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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of the Securities
Exchange Act of 1934
For the quarter ended June 30, 2001
Commission File Number 000-27663
SATYAM INFOWAY LIMITED
(Exact name of registrant as specified in its charter)
Not Applicable
(Translation of registrant's name into English)
Republic of India
(Jurisdiction of incorporation or organization)
Tidel Park, 2nd Floor
No. 4, Canal Bank Road, Taramani, Chennai 600 113 India
(91) 44-254-0770
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F. Form 20F [X] Form 40 F [ ]
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [ ] No [X]
If "Yes" is marked, indicate below the file number assigned to registrant in
connection with Rule 12g3-2(b). Not applicable.
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CURRENCY OF PRESENTATION AND CERTAIN DEFINED TERMS
Unless the context otherwise requires, references herein to "we," "us,"
the "company," "SIFY" or "Satyam Infoway" are to Satyam Infoway Limited, a
limited liability company organized under the laws of the Republic of India.
References to "U.S." or the "United States" are to the United States of America,
its territories and its possessions. References to "India" are to the Republic
of India. We are presently a majority-owned subsidiary of Satyam Computer
Services Limited, a leading Indian information technology services company which
is traded on the New York Stock Exchange and the major Indian stock exchanges
("Satyam Computer Services"). "Satyam" is a trademark owned by Satyam Computer
Services, which has licensed the use of the "Satyam" trademark to us subject to
specified conditions. "Sify.com," "SatyamOnline," "Satyam:Net,"
"satyamonline.com" and "Satyam iway" are trademarks used by us for which we have
registration applications pending in India. All other trademarks or tradenames
used in this Report on Form 6-K are the property of their respective owners.
In this report, references to "$," "Dollars" or "U.S. dollars" are to
the legal currency of the United States, and references to "Rs.," "rupees" or
"Indian Rupees" are to the legal currency of India. References to a particular
"fiscal" year are to our fiscal year ended March 31 of such year.
For your convenience, this report contains translations of some Indian
rupee amounts into U.S. dollars which should not be construed as a
representation that those Indian rupee or U.S. dollar amounts could have been,
or could be, converted into U.S. dollars or Indian rupees, as the case may be,
at any particular rate, the rate stated below, or at all. Except as otherwise
stated in this report, all translations from Indian rupees to U.S. dollars
contained in this report have been based on the noon buying rate in the City of
New York on June 30, 2001 for cable transfers in Indian rupees as certified for
customs purposes by the Federal Reserve Bank of New York. The noon buying rate
on June 30, 2001 was Rs.47.09 per $1.00.
Our financial statements are prepared in Indian rupees and presented in
accordance with United States generally accepted accounting principles or U.S.
GAAP. Solely for your convenience, some of the information contained in our
financial statements has been translated into U.S. dollars. In this report, any
discrepancies in any table between totals and the sums of the amounts listed are
due to rounding.
Information contained in our websites, including our principal corporate
website, www.sifycorp.com, is not part of this report.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
IN ADDITION TO HISTORICAL INFORMATION, THIS REPORT CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE SUBJECT TO RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE REFLECTED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH
A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION
ENTITLED "ITEM 2--OPERATING AND FINANCIAL REVIEW AND PROSPECTS--RISKS RELATED TO
OUR BUSINESS" AND ELSEWHERE IN THIS REPORT. YOU ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT MANAGEMENT'S
ANALYSIS ONLY AS OF THE DATE OF THIS REPORT. IN ADDITION, YOU SHOULD CAREFULLY
REVIEW THE OTHER INFORMATION IN THIS REPORT AND IN OUR PERIODIC REPORTS AND
OTHER DOCUMENTS FILED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION
(THE "SEC") FROM TIME TO TIME. OUR FILINGS WITH THE SEC ARE AVAILABLE ON ITS
WEBSITE, WWW.SEC.GOV.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SATYAM INFOWAY LIMITED
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN THOUSANDS, EXCEPT SHARE DATA AND AS OTHERWISE STATED)
AS AT
------------------------------------------------
MARCH 31,
2001 JUNE 30, 2001 JUNE 30, 2001
----------- ------------- -------------
RS. RS. US $
----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 1,444,307 1,074,564 22,819
Accounts receivable 826,273 751,129 15,952
Due from officers and employees 11,487 6,699 142
Inventories 110,092 105,265 2,235
Prepaid expenses 209,335 205,359 4,361
Other current assets 276,390 291,075 6,181
----------- ----------- -----------
TOTAL CURRENT ASSETS 2,877,884 2,434,091 51,690
Property, plant and equipment--net 2,408,253 2,294,623 48,728
Goodwill and other intangible assets 4,433,142 4,138,030 87,875
Investments in affiliates 1,506,244 1,365,690 29,002
Investments 9,834 9,815 208
Other assets 266,527 254,631 5,408
=========== =========== ===========
TOTAL ASSETS 11,501,884 10,496,880 222,911
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of capital lease obligations 4,807 4,200 89
Trade accounts payable 136,351 116,718 2,479
Accrued expenses 369,518 241,901 5,137
Deferred revenue 189,117 163,018 3,462
Taxes payable 1,796 3,296 70
Advances from customers 99,708 105,219 2,234
Other current liabilities 44,380 41,695 885
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 845,677 676,047 14,356
NON-CURRENT LIABILITIES:
Long-term debt, excluding current installments 960 960 20
Capital lease obligations, excluding current installments 8,028 6,445 137
Other liabilities 25,204 27,928 593
----------- ----------- -----------
TOTAL LIABILITIES 879,869 711,380 15,106
----------- ----------- -----------
MINORITY INTEREST 33,677 26,585 565
STOCKHOLDERS' EQUITY
Common stock, Rs.10 par value; 25,000,000 equity shares 231,831 231,831 4,923
authorized; issued and outstanding: 23,183,103
Additional paid-in capital 13,669,572 13,627,361 289,390
Deferred compensation - employee stock offer plan (101,105) (83,269) (1,768)
Accumulated deficit (3,205,864) (4,011,320) (85,184)
Accumulated other comprehensive income (6,096) (5,688) (121)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY 10,588,338 9,758,915 207,240
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 11,501,884 10,496,880 222,911
=========== =========== ===========
See accompanying notes to consolidated financial statements
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SATYAM INFOWAY LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN THOUSANDS, EXCEPT SHARE DATA AND AS OTHERWISE STATED)
QUARTER ENDED JUNE 30,
-----------------------------------------------
2000 2001 2001
RS. RS. US $
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenues 321,678 445,894 9,469
Cost of revenues (excluding depreciation and
amortization) (196,804) (361,793) (7,683)
----------- ----------- -----------
GROSS PROFIT (excluding depreciation
and amortization) 124,874 84,101 1,786
----------- ----------- -----------
OPERATING EXPENSES:
Selling, general and administrative expenses 312,390 521,657 11,078
Amortization of goodwill 86,994 368,174 7,819
Amortization of deferred stock compensation expense 18,868 17,836 379
Foreign exchange gain (57,554) (9,732) (207)
----------- ----------- -----------
TOTAL OPERATING EXPENSES 360,698 897,935 19,069
----------- ----------- -----------
Operating loss (235,824) (813,834) (17,283)
Other income, net 62,195 28,918 614
Loss before equity in losses of affiliates, taxes
and minority interest (173,629) (784,916) (16,669)
Equity in losses of affiliates (5,423) (23,132) (491)
Loss before income taxes and minority interest (179,052) (808,048) (17,160)
Income taxes 325 -- --
Minority interest 383 2,592 55
----------- ----------- -----------
NET LOSS (178,344) (805,456) (17,105)
=========== =========== ===========
NET LOSS PER EQUITY SHARE (8.02) (34.74) (0.74)
=========== =========== ===========
Weighted equity shares used in computing net loss
per equity share 22,249,425 23,183,103 23,183,103
See accompanying notes to consolidated financial statements.
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SATYAM INFOWAY LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN THOUSANDS, EXCEPT SHARE DATA AND AS OTHERWISE STATED)
QUARTER ENDED JUNE 30,
------------------------------------------
2000 2001 2001
---------- ---------- ----------
RS. RS. US$
---------- ---------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
NET LOSS (178,345) (805,456) (17,105)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Depreciation and amortization 171,198 528,435 11,222
Equity in losses of affiliates -- 23,132 491
Loss on sale of plant and equipment -- 1,285 27
Provision for doubtful receivables 6,000 19,000 403
Minority interest (8,298) (2,592) (55)
Changes in assets and liabilities:
Accounts receivable (93,823) 56,144 1,192
Due from officers and employees (4,253) 12,752 271
Inventories (12,855) 4,828 103
Prepaid expenses (73,460) 3,976 84
Other assets (96,405) (10,755) (228)
Accrued expenses 27,042 (127,617) (2,710)
Trade accounts payable 21,823 (19,631) (417)
Deferred revenue 4,179 (26,099) (554)
Taxes payable (2,653) 1,500 32
Advances from customers 6,094 5,510 117
Other liabilities (24,002) (4,462) (95)
---------- ---------- ----------
NET CASH USED IN OPERATING ACTIVITIES (257,758) (340,050) (7,222)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditure on plant and equipment (427,108) (30,374) (645)
Proceeds from sale of plant and equipment -- 2,759 59
Expenditure on investment in affiliates (20,077) -- --
Purchase consideration for acquisition, net of cash (2,165,221) -- --
Proceeds from sale of investments 2,328 -- --
---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (2,610,078) (27,615) (586)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (208,167) -- --
Principal payments under capital lease obligations 5,440 (2,506) (53)
---------- ---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (202,727) (2,506) (53)
---------- ---------- ----------
Effect of exchange rate changes on cash -- 428 9
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,070,563) (369,743) (7,852)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 7,307,625 1,444,307 30,671
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 4,237,062 1,074,564 22,819
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SUPPLEMENTARY INFORMATION
Cash paid towards interest 16,142 -- --
Cash paid towards taxes -- -- --
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITY
Capital leases 7,254 317 7
Additional common stock issued for acquisition of business 1,100,000 -- --
See accompanying notes to consolidated financial statements.
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SATYAM INFOWAY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA AND AS OTHERWISE STATED)
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE QUARTER ENDED JUNE 30, 2000 AND
JUNE 30, 2001 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Preparation of Financial Statements
The accompanying financial statements have been prepared in Indian Rupees (Rs.),
the national currency of India. Solely for the convenience of the reader, the
financial statements as of and for the fiscal quarter ended June 30, 2001 have
been translated into United States dollars at the noon buying rate in New York
City on June 30, 2001 for cable transfers in Indian rupees, as certified for
customs purposes by the Federal Reserve Bank of New York of $1 = Rs.47.09. No
representation is made that the Indian rupee amounts have been, could have been
or could be converted into United States dollars at such a rate or at any other
certain rate on June 30, 2001 or at any other date.
(b) Interim Information (unaudited)
Interim information presented in the consolidated financial statements has been
prepared by the management without audit and, in the opinion of management,
includes all adjustments of a normal recurring nature that are necessary for the
fair presentation of the financial position, results of operations and cash
flows for the periods shown in accordance with the generally accepted accounting
principles in the United States.
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ITEM 2. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.
