<PAGE>
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 September 30, 1999
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)
Maanasarovar Towers
271-A, Anna Salai, Teynampet, Chennai 600 018, India
(91) 44-435-3221
(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.
1
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Currency of Presentation and Certain Defined Terms
Unless the context otherwise requires, references herein to "we," "us," the
"company" 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 a
majority-owned subsidiary of Satyam Computer Services Limited, a leading Indian
information technology services company which is traded on the principal 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. "Satyam Online," "Satyam:Net" and
"satyamonline.com" are trademarks used by us for which we have registration
applications pending in India. Each trademark, trade name or service mark of
any other company appearing in this Quarterly Report on Form 6-K ("Quarterly
Report") belongs to its holder.
In this Quarterly Report, all references to "Indian rupees," "rupees" and
"Rs." are to the legal currency of India and all references to "U.S. dollars,"
"dollars" and "$" are to the legal currency of the United States. References to
a particular "fiscal" year are to our fiscal year ended March 31 of that year.
For your convenience, this Quarterly 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 Quarterly Report, all translations from Indian rupees to U.S.
dollars contained in this Quarterly Report have been based on the noon buying
rate in the City of New York on September 30, 1999 for cable transfers in Indian
rupees as certified for customs purposes by the Federal Reserve Bank of New
York. The noon buying rate on September 30, 1999 was Rs.43.59 per $1.00.
Our financial statements are prepared in Indian rupees and presented in
accordance with United States generally accepted accounting principles ("U.S.
GAAP"). Solely for your convenience, our financial statements have been
translated into U.S. dollars. In this Quarterly 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 website,
satyamonline.com, is not part of this Quarterly Report.
Forward-looking Statements May Prove Inaccurate
IN ADDITION TO HISTORICAL INFORMATION, THIS QUARTERLY 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
CERTAIN 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 "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS QUARTERLY REPORT. YOU
ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS,
WHICH REFLECT MANAGEMENT'S ANALYSIS ONLY AS OF THE DATE HEREOF. IN ADDITION, YOU
SHOULD CAREFULLY REVIEW THE OTHER INFORMATION IN THIS QUARTERLY REPORT AND IN
OUR PERIODIC REPORTS AND OTHER DOCUMENTS FILED WITH THE UNITED STATES SECURITIES
AND EXCHANGE COMMISSION (THE "SEC") FROM TIME TO TIME.
2
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Part I - Financial Information
Item 1. Financial Statements
SATYAM INFOWAY LIMITED
Balance Sheets
<TABLE>
<CAPTION>
As of
----------------------------------------------------------------------------
September 30, September 30, March 31,
1999 1998 1999
Rs. U.S. $ Rs. Rs. U.S. $
----------------------------------------------------------------------------
(unaudited) (unaudited) (audited)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 36,614,429 839,973 26,665,719 125,547,453 2,880,188
Accounts receivable, net of
allowances of Rs.Nil, 501,839 and
Rs.2,420,628 as of September 30,
1998, March 31, 1999 and September
30, 1999 102,281,194 2,346,438 12,374,540 45,087,639 1,034,357
Due from officers and employees 2,625,388 60,229 171,860 573,143 13,148
Inventories 10,085,579 231,374 1,570,385 6,758,190 155,040
Other current assets 104,736,414 2,402,762 13,711,852 73,688,213 1,690,484
----------------------------------------------------------------------------
Total current assets 256,343,004 5,880,776 54,494,356 251,654,638 5,773,217
Plant and equipment - net 396,543,996 9,097,132 86,267,624 162,833,876 3,735,579
Intangible assets 7,726,327 177,250 10,105,777 8,916,052 204,544
Other assets 45,106,922 1,034,800 18,509,139 31,483,855 722,272
----------------------------------------------------------------------------
Total assets 705,720,249 16,189,958 169,376,896 454,888,421 10,435,612
============================================================================
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Current installments of long-term
debt 45,500,000 1,043,817 122,000,000 144,750,000 3,320,716
Current installments of capital
lease obligations 2,007,833 46,062 2,834,091 596,740 13,690
Short-term borrowings 59,474,802 1,364,414
Trade accounts payable 116,240,658 2,666,682 21,389,117 17,275,480 396,317
