes 169,915

Net Income $ 1,123,801

Consolidated Statements of Changes in Stockholders’ EquityFor the six months period ended December 31, 2004

Shareholder Share Additional Accum. Other Less: Total Total

Preferred Stock Common Stock Notes Retained Application Paid in Comprehensive Treasury Stockholders’ Comprehensive# of Shares Amount # of Shares Amount Receivable Earnings Money Capital I ncome Stocks Equity Income

Balance, June 30, 2004 – – 24,552,388 $ 396,201 $ (265,542) $ 6,314,945 $ 500 $ – $ 286,366 $ (50,000) $ 6,682,470 $ 286,366Prior Period Adjustment

(net of Tax) (2,121,293) (2,121,293)

Deferred Tax Adjustmentfor prior yr 640,235

Acquisition Adjustment (10,757,110) (10,757,110)Cancellation of Stocks (1,352,388) (19,405) 265,542 246,137

Net Income 1,123,801 1,123,801 1,123,801

Foreign currency translationadjustments 206,860 206,860 206,860

Comprehensive Income $ 1,617,027

Share Application Money 500 (500) –Issuance of common stock 1,467,500 53,438 1,132,699 1,186,137Treasury Stock –

Balance, December 31, 2004 – – 24,667,500 $ 430,733 $ – $ (4,799,422) $ – $ 1,132,699 $ 493,226 $ (50,000) $ (2,792,764)

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Notes to the consolidated financial statements December 31, 2004

Note 1 – Description of Operation and Summary of

Significant Accountant Policies

Cymbal Corporation (the Company) is a wholly-owned subsidiary of Patni

Computer Systems, Inc. of Massachusetts. The Company is a United

States corporation based in California.

Nature of BusinessCymbal Corporation (the Company) provides IT consulting services and

delivers on-time solutions to its customers in the Telecommunication and

Financial Services. The Company also offers support to its customers in

system integration, application management, and product development

programs. Cymbal Corporation was incorporated in California in

December 1997.

During the year ended June 30, 2002, the Company established

subsidiaries, Cymbal Limited, in the United Kingdom and Cymbal

Information Services Private Limited in India. Both subsidiaries are also

engaged in IT consulting services in telecommunication industry. In April

2004, Cymbal Information Services Limited of India established a wholly-

owned subsidiary in Thailand, Cymbal Information Services Limited.Principles of Consolidation and Presentation

The consolidated financial statements include the accounts of the

Company, and its wholly owned subsidiaries. All intercompany accounts

and transactions have been eliminated. Certain amounts from prior

years have been reclassified to conform to the current year

presentation.

On November 3, 2004, the Company was acquired by Patni Computer

Systems, Inc. The accompanying financial statements have been

prepared on the Company’s historical basis and they do not reflect any

adjustments that result from the parent company’s application of the

purchase method of accounting for the acquisition.

For purpose and use of the parent company, the statement of income,

changes in stockholder’s equity and comprehensive income, and cash

flows have been prepared for period July 1, 2004 to December 31,

2004. All subsidiaries have been audited by local auditors for the six

months period ended December 31, 2004.

Basis of Accounting

The company uses the accrual method of accounting for financial and

income tax reporting.

Use of estimates

The preparation of the financial statements in conformity with accounting

principles generally accepted in the United States of America requires

management to make estimates and assumptions that affect the

amounts reported in the Consolidated Financial Statements and

accompanying notes. Estimates are used for, but not limited to, the

accounting for the allowance for doubtful accounts, depreciation and

amortization, commissions, taxes, contingencies and cost and

estimated earnings on uncompleted contracts reported under the

percentage of completion method of accounting. Actual results could

differ from these estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with

maturity of three months or less to be cash equivalents. Occasionally,

the Company has cash deposited in a financial institution in excess of

federally insured limits.

Property and Equipments

Property and equipment are stated at cost. Depreciation is provided

Consolidated Statement of Cash Flows (Contd.) For the six months ended December 31,

2004

Cash Flows from investing activities

Purchase of Property and Equipment (861,766)

Disposal of Automobile 44,121

Intangible Asset (300,000)

Employee Advances (132,766)

Investment (127,785)

Decrease in Notes Receivable from Stockholder 265,042

Decrease in Due from Stockholder 87,820

Net Cash provided by (used in) investing activities (1,025,334)

Cash flows from financing actvities

Cancellation of Common Stock (19,405)

Issuance of Stock 1,186,637

Net cash provided by (used in) financing activities 1,167,232

Net Increase (Decrease) in Cash & Cash Equivalents (452,531)

Cash & Cash Equivalents at the beginning of period 2,908,453

Cash & Cash Equivalents at the end of period $ 2,455,922Supplementary disclosure

Interest paid during the six-months period 3,364

See independent accountant’s review report


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158

principally on straight-line method over estimated useful lives of five to

seven years. Depreciation expense for the six months period ended

December 31, 2004 was $87,344.

Investments

The Company accounts for investment in private equity securities of less

than 20% owned company using the cost method.