The following discussion of the financial condition and results of
operations of our company should be read in conjunction with the unaudited
financial statements and the related notes included elsewhere in this report and
the audited financial statements and the related notes contained in our Annual
Report on Form 20-F for the fiscal year ended March 31, 2001. This discussion
contains forward-looking statements that involve risks and uncertainties. For
additional information regarding these risks and uncertainties, please see "Risk
Related to Our Business."
OVERVIEW
Our company, Satyam Infoway Limited, was organized as a limited
liability company under the laws of the Republic of India pursuant to the
provisions of the Indian Companies Act on December 12, 1995. We are presently a
majority-owned subsidiary of Satyam Computer Services, a leading Indian
information technology services company traded on the New York Stock Exchange
and the principal Indian stock exchanges. We conduct a significant majority of
our business in India. The address of our principal executive offices is Tidel
Park, 2nd Floor, No. 4, Canal Bank Road, Taramani, Chennai 600 113 India, and
our telephone number is (91) 44-254-0770.
Our company was formed as an independent business unit of Satyam
Computer Services to develop and offer connectivity-based corporate services
allowing businesses in India to exchange information, communicate and transact
business electronically. From December 1995 through 1997, we focused on the
development and testing of our private data network. In 1997, we began forming
strategic partnerships with a number of leading technology and electronic
commerce companies, including Open Market, Sterling Commerce and UUNet
Technologies, in order to broaden our product and service offerings to our
corporate customers. In March 1998, we obtained network certification for
conformity with Indian and international network operating standards from the
Technical Evaluation Committee of India. In April 1998, we began offering
private network services to businesses in India. Our initial products and
services included electronic data interchange, e-mail and other messaging
services, virtual private networks and related customer support.
In October 1998, we initiated our online content offerings with two
websites: carnaticmusic.com and indiaupdate.com. We also started development of
www.sify.com, our online portal, and other related content sites for personal
finance, movies and automobiles with the goal of offering a comprehensive suite
of websites offering content specifically tailored to Indian interests
worldwide.
On November 6, 1998, the Indian government opened the Internet service
provider marketplace to private competition. Capitalizing on our existing
private data network, we launched our Internet service provider business,
SatyamOnline, on November 22, 1998 and became the first private national
Internet service provider in India. We began offering SatyamOnline Internet
access and related services to India's consumer market as a complement to the
network services offered to our business customers. Our SatyamOnline service was
the first in India to offer ready-to-use CD-ROMs enabling online registration
and immediate usage.
In October 1999, we completed our initial public offering and issued
19,205,000 ADSs (representing 4,801,250 equity shares) at a price of $4.50 per
ADS. We received approximately $79.2 million, net of underwriting discounts,
commissions and other offering costs.
On November 29, 1999, we purchased 24.5% of the outstanding shares of
IndiaWorld Communications, a private company organized under the laws of the
Republic of India, for a cash purchase price of Rs.1,222.5 million. Prior to its
acquisition by our company, IndiaWorld was a leading provider of Internet
content and services in India. In connection with this purchase, we acquired an
option to purchase the remaining 75.5% of the outstanding shares in IndiaWorld
Communications for a cash purchase price of Rs.3,767.4 million. In June 2000, we
amended the option agreement to provide for the payment of the exercise price by
us with a mix of equity shares and cash. We completed the acquisition by
exercising the option in June 2000 through the payment of Rs.2,154.3 million in
cash and the issuance of 268,500 equity shares. For U.S. GAAP reporting
purposes, the financial statements of IndiaWorld Communications have been
consolidated with our financial statements from and after December 1, 1999. The
acquisition has been accounted for as a purchase and most of the purchase price
represented goodwill. We are amortizing the goodwill on a straight line basis
over a period of five years, although the United States Financial Accounting
Standards Board recently issued a pronouncement which will result in changes in
the accounting treatment for goodwill and other intangible assets. Please see
"Impact of Recently Issued Accounting Standards."
In February 2000, we completed a secondary offering and issued 1,868,700
ADSs (representing 467,175 equity shares) at a price at $80.00 per ADS. We
received approximately $141.2 million, net of underwriting discounts,
commissions and other costs.
In July 2000, we acquired a 25% stake in CricInfo Limited, a private
company incorporated in the United Kingdom, through the issuance of 2,204,720
ADSs (representing 551,180 equity shares). Also in July 2000, we entered into an
agreement
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to acquire all of the outstanding capital stock of Indiaplaza.com, a private
company incorporated in California. We completed our acquisition of
Indiaplaza.com in December 2000 through the issuance of an aggregate of 455,192
shares ADSs (representing 113,798 equity shares) to the former equity holders of
Indiaplaza.com. A portion of those ADSs are being held by an escrow agent to
compensate us for potential damages relating to any breach of the merger
agreement and will be released on January 1, 2002 if no such breach is
identified. For U.S. GAAP reporting purposes, the financial statements of
Indiaplaza.com have been consolidated with our financials statements from and
after December 8, 2000.
Approximately 30% of our revenues in fiscal 2001 was denominated in
foreign currency. Our expenses denominated in foreign currency include the cost
of purchasing software from BroadVision, Open Market and Sterling Commerce.
Our foreign exchange loss was Rs.0 and Rs.0.01 million in fiscal 1997
and 1998, respectively, and our foreign exchange gain was Rs. 0.6 million,
Rs.5.4 million and Rs.162 million for fiscal 1999, 2000 and 2001, respectively.
Our foreign exchange gain in fiscal 1999, 2000 and 2001 was primarily due to our
short-term investment of the proceeds from our public offerings in interest
bearing instruments denominated in U.S. dollars.
REVENUES
For reporting purposes, we classify our revenues into three divisions:
- corporate network/data and e-consulting services;
- consumer Internet access services; and
- online portal and content offerings.
Our corporate network/data and e-consulting services division derives
its revenues from dial-up and dedicated Internet access, electronic commerce,
electronic data interchange, e-mail and other messaging services, virtual
private networks, web hosting and web-based solutions. An important asset in
this business is the quality and reach of our network which, as of the date of
this report, is the largest IP protocol network in India. Our corporate private
network customers typically enter into arrangements that provide for an initial
installation fee and recurring service fees. E-consulting is generally charged
on a fixed-price basis. We derive revenues from website hosting based upon our
customer's bandwidth requirements, and we charge co-location customers for use
of our physical facilities. We also generate a portion of our revenues through
the sale of third-party hardware.
Our consumer Internet access services division derives its revenues
primarily from the "SatyamOnline" dial-up business and the "iway" public
Internet access business. We offer our prepaid subscriptions in a number of time
period and pricing plans through ready-to-use CD-ROMs sold through our
distribution partners. Our distribution partners resell the CD-ROMs to consumers
for online registration and immediate Internet access. Revenues are recognized
ratably as the prepaid subscription is used with any unused portion recognized
as revenue at the expiration date of the subscription. We also generate revenues
through international roaming and e-mail registration fees. As of June 30, 2001,
we had over 500,000 Internet access subscribers and there were 427 iway cafes
operational in five cities providing Internet access to consumers on a
non-subscription basis.
Our online portal and content offerings division derives revenues from
third-party advertising and commissions from electronic commerce transactions on
our websites. Advertising fees are recognized over the period in which the
advertisements are hosted on our websites.
EXPENSES
Cost of revenues for the corporate network/data and e-consulting
services division is divided into three groups: corporate Internet access,
corporate e-consulting and electronic commerce products, and web development.
Cost of revenues for the corporate Internet access group consists of
telecommunications costs necessary to provide service, customer support costs
and the cost of providing network operations. Cost of revenues for the corporate
e-consulting and electronic commerce products group consists primarily of
third-party software and hardware purchased from our strategic partners for
resale, direct labor costs for initial installation and recurring customer
support and network operation and associated telecommunications costs. Cost of
revenues for the web development group includes direct labor and associated
telecommunications costs.
Cost of revenues for the consumer Internet access services division
consists primarily of recurring telecommunications costs necessary to provide
service to subscribers. Telecommunications costs include the costs of providing
local telephone lines to our points of presence, the costs of using third-party
networks pursuant to service agreements and leased line costs. Bandwidth costs
are presently controlled to a significant extent by VSNL, the government
controlled provider which also competes with us in the Internet access business.
We are addressing these costs issues through alternative bandwidth sources and
the establishment of our own international access gateways. Until recently,
private companies in India were not permitted to operate their own international
gateways. Our initiatives are expected to result in bandwidth cost relief over
the next several quarters.
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Another recurring cost is the personnel and related operating expenses
associated with customer support and network operations. We expect that customer
support and network operations expenses will decrease as a percentage of
revenues as we more efficiently utilize these capabilities across a larger
customer base assuming that subscription rates stabilize.
The cost of revenues for the online portal and content offerings
division includes the labor cost of developing and maintaining our websites, the
cost of third-party software and the cost of obtaining content from third-party
vendors.
Selling, general and administrative expenses consist primarily of
salaries and commissions for sales and marketing personnel; salaries and related
costs for executive, financial and administrative personnel; sales, marketing,
advertising and other brand building costs; travel costs; and occupancy and
overhead costs.
As of June 30, 2001, a total of 825,000 equity shares were reserved for
issuance under our Associate Stock Option Plan. At our 2001 Annual General
meeting held on August 2, 2001, our stockholders approved a special resolution
to increase the total number of equity shares reserved for issuance under our
ASOP to 1.2 million. As of June 30, 2001, we had outstanding an aggregate of
565,020 options (net of 95,740 options forfeited by employees and 200 options
exercised for equity shares) under our ASOP with a weighted average exercise
price equal to approximately Rs.2,621 per equity share. We recorded non-cash
compensation charges related to these grants in the aggregate amount of
approximately Rs.101.1 million to be recognized over a three-year period in
accordance with vesting provisions.
We depreciate our tangible assets on a straight-line basis over the
useful life of assets, ranging from two to five years and, in the case of
buildings, 28 years. We presently depreciate our intangible assets, including
the goodwill recognized in the Indiaplaza.com and IndiaWorld transitions, on a
straight-line basis over five years. Please see "Impact of Recently Issued
Accounting Standards" for a discussion of recent significant changes in the
accounting principles applicable to goodwill and other tangible assets.
We face significant competitive pricing pressure from VSNL and a number
of new competitors that are entering India's recently opened Internet service
provider market. This competition has resulted in erosion in selling prices in
the consumer Internet access business. In the face of this competition, we do
not anticipate being able to maintain our present subscriber retention rates as
our subscriber base grows.
In addition to our operations and those of our consolidated
subsidiaries, our financial statements include our pro rata share of the
financial results of those companies in which we have significant,
non-controlling minority interests, such as CricInfo Limited and Refco Sify
Limited. These investments are accounted for under the equity method of
accounting.
Since our inception, we have experienced negative cash flow from
operations and have incurred net losses. Our ability to generate positive cash
flow from operations and achieve profitability is dependent on our ability to
continue to grow our revenue base and achieve further operating efficiencies.