Due to parent company 62,026,870 1,422,961 13,009,664 3,980,370 91,314
Accrued expenses 35,320,957 810,300 6,645,866 19,028,671 436,537
Deferred Revenue 111,653,393 2,561,445 2,219,754 71,506,440 1,640,432
Advances from customers 9,497,868 217,891 612,275 11,747,346 269,496
Other current liabilities 3,999,014 91,742 3,940,409 4,476,322 102,691
----------------------------------------------------------------------------
Total current liabilities 445,721,395 10,225,314 172,651,176 273,361,369 6,271,193
Non-current liabilities:
Long-term debt, excluding current
installments 91,000,000 2,087,635 64,400,000 113,750,000 2,609,543
Capital lease obligations, excluding
current installments 3,708,733 85,082 8,895,487 159,244 3,653
Other liabilities 9,100,000 208,763
----------------------------------------------------------------------------
Total liabilities 549,530,128 12,606,794 245,946,663 387,270,613 8,884,389
============================================================================
</TABLE>
3
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<TABLE>
<S> <C> <C> <C> <C> <C>
Stockholders' equity:
Common stock, Rs.10 par value:
15,000,000, 25,000,000 and
25,000,000 equity shares authorized
as of September 30, 1998, March 31,
1999 and September 30, 1999; Issue
and outstanding equity
shares-12,000,230, 15,750,000 and
16,231,000 as of September 30,
1998, March 31, 1999 and September
30, 1999 162,310,000 3,723,560 120,002,300 157,500,000 3,613,214
Additional paid-in capital 455,496,200 10,449,557 226,636,200 5,199,270
Accumulated deficit during
development stage
Deferred compensation-Employee Stock
offer Plan (18,019,210) (413,379) (1,581,249) (36,275)
Accumulated deficit (443,596,869) (10,176,574) (196,572,067) (314,937,143) (7,224,986)
----------------------------------------------------------------------------
Total stockholders' equity 156,190,121 3,583,164 (76,569,767) 67,617,808 1,551,223
----------------------------------------------------------------------------
Total liabilities and stockholders'
equity 705,720,249 16,189,958 169,376,896 454,888,421 10,435,612
============================================================================
</TABLE>
See accompanying notes to financial statements.
4
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SATYAM INFOWAY LIMITED
Statements of Income
<TABLE>
<CAPTION>
3 months ended September 30, 6 months ended September 30, Year ended March 31, 1999
--------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
Rs. U.S. $ Rs. Rs. U.S. $ Rs. Rs. U.S. $
(unaudited) (unaudited) (unaudited) (unaudited) (audited)
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues 127,423,809 2,923,235 17,801,006 208,227,061 4,776,946 35,358,725 103,343,832 2,370,815
Cost of revenues (68,213,512) (1,564,889) (11,961,540) (107,110,142) (2,457,218) (19,035,621) (63,651,265) (1,460,226)
--------------------------------------------------------------------------------------------------------------
Gross profit (loss) 59,210,297 1,358,346 5,839,466 101,116,919 2,319,728 16,323,104 39,692,567 910,589
--------------------------------------------------------------------------------------------------------------
Operating expenses:
Selling, general and
administrative
expenses 125,074,890 2,869,348 44,108,387 209,206,649 4,799,418 74,715,861 200,212,761 4,593,089
Amortization of
deferred stock
compensation
expense 275,789 6,327 482,039 11,058 68,751 15,777
--------------------------------------------------------------------------------------------------------------
Total
operating
expenses 125,350,679 2,875,675 44,108,387 209,688,688 4,810,476 74,715,861 200,281,512 4,594,666
--------------------------------------------------------------------------------------------------------------
Operating loss (66,140,382) (1,517,329) (38,268,921) (108,571,769) (2,490,748) (58,392,757) (160,588,945) (3,684,077)
Other expense, net (10,770,650) (247,090) (5,912,422) (20,087,957) (460,839) (10,617,833) (26,786,720) (614,515)
--------------------------------------------------------------------------------------------------------------
Net loss (76,911,032) (1,764,419) (44,181,343) (128,659,726) (2,951,587) (69,010,590) (187,375,665) (4,298,592)
--------------------------------------------------------------------------------------------------------------
Loss per equity share (4.87) (0.11) (4.17) (8.16) (0.19) (7.61) (17.31) (0.40)
--------------------------------------------------------------------------------------------------------------
Weighted equity shares
used in computed
loss per equity
share 15,797,054 15,797,054 10,598,056 15,773,656 15,773,656 9,074,000 10,824,826 10,824,826
</TABLE>
See accompanying notes to financial statements.