Accounts Receivable

The company uses the Aging of the Accounts Receivable method for

valuation of allowance for bad debts. Accordingly, the Company has

written off all accounts that are deemed uncollectible. Threfore,

Accounts Receivable represents the net realizable value.

Revenue Recognition

The Company derives revenues from consulting projects, which are

billed by actual time and expenses incurred. Revenues are recognised

on the accrual basis when services are rendered.

Revenues on long-term fixed price contracts are recognised on the

percentage of completion method of accounting. Profits are recorded

on the basis of management’s estimate of the percentage of

completion, when progress reaches a point where experience is

sufficient to estimate final results with reasonable accuracy, measured

by the percentage of man-days of service incurred to date to the

estimated total man-days of service for each contract. Since long-term

contracts usually extend over more than one reporting period, revisions

in cost and profits estimates during the course of the work are reflected

in the accounting period in which the facts that require the revision

become known. Provisions for estimated losses on uncompleted

contracts are made in the period in which such losses are estimated.

The liability, “Billings in excess of costs and estimated earnings”

represents billings in excess of revenues recognised on uncompleted

contracts.

Income Taxes

The Company accounts for income taxes in accordance with Statement

of Financial Accounting Standards No. 109, “Accounting for Income

Taxes”, which requires an asset and liability approach to financial

accounting and reporting of income taxes. Deferred income tax assets

and liabilities are computed annually for differences between the

financial statement and tax basis of assets and liabilities that will result

in taxable or deductible amounts in the future based on the enacted tax

laws and rates applicable to the periods in which the differences areexpected to affect taxable income. Valuation allowance is established

when necessary to reduce deferred tax assets to the amount expected

to be realized.

Stock-Based Compensation

The Company accounts for stock-based employee compensation

arrangements in accordance with provisions of Accounting Principles

Board Opinion No. 25, “Accounting for stock Issued to Employees, (APB

No. 25)” and related interpretations. The Company also complies with

the disclosure provisions of Statement of Financial Accounting Standard

No 123, “Accounting for Stock based Compensation, (SFAS No. 123)”

Notes to the consolidated financial statements (Contd.) December 31, 2004

for employees stock-based transactions, which was amended by

Statement of Financial Accounting Standard No. 148, “Accounting for

Stock-based Compensation - Transition and Disclosure - An amendmentof FASB Statement No. 123”. Accordingly, compensation expense for

stock options is measure as the excess, if any, of the fair value of the

Company’s stock at the date of grant over the amount and individual

must pay to acquire the stock and amortized over the vesting period. All

transactions, with other than employees, in which goods and services

are the consideration received for the issuance of equity instruments,

such as stock options, are accounted for under SFAS No. 123 and

expensed based on the fair value of the equity instruments issued or the

goods and services received, whichever is more reliably measured.

Foreign Currency Translation

The functional currency of the Company’s foreign subsidiary is the local

currency of the country. Accordingly, the assets and liabilities of theforeign subsidiary are translated at the rate of exchange at year-end,

and revenues and expense are translated at the average rate of

exchange during the year. All gains and losses from the translation of

the financial statements of the foreign subsidiary are included in other

comprehensive income. Where the U.S. dollar is the functional currency,

translation adjustments are recorded in income/expense. Gains and

losses are presented as gross on the financial statements as of

December 31, 2004 because the income tax effect on the gains and

losses are considered immaterial.

Comprehensive Income

The Company follows the provisions of SFAS No. 130 “Reporting

Comprehensive Income”. This statement requires companies to classifyitems of other comprehensive income by their components in the

financial statements and display the accumulated balance of other

comprehensive income separately from retained earnings in the equity

section of a statement of financial position.

Advertising

Advertising cost are charged to expense when incurred. Advertising

expense was $71,875 for the six months period ended December 31,

2004.

Note 2 – Concentration in Credit Risk

The majority of cash and cash equivalents are maintained with one major

financial institution in the United States. Deposits with this bank exceed

the amount of the $100,000 Federal Deposit Insurance Corporation(FDIC) insurance provided on such deposits.

The Company performs ongoing credit evalutaions of its customers and

maintains allowances for potential uncollectible accounts as deemed

necessary. The Company generally does not require collateral to secure

its accounts receivable.

The Company estimates credit losses based on management’s

evaluation of historical experience and current industry trends. Although

the Company expects to collects amounts due, actual collections may

differ from the estimated amounts.

During the six month period ended December 31, 2004, three


8/7/2019 Patni_AR_2004





customers accounted for 40%, 14% and 10% of total revenue,

respectively. Additionally, these customers accounted for 20%, 9% and

17% of the accounts receivable balance at December 31, 2004.

The Company’s consolidated balance sheet includes the net assets of

its whollyowned subsidiaries, Cymbal Limited UK and Cymbal Information

Services Private Limited of India, which approximately total to $1.8

million and $2.0 million, respectively.