For fiscal 1997 through 2001 and the fiscal quarter ended June 30, 2001,
we incurred negative cash flow from operations of approximately Rs.30.4 million,
Rs.74.0 million, Rs.172.1 million, Rs.527.2 million, Rs.1,308.4 million ($27.9
million) and Rs.340.0 million ($7.2 million), respectively. For fiscal 1997
through 2001 and the quarter ended June 30, 2001, we incurred net losses of
approximately Rs.26.3 million, Rs.100.6 million, Rs.187.4 million, Rs.381.9
million, Rs.2,509.0 million ($53.6 million) and Rs.805.5 million ($17.1
million), respectively. Giving pro forma effect to our acquisitions of
Indiaplaza.com and IndiaWorld Communications as if they had occurred at the
beginning of each period, we would have incurred net losses of approximately
Rs.1,457.1 million and Rs.2,883.6 million ($61.5 million) for fiscal 2000 and
2001, respectively. We may not be able to realize sufficient future revenues to
offset our present investment in network infrastructure and online content
offerings or achieve positive cash flow or profitability in the future. As of
June 30, 2001, we had an accumulated deficit of approximately Rs.4,011.3 million
($85.2 million).
RESULTS OF OPERATIONS
Quarter ended June 30, 2001 compared to quarter ended June 30, 2000
Revenues. We recognized Rs.445.9 million ($9.5 million) in revenues for
the quarter ended June 30, 2001, as compared to Rs.321.7 million for the quarter
ended June 30, 2000, representing an increase of Rs.124.2 million, or 39%. This
increase was attributable to a significant increase in the corporate services
businesses which increased by 76 % over the same period in the prior year. From
June 30, 2000 to June 30, 2001, our number of corporate customers grew from more
than 500 to more than 650. The corporate services businesses successfully
obtained a significant number of new orders from prominent customers with
operations throughout India. Internet access revenues decreased by 22%
notwithstanding continued growth in number of subscribers due to continuing
decreases in average selling prices resulting from competition. We expect the
market for consumer Internet access to remain extremely price competitive. Our
online portal and content offerings division
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accounted for Rs.51.8 million of revenues for the quarter ended June 30, 2001 as
compared to Rs.33.0 million for the quarter ended June 30, 2000, representing an
increase of 57%.
Cost of Revenues. Cost of revenues were Rs.361.8 million ($7.7 million),
or 81% of revenues, for the quarter ended June 30, 2001, compared to Rs.196.8
million, or 61% of revenues, for the quarter ended June 30, 2000, representing
an increase of Rs.165.0 million, or 84%. This increase was primarily
attributable to a Rs.13.2 million increase in software and hardware purchased
for resale, a Rs.92.6 million increase in leased line charges due to the
increased requirement for international bandwidth and last mile connectivity and
a Rs.65.5 million increase in direct personnel costs for web development and
customer technical support partially offset by a reduction in product
development expenses, hosting charges and other costs.
Selling, general and administrative expenses. Selling, general and
administrative expenses were Rs.521.7 million ($11.1 million) for the quarter
ended June 30, 2001, compared to Rs.312.4 million for the quarter ended June 30,
2000, representing an increase of Rs.209.3 million, or 67%.
Amortization. Amortization was Rs.386.0 million ($8.2 million) for the
quarter ended June 30, 2001, compared to Rs.105.9 million for the quarter ended
June 30, 2000, representing an increase of Rs.280.1 million, or 264%. This
increase was primarily attributable to amortization of goodwill arising out of
our acquisitions of IndiaWorld Communications and Indiaplaza and our investment
in CricInfo Limited.
Other income (Net). Other income was Rs.28.9 million ($0.6 million) for
the quarter ended June 30, 2001, compared to Rs.62.2 million for the quarter
ended June 30, 2000, representing a decrease of Rs.33.3 million, or 54%. This
decrease was primarily attributable to a reduction in interest income earned on
deposits placed with banks.
Net Loss. Our net loss was Rs.805.5 million ($17.1 million) for the
quarter ended June 30, 2001, compared to a net loss of Rs.178.3 million for the
quarter ended June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through a
combination of equity sales and borrowings from institutions and banks. During
fiscal 1998, 1999 and 2000, we received Rs.38.5 million, Rs.307.5 million and
Rs.10,220.0 million, respectively, in net proceeds from the sale of equity
shares.
In July 1999, we agreed to sell 481,000 equity shares to Sterling
Commerce for $5.0 million. We completed this transaction in September 1999 and
used the funds for general corporate purposes, primarily the repayment of debt.
In October 1999, we completed our initial public offering and issued
19,205,000 ADSs (representing 4,801,250 equity shares) at a price of $4.50 per
share. We received approximately $79.2 million in cash, net of underwriting
discounts, commissions and other offering costs. We used approximately $28.0
million of these proceeds to purchase 24.5% of the outstanding shares of
IndiaWorld Communications and an additional $12.0 million as a non-refundable
deposit towards purchasing the remaining 75.5% of the outstanding shares of
IndiaWorld Communications. We used the balance of these proceeds to fund network
expansion and enhancements, to advertise and promote our brand and for general
corporate purposes. Pending these uses we invested these proceeds in interest
bearing instruments denominated in dollars.
In February 2000, we completed a secondary offering and issued 1,868,700
ADSs (representing 467,175 equity shares) at a price at $80.00 per ADS. We
received approximately $141.2 million, net of underwriting discounts, commission
and other offering costs. We used approximately $48.0 million of the proceeds
from our public offering to complete our acquisition of IndiaWorld
Communications. The balance of the proceeds are being used for general corporate
purposes. Pending this use we invested these proceeds in interest bearing
instruments denominated in dollars.
The following table summarizes our statements of cash flows for the
periods presented:
FISCAL YEAR ENDED MARCH 31, QUARTER ENDED JUNE 30,
--------------------------------------------------------------------- --------------------------
1997 1998 1999 2000 2001 2001 2001
----------- ----------- ----------- ------------ ------------ ----------- ------------
INDIAN RUPEES U.S. DOLLARS
------------------------------------------------------------------------------------ ------------
(IN THOUSANDS)
Net loss ....................... Rs. (26,337) Rs.(100,590) Rs.(187,376) Rs. (381,896) Rs.(2,509,030) Rs.(805,456) $ (17,105)
Net decrease (increase) in
working capital ............. (4,625) 7,257 (34,434) (406,189) (569,381) (103,854) (2,205)
Other adjustments for
non-cash items .............. 536 19,383 49,703 260,837 1,770,050 569,260 12,088
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Net cash provided by (used
in) operating activities .... (30,426) (73,950) (172,107) (527,248) (1,308,361) (340,050) (7,222)
Net cash provided by (used
in) investing activities .... (3,230) (77,070) (144,196) (2,458,384) (4,338,491) (27,615) (586)
Net cash provided by (used
in) financing activities .... 35,138 159,449 431,939 10,167,709 (216,466) (2,506) (53)
Net increase (decrease) in
cash and cash equivalents ... 1,482 8,429 115,636 7,182,077 (5,863,319) (369,743) (7,852)
Our principal capital and liquidity needs historically have related to
developing our network infrastructure and our corporate network and electronic
commerce products, establishing our customer service and support operations,
developing our sales and marketing activities and for general working capital
needs. Prior to 1998, our capital needs were primarily met by funding from our
parent company, Satyam Computer Services, and borrowings from institutions and
banks. As we placed greater emphasis on expanding our network infrastructure and
developing our consumer Internet access and online portal and content services,
we sought additional capital from other sources, including vendor capital leases
and other vendor financing arrangements and through private placements of our
securities. During recent periods, we have also expended significant funds in
our acquisition and investment program, including the IndiaWorld Communications
transaction.
Cash used in operating activities for the quarter ended June 30, 2001
was Rs.340.0 million ($7.2 million) primarily attributable to a net loss of
Rs.805.5 million ($17.1 million), decrease in accounts receivable of Rs.56.1
million ($1.2 million), prepaid expenses of Rs.4.0 million ($0.1 million),
amounts due from officers and employees of Rs.12.8 million ($0.2 million) and
inventories of Rs.4.8 million ($0.1 million) partially offset by an increase in
other assets of Rs.10.8 million ($0.2 million) accrued expenses of Rs.127.6
million ($2.7 million), depreciation of plant and equipment and amortization of
Rs.528.4 million ($11.2 million), an increase in accounts payable of Rs.19.6
million ($0.4 million) and an increase in deferred revenue of Rs.26.1 million
($0.5 million). Cash used in investing activities during the quarter ended June
30, 2001 was Rs.27.6 million ($0.6 million), principally as a result of the
purchase of routers, modems, ports, servers and other capital equipment in
connection with the expansion of our servers and other capital equipment in
connection with the expansion of our network. Cash used in financing activities
was Rs.2.5 million ($0.05 million) for the quarter ended June 30, 2001, which
consisted primarily of repayment of Rs.2.5 million ($0.05 million) principal
payments under capital lease obligations
As of June 30, 2001, we had spent approximately Rs.1,187.7 million to
develop and deploy our network infrastructure. As of June 30, 2001, we had
aggregate commitments for capital expenditures in an amount equal to
approximately Rs.139.1 million ($3.0 million), of which we had advanced
approximately Rs.98.6 million ($2.1 million).
In the ordinary course of our business we regularly engage in
discussions and negotiations relating to potential investments, strategic
partnerships and acquisitions. We will continue to be aggressive in our efforts
to identify one or more such opportunities. However, we cannot assure you that
we will be able to identify or complete any such transaction on favorable terms,
or at all.
Our highest operational priority for the fiscal year ending March 31,
2002 is to reduce the negative cash flow incurred by our company during its
rapid growth stage and, ideally, to reach a cash flow neutral or cash flow
positive operating position by the end of this fiscal year. Accomplishment of
these objectives will require continued progress in our business, including
continued significant growth in revenues, which cannot be assured. Nonetheless,
we expect to incur continued losses in the near future. Based upon our present
business and funding plans and a May 2001 government policy change that
increased the permissible foreign ownership in certain Internet service
providers, including our company, from 49.0% to 74.0% (assuming that our
Internet Service provide license is amended accordingly), we believe that our
cash and cash equivalents of $22.8 million as of June 30, 2001 and, if
necessary, other resources believed to be available to us, are sufficient to
meet our currently known requirements through March 31, 2002. In light of the
highly dynamic nature of our business, however, we cannot assure you that our
capital requirements and sources will not change significantly in the future.
In order to provide further financial flexibility, we are actively
investigating opportunities to raise additional capital, which could be in the
form of debt, equity, or a combination. As noted elsewhere in this report, our
ability to raise funds through the sale of equity is limited by foreign
ownership restrictions imposed on us by Indian law and the terms of our Internet
service provider license. Until recently, Government of India policies limited
the total foreign equity in an Internet service provider to 49%. Our license
currently provides that the total foreign equity in our company may not, at any
time, exceed 49% of our total equity. In May 2001, the Department of Commerce
and Industry increased the limit on foreign direct investment for Internet
companies, such as our company, from 49% to 74%. The administrative process to
implement this policy has commenced, and we expect to apply to the DOT to amend
our license to increase the total foreign equity restriction contained therein
from 49% to 74%. If additional funds are raised through the issuance of equity
or convertible debt securities, the percentage ownership of our stockholders and
the holders of our ADSs will be reduced and these securities may have rights,
preferences or privileges senior to those of our stockholders and the holders of
our ADSs. We cannot assure you that additional financing will be available on
terms favorable to us, or at all. If adequate funds are not available or are not
available on acceptable terms, our ability to fund and expand our operations,
take advantage of unanticipated opportunities, develop or enhance Internet
content, features or services, or
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otherwise respond to competitive pressures will be significantly limited. Our
business, results of operations and financial condition would be materially
adversely affected by any such limitation.