5
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SATYAM INFOWAY LIMITED
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional Paid In Accumulated Deferred Accumulated Total
Capital Deficit during Compensation- Deficit Stockholders'
Development Employee Stock Equity
Stage Offer Plan
Shares Par Value
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of March 31, 1996 230 2,300 (634,213) (631,913)
Net loss (26,336,901) (26,336,901)
----------------------------------------------------------------------------------------------------
Balance as of March 31, 1997 230 2,300 (26,971,114) (26,968,814)
Common stock issued to the
parent company 7,500,000 75,000,000 75,000,000
Net loss (100,590,364) 100,590,364
----------------------------------------------------------------------------------------------------
Balance as of March 31, 1998 7,500,230 75,002,300 (127,561,478) (52,559,178)
Deficit transfer 127,561,478 (127,561,478)
Common stock issued to the
parent company 4,500,000 45,000,000 45,000,000
Net loss (69,010,590) (69,010,590)
----------------------------------------------------------------------------------------------------
Balance as of September 30,
1998 12,000,230 120,002,300 (196,572,068) (76,569,768)
Common stock issued to the
parent company 379,770 3,797,700 44,986,200 48,783,900
Other issues of common stock 3,370,000 33,700,000 180,000,000 213,700,000
Net loss (118,365,075) (118,365,075)
Compensation related to stock 1,650,000 (1,650,000)
option grants
Amortization of compensation
related to stock option grants 68,751 68,751
----------------------------------------------------------------------------------------------------
Balance as of March 31, 1999 15,750,000 157,500,000 226,636,200 (1,581,249) (314,937,143) 67,617,808
Deficit transfer
Common stock issued during the
period 481,000 4,810,000 211,940,000 216,750,000
Share application money received
Net loss (128,659,726) (128,659,726)
Compensation related to stock 16,920,000 (16,920,000)
option grants
Amortization of compensation
related to stock option grants 482,039 482,039
----------------------------------------------------------------------------------------------------
Balance as of September 30, 16,231,000 162,310,000 455,496,200 (18,019,210) (443,596,869) 156,190,121
1999 (unaudited)
----------------------------------------------------------------------------------------------------
Balance as of March 31, 1999 361,321 3,613,214 5,199,270 (36,275) (7,224,986) 1,551,223
(in U.S. $)
----------------------------------------------------------------------------------------------------
Balance as of September 30,
1999 (in U.S. $) (unaudited) 372,356 3,723,560 10,449,557 (413,379) (10,176,574) (3,583,164)
----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
6
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SATYAM INFOWAY LIMITED
Statement of Cash Flows
<TABLE>
<CAPTION>
Six months ended September 30, Year ended March 31,
---------------------------------------------------------------------------
1999 1998 1999
Rs. U.S. $ Rs. Rs. U.S. $
---------------------------------------------------------------------------
(unaudited) (unaudited) (audited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss (128,659,726) (2,951,587) (69,010,590) (187,375,665) (4,298,592)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation of plant and equipment 46,903,904 1,076,024 18,538,672 46,714,402 1,071,677
Amortization of technical know how
fees 1,189,725 27,294 1,189,726 2,379,450 54,587
Amortization of deferred compensation
expense 482,039 11,058 68,751 1,577
Loss on sale of plant and equipment 37,627 863
Changes in assets and liabilities
Accounts receivable (net) (57,193,555) (1,312,080) (10,429,057) (43,142,156) (989,727)
Inventories (3,327,389) (76,333) (1,570,386) (6,758,190) (155,040)
Other current assets (31,048,201) (712,278) (2,733,692) (62,710,053) (1,438,634)
Other assets (11,898,755) (272,970) (8,335,891) (21,218,607) (486,777)
Due to parent company 58,046,500 1,331,647 11,500,777 1,387,583 31,833
Accrued expenses 16,292,286 373,762 2,960,341 15,343,146 351,988
Deferred revenue 40,146,953 921,013 2,219,754 71,506,440 1,640,432
Trade accounts payable 98,965,178 2,270,364 5,917,815 1,804,178 41,390