Note 3 – Advances to Employees

The advances given to employees are for a short period of time and will

be paid by deducting from their payroll. Balance as of December 31,

2004 is $188,586.

Note 4 – Investment

Investment includes private equity investments in privately held

companies. The investment is accounted for using cost method, as theCompany’s ownership interest was less than 20%. Management believes

that the carrying value of the investment approximated its fair value as

on December 31, 2004 and, therefore, no impairment charges were

required.

Note 5 – Accounts payble and Accrued Expenses

As of December 31, 2004, accrued expenses consist of the following:

Accounts Payable $ 2,173,001

Accrued Payroll Expenses 292,609

Accrued VAcation and Sick Leave 423,696

Accrued Employee Benefits 120,222

Accrued Expenses 2,126,742

$ 5,136,270

Note 6 – Income Taxes

The provision for income taxes for the six month ended December 31,

2004 consist of the following:

2004

Current Income tax Expense $ 298,258

Deferred Tax Benefit (128,343)

Total Provision $ 169,915

Undistributed earnings of the Company’s foreign subsidiaries amounted

to approximately $912,000 for United Kingdom and $960,000 for India

at December 31, 2004. Those earnings are considered to be indefinitely

reinvested and accordingly, no U.S. federal and state income taxes have

been provided thereon. Upon distribution of those earnings in the form

of dividends or otherwise, the Company would be subject to both U.S.

income taxes and withholding taxes payable to the foreign country.

However, unrecognized foreign tax credits would be available to reduce

a substantial portion of the U.S. liability.

The significant differences between the carrying amounts and cash basis

tax reporting in prior years bases of existing assets and liabilities that

give rise to deferred tax assets and liabilities are depreciation and

amortization, accounts receivable, accounts payable and accruals, state

income taxes and allowance for bad debts.

Deferred income taxes reflect the net tax effects of temporary

differences between the carrying amount of assets and liabilities for

financial reporting purposes and the amounts used for tax reportingpurposes. Significant components of the Company’s net deferred taxes

are as follows:

2004

Current deferred income taxes

Assets $ 683,705

Liabilites (384,505)

$ 299,200

Non-current deferred income taxes

Assets –

Liabilites ($ 219,551)

($ 219,551)

Net deferred tax asset $ 79,649

Note 7 – Preferred Stock

In September 2002, the Board approved the resolutions to amend its

Certificate of Incorporation to authorize 5,000,000 shares of the

Corporation’s Preferred Stock. The Board may divide the Preferred

Stock into any number of series and shall fix the designation and number

of shares of each such series. The Board may determine and alter the

rights, preferences, privileges and restrictions granted to and impose

upon any wholly unissued series of the Preferred Stock. No preferred

stock has been issued as of December 31, 2004.

Note 8 – Common Stock

During the six month then ended December 31, 2004, the Company hascancelled 1,352,388 shares of common stock issued in the prior fiscal

year. Also, during this period, additional 1,467,500 shares of common

stock were issued pursuant to exercised of stock options by employees.

As of November 3, 2004, Patni Computer Systems, Inc., a

Massachusetts corporation has acquired 100% common stock of the

Company.

Note 9 – Stock Option Plans

The Board approved and adopted the 1997 Incentive Stock Plan (the

“1997 Plan”) in December 1997. Under the 1997 Plan, officers,

directors, employees and consultants may be granted stock options.

The Company has reserved a total of 2,500,000 shares of common

stock for issuance under the 1997 plan. The purchase price for incentivestock options shall not be less than 100% of the fair market value of the

Company’s common stock on the date of the grant. The purchase price

for non-qualified options shall not be less than 85% of the fair market

value of the Company’s common stock on the date of the grant. The

options generally expire 10 years from date of grant and generally vest

ratably over a four to five year period.

The Board approved and adopted the 2000 Incentive Stock Plan (the

“2000 Plan”) in August 2000. Under the 2000 plan, officers, directors,

employees and consultants may be granted the stock option. The

Company has reserved a total of 1,000,000 shares of commom stock

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160

March 31,2005 and March 31, 2006, respectively. In addition, the

agreements provide for ‘cost plus’ model thereby generating mark up

on such services rendered up to $ 720,000 - $500,000 and $220,000

during twelve months ending March 31, 2005 and March 31st 2006,

respectively. This mark up referred to constitute the Net profit agreed

and shall be prorated on monthly basis for each year for which the

Company has provided irrevocable letter of credit from Bank of America.

The agreement also provides for an option to purchase ODC including

the transfer of the Leasehold interest of facilities, legal transfer of

ownership of all equipments used in connection with ODC, transfer of all

the Zensar personnel and assignment of any other contract rights of

Zensar relating to the ODC to the Company. The option may be

exercisable on or before March 31, 2006. The consideration to be paid

by the Company to Zensar is for facilities at Fair Value to be mutually

agreed upon and for ODC employees equivalent of four months Payroll

cost for any employee employed for less than 12 months as a April 1,

2004 and equivalent of six months Payroll Cost for an employeeemployed for more than 12 months as of April 1, 2004 and the amount

of loans and advances taken by such employees from Zensar, provided

the obligation to repay any such loans or advances shall be transferred

to company.