INCOME TAX MATTERS
As of March 31, 2001, the end of our most recently completed fiscal
year, we had a net operating loss carryforward of approximately Rs.1,777.5
million ($37.9 million) for financial reporting purposes. Under Indian law, loss
carryforwards from a particular year may be used to offset taxable income over
the next eight years.
The statutory corporate income tax rate in India is currently 35.0%. For
fiscal 2001, this tax rate was subject to a 13.0% surcharge resulting in an
effective tax rate of 39.6%. The tax surcharge for fiscal 2002 has been reduced
to 2.0%. We cannot assure you that the surcharge will be in effect for a limited
period of time or that additional surcharges will not be implemented by the
Government of India. Dividends declared, distributed or paid by an Indian
corporation are subject to a dividend tax of 10.2%, including the applicable
surcharge for fiscal 2001, of the total amount of the dividend declared,
distributed or paid. This tax is not paid by stockholders nor is it a
withholding requirement, but rather it is a direct tax payable by the
corporation.
EFFECTS OF INFLATION
Inflation has not had a significant effect on our results of operations
and financial condition to date. However, India has experienced relatively high
rates of inflation. According to the Economist Intelligence Unit, the rates of
inflation in India for 1997 through 2000 were 7.2%, 13.2%, 5.0% and 4.3%,
respectively. Under our Internet service provider license, we are given the
right to establish the prices we charge to our subscribers, as determined by
market forces. However, under the conditions of our license, the Telecom
Regulatory Authority of India, or TRAI, may review and fix the prices we charge
our subscribers at any time. If the TRAI were to fix prices for the Internet
service provider services we provide, we might not be able to increase the
prices we charge our subscribers to mitigate the impact of inflation, which
could have a material adverse effect on our business, results of operations and
financial condition.
FOREIGN EXCHANGE LOSS
Approximately 30% of our revenues in fiscal 2001 was denominated in
foreign currency. Our expenses denominated in foreign currency include the cost
of purchasing software from BroadVision, Open Market and Sterling Commerce.
Our foreign exchange gain was Rs.9.7 million ($0.2 million) and Rs.57.6
million for the quarters ended June 30, 2001 and June 30, 2000, respectively.
Our foreign exchange gain was primarily due to our short-term investment of the
proceeds from our public offerings in interest bearing instruments denominated
in U.S. dollars.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued Statement No. 141, Business Combinations,
and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. Statement 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of.
We are required to adopt the provisions of Statement 141 immediately,
except with regard to business combinations initiated prior to July 1, 2001, and
Statement 142 effective April 1, 2002. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that are acquired
in a purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-Statement 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be subject to amortization prior to the adoption of Statement 142.
Statement 141 will require upon adoption of Statement 142 that we
evaluate our existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, we will be required to reassess
the useful lives and residual values of all intangible assets acquired in
purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption,
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expected to be the fiscal quarter ended June 30, 2002. In addition, to the
extent an intangible asset is identified as having an indefinite useful life, we
will be required to test the intangible asset for impairment in accordance with
the provisions of Statement 142 within that first interim period. Any impairment
loss will be measured as of the date of adoption and recognized as the
cumulative effect of a change in accounting principle in the first interim
period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require us to perform an assessment of whether there is an
indication that goodwill and equity-method goodwill is impaired as of the date
of adoption. To accomplish this we must identify our reporting units and
determine the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of the date of adoption. We will then have up to six months
from the date of adoption to determine the fair value of each reporting unit and
compare it to the reporting unit's carrying amount. To the extent a reporting
unit's carrying amount exceeds its fair value, an indication exists that the
reporting unit's goodwill may be impaired and we must perform the second step of
the transitional impairment test. In the second step, we must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in our statement of operations.
Amortization expense related to goodwill was $ 24.1 million and $ 7.8
million for the year ended March 31, 2001 and the three months ended June 30,
2001, respectively. Because of the extensive effort needed to comply with
adopting Statements 141 and 142, it is not practicable to reasonably estimate
the impact of adopting these Statements on our financial statements at the date
of this report, including whether any transitional impairment losses will be
required to be recognized as the cumulative effect of a change in accounting
principle. As of June 30, 2001, we were carrying on our consolidated balance
sheet goodwill amounts relating to acquisitions and investments made by us in
1999 and 2000, including $78.9 million for IndiaWorld, $8.4 million for
IndiaPlaza and $26.1 million for CricInfo.com. Under present accounting
principles, we are amortizing this goodwill into our statement of operations on
a periodic basis. If either present accounting principles or the new standards
discussed above require that an impairment in value be recognized, we would be
required to write-down the carrying value of the asset to its estimated fair
value with an offsetting charge to our statement of operations. While such a
charge would be non-cash, it nonetheless could be highly material to our
reported results of operations for any such period in which a charge would have
to be recognized.
RISKS RELATED TO OUR BUSINESS
Any investment in our ADSs involves a high degree of risk. You should
consider carefully the following information about these risks, together with
the other information contained in this report, before you decide to buy our
ADSs. If any of the following risks actually occurs, our company could be
seriously harmed. In any such case, the market price of our ADSs could decline,
and you may lose all or part of the money you paid to buy our ADSs.
RISKS RELATED TO INVESTMENTS IN INDIAN COMPANIES
We are incorporated in India, and a significant majority of our assets
and employees are located in India. Consequently, our financial performance and
the market price of our ADSs will be affected by changes in exchange rates and
controls, interest rates, Government of India policies, including taxation
policies, as well as political, social and economic developments affecting
India.
Political instability could halt or delay the liberalization of the
Indian economy and adversely affect business and economic conditions in
India generally and our business in particular.
During the past decade, the Government of India has pursued policies of
economic liberalization, including significantly relaxing restrictions on the
private sector. Nevertheless, the role of the Indian central and state
governments in the Indian economy as producers, consumers and regulators has
remained significant. The Government of India has changed five times since 1996.
The rate of economic liberalization could change, and specific laws and policies
affecting technology companies, foreign investment, currency exchange rates and
other matters affecting investment in our securities could change as well. A
significant change in India's economic liberalization and deregulation policies
could adversely affect business and economic conditions in India generally and
our business in particular.
Regional conflicts in South Asia could adversely affect the Indian
economy and cause our business to suffer.
South Asia has from time to time experienced instances of civil unrest
and hostilities among neighboring countries, including between India and
Pakistan. In April 1999, India and Pakistan conducted long-range missile tests.
Since May 1999, military confrontations between India and Pakistan have occurred
in the Himalayan region of Kargil and other border areas. Further, in October
1999 the leadership of Pakistan changed as a result of a coup led by the
military. Events of this nature in the
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future could influence the Indian economy and could have a material adverse
effect on the market for securities of Indian companies, including our ADSs, and
on the market for our services.
We are subject to foreign investment restrictions under Indian law that
limit our ability to attract foreign investors which, together with the
lack of a public market for our equity shares, may adversely impact the
value of our ADSs.
Currently, there is no public trading market for our equity shares in
India or elsewhere nor can we assure you that we will take steps to develop one.
Our equity securities are not traded publicly in India, but are only traded on
Nasdaq through the ADSs as described in this report. Until recently, under
Indian laws and regulations our depositary could not accept deposits of
outstanding equity shares and issue ADRs evidencing ADSs representing such
equity shares without prior approval of the Government of India. The Reserve
Bank of India recently announced new fungibility regulations permitting the
conversion of ADSs to equity shares and the reconversion of equity shares to
ADSs provided that the actual number of ADSs outstanding after such reconversion
is not greater than the original number of ADSs outstanding. If you elect to
surrender your ADSs and receive equity shares, you will not be able to trade
those equity shares on any securities market and under present law likely will
not be permitted to reconvert those equity shares to ADSs.
If in the future a market for our equity shares is established in India
or another market outside of the United States, those shares may trade at a
discount or premium to the ADSs in part because of restrictions on foreign
ownership of the underlying shares. Under current Indian regulations and
practice, the approval of the Reserve Bank of India is required for the sale of
equity shares underlying ADSs by a non-resident of India to a resident of India
as well as for renunciation of rights to a resident of India, unless the sale of
equity shares underlying the ADSs is through a recognized stock exchange or in
connection with the offer made under the regulations regarding takeovers. Since
exchange controls still exist in India, the Reserve Bank of India will approve
the price at which the equity shares are transferred based on a specified
formula, and a higher price per share may not be permitted. Holders who seek to
convert the rupee proceeds from a sale of equity shares in India into foreign
currency and repatriate that foreign currency from India will have to obtain
Reserve Bank of India approval for each transaction. We cannot assure you that
any required approval from the Reserve Bank of India or any other government
agency can be obtained.
Because we operate our business in India, exchange rate fluctuations may
affect the value of our ADSs independent of our operating results.
The exchange rate between the rupee and the U.S. dollar has changed
substantially in recent years and may fluctuate substantially in the future.
During the three-year period from July 1, 1998 through June 30, 2001, the value
of the rupee against the U.S. dollar declined by approximately 11%. Devaluations
of the rupee will result in higher expenses to our company for the purchase of
capital equipment, such as servers, routers, modems and other telecommunications
and computer equipment, which is generally manufactured in the U.S. In addition,
our market valuation could be materially adversely affected by the devaluation
of the rupee if U.S. investors analyze our value based on the U.S. dollar
equivalent of our financial condition and results of operations.
The Government of India may change its regulation of our business or the
terms of our license to provide Internet access services without our
consent, and any such change could decrease our revenues and/or increase
our costs which would adversely affect our operating results.
Our business is subject to government regulation under Indian law and to
significant restrictions under our Internet service provider license issued by
the Government of India. These regulations and restrictions include the
following:
- Our Internet service provider license has a term of 15 years and we
have no assurance that the license will be renewed. If we are unable
to renew our Internet service provider license in 2013 for any
reason, we will be unable to operate as an Internet service provider
in India and will lose one of our primary sources of revenue.
- The Telecom Regulatory Authority of India, or TRAI, a statutory
authority constituted under the Telecom Regulatory Authority of India
Act, 1997, maintains the right to regulate the prices we charge our
subscribers. The success of our business model depends on our ability
to price our services at levels we believe are appropriate. If the
TRAI sets a price floor, we may not be able to attract and retain
subscribers. Likewise, if the TRAI sets a price ceiling, we may not
be able to generate sufficient revenues to fund our operations.
Similarly, an action of the Indian Parliament may impact our ability
to set the prices for our services.
- The Government of India maintains the right to take over our entire
operations or revoke, terminate or suspend our license for national
security and similar reasons without compensation to us. If the
Government of India were to take any of these actions, we would be
prevented from conducting all or part of our business.
We had outstanding performance guarantees for various statutory purposes
totaling Rs.37.4 million ($0.8 million) as of June 30, 2001. These guarantees
are generally provided to government agencies, primarily the TRAI and the
Department of Telecommunications, or DOT, as security for compliance with and
performance of terms and conditions contained in our Internet
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service provider license, and Videsh Sanchar Nigam Limited, or VSNL, the
government-controlled provider of international telecommunications services in
India, towards the supply and installation of an electronic commerce platform.