Advances from customers (2,249,478) (51,605) (1,029,017) 10,106,054 231,843
Other current liabilities (477,308) (10,950) 511,205 1,047,118 24,021
Advances given to officers and
directors (3,776,557) (86,638) (84,558) (577,841) (13,256)
Other liabilities 9,100,000 208,763
---------------------------------------------------------------------------
Net cash used in operating activities 32,495,616 745,484 (50,354,901) (171,387,763) (3,931,815)
---------------------------------------------------------------------------
Cash flows from investing activities:
Expenditure on plant and equipment (280,614,024) (6,437,578) (41,565,402) (146,134,547) (3,352,479)
Expenditure on technical know how
Proceeds from sale of plant and
equipment 135,000 3,097
---------------------------------------------------------------------------
Net cash used in investing activities 280,614,024 6,437,578 41,565,402 145,999,547 3,349,382
---------------------------------------------------------------------------
Cash flows from financing activities:
Principal payments of long-term debt (122,000,000) (2,798,807)
Proceeds from issuance of long-term
debt 64,400,000 136,500,000 3,131,452
Proceeds from short-term debt 59,474,802 1,364,414
Principal payments under capital lease
obligations 4,960,582 113,801 (725,645) (12,044,704) (276,318)
Net proceeds from issuance of common
stock 216,750,000 4,972,471 45,000,000 307,483,900 7,054,001
Due to parent company 1,083,900 24,866
---------------------------------------------------------------------------
Net cash provided by financing
activities 159,185,384 3,651,879 108,674,355 433,023,096 9,934,001
---------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents (88,933,024) (2,040,215) 16,754,052 115,635,786 2,652,804
Cash and cash equivalents at the
beginning of the year 125,547,453 2,880,188 9,911,667 9,911,667 227,384
</TABLE>
7
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<TABLE>
<S> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------
Cash and cash equivalents at the end of
the year 36,614,429 839,973 26,665,719 125,547,453 2,880,188
---------------------------------------------------------------------------
Supplementary information:
Cash paid towards interest 20,770,936 476,507 10,064,956 27,754,615 636,720
Supplemental schedule of non-cash
financing activity
Additional common stock issued upon
conversion of amounts payable to
parent company 1,083,900 24,866
Capital leases 4,912,159 112,690 161,443 161,443 3,704
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
Notes to Financial Statements
1. Summary of Significant Accounting Policies
------------------------------------------
(a) Description of Business
-----------------------
Satyam Infoway Limited ("Satyam" or the "Company") was incorporated on
December 12, 1995 in Chennai, India with the objective of offering
electronic commerce and Internet/intranet based solutions. Headquartered
at Chennai, the Company has 25 points of presence throughout the country.
Prior to April 1, 1998, the Company was in the development stage and its
primary activities included raising capital, developing strategic
alliances, developing, deploying and certifying its network, acquiring
plant and equipment and other operating assets and identifying markets. As
of April 1, 1998, the Company is no longer in the development stage.
The Company commenced its Internet service operations on November 22,
1998, consequent to the privatization of Internet services by the
Government of India.
The Company is a majority owned subsidiary of Satyam Computer Services
Limited ("Satyam Computer Services"). As of September 30, 1999, Satyam
Computer Services held approximately 76.2% of the voting control of the
Company represented by 12,379,800 Equity Shares of Rs.10 each.
(b) 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 year ended March
31, 1999 and six months ended September 30, 1999 have been translated into
United States dollars at the noon buying rate in New York City on September
30, 1999 for cable transfers in Indian rupees, as certified for customs
purposes by the Federal Reserve Bank of New York of US$1 = Rs.43.59. 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 September 30, 1999 or at any other date.