During the six month period ending December 31, 2004, the Company

has exercised the option to transfer all the Zensar ODC employees to the

Company. As a result of this exercise of such option there is a net

liability of $710,572.

Also, time deposit of Cymbal India in the amount of $26,950 is

restricted for use. The deposit serves as margin money of the guarantee

amount required by Custom Department of India to avail government

incentives for free custom duties in the import of equipments.

Note 11 – Letter of Credit

The Company has an approved standby letter of credit with Bank of

America in favor of Zensar Technologies Ltd. India in the amount of

$500,000 and it is secured by time deposit which is classified as non-

current assets.

Note 12 – Litigation

The Company is sued by E-Business Application Solutions, Inc. for

$36,000 for breach of contract. Outcome of which cannot be

determined yet.

Note 13 – Related PartyAs of December 31, 2004, the Company has given $1,110,000

unsecured loan to one of its previous stockholder which accrues interst

at 5.4% per annum. Total interest accrued on this loan amounts to

$90,169 as of balance sheet date. This loan was assumed by Patni

Computer Systems, Inc. in connection with the acquisition of the

Company.

Also, as part of the acquisition, the Company’s liabilities amounting to

$10,968,029 was assumed and paid by its parent company. At

December 31, 2004, $10,979,333 is due and payable to Patni

Computer Systems, Inc.,


for issuance under the 2000 plan. The purchase price for incentive stock

options shall not be less than 100% of the fair market value of the

Company’s common stock on the date of the grant. The purchase price

for non-qualified options shall not be less than 85% of the fair market

value of the Company’s common stock on the date of the grant. The

options generally expire 10 years from the date of grant and generally

vest ratably over a four to five year period.

Under the Company’s 2001 Incentive Stock Plan (the “2001 Plan”),

directors, officers and other key employees and consultants may be

granted stock options. The Company has reserved a total of 1,000,000

shares of common stock for issuance under the 2001 Plan. The

purchase price for incentive stock options and non-qualified options shall

not be less than 100% and 8505 of the fair market value of the

Company’s stock on the date of the grant. The awards generally expire

10 years from date of grant and generally vest over a four-year period.

Under all these plans, 2,765,000 stock options were granted to the

employees. During the six month period ended December 31, 2004,

option holders exercised 1,467,500 stock options for the total

consideration of $53,438.

Note 10 – Commitments

The Company leases its corporate headquarters under a non-cancelable

operating lease until February 28, 2009.

The subsidiary in India is leasing facilities in two locations - Hyderabad

and Pune. For Hyderabad location, the lease will expire in November 1,

2006 and renewable for another three years. As for Pune location, the

lease is based on “Leave and Licence” agreement which will start on

October 1,2004 for term of eleven months only.

At December 31, 2004, the future minimum lease payments under thenon-cancelable operating lease are as follows:

Year Ending on December 31

2005 $ 1,012,876

2006 384,111

2007 244,258

2008 293,893

2009 98,526

Total minimum lease payments $ 2,033,664

Rent expense was $534,793 for the six months period ended December

31, 2004.

The Company currently has a certain Strategic Partnership and Master

Services Agreement dated November 19,2002 with Zensar

Technologies Limited India (Zensar). This partnership agreement was

entered into with intention of serving customers of the Company by

subcontracting certain services to Zensar.

To effect certain changes in which services are controlled, on April 1,

2004 the Company entered into an agreement with Zensar to the

transition of control of Zensar’s Offshore Development Center (ODC) at

India dedicated to execute the projects subcontracted by the Company.

The agreement requires providing subcontracting services with a

minimum commitment of $ 12,100,000 until March 31, 2006. Annual

commitments are $8, 500,000 and $3,600,000 for the period ended


8/7/2019 Patni_AR_2004



Schedule 1 – Analysis of Cost of Sales

2004Consulting $ 477,171

Immigration 152,709

Insurance 222,595

Moving Expense 20,580

Other Direct Cost 11,901

Other Establishment Cost 29,586

Other Personnel Cost 22,421

Patni Costs 10,830

Payroll and payroll taxes 8,780,032

Reversal of Nov 3rd entry (274,481)

Recruiting 36,788

Reimbursed Expenses 215,907Subcontractors 6,947,418

Telephone 32,973

Training 35,597

Travel 781,466

Total Cost of Sales $ 17,503,493

Schedule 2 – Analysis of Selling & Marketing Expenses

2004

Advertising $ 71,875

Business Development 87,052

Commission 1,114,880

Insurance 25,551

Legal & Immigration 19,254

Meals and entertainment 24,928

Payroll & Payroll Taxes 1,289,915

Recruiting 13,406

Rev. of Nov 3rd entry (49,310)