These guarantees may be seized by the governmental agencies if they suffer any
losses or damage by reason of our failure to perform our obligations. Any
failure on our part to comply with governmental regulations and the terms of our
Internet service provider license could result in the loss of our license and
any amount outstanding as performance guarantees, which would also prevent us
from carrying on a very significant part of our business. Further, additional
laws regulating telecommunications, electronic records, the enforceability of
electronic documents and the liability of network service providers are under
consideration and, if enacted, could impose additional restrictions on our
business.
The charges for international gateways and other services presently
being provided by VSNL are the subject of a dispute pending before the TRAI and
the Telecom Disputes Settlement and Appellate Tribunal between VSNL and private
Internet service providers, including our company. VSNL has priced these
services at levels which we believe are inconsistent with the terms and
conditions on which VSNL has secured the bandwidth for its international
gateways. This is a pending matter and, as of the date of this report, no
decision has been announced. The resolution of this dispute could have a
material impact on our business.
Surcharges on Indian income taxes will increase our tax liability and
decrease any profits we might have in the future.
The statutory corporate income tax rate in India is currently 35.0%. For
fiscal 2001, this tax rate was subject to a 13.0% surcharge resulting in an
effective tax rate of 39.6%. The tax surcharge for fiscal 2002 has been reduced
to 2.0%. We cannot assure you that the surcharge will be in effect for a limited
period of time or that additional surcharges will not be implemented by the
Government of India. Dividends declared, distributed or paid by an Indian
corporation are subject to a dividend tax of 10.2%, including the applicable
surcharge for fiscal 2001, of the total amount of the dividend declared,
distributed or paid. This tax is not paid by stockholders nor is it a
withholding requirement, but rather it is a direct tax payable by the
corporation before the distribution of a dividend.
RISKS RELATED TO THE INTERNET MARKET IN INDIA
Our success will depend in large part on the increased use of the
Internet by consumers and businesses in India. However, our ability to exploit
the Internet service provider and other data service markets in India is
inhibited by a number of factors. If India's limited Internet usage does not
grow substantially, our business may not succeed.
The success of our business depends on the acceptance of the Internet in
India which may be slowed or halted by high bandwidth costs and other
technical obstacles in India.
Bandwidth, the measurement of the volume of data capable of being
transported in a communications system in a given amount of time, remains very
expensive in India, especially when compared to bandwidth costs in the United
States. Bandwidth rates are commonly expressed in terms of Kbps (kilobits per
second, or thousands of bits of data per second) or Mbps (megabits per second,
or millions of bits of data per second). Prices for bandwidth capacity are set
by the TRAI and have remained high due to, among other things, capacity
constraints. High bandwidth prices have continued notwithstanding rapid
increases in demand for Internet access and a very competitive pricing
environment for those services which has resulted in decreasing average selling
prices.
The limited installed personal computer base in India limits our pool of
potential customers and restricts the amount of revenues that our
consumer Internet access services division may generate.
The market penetration rates of personal computers and online access in
India are far lower than such rates in the United States. For example, according
to International Data Corporation, in 2000 the Indian market contained
approximately 4.4 million Internet users compared to a total population in India
of 1.0 billion, while the U.S. market contained approximately 135 million
Internet users compared to a total population in the U.S. of 275 million.
Alternate methods of obtaining access to the Internet, such as through set-top
boxes for televisions, are currently not popular in India. There can be no
assurance that the number or penetration rate of personal computers in India
will increase rapidly or at all or that alternate means of accessing the
Internet will develop and become widely available in India. While the personal
computer penetration level in India is relatively low, we are addressing the
demand for public Internet access through the establishment of a retail chain of
public Internet access centers, which we refer to as "cybercafes," under the
"iway" brand name. Although this service creates a larger market, it also
imposes on the operator of the cybercafe the considerable costs of providing the
consumer access to a personal computer and related hardware and software.
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The high cost of accessing the Internet in India limits our pool of
potential customers and restricts the amount of revenues that our
consumer Internet access services division may generate.
Our growth is limited by the cost to Indian consumers of obtaining the
hardware, software and communications links necessary to connect to the Internet
in India. If the costs required to access the Internet do not significantly
decrease, most of India's population will not be able to afford to use our
services. The failure of a significant number of additional Indian consumers to
obtain affordable access to the Internet would make it very difficult to execute
our business plan.
The success of our business depends on the acceptance and growth of
electronic commerce in India which is uncertain and, to a large extent,
beyond our control.
Many of our existing and proposed products and services are designed to
facilitate electronic commerce in India, although there is relatively little
electronic commerce currently being conducted in India. Demand and market
acceptance for these products and services by businesses and consumers,
therefore, are highly uncertain. Although the Indian Parliament has passed the
Information Technology Act, 2000, several critical issues concerning the
commercial use of the Internet in India, such as legal recognition of electronic
records, validity of contracts entered into online and the validity of digital
signatures, remain uncertain. In addition, many Indian businesses have deferred
purchasing Internet access and deploying electronic commerce initiatives for a
number of reasons, including the existence or perception of, among other things:
- inconsistent quality of service;
- the need to deal with multiple and frequently incompatible vendors;
- inadequate legal infrastructure relating to electronic commerce in
India;
- a lack of security of commercial data, such as credit card numbers;
and
- low number of Indian companies accepting credit card numbers over the
Internet.
If usage of the Internet in India does not increase substantially and
the legal infrastructure and network infrastructure in India are not developed
further, we are not likely to realize any benefits from our investment in the
development of electronic commerce products and services.
RISKS RELATED TO SATYAM INFOWAY
Our limited operating history makes it difficult to evaluate our
business.
We commenced operation of our private data network business in April
1998 and launched our Internet service provider operations and Internet portal
website in November 1998. Accordingly, we have a limited operating history to
evaluate our business. You must consider the risks and difficulties frequently
encountered by companies in the early stages of development, particularly
companies in the new and rapidly evolving Internet service markets. These risks
and difficulties include our ability to:
- continue to develop and upgrade our technology, including our network
infrastructure;
- maintain and develop strategic relationships with business partners;
- offer compelling online services and content; and
- promptly address the challenges faced by early stage, rapidly growing
companies which do not have an experience or performance base to draw
on.
Not only is our operating history short, but we have determined to
compete in three businesses that we believe are complementary. These three
businesses are corporate network/data and e-consulting services, consumer
Internet access services and online portal and content offerings. Our three
businesses were started at different times and have only been functioning
together since late in 1998. We do not yet know whether these businesses will
prove complementary. We cannot assure you that we will successfully address the
risks or difficulties described above. Failure to do so could lead to an
inability to attract and retain corporate customers for our network services and
subscribers for our consumer Internet services as well as the loss of
advertising revenues.
We have a history of losses and negative cash flows and anticipate this
to continue because our business plan, which is unproven, calls for
additional corporate customers and subscribers to attain profitability.
Since our founding, we have incurred significant losses and negative
cash flows. As of June 30, 2001, we had an accumulated deficit of approximately
$85.2 million. We have not been profitable and expect to incur operating losses
as we
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expand our services, invest in expansion of our network/data and technology
infrastructure, and advertise and promote our brand. Our business plan assumes
that businesses in India will demand private network and related electronic
commerce and web-based services. Our business plan also assumes that consumers
in India will be attracted to and use Internet access services and content
available on the Internet in increasing numbers. This business model is not yet
proven in India, and we cannot assure you that we will ever achieve or sustain
profitability or that our operating losses will not increase in the future.
Our ability to compete in the Internet service provider market is
hindered by the fact that our principal competitor is a
government-controlled provider of international telecommunications
services in India which enjoys significant competitive advantages over
our company.
VSNL is a government-controlled provider of international
telecommunications services in India. VSNL is also the largest Internet service
provider in India and, according to information published on VSNL's website, had
631,000 subscribers as of June 30, 2001. VSNL enjoys significant competitive
advantages over our company, including the following:
- Longer service history. VSNL has offered Internet service provider
services since August 1995, whereas we have offered Internet service
provider services only since November 1998.
- Access to network infrastructure. Because VSNL is controlled by the
Government of India, it has direct access to network infrastructure
which is owned by the Indian government.
- Greater financial resources. VSNL has significantly greater total
assets and annual revenues than our company.
Recently, VSNL has continued to aggressively reduce consumer Internet
access prices despite the lack of offsetting reductions in prevailing bandwidth
tariffs payable by private competitors, such as our company. We believe that
these practices constitute an improper cross-subsidy funded by VSNL's present
monopoly in long distance telephone service. The charges for international
gateways and other services presently being provided by VSNL are the subject of
a dispute pending before the TRAI and the Telecom Disputes Settlement and
Appellate Tribunal between VSNL and private Internet service providers,
including our company. This is a pending matter and, as of the date of this
report, no decision has been announced. Unless there is a change in government
policy or favorable resolution of this dispute, or until we are able to reduce
our bandwidth costs through other means, we will continue to face difficult
market conditions in the consumer Internet access services business.
These competitive issues may prevent us from attracting and retaining
subscribers and generating advertising revenue. This could result in loss of
market share, price reductions, reduced margins or negative cash flow for our
company's operations.
We may be required to further lower the rates we charge for our products
and services in response to new pricing models introduced by new and
existing competition in the Internet services market which would
significantly decrease our revenues.
Our corporate and e-consulting services business faces significant
competition from well-established companies, including Global E-Commerce
Limited, Sprint-RPG Limited and WIPRO-CSD. Reliance Infocom, a member of the
Reliance Group, is building a nationwide fiber optic network in India and has
announced plans to provide a range of value-added services, including corporate
connectivity services.
A significant number of new competitors have recently entered India's
recently liberalized Internet service provider market, and we expect additional
competitors to emerge in the near future. As of June 30 2001, approximately 437
companies had obtained Internet service provider licenses in India, including 79
companies which have obtained licenses to offer Internet service provider
services throughout India. New entrants into the national Internet service
provider market in India may enjoy significant competitive advantages over our
company, including greater financial resources, which could allow them to charge
Internet access fees that are lower than ours in order to attract subscribers.
Since May 2000, we have offered unlimited Internet access to consumers for a
fixed price. A number of our competitors, including VSNL, Dishnet and Mantra,
also offer unlimited Internet access for a fixed price. In addition, some
competitors offer free Internet service. These factors have resulted in
significant reduction in actual average selling prices for consumer ISP services
over the past several quarters. We expect the market for consumer Internet
access to remain extremely price competitive.
Our online portal, www.sify.com, faces significant competition from
well-established Indian content providers, including rediff.com, which completed
its initial public offering in the United States in June 2000. Some of these
sites currently have greater traffic than our site and offer some features that
we do not. Further, the dominant Internet portals continue to be the online
services and search engine companies based in the United States, such as America
Online, Excite@Home, Lycos, Microsoft Network and Yahoo!. These companies have
been developing specially branded or co-branded products designed for audiences
in specific markets. We expect that these companies will deploy services that
are targeted at the Indian market. For example, Yahoo! launched an Indian
service in June 2000.
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Increased competition may result in reduced operating margins or
operating losses, loss of market share and diminished value in our services, as
well as different pricing, service or marketing decisions. We cannot assure you
that we will be able to successfully compete against current and future
competitors.