(c) Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(d) Cash, Cash Equivalents and Short-term Investments
-------------------------------------------------
The Company considers all highly liquid investments with original
maturities, at the date of purchase/investment, of three months or less to
be cash equivalents. Cash and cash equivalents currently consist of cash
and cash on deposit with banks.
(e) Revenue Recognition
-------------------
Revenues from corporate network services which include providing e-
commerce solutions, electronic data interchange and other network based
services are recognized upon actual usage of such services by customers and
is based on either the time for which the network is used or the volume of
data transferred or both. The Company enters into contracts with its
corporate customers for the use of its networks on both a time and usage
basis. In accordance with the terms of these contracts, customers are
9
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allowed to transmit certain volumes of data free of cost through the
Company's networks. No revenues are recognized for such data transfers.
Data transfers above the minimum exempt volumes are charged to customers at
specified rates. Customers also receive the right to use the Company's
networks free of cost for specified periods of time. No revenues are
recognized for such exempt periods of time. Network usage over and above
the exempt periods of time are billed to customers at agreed rates. The
Company recognizes such revenues based on actual usage of the networks by
customers both in terms of time and data transferred.
Revenues from web-site design and development are recognized upon
completion of the project once the customer's web links are commissioned
and available on the world-wide-web. Revenues from web-site hosting are
recognized ratably over the period for which the site is hosted.
Internet access is sold to customers for a specified number of hours,
which is to be utilized within a specified period of time. Customers
purchase a CD ROM that allows them to access the Internet. The amounts
received from customers on the sale of these CD ROMs are not refundable.
The Company recognizes revenue based on usage by the customer over the
specified period. At the end of the specified time frame, the remaining
unutilized hours, if any, are recognized as revenue. Electronic mail
access is sold to customers for a specified period of time over which the
related revenue is recognized.
Revenues from banner advertisements are recognized ratably over the
period in which the advertisement is displayed, provided that no
significant Company obligations remain at the end of the period and the
collection of the related receivable is probable. Revenues from
sponsorship contracts are recognized ratably over the period in which the
sponsors' advertisements are displayed provided no significant Company
obligations remain at the end of the period and collection of the resulting
receivable is probable. Revenues from electronic commerce transactions are
recognized when the transaction is completed provided there are no
significant remaining Company obligations and collection of the resulting
receivable is probable.
The Company has entered into an agreement with UUNET Technologies Inc.
to provide dial up access services through its Internet network. The
Company recognizes revenues from this agreement on the basis of usage of
its Internet network by UUNET's customers. Revenues from the sale of
communication hardware and software required to provide the Company's
network based services is recognized when the sale is complete with the
passing of title.
(f) Inventories
-----------
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out method for all classes of
inventories other than CD ROMs used for Internet service activities for
which the weighted average method is used to determine cost.
(g) Plant and Equipment
-------------------
Plant and equipment are stated at cost. Plant and equipment under
capital leases are stated at the present value of minimum lease payments.
The Company computes depreciation for all plant and equipment using the
straight-line method. Leasehold improvements are amortized on a straight-
line basis over the shorter of the primary lease period or estimated useful
life of the asset. The estimated useful lives of assets are as follows:
Plant and machinery.....................................5 years
Computer equipment......................................2 years
Office equipment........................................5 years
10
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Furniture and fixtures..................................5 years
Vehicles................................................5 years
System software.........................................3 years
The Company purchases certain application software for internal use.
It is estimated that such software has a relatively short useful life,
usually less than one year. The Company, therefore, charges to income the
cost of acquiring such software, entirely at the time of acquisition.
Deposits paid towards the acquisition of plant and equipment outstanding at
each balance sheet date and the cost of plant and equipment not put to use
before such date are disclosed under Construction-in-progress.
(h) Intangible Asset
----------------
The Company entered into a five year agreement effective September
1997 with Sterling Commerce International Inc ("Sterling") whereby Sterling
agreed to grant the Company certain rights to market, provide, install,
facilitate, maintain and support Sterling's proprietary electronic commerce
technology. In consideration for granting this proprietary technology, the
Company paid Sterling a licensing fee of $300,000, which was capitalized.