Telephone 28,727

Travel 210,851

Total Cost of selling and

marketing expenses $ 2,837,129

Schedule 3 – Analysis of General & Administrative Expenses

2004

Automobiles $ 872

Bad Debt 14,869

Bank Charges 13,447

Continuing Education 429

Depreciation and amortization 87,344

Dues & Subscription 2,753

Insurance 93,959

Internet Charges 24,729

Janitorial 1,020

Legal and professional fees 262,679Licenses and permits 19,729

Meals & Entertainment 13,744

Miscellaneous 15,899

Office Expenses 25,862

Other Administrative Cost 8,412

Other Establishment Cost 4,212

Payroll & Payroll Taxes 1,185,542

Postage & Delivery 29,196

Printing & Stationery 50,890

Recruiting 3,170

Rent 534,793

Repairs & Maintenance 27,066

Rev. of Nov 3rd entry (55,569)

Telephone & Communication 181,797

Travel and lodging 221,820

Utilities 34,418

Zensar Infrastructure Cost 299,102

Total General and Administrative

Expenses $ 3,102,184

Note 14 – Cost and Estimated Earnings on Uncompleted

Contracts

The following is a summary of costs and estimated earnings on

uncompleted contracts in comparison to related billings at December31, 2004:

Costs and estimated earnings on

uncompleted contracts $ 120,592

Billing to date 220,000

Billings in excess of cost and

estimated earnings $ 99,408

At December 31, 2004, amount of revenue to be realized from work yet

to be performed in uncompleted contracts approximates to $750,000.

Note 15 – Prior Period Adjustments

The balance of retained earnings at the beginning of the fiscal year of

2005 has been restated for the balance previously reported to reflect

the total adjustments of $2,121,293 (net of $790,928 income tax

effect) for an understatement of Change of Control Bonus in fiscal year

ending June 30, 2004 effected in US books. Also, it is the result of

writing off of prior period inter-company balance in India books.


Schedules to the Accounts For the six months period ended December 31,


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Country Concentration

Patni primarily derives its revenues from the U.S. With any

slowdown in the recent trend of economic recovery in the U.S.,

technology spending by clients maybe reduced or postponed.

This may negatively impact the Company’s business by

lowering the demand for its services. The Company therefore

continues to focus on market expansion in Europe, Japan, Asia-

Pacific excluding Japan and other regions. To achieve this, the

Company has enhanced its sales teams and opened new

offices in many of the mentioned regions. Our U.S.-based

revenues grew by 28.6% in 2004 whereas revenues from

other regions grew by 41.9%,

The following is the Geography-wise break-up of revenues:

2002 2003 2004

U.S. 87.6% 88.8% 87.8%

Europe 7.2% 7.2% 7.9%Japan 3.5% 2.9% 3.3%

Asia-Pacific excluding Japan 1.0% 0.7% 0.6%

Rest of the World 0.7% 0.4% 0.4%

Scanning the Competitive Environment

Patni strives to provide customers with superior solutions, by

continuously developing technology intensive and innovative

solutions. The Product and Technology Initiatives (PTI) group

and the Delivery Innovation group have been established to

provide the Company with opportunities to sharpen its solution

and technology edge.

The PTI group is focused on applied research and development

initiatives. It is responsible for identifying new opportunities and

developing solutions to address these opportunities. The group

regularly tracks new technologies and market trends to identify

such offerings. These offerings can be targeted solutions or

intellectual property that can be leveraged by existing service

offerings to deliver a differentially superior edge. Focus group

set up in PTI act as "Seeds for Centres of Excellence" in a

particular technology or market, through these initiatives. The

PTI group has also established systems that encourage all

employees to participate in idea generation, evaluation anddevelopment of products or solutions. In addition, the group

looks at new potential areas for service offerings.

The Delivery Innovation group is focused on operational

excellence and serving customers in the most efficient manner.

This group’s activities include developing and refining

methodologies, tools and techniques, implementing metrics,

improving estimation processes and adopting new

technologies.

Business Models and Structure

Patni offers a wide spectrum of services in several industry

and technology practices. The Company has developed a

diversified business portfolio and is continuously working

towards inhancing the number of industry segments and

service lines to manage revenue concentration and excessive

dependence on any one industry practice, technology practice

or service lines.

The Company currently derives approximately 42.6 per cent of

its revenues from fixed price contracts. The proportion of fixed

price projects in 2004 reduced from 48.1 per cent in the

previous year. It has been executing fixed price projects from a

long time with considerable success, due to its superior

project management capabilities. All fixed price contracts are

monitored closely to ensure that all contractual obligations and

project deadlines are met and to mitigate the delivery risk.

The Company faces potential risks arising out of political

instability, changes in the currently favorable policies of the

government towards the software sector etc. The Indian

government has recognised the global competitiveness of the

Indian software sector and continues to adopt progressive

policies to encourage sustainable growth in the sector.

Accounts Receivable

The Company’s receivables position, measured in terms of

days’ sales outstanding, is at about 80 days. The Company

primarily has Fortune 1000 customers and hence carries low

credit risks. In case of non Fortune 1000 customers, theCompany undertakes suitable credit assessments to secure

itself from credit defaults and bad debts on account of such

customers. The Company has suitably streamlined its

processes to develop a more focused and aggressive

receivables management system to ensure timely collections.