Our marketing campaign to establish brand recognition and loyalty for
the SatyamOnline, SIFY and iway brands could be unsuccessful or, if
successful, may not benefit our company if in the future we are no
longer permitted to use the "Satyam" trademark that we license from
Satyam Computer Services.
In order to expand our customer base and increase traffic on our
websites, we must establish, maintain and strengthen the SatyamOnline, SIFY and
iway brands. We plan to continue to incur significant marketing expenditures to
establish brand recognition and brand loyalty. If our marketing efforts do not
produce a significant increase in consumer traffic to offset our marketing
expenditures, our losses will be increased or, to the extent that we are
generating profits, our profits will be decreased. Furthermore, our Internet
portal will be more attractive to advertisers if we have a large audience of
consumers with demographic characteristics that advertisers perceive as
favorable. Therefore, we intend to introduce additional and enhanced content,
interactive tools and other services and features in the future in an effort to
retain our current subscribers and users and attract new ones. Our reputation
and brand name could be adversely affected if we are unable to do so
successfully.
"Satyam" is a trademark owned by Satyam Computer Services, our parent
company. We have a license to use the "Satyam" trademark for so long as Satyam
Computer Services continues to own at least 51% of our company. If its ownership
is reduced below 51%, however, Satyam Computer Services may terminate our
license to use the "Satyam" trademark upon two years' prior written notice.
Termination of our license to use the "Satyam" trademark could require us to
invest significant funds in building a new brand name and have a material
adverse effect on our business, results of operations and financial condition.
If our efforts to retain our subscribers through investment in network
infrastructure and customer and technical support are unsuccessful, our
revenues will decrease without a corresponding reduction in costs.
Our sales, marketing and other costs of acquiring new subscribers are
substantial relative to the fees actually derived from these subscribers.
Accordingly, our long-term success depends to a great extent on our ability to
retain our existing subscribers, while continuing to attract new subscribers. We
invest significant resources in our network infrastructure and in our customer
and technical support capabilities to provide high levels of customer service.
We cannot be certain, however, that these investments will maintain or improve
subscriber retention. We believe that intense competition from our competitors,
some of whom may offer free hours of service or other enticements for new
subscribers, has caused, and may continue to cause, some of our subscribers to
switch to our competitors' services. In addition, some new subscribers use the
Internet only as a novelty and do not become consistent users of Internet
services, and therefore are more likely to discontinue their service. Any
decline in our subscriber retention rate could decrease the revenues generated
by our consumer Internet access services division.
Our future operating results could fluctuate in part because our
expenses are relatively fixed in the short-term while future revenues
are uncertain, and any adverse fluctuations could negatively impact the
price of our ADSs.
Our revenues, expenses and operating results have varied in the past and
may fluctuate significantly in the future due to a number of factors, many of
which are outside our control. Our business involves significant capital outlays
and, thus, a significant portion of our investment and cost base is relatively
fixed in the short term. Our revenues for the foreseeable future will depend on
the following:
- the products developed by our strategic partners and the usage
thereof by our customers determines the amount of revenues generated
by our corporate network/data and e-consulting services division;
- the number of subscribers to our Internet service provider service
and the prevailing prices charged determine the amount of revenues
generated by our consumer Internet access services division; and
- advertising and electronic commerce activity on www.sify.com and its
related sites determines the amount of revenues generated by our
online portal and content offerings division.
Our future revenues are difficult to forecast and, in addition to the
foregoing, will depend on the following:
- the timing and nature of any agreements we enter into with strategic
partners will determine the amount of revenues generated by our
corporate network/data and e-consulting services division;
- new Internet sites, services, products or pricing policies introduced
by our competitors may require us to introduce new offerings or
reduce the prices we charge our customers for Internet access;
- our capital expenditures and other costs relating to the expansion of
our operations could affect the expansion of our network or could
require us to generate additional revenue in order to be profitable;
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- the timing and nature of our marketing efforts could affect the
number of our subscribers and the level of electronic commerce
activity on our websites;
- our ability to successfully integrate operations and technologies
from any acquisitions, joint ventures or other business combinations
or investments, including our acquisitions of IndiaWorld
Communications and Indiaplaza.com and our investment in CricInfo
Limited;
- the introduction of alternative technologies may require us to
reevaluate our business strategy and/or to adapt our products and
services to be compatible with such technologies; and
- technical difficulties or system failures affecting the
telecommunication infrastructure in India, the Internet generally or
the operation of our websites.
We plan to continue to expand and develop content and enhance our
technology and infrastructure. Many of our expenses are relatively fixed in the
short-term. We cannot assure you that our revenues will increase in proportion
to the increase in our expenses. We may be unable to adjust spending quickly
enough to offset any unexpected revenues shortfall. This could lead to a
shortfall in revenues in relation to our expenses.
You should not rely on yearly comparisons of our results of operations
as indicators of future performance. It is possible that in some future periods
our operating results may be below the expectations of public market analysts
and investors. In this event, the price of our ADSs may underperform or fall.
Because we lack full redundancy for our computer systems, a systems
failure could prevent us from operating our business.
We rely on the Internet and, accordingly, depend upon the continuous,
reliable and secure operation of Internet servers, related hardware and software
and network infrastructure such as lines leased from service providers operated
by the Government of India. We have a back-up data facility but we do not have
full redundancy for all of our computer and telecommunications facilities. As a
result, failure of key primary or back-up systems to operate properly could lead
to a loss of customers, damage to our reputation and violations of our Internet
service provider license and contracts with corporate customers. These failures
could also lead to a decrease in value of our ADSs, significant negative
publicity and litigation. From time to time, a number of several large Internet
companies have suffered highly publicized system failures resulting in adverse
reactions to their stock prices, significant negative publicity and, in some
instances, litigation.
We have at times suffered service outages. We guarantee to a number of
our corporate customers that our network will meet or exceed contractual
reliability standards, and our Internet service provider license requires that
we provide an acceptable level of service quality and that we remedy customer
complaints within a specified time period. Our computer and communications
hardware are protected through physical and software safeguards. However, they
are still vulnerable to fire, storm, flood, power loss, telecommunications
failures, physical or software break-ins and similar events. We do not carry
business interruption insurance to protect us in the event of a catastrophe even
though such an event could lead to a significant negative impact on our
business. Any sustained disruption in Internet access provided by third parties
could also have a material adverse effect on our business.
Security breaches could damage our reputation or result in liability to
us.
Our facilities and infrastructure must remain secure, and be perceived
by our corporate and consumer customers to be secure, because we retain
confidential customer information in our database. Despite the implementation of
security measures, our infrastructure may be vulnerable to physical break-ins,
computer hacking, computer viruses, programming errors or similar disruptive
problems. If a person circumvents our security measures, he or she could
jeopardize the security of confidential information stored on our systems,
misappropriate proprietary information or cause interruptions in our operations.
We may be required to make significant additional investments and efforts to
protect against or remedy security breaches. A material security breach could
damage our reputation or result in liability to us, and we do not carry
insurance that protects us from this kind of loss.
The security services that we offer in connection with our business
customers' networks cannot assure complete protection from computer viruses,
break-ins and other disruptive problems. Although we attempt to limit
contractually our liability in such instances, the occurrence of these problems
could result in claims against us or liability on our part. These claims,
regardless of their ultimate outcome, could result in costly litigation and
could damage our reputation and hinder our ability to attract and retain
customers for our service offerings.
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If we are unable to manage the rapid growth required by our business
strategy, our results of operations will be adversely affected.
We have experienced and are currently experiencing a period of
significant growth. This growth has placed, and the future growth we anticipate
in our operations will continue to place, a significant strain on our
managerial, operational, financial and information systems resources. As part of
this growth, we will have to implement new operational and financial systems and
procedures and controls, expand our office facilities, train and manage our
employee base and maintain close coordination among our technical, accounting,
finance, marketing, sales and editorial staffs. If we are unable to manage our
growth effectively, we will be unable to implement our growth strategy, upon
which the success of our business depends.
We face a competitive labor market for skilled personnel and therefore
are highly dependent on our existing key personnel and on our ability to
hire additional skilled employees.
Our success depends upon the continued service of our key personnel,
particularly Mr. Ramaraj, our Chief Executive Officer, Mr. Zacharias, our
President and Chief Operating Officer, Mr. Santhanakrishnan, our Chief Financial
Officer, and each other member of our senior management. Although we recently
determined to open a branch in Northern California, substantially all of our
employees are located in India. Each of our employees may voluntarily terminate
his or her employment with us. We do not carry key person life insurance on any
of our personnel. Our success also depends on our ability to attract and retain
additional highly qualified technical, marketing and sales personnel. The labor
market for skilled employees in India and Northern California is extremely
competitive, and the process of hiring employees with the necessary skills is
time consuming and requires the diversion of significant resources. While we
have not experienced difficulty in employee retention or integration to date, we
may not be able to continue to retain or integrate existing personnel or
identify and hire additional personnel in the future. The loss of the services
of key personnel, especially the unexpected death or disability of such
personnel, or the inability to attract additional qualified personnel, could
disrupt the implementation of our growth strategy, upon which the success of our
business depends.
We are highly dependent on our relationships with strategic partners to
provide key products and services to our customers.
We rely on our arrangements with strategic partners to provide key
network and electronic commerce products and services to our business clients.
Our relationships with Open Market, Sterling Commerce, a unit of SBC
Communications, and UUNet Technologies can be terminated by our partners in some
circumstances. We also rely on some of our strategic partners to provide us with
access to their customer base. If our relationships with our strategic partners
do not continue, the ability of our corporate network/data and e-consulting
services division to generate revenues will be decreased significantly. We also
provide access to a co-branded version of the AOL Instant Messenger service to
our portal customers, and this proprietary service is an important feature of
our website.
We and our subsidiary IndiaWorld Communications are engaged in disputes
which, if resolved unfavorably, could impose material costs on us or
have other undesirable effects.
We and our subsidiary IndiaWorld Communications are involved in pending
litigation relating to the IndiaWorld trademark in Federal Court in San Diego,
California with a third party located in the United States. IndiaWorld
Communications commenced the lawsuit alleging, among other things, that the
third party fraudulently registered and used the IndiaWorld trademark, and
committed copyright infringement and misappropriation of content off IndiaWorld
Communications' website. The third party filed a counterclaim alleging, among
other things, that the activities of IndiaWorld Communications infringe a United
States trademark for the term "Indiaworld" and associated logos and trade dress
purportedly owned by this third party, and that the third party has an ownership
interest in the underlying assets of IndiaWorld Communications. We have been
advised by the prior owners of IndiaWorld Communications that no such
infringement or misappropriation has taken place. Our contract with the prior
owners of IndiaWorld Communications includes an indemnity for past infringement
or misappropriation. We and IndiaWorld Communications have also been contacted
by a party that alleges, among other things, that he is entitled to an equity
ownership in IndiaWorld Communications. We believe that this claim is also
covered by the contractual indemnity provided by the prior owners of IndiaWorld
Communications. Nonetheless, any dispute such as those described above creates
uncertainty as to the possible outcome, including whether or not our indemnity
will be effective in protecting us, and also could divert management time and
attention away from our business. An adverse outcome that is not indemnified
could be material to our company.
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We face risks associated with our joint venture with Refco Sify, our
strategic partnership with VeriSign and our co-branding agreement with
America Online, our acquisitions of Indiaplaza.com and IndiaWorld
Communications, our investment in CricInfo Limited and with other
potential acquisitions, investments, strategic partnerships or other
ventures, including whether any such transactions can be identified,
completed and the other party integrated with our business on favorable
terms.