The Company currently amortizes this fee over five years, this being the
initial period over which it is entitled to use the electronic commerce
technology. The amortization related to the license is included under
"Depreciation and amortization" and is classified in the Income Statement
under the caption "Selling, general and administrative expenses."
(i) Earnings Per Share
------------------
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings Per Share. In accordance
with SFAS No. 128, basic earnings per share is computed using the weighted
average number of common shares outstanding during the period. Diluted
earnings per share is computed using the weighted average number of common
and dilutive common equivalent shares outstanding during the period, using
the treasury stock method for options and warrants, except where the
results would be anti-dilutive.
(j) Income Taxes
------------
Income taxes are accounted for using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. The measurement of deferred tax assets
is reduced, if necessary, by a valuation allowance for any tax benefits of
which future realization is uncertain.
(k) Retirement Benefits to Employees
--------------------------------
Provident fund: In accordance with Indian law, all employees receive
benefits from a provident fund, which is a defined contribution plan. Both
the employee and employer each make monthly contributions to the plan equal
to 12% of the covered employee's basic salary. The Company has no further
obligations under the plan beyond its monthly contributions.
Gratuity: In addition to the above benefits, the Company provides for
gratuity, a defined benefit retirement plan (the "Gratuity Plan") covering
all employees. The Gratuity Plan commenced on April 1, 1997. The plan
provides a lump sum payment to vested employees at retirement or
termination of employment in an amount based on the respective employee's
salary and the years of employment with the
11
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Company. The Company contributes each year to a gratuity fund maintained by
the Life Insurance Corporation of India ("LIC") based upon actuarial
valuations. No additional contributions were required to be made by the
Company in excess of the unpaid contributions to the plan. The LIC has no
recourse to the Company in the event of any shortfall in its obligations to
vested employees and is entirely responsible for meeting all unfunded
liabilities. Consequently, all additional liabilities that may arise will
be borne by the LIC. Further, vested employees do not have any recourse to
the Company in the event the LIC does not fulfil its obligations to them.
The Company does not carry any pension liability in its financial
statements and has no further obligations under the plan beyond its monthly
contributions.
(l) Stock-based Compensation
------------------------
The Company uses the intrinsic value-based method of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, to account for its employee stock-based compensation plan. The
Company has therefore adopted the pro forma disclosure provisions of SFAS
No. 123, Accounting for Stock-Based Compensation.
2. Cash and Cash Equivalents
-------------------------
The cost and fair values for cash and cash equivalents as of March 31,
1999 and September 30, 1999, are set out below.
<TABLE>
<CAPTION>
March 31, March 31, September September
-------- -------- -------- --------
1999 1999 30, 1999 30, 1999
---- ---- -------- --------
Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cost and fair values
Cash and cash equivalents 125,547,453 2,880,188 36,614,429 839,973
</TABLE>
Cash and cash equivalents include deposits of Rs.7,261,200 (US
$166,579) and Rs.7,634,477 (175,143) as of March 31, 1999 and September
30, 1999, respectively placed in "No-charge-no-lien" accounts as security
towards performance guarantees issued by the Company's bankers on the
Company's behalf. The Company cannot utilize these amounts until the
guarantees are discharged or revoked. Cash and cash equivalents as of
March 31, 1999 also include deposits of Rs.115,000,000 (US $2,638,220)
placed with banks as short-term deposits.
3. Inventories
-----------
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, March 31, September 30, September 30,
-------- -------- ------------ ------------
1999 1999 1999 1999
---- ---- ---- ----
Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
CD-ROMs 120,192 2,757 233,399 5,437
Communication hardware 3,288,496 75,442 6,704,770 152,510
Application software 3,349,502 76,841 3,551,500 81,475
-------------------------------------------------------------------
6,758,190 155,040 10,489,669 239,422
Valuation allowance 404,090 9,270
-------------------------------------------------------------------
6,758,190 155,040 10,085,579 230,152
===================================================================
</TABLE>
12
<PAGE>
4. Other Current Assets
--------------------
Other current assets consist of the following:
<TABLE>
<CAPTION>
March 31, March 31, September 30, September 30,
-------- -------- ------------ ------------
1999 1999 1999 1999
---- ---- ---- ----
Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Advance for expenses 1,617,959 37,118 6,687,376 153,415
Prepaid expenses 70,329,478 1,613,432 95,711,812 2,195,729
Prepaid telephone rentals 296,250 6,796 321,750 7,380
Advance tax payments 959,516 22,012 1,774,050 40,699
Due from associate company 190,104 4,361 241,426 5,539
Other advances 294,906 6,765 - -
----------------------------------------------------------------------
73,688,213 1,690,484 104,736,414 2,402,762
======================================================================
</TABLE>
Prepaid expenses consist mainly of the unexpired portion of annual
rentals paid to the Department of Telecommunications, Ministry of
Communications, Government of India for use of leased telecommunication
lines.