The provision for doubtful debts as a percentage of revenue

was at 0.15 per cent in 2004.

EXISTENCE AND ADEQUACY OF INTERNAL CONTROLS

The Company has a well defined internal control system that is

adequate and commensurate with the size and nature of its

business. Clear roles, responsibilities and authorities, coupled

with robust internal information systems, ensures appropriate

information flow to facilitate effective monitoring. Adequate

controls are established to ensure that assets of the Company

are safeguarded and transactions are executed in accordance

with documented policies.

Compliance with the above policies is monitored through

regular internal audits of processes as well as underlying

transactions. The Company has appointed independent audit

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firms as internal auditors. The Audit Committee periodically

reviews their reports and recommendations. Action plans are

agreed with the process owners to facilitate properimplementation of the recommendations. The auditors also

conduct follow up reviews to report on the efficacy of the

implementation process.

The Company has an effective budgetary control mechanism in

place to take care of planning, monitoring and controlling.

RISKS EMERGING FROM NATURE OF FINANCIAL

OPERATIONS

Foreign exchange fluctuations

The Company earns revenues in various foreign currencies,

with earnings in US dollars comprising the bulk. Therefore, the

Company is exposed to risks arising out of fluctuations in the

foreign exchange rates. The Company seeks to minimise such

risks by entering into forward contracts and other hedging

products. A treasury team operates to mitigate foreign

exchange volatility risk in accordance with the policy approved

by the Board in this regard.

Liquidity Management

The Company has adequate cash reserves and liquid assets,

which are actively managed through efficient treasury

operations. Patni is currently a zero-debt Company apart fromsmall leases for cars. Its investment policy is driven by the

objective of ensuring adequate liquidity to meet any exigency.

Accordingly, all the investible surpluses are primarily deployed

in short term liquid instruments in purely debt funds. The

investments are well diversified to mitigate risk and are made

in accordance with the policy approved by the Board in this

regard.

LEGAL AND REGULATORY RISKS

Conformity with Local Laws and Regulation

The Company has transnational operations, with a globalworkforce. This requires it to ensure that its diverse workforce

is sensitive to and compliant with local laws. The Company has

processes to make the workforce aware of local employment

laws and significant legal requirements pertaining to work

practices.

The Company is also suitably represented by competent legal

firms at different locations where it has its operations. These

firms advise the Company on various requirements.

Directors and Officers Liability

Directors’ and Officers’(D&O) liabilities are risks arising out of

their commitments, statements and decisions which may resultin legal liability to any third party. The Company has

appropriately and sufficiently insured itself to mitigate such

risks, apart from internal policies, procedures and

communications that guide the officers to act with proper due

diligence.

Contracts

There are no material litigations outstanding against the

company.

Contractual risks may arise out of non-performance of contracts

or any other breach in the contracts signed by the Company

with its customers or other external entities. The Company has

a centralised contract management cell that reviews all legal

customer contracts entered into by the Company and ensures

that it is suitably protected. This legal vetting process is applied

to contracts with the Company’s customers, key suppliers,

business partners and associates. Suitable insurance covers

have also been obtained including Errors & Omission and

Commercial & General Liability. These insurances adequately

protect the Company from financial risks emanating from non-

performance of contractual obligations.

Fixed asset and employee insurance

The fixed assets and facilities of the Company are

comprehensively covered under suitable insurance policies.

The Company covers mediclaim for employees and their

dependants. The Company also covers them for personal

accident, permanent disability and critical illness as well as for

life cover. In addition, the Company covers the risks

associated with medical illnesses for employees traveling

abroad on deputation onsite.

Intellectual propertyThe Company has developed a comprehensive approach to

protect itself against infringement of Intellectual Property (IP).

The IP may belong to its customers, third parties or even to

the Company. Processes are in place to protect the

Company’s IP from misuse by third parties. At the same time,

the Company has controls in place to ensure that it is not

exposed to risks associated with the misuse of IP or

technology products owned by third parties. In addition, the

Company ensures that only licensed software is used in all its

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facilities. Further, the legal cell ensures that IP related issues

are given due consideration while executing agreements with

customers or third parties.

CONDUCIVE ENVIRONMENT FOR EMPLOYEE RETENTION AND

DEVELOPMENT

Employees are exposed to travel risks while traveling abroad.

All employees planning to travel are given an orientation on the

various aspects of travel and medical insurance at Company

cost. The Company ensures efficient travel and visa

arrangements to ensure that employee productivity and

utilisation are both optimised.

The Company operates in a sector, where human resources

are the most critical resources in business. Its human

resources division, the resource management team and the

business units work closely with each other to ensure timely

and effective recruitment to support the growing business

needs of the Company. The skills and experience of employees

are aligned with the job requirements on a continuous basis to

ensure the most productive and efficient allocation of

resources. The Company also conducts training programmes

to continuously enhance technical and behavioural skills of its

employees. In addition, cross functional opportunities are a key

feature of our HR endeavours to promote employeedevelopment and growth thereby helping the Company in its

pursuit of employee retention and improved productivity.