In November 1999, we acquired 24.5% of the outstanding shares of
IndiaWorld Communications, together with an option to acquire IndiaWorld
Communications' remaining outstanding shares which we exercised in June 2000. In
May 2000, we entered into a strategic partnership with VeriSign to provide
managed digital certificate-based authentication services in India. In June
2000, we acquired a 25% stake in CricInfo Limited, entered into an agreement
with America Online to distribute a co-branded version of the AOL Instant
Messenger and made an investment in Refco Sify. In July 2000, we completed our
investment in CricInfo Limited and agreed to acquire Indiaplaza.com. In December
2000, we completed our acquisition of Indiaplaza.com. These transactions were
only recently entered into and most of them are not yet fully operational. These
alliances may not provide all or any portion of the anticipated benefits. We may
acquire or make investments in other complementary businesses, technologies,
services or products, or enter into additional strategic partnerships with
parties who can provide access to those assets, if appropriate opportunities
arise in the future. From time to time we have had discussions and negotiations
with a number of companies regarding our acquiring, investing in or partnering
with their businesses, products, services or technologies, and we regularly
engage in such discussions and negotiations in the ordinary course of our
business. Some of those discussions also contemplate the other party making an
investment in our company. We may not identify suitable acquisition, investment
or strategic partnership candidates in the future, or if we do identify suitable
candidates, we may not complete those transactions on commercially acceptable
terms or at all. In addition, the key personnel of an acquired company may
decide not to work for us. If we make other types of acquisitions, we could have
difficulty in integrating the acquired products, services or technologies into
our operations. These difficulties could disrupt our ongoing business, distract
our management and employees and increase our expenses which could adversely
affect our operating results and cause the price of our ADSs to decline.
Furthermore, we may incur indebtedness or issue additional equity securities to
pay for any future acquisitions. The issuance of additional equity securities
would dilute the ownership interests of the holders of our ADSs.
Our financial results are impacted by the financial results of entities
that we do not control.
We have a significant, non-controlling minority interest in CricInfo
Limited and Refco Sify that is accounted for under U.S. GAAP using the equity
method of accounting. Under this method, we are obligated to report as "Equity
in losses (gains) of affiliates" a pro rata portion of the financial results of
any such company in our statement of operations even though we do not control
the other company. Thus, our reported results of operations can be significantly
increased or decreased depending on the results of CricInfo Limited and Refco
Sify or other companies in which we may make similar investments even though we
may have only a limited ability to influence these activities.
Satyam Computer Services controls our company and may have interests
which conflict with those of our other stockholders or holders of our
ADSs.
As of the date of this report, Satyam Computer Services beneficially
owns approximately 52.5% of our equity shares. As a result, it is able to
exercise control over many matters requiring approval by our stockholders,
including the election of directors and approval of significant corporate
transactions. Under Indian law, a simple majority is sufficient to control all
stockholder action except for those items which require approval by a special
resolution. If a special resolution is required, the number of votes cast in
favor of the resolution must not be less than three times the number of votes
cast against it. Examples of actions that require a special resolution include:
- altering our Articles of Association;
- issuing additional shares of capital stock, except for pro rata
issuances to existing stockholders;
- commencing any new line of business; and
- commencing a liquidation.
Circumstances may arise in which the interests of Satyam Computer
Services could conflict with the interests of our other stockholders or holders
of our ADSs. Satyam Computer Services could delay or prevent a change of control
of our company even if a transaction of that sort would be beneficial to our
other stockholders, including the holders of our ADSs. In addition, we have an
agreement with South Asia Regional Fund, an investor in our company, which
assures them a board seat and provides specified additional rights to them.
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We have recorded significant amounts of goodwill in connection with
recent investments and acquisitions and should we be required by
applicable accounting principles to conclude that an impairment in the
value of the investments has occurred we could be required to recognize
material, non-cash charges to our statements of operations.
We have made a number of significant acquisitions of, and investments
in, Internet companies which we believe are complementary to our businesses,
including our acquisition of IndiaWorld, an operator of an Internet portal and
related content sites, our acquisition of IndiaPlaza.com, an operator of a
consumer e-commerce site, and our strategic investment in CricInfo Limited, the
operator of a popular Internet site covering the sport of cricket. In connection
with these transactions, as of June 30, 2001, we were carrying on our
consolidated balance sheet goodwill amounts of $78.9 million for IndiaWorld
Communications, $8.4 million for Indiaplaza.com and $26.1 million for
CricInfo.com. Under present accounting principles, we are amortizing this
goodwill into our statement of operations on a periodic basis. Once SFAS 142
becomes effective, however, goodwill and other similar intangible assets will no
longer be amortized on a periodic basis but rather we will be required to test
such assets for impairment at the reporting unit level.
If, either under present or future accounting principles, we conclude
that there has been an impairment in the value of one or more of these
investments or any of the other transactions that we have completed or may
complete that results in the recognition of goodwill or similar intangible
assets, we would be required to write-down the carrying value of the asset to
its estimated fair value with an offsetting charge to our statement of
operations. While such a charge would be non-cash, it nonetheless could be
highly material to our reported results of operations for any such period in
which a charge would have to be recognized. For additional information, please
see "Impact of Recently Issued Accounting Standards."
We must continue to make capital expenditures in new network
infrastructure which, if not offset by additional revenue, will
adversely affect our operating results.
We must continue to expand and adapt our network infrastructure as the
number of users and the amount of information they wish to transfer increases
and as the requirements of our customers change. The expansion of our Internet
network infrastructure will require substantial financial, operational and
management resources. The development of private Internet access and other data
networks and related services in India is a new business, and we may encounter
cost overruns, technical difficulties or other project delays in connection with
any or all of the new facilities. We can give no assurance that we will be able
to expand or adapt our network infrastructure to meet the additional demand or
our customers' changing requirements on a timely basis, or at a commercially
reasonable cost, or at all. A portion of our capital expenditures for network
development are fixed, and the success of our business depends on our ability to
grow our business to utilize this capacity. In addition, if demand for usage of
our network were to increase faster than projected, our network could experience
capacity constraints, which would adversely affect the performance of the
system.
The legal system in India does not protect intellectual property rights
to the same extent as those of the United States, and we may be
unsuccessful in protecting our intellectual property rights.
Our intellectual property rights are important to our business. We rely
on a combination of copyright and trademark laws, trade secrets, confidentiality
procedures and contractual provisions to protect our intellectual property.
Our efforts to protect our intellectual property may not be adequate.
Our competitors may independently develop similar technology or duplicate our
products or services. Unauthorized parties may infringe upon or misappropriate
our products, services or proprietary information. In addition, the laws of
India do not protect proprietary rights to the same extent as laws in the United
States, and the global nature of the Internet makes it difficult to control the
ultimate destination of our products and services. For example, the legal
processes to protect service marks in India are not as effective as those in
place in the United States. The misappropriation or duplication of our
intellectual property could disrupt our ongoing business, distract our
management and employees, reduce our revenues and increase our expenses. In the
future, litigation may be necessary to enforce our intellectual property rights
or to determine the validity and scope of the proprietary rights of others. Any
such litigation could be time-consuming and costly.
We could be subject to intellectual property infringement claims as the
number of our competitors grows and the content and functionality of our
websites or other product or service offerings overlap with competitive
offerings. Defending against these claims, even if not meritorious, could be
expensive and divert management's attention from operating our company. If we
become liable to third parties for infringing their intellectual property
rights, we could be required to pay a substantial damage award and forced to
develop non-infringing technology, obtain a license or cease selling the
applications that contain the infringing technology. We may be unable to develop
non-infringing technology or obtain a license on commercially reasonable terms,
or at all.
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Our platform infrastructure and its scalability are not proven, and our
current systems may not accommodate increased use while maintaining
acceptable overall performance.
Currently, only a relatively limited number of customers use our
corporate network, our Internet service provider services and our Internet
portal. We must continue to expand and adapt our network infrastructure to
accommodate additional users, increasing transaction volumes and changing
customer requirements. We may not be able to project accurately the rate or
timing of increases, if any, in the use of our websites or expand and upgrade
our systems and infrastructure to accommodate such increases. Our systems may
not accommodate increased use while maintaining acceptable overall performance.
Service lapses could cause our users to use the online services of our
competitors.
We do not plan to pay dividends in the foreseeable future.
We do not anticipate paying cash dividends to the holders of our ADSs in
the foreseeable future. Accordingly, investors must rely on sales of their ADSs
after price appreciation, which may never occur, as the only way to realize a
positive return on their investment. Investors seeking cash dividends should not
purchase our ADSs.
RISKS RELATED TO THE INTERNET
We may be liable to third parties for information retrieved from the
Internet.
Because users of our Internet service provider service and visitors to
our websites may distribute our content to others, third parties may sue us for
defamation, negligence, copyright or trademark infringement, personal injury or
other matters. We could also become liable if confidential information is
disclosed inappropriately. These types of claims have been brought, sometimes
successfully, against online services in the United States and Europe. Others
could also sue us for the content and services that are accessible from our
websites through links to other websites or through content and materials that
may be posted by our users in chat rooms or bulletin boards. We do not carry
insurance to protect us against these types of claims, and there is no precedent
on Internet service provider liability under Indian law. Further, our business
is based on establishing our network as a trustworthy and dependable provider of
information and services. Allegations of impropriety, even if unfounded, could
damage our reputation, disrupt our ongoing business, distract our management and
employees, reduce our revenues and increase our expenses.
The success of our strategy depends on our ability to keep pace with
technological changes.
Our future success depends, in part, upon our ability to use leading
technologies effectively, to continue to develop our technical expertise, to
enhance our existing services and to develop new services that meet changing
customer requirements. The markets for our service are characterized by rapidly
changing technology, evolving industry standards, emerging competition and
frequent new service introductions. We may not successfully identify new
opportunities and develop and bring new services to market in a timely manner.
Our business may not be compatible with delivery methods of Internet
access services developed in the future.
We face the risk that fundamental changes may occur in the delivery of
Internet access services. Currently, Internet services are accessed primarily by
computers and are delivered by modems using telephone lines. As the Internet
becomes accessible by cellular telephones, personal data assistants, television
set-top boxes and other consumer electronic devices, and becomes deliverable
through other means involving digital subscriber lines, coaxial cable or
wireless transmission mediums, we will have to develop new technology or modify
our existing technology to accommodate these developments. Our pursuit of these
technological advances, whether directly through internal development or by
third party license, may require substantial time and expense. We may be unable
to adapt our Internet service business to alternate delivery means and new
technologies may not be available to us at all.
Our product and service offerings may not be compatible with industry
standards developed in the future.
Our ability to compete successfully depends upon the continued
compatibility and interoperability of our services with products and
architectures offered by various vendors. Although we intend to support emerging
standards in the market for Internet access, industry standards may not be
established and, if they become established, we may not be able to conform to
these new standards in a timely fashion or maintain a competitive position in
the market. The announcement or introduction of new products or services by us
or our competitors and any change in industry standards could cause customers to
deter or cancel purchases of existing products or services.