5. Plant and Equipment
----------------------
Plant and equipment consist of the following:
<TABLE>
<CAPTION>
March 31, March 31, September 30, September 30,
-------- -------- ------------ ------------
1999 1999 1999 1999
---- ---- ---- ----
Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Leasehold improvements 6,164,699 141,424 11,181,654 256,519
Plant and machinery 101,558,254 2,329,852 264,079,178 6,058,251
Computer equipment 72,577,533 1,665,004 85,481,928 1,961,045
Office equipment 1,727,654 39,634 2,343,596 53,765
Furniture and fixtures 7,665,644 175,857 10,353,130 237,512
Vehicles 161,443 3,703 6,071,147 139,278
System software 20,022,142 459,328 22,720,350 521,228
Construction-in-progress 18,977,088 435,354 107,237,498 2,460,139
----------- --------- ----------- ----------
228,854,457 5,250,156 509,468,481 11,687,737
Accumulated depreciation (66,020,581) (1,514,580) (112,924,485) (2,590,605)
-------------------------------------------------------------------------
162,833,876 3,735,576 396,543,996 9,097,132
=========================================================================
</TABLE>
Depreciation expense amounted to Rs.18,781,598, Rs.46,714,402
(US$1,071,677) and Rs.46,903,904 (US $1,076,024) for fiscal years 1998 and
1999 and for the quarter ended September 30, 1999, respectively.
13
<PAGE>
6. Technical know-how fees as of March 31, 1999 and September 30,1999, net of
accumulated amortization of Rs.2,981,198 (US$68,392), and Rs.4,170,923
(US$95,685) respectively amounted to Rs.8,916,052 (US$204,544) and
Rs.7,726,327 (US$177,250) respectively.
7. Leases
------
The Company is obligated under capital leases that expire in fiscal
1999 through 2002 for certain items of computers and vehicles. The gross
amount and related accumulated amortization recorded under capital leases
were as follows:
<TABLE>
<CAPTION>
March 31, March 31, September 30, September 30,
-------- -------- ------------ ------------
1999 1999 1999 1999
---- ---- ---- ----
Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Computer equipment 14,156,489 324,764 1,649,789 37,848
Vehicles 161,443 3,703 5,073,602 116,394
---------- ------- --------- -------
Total 14,317,932 328,464 6,723,391 154,782
========== ======= ========= =======
Accumulated depreciation (10,628,548) (243,829) (1,875,698) (43,031)
</TABLE>
Depreciation on assets held under capital leases is included in total
depreciation expense.
Future minimum capital lease payments as of September 30, 1999
(unaudited) are:
<TABLE>
<CAPTION>
March 31, September 30,
-------------------- -------------------------
Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
2000 701,804 16,100 2,616,715 60,030
2001 166,461 3,819 2,099,352 48,161
2002 - - 1,686,175 38,683
--------------------------------------------------
Total minimum lease payments 868,265 19,919 6,402,242 146,874
Less: Amount representing interest (112,281) (2,576) (685,676) (15,730)
--------------------------------------------------
Present value of net minimum capital lease payments 755,984 17,343 5,716,566 131,144
Less: Current installments of obligations under capital leases (596,740) (13,690) (2,007,833) (46,062)
--------------------------------------------------
Obligations under capital leases, excluding current installments 159,244 3,653 3,708,733 85,082
==================================================
</TABLE>
During fiscal 1999 the Company prepaid certain of its capital lease
obligations acquiring ownership of the related assets. The principal
repaid amounted to Rs.1,121,696 and Rs.11,385,004 (US$261,184) in fiscal
1998 and 1999, respectively.