The Company operates in a sector where attrition exists. It

therefore may face the challenge of attracting and retaining

professional and skilled talent to be able to continuously deliver

a superior quality of service. Patni endeavours to attract and

retain the best professional talent, by creating a professional

work culture, by offering exciting growth opportunities and by

exposing employees to new technologies through on-going

training programmes. The Company also offers ESOPs to

certain employees.

LEADERSHIP DEVELOPMENT AND CONTINUITY

The Company has a strong and competent top management

collectively called the Corporate Centre (CC). The CC mentors

the strategic business units and provides overall direction and

leadership to the Company. The Company has implemented a

leadership development framework called Leadership

Excellence At Patni (LEAP) through which it identifies

employees with leadership potential who can lead the Company

during challenging and difficult times.

TECHNOLOGY OBSOLESCENCE, BUSINESS CONTINUITY AND

DISASTER RECOVERY PLANNING

The Company could face problems in its existing infrastructure

such as unavailability of internet, voice and international links,

power failures, network systems failures, etc. which could

adversely impact the delivery of services. Each development

centre is connected to the national backbone built with multiple

data links from multiple vendors. The national backbone is

designed with state-of-the-art technologies and protocols. The

Company has several links to overseas destinations, using

different routes and provided by multiple service providers.

Redundancy in data centre and communications room for air-

conditioning, UPS, generators, power supply, fiber optic back

bone for connecting LAN switches, on-site hot spares and a

24x7 tracking and monitoring system ensures that standby

mechanisms take over immediately whenever any mission

critical system breaks down. The core servers of the Company

are fault tolerant with high availability built in.

There is also a 24x7 on-site team, which provides online

support to the Company infrastructure. The Company has a

very efficient multi tier virus tracking and scanning system toensure a virus free environment. Clustered firewalls and

intrusion detection systems are in place at all internet

gateways to ensure adequate safety to all the Company’s

systems and to prevent hacking.

The Company has reviewed and further strengthened its

Disaster Recovery and Business Continuity Plans (DR/BCP) for

all its operations over the last fiscal year. Strict requirement of

periodic reviews is carried out to ensure that all the DR/BCP

compliance requirements are met. Mock drills and audits are

conducted to ensure the currency of the DR/BCP plans. The

logical security of information systems is adequate and

reviewed regularly since new threats occur every day. The

security audit and architecture organisation was strengthened

and the Company adopted the BS 7799 standards for

information security. Data backups are taken daily and stored

in fireproof safes. Backups are stored at secured remote

locations. The Company has deployed technologies like

Storage Area Network (SAN) to ensure high availability of its

own data.

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CORPORATE OFFICE

Patni Computer Systems Ltd.

Akruti Softech Park

MIDC Cross Road No. 21

Andheri (E), Mumbai 400 093.

Tel: + 91 22 5693 0500

Fax: + 91 22 5693 0211

North America• Patni Computer Systems, Inc.

One Broadway

Cambridge, MA 02142.

Tel: 617 914 8000

Fax: 617 914 8200

[email protected]

• 5901 Peachtree Dunwoody Road NESuite B-390, Atlanta, GA 30328.

Tel: +1 770 395 0300

Fax: +1 770 395 9911

[email protected]

• 1400 Opus Place, Suite 525

Downers Grove, IL 60515.

Tel: +1 630 874 1801

Fax: +1 630 271 9296

[email protected]

• 11260 Chester Road, Suite 600Cincinnati, OH 45246.

Tel: +1 513 772 2072

Fax: +1 513 772 5082

[email protected]

• 940 South Coast Drive

Suite 175, Costa Mesa, CA 92626.

Tel: +1 714 241 9555

Fax: +1 714 241 9556

[email protected]

• 4390 US Route 1, Suite 230

Princeton, NJ 08540.

Tel: +1 609 580 0011

Fax: +1 609 580 0017

[email protected]

• 39141 Civic Center Drive, Suite 325

Fremont CA 94538.

Tel: +1 510 797 6000

Fax: +1 510 797 6002

[email protected]

• 39141 Civic Center Drive

Suite 250, Fremont, CA 94538.Tel: 510 494 2050

[email protected]

• 101 Merritt 7, Main Ave

Norwalk, CT 06851.

Tel: +1 203 849 0309

Fax: +1 203 849 0374

[email protected]

• 222 West Las Colinas Blvd

Suite 742 E

Irving, TX 75039.

Tel: +1 972 401 4800

Fax: +1 972 401 4801

[email protected]

• 10900 NE 8th Street, Suite 900

Bellevue, WA 98004.

Tel: +1 425 462 5870

Fax: +1 425 462 5890

[email protected]

• 20700 Civic Center Drive

Suite 170, Southfield

MI 48076.