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RISK RELATED TO THE ADSS AND OUR TRADING MARKET
Holders of ADSs are restricted in their ability to exercise preemptive
rights under Indian law and thereby may suffer future dilution of their
ownership position.
Under the Companies Act, 1956 of India, or Companies Act, a public
company incorporated in India must offer its holders of equity shares preemptive
rights to subscribe and pay for a proportionate number of shares to maintain
their existing ownership percentages prior to the issuance of any new equity
shares, unless the preemptive rights have been waived by adopting a special
resolution by holders of three-fourths of the company's shares which are voted
on the resolution. At our 2000 Annual General Meeting, our stockholders approved
a special resolution permitting us to issue up to one million equity shares
(equivalent to four million ADSs) in connection with acquisitions. We issued
virtually all of these equity shares in connection with our acquisitions of
IndiaWorld Communications and Indiaplaza.com and our investment in CricInfo
Limited. At our 2001 Annual General Meeting, our stockholders approved a special
resolution permitting us to issue up to four million additional equity shares
(equivalent to 16 million ADSs) in connection with acquisitions or capital
raising transactions, and our ADS holders are deemed to have waived their
preemptive rights with respect to these shares and our Board of Directors may
approve the issuance of these shares without further action of our stockholders.
U.S. holders of ADSs may be unable to exercise preemptive rights for
equity shares underlying ADSs unless approval of the Ministry of Finance of the
Government of India is obtained and a registration statement under the
Securities Act of 1933, as amended, is effective with respect to the rights or
an exemption from the registration requirements of the Securities Act is
available. Our decision to file a registration statement will depend on the
costs and potential liabilities associated with any given registration statement
as well as the perceived benefits of enabling the holders of our ADSs to
exercise their preemptive rights and any other factors that we deem appropriate
to consider at the time the decision must be made. We may elect not to file a
registration statement related to preemptive rights otherwise available by law
to our stockholders. In the case of future issuances, the new securities may be
issued to our depositary, which may sell the securities for the benefit of the
holders of the ADSs. The value, if any, our depositary would receive upon the
sale of such securities cannot be predicted. To the extent that holders of ADSs
are unable to exercise preemptive rights granted in respect of the equity shares
represented by their ADSs, their proportional interests in our company would be
reduced.
Holders of ADSs may be restricted in their ability to exercise voting
rights and the information provided with respect to stockholder
meetings.
As a holder of ADSs, you generally have the right under the deposit
agreement to instruct the depositary bank to exercise the voting rights for the
equity shares represented by your ADSs. At our request, the depositary bank will
mail to you any notice of stockholders' meeting received from us together with
information explaining how to instruct the depositary bank to exercise the
voting rights of the securities represented by ADSs. If the depositary bank
timely receives voting instructions from a holder of ADSs, it will endeavor to
vote the securities represented by the holder's ADSs in accordance with such
voting instructions. However, the ability of the depositary bank to carry out
voting instructions may be limited by practical and legal limitations and the
terms of the securities on deposit. We cannot assure you that you will receive
voting materials in time to enable you to return voting instructions to the
depositary bank in a timely manner.
Under Indian law, subject to the presence in person at a stockholder
meeting of persons holding equity shares representing a quorum, all resolutions
proposed to be approved at that meeting are voted on by a show of hands unless a
stockholder present in person at the meeting demands that a poll be taken.
Equity shares not represented in person at the meeting, including equity shares
underlying ADSs for which a holder has provided voting instructions to the
depositary bank, are not counted in a vote by show of hands. As a result, only
in the event that a stockholder present at the meeting demands that a poll be
taken will the votes of ADSs holders be counted. Securities for which no voting
instructions have been received will not be voted on a poll.
As a foreign private issuer, we are not subject to the SEC's proxy rules
which regulate the form and content of solicitations by United States-based
issuers of proxies from their stockholders. To date, our practice has been to
provide advance notice to our ADS holders of all stockholder meetings and to
solicit their vote on such matters, through the depositary, and we expect to
continue this practice. The form of notice and proxy statement that we have been
using does not include all of the information that would be provided under the
SEC's proxy rules.
The market price of our ADSs has been and may continue to be highly
volatile.
The market price of our ADSs has fluctuated widely and may continue to
do so. For example, since our initial public offering in October 1999 through
July 31, 2001 and, after giving effect to the 4-for-1 split of our ADSs in
January 2000, the trading price of our ADSs has ranged from a high of $113 per
ADS to a low of $1.69 per ADS. Many factors could cause the market price of our
ADSs to rise and fall. Some of these factors include:
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- our failure to integrate successfully our operations with those of
acquired companies;
- actual or anticipated variations in our quarterly operating results;
- announcement of technological innovations;
- conditions or trends in the corporate network services, Internet and
electronic commerce industries;
- the competitive and pricing environment for corporate network and
consumer Internet access services in India and the related cost and
availability of bandwidth;
- the perceived attractiveness of investment in Indian companies;
- acquisitions and alliances by us or others in the industry;
- changes in estimates of our performance or recommendations by
financial analysts;
- market conditions in the industry and the economy as a whole;
- introduction of new services by us or our competitors;
- changes in the market valuations of other Internet service companies;
- announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
- additions or departures of key personnel; and
- other events or factors, many of which are beyond our control.
The financial markets in the United States and other countries have
experienced significant price and volume fluctuations, and the market prices of
technology companies, particularly Internet-related companies, have been and
continue to be extremely volatile with negative sentiment prevailing. Volatility
in the price of our ADSs may be caused by factors outside of our control and may
be unrelated or disproportionate to our operating results. In the past,
following periods of volatility in the market price of a public company's
securities, securities class action litigation has often been instituted against
that company. Such litigation could result in substantial costs and a diversion
of our management's attention and resources.
An active or liquid market for the ADSs is not assured, particularly in
light of Indian legal restrictions on equity share conversion and
foreign ownership of an Internet service provider.
We cannot predict the extent to which an active, liquid public trading
market for our ADSs will exist. Active, liquid trading markets generally result
in lower price volatility and more efficient execution of buy and sell orders
for investors. Liquidity of a securities market is often a function of the
volume of the underlying shares that are publicly held by unrelated parties.
Although ADS holders are entitled to withdraw the equity shares underlying the
ADSs from the depositary at any time, there is no public market for our equity
shares in India or the United States. Furthermore, foreign ownership in our
company, which includes all ADSs, is limited to 74% under present Indian law,
assuming that our license is amended in accordance with a recently-enacted
change in Government of India policy. The previous policy limit was 49%. This
limitation means that, unless Indian law changes, at least 26% of our equity
shares will never be available to trade in the United States market.
The future sales of securities by our company or existing stockholders
may hurt the price of our ADSs.
The market price of our ADSs could decline as a result of sales of a
large number of equity shares or ADSs or the perception that such sales could
occur. Such sales also might make it more difficult for us to sell equity
securities in the future at a time and at a price that we deem appropriate. We
intend to issue additional equity shares and ADSs to raise capital and to fund
acquisitions and investments, and the parties to any such future transactions
could also decide to sell them.
Forward-looking statements contained in this report may not be realized.
This report contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of the risks faced by us
described above and elsewhere in this report. We do not intend to update any of
the forward-looking statements after the date of this report to conform such
statements to actual results.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We and our subsidiary IndiaWorld Communications are involved in pending
litigation relating to the IndiaWorld trademark in Federal Court in San Diego,
California with a third party located in the United States. IndiaWorld
Communications commenced the lawsuit alleging, among other things, that the
third party fraudulently registered and used the IndiaWorld trademark, and
committed copyright infringement and misappropriation of content off IndiaWorld
Communications' website. The third party filed a counterclaim alleging, among
other things, that the activities of IndiaWorld Communications infringe a United
States trademark for the term "Indiaworld" and associated logos and trade dress
purportedly owned by this third party, and that the third party has an ownership
interest in the underlying assets of IndiaWorld Communications. We have been
advised by the prior owners of IndiaWorld Communications that no such
infringement or misappropriation has taken place. Our contract with the prior
owners of IndiaWorld Communications includes an indemnity for past infringement
or misappropriation. We and IndiaWorld Communications have also been contacted
by a party that alleges, among other things, that he is entitled to an equity
ownership in IndiaWorld Communications. We believe that this claim is also
covered by the contractual indemnity provided by the prior owners of IndiaWorld
Communications. Nonetheless, any dispute such as those described above creates
uncertainty as to the possible outcome, including whether or not our indemnity
will be effective in protecting us, and also could divert management time and
attention away from our business. An adverse outcome that is not indemnified
could be material to our company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Under the Companies Act, 1956 of India, or Companies Act, a company
incorporated in India must offer its holders of equity shares preemptive rights
to subscribe and pay for a proportionate number of shares to maintain their
existing ownership percentages prior to the issuance of any new equity shares,
unless the preemptive rights have been waived by adopting a special resolution
by holders of three-fourths of the company's shares which are voted on the
resolution. At our 2000 Annual General Meeting, our stockholders approved a
special resolution permitting us to issue up to one million equity shares
(equivalent to four million ADSs) in connection with acquisitions. We issued
virtually all of these equity shares in connection with our acquisitions of
IndiaWorld Communications and Indiaplaza.com and our investment in CricInfo
Limited. At our 2001 Annual General Meeting, our stockholders approved a special
resolution permitting us to issue up to four million additional equity shares
(equivalent to 16 million ADSs) in connection with acquisitions or capital
raising transactions, and our ADS holders are deemed to have waived their
preemptive rights with respect to these shares and our Board of Directors may
approve the issuance of these shares without further action of our stockholders.
In accordance with practices and procedures established under the Indian
Companies Act, the following actions were approved by our stockholders at our
2001 Annual General Meeting of Stockholders held on August 2, 2001:
- adoption of the Audited Balance Sheet, as of March 31, 2001, and the
Profit and Loss Account, the Auditors' Report and the Directors'
Report for the fiscal year ended March 31, 2001;
- re-appointment of Mr. C. Srinivasa Raju as a director;
- re-appointment of Mr. S. Srinivasan as a director;
- re-appointment of M/s. Bharat S. Raut & Co., Chartered Accountants,
who retired at the conclusions of the AGM, fur a further period of
one year (i.e., until the conclusion of the next Annual General
Meeting) on a remuneration to be fixed by the Board of Directors;
- an increase in the authorized share capital of our company;
- an amendment to our Memorandum of Association;
- the further issue of shares by our company;
- an additional allocation for our Associate Stock Option Plan;
- an increase in the borrowing powers of our company;
- the creation of mortgages for securing assets of our company; and
- an increase in the remuneration payable to Mr. R. Ramaraj, our
Managing Director.
A description of these resolutions was previously filed in our Form 6-K
dated July 9, 2001 and incorporated herein by reference.
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ITEM 6. EXHIBITS AND REPORTS
(a) Our report on Form 6-K which we filed with the SEC on June 6, 2001;
(b) Our report on Form 6-K which we filed with the SEC on June 21, 2001;
(c) Our report on Form 6-K which we filed with the SEC on July 9, 2001;
and
(d) Our report on Form 6-K which we filed with the SEC on July 23, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunder duly organized.
Date: August 7, 2001
SATYAM INFOWAY LIMITED
By: /s/ T.R. Santhanakrishnan
-------------------------------------
Name: T.R. Santhanakrishnan
Title: Chief Financial Officer
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