Tel: +1 248 663 4098

Fax: +1 248 663 4029

[email protected]

• 245 Park Avenue Suite 2480

New York, NY 10167.

Tel: +1 212 672 1618

Fax: +1 212 672 1601

[email protected]

Canada

1 Yonge St., Suite 1801

Toronto Star Building

Toronto, Ontario M5E 1W7.

Tel: +1 416 214 7840

Fax: +1 416 369 0515

[email protected]

UK

Patni Computer Systems (UK) Ltd.

Vistacentre, 50 Salisbury Road

Hounslow, Middlesex, TW4 6JQ

United Kingdom.

Tel: +44 20 8538 0120

Fax: +44 20 8538 0276

[email protected]

Germany

Patni Computer Systems GmbH

Garmischer Straße 4

D-80339 München.

Tel: +49 89 5405 2451

Fax: +49 89 5405 2109

[email protected]

Patni World-wide

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Sweden

Patni Computer Systems Ltd Indien Filial

Knarrarnasgatan 7,164 40 Kista

Sweden.

Tel: +46 8 52291845

Fax: +46 8 [email protected]

The Netherlands


Beech Avenue 54-80

1119 PW Schiphol-Rijk

The Netherlands.

Tel: +31 20 6586158

Fax: +31 20 6586111

[email protected]

Japan

Patni Computer Systems Japan Branch

4th floor, Aoyagi Building

Chuo 5-39-11, Nakano-ku, Tokyo

Japan 164-0011.

Tel: +81 3 5328 1952/53/54

Fax: +81 3 5328 1951

[email protected]

Korea


Korea Branch

Anam Tower 1622

Yeoksam Dong 702-10

Gangnam Gu, Seoul

South Korea 135-081.

Tel: +82 2 2009 2777

Fax: +82 2 2009 2778

Australia

• Level 20, 99 Walker Street

North Sydney

NSW 2060.

Tel: +61 2 9657 1010

Fax: +61 2 9657 1011

• Level 40, 140 William Street

Melbourne, VIC-3000.

Office: +61 3 9607 8371

Fax: +61 3 9607 8282

[email protected]

India

• Patni Computer Systems Ltd.

55, SDF II, SEEPZ

Andheri (E), Mumbai 400 096.

Tel: +91 22 2829 1454

Fax: +91 22 2829 2764

[email protected]

• Maestros House, Building No. 2

Sector No. 2

Millenium Business Park, Mahape

Navi Mumbai 400 710.

Tel: +91 22 2778 3600

Fax: +91 22 2778 1007

• Unit 141 & 151, 4th Floor

International Infotech Park

Tower No.1, Vashi


Tel: +91 22 5591 0849

Fax: +91 22 5591 0855

• Electronic Sadan, No. III

TTC Industrial Area, Mahape


Tel: +91 22 2761 1090/ 2762 2651Fax: +91 22 2761 9602

[email protected]

• Plots B-45, B-46 Sipcot IT Park

Old Mahabalipuram Road

Siruseri, Chennai 603 103.

Tel: +91 4114 508888

Fax: +91 4114 508899

[email protected]

• A-78/9, GIDC Electronics Estate

Sector 25, Gandhinagar 382 016.

Tel: +91 79 2324 0905

Fax: +91 79 2324 2763

[email protected]

• A-39/40, Sector 16

Noida 201 301.

Tel: +91 120 2516 880-3

Fax: +91 120 2516 890

[email protected]

• A-4/5, 3rd Floor, Logix Park

Sector 16, Noida 201 301.

Tel: +91 120 2516880 - 3

Fax: +91 120 2516890

• C-28, Sector 58

Noida 201301.

Tel: +91 120 2589 244

Fax: +91 120 2589 711

[email protected]

• Unit 5-8, Electronic Sadan III

MIDC, Bhosari, Pune 411 026.

Tel: +91 20 2710 5000

Fax: +91 20 27121 882

[email protected]

• 148, Mumbai Pune HighwayPimpri, Pune 411 018.

Tel: +91 20 2742 6111

Fax: +91 20 2742 6117

• EL 31/10, "J" Block

MIDC, Bhosari, Pune 411 026.

Tel: +91 20 2710 6000

Fax: +91 20 2712 3396

• Survey No. 438, CTS No. 265322655

Mumbai-Pune Highway

Kasarwadi, Pune 411 034.

Tel: +91 20 3984 4000

Fax: +91 20 2712 7967

• Level 1, Level 2, Tower III

Cyber City, Magarpatta City

Hadapsar, Pune 411 028.

Tel./Fax: +91 20 3984 2000

[email protected]

• 43, Electronics City Phase 2

Hosur Road, Bangalore 560 100.

Tel: +91 80 5190 2100

Fax: +91 80 2852 7150

[email protected]

• 5Q4-A1, Cyber Towers, Hitec City

Madhapur, Hyderabad 500 081.

Tel: +91 40 2311 9800

Fax: +91 40 2311 9801

[email protected]

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