14
<PAGE>
8. Other Assets
------------
Other assets consist of the following:
<TABLE>
<CAPTION>
March 31, March 31, September 30, September 30,
-------- -------- ------------ ------------
1999 1999 1999 1999
---- ---- ---- ----
Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Rent and maintenance deposits 8,239,345 189,019 12,342,790 283,157
Telephone deposits 17,308,000 397,063 24,965,712 572,739
Other deposits 392,197 8,997 464,357 10,653
Prepaid telephone rentals 5,307,313 121,755 5,372,751 123,257
Staff advances recoverable after one year
237,000 5,437 1,961,312 44,994
----------------------------------------------------------------------
31,483,855 714,171 45,106,922 1,034,800
======================================================================
</TABLE>
9. Short term borrowings
---------------------
Short term borrowings comprise the following:
<TABLE>
<CAPTION>
March 31, March 31, September 30, September 30,
-------- -------- ------------ ------------
1999 1999 1999 1999
---- ---- ---- ----
Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Short term loan - - 50,000,000 1,147,052
Cash credit facilities from banks - - 9,474,802 217,362
-----------------------------------------------------------------------------
- - 59,474,802 1,364,414
=============================================================================
</TABLE>
In June 1999, the Company obtained a short term loan facility from the
IDBI Bank Limited ("IDBI") in an amount of Rs.100,000,000. This loan is
secured by a subordinated charge on the fixed assets (both present and
future) of the Company and also by a corporate guarantee provided by Satyam
Computer Services. The loan carries an interest rate of 12.75% per annum
and is repayable within 90 days. As of September 30, 1999, the Company has
availed the entire amount under this facility and has repaid an amount of
Rs.50,000,000. The balance amount of 50,000,000 is repayable in the month
of October 1999. The Company has also availed of a cash credit facility
from IDBI to meet its working capital requirements. The facility carries
an interest rate of 15.81% per annum. This loan is secured by a senior
charge on all present and future goods, book debts and other movable
current assets of the Company.
15
<PAGE>
10. Long-term Debt
--------------
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31, March 31, September 30, September 30,
-------- -------- ------------ ------------
1999 1999 1999 1999
---- ---- ---- ----
Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Unsecured debentures 122,000,000 2,798,807 - -
Term loan from Export Import Bank of India 136,500,000 3,131,452 136,500,000 3,131,452
-------------------------------------------------------------------------
Total long-term debt 258,500,000 5,930,259 136,500,000 3,131,452
Less: Current installments (144,750,000) (3,320,715) (45,500,000) (1,043,817)
-------------------------------------------------------------------------
Long-term debt, excluding current
installments 113,750,000 2,609,544 91,000,000 2,087,635
=========================================================================
</TABLE>
During the quarter ended September 30, 1999, the Company has redeemed
1,220,000 unsecured debentures of Rs.100 each issued to Citibank NA at par.
In June 1998, the Company obtained a facility from the Export Import
Bank of India for a term loan of Rs.215,000,000. This term loan is secured
by a first charge on the fixed assets (both present and future) of the
Company and is also guaranteed by Satyam Computer Services. The loan
carries an interest rate of 15.5% per annum and will be repaid in six equal
half-yearly installments commencing on December 20, 1999. As of September
30, 1999, the Company has availed an amount of Rs.136,500,000
(US$3,131,452) under this facility.
Aggregate maturities of long-term debt for each of the years
subsequent to September 30, 1999 are as follows: September 30, 2000 -
Rs.45,500,000 and September 30, 2001 - Rs.45,500,000 and September 30, 2002
- 45,500,000.
11. Income Taxes
------------
The Company has incurred book and tax operating losses since inception
and has not provided for any deferred income tax because of the uncertainty
associated with the realization of such deferred tax assets.
The composition of the deferred tax asset is as follows:
<TABLE>
<CAPTION>
March 31, March 31, September 30, September 30,
-------- -------- ------------ ------------
1999 1999 1999 1999
---- ---- ---- ----
Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Deferred tax assets
Operating loss carry forwards
95,590,394 2,192,943 142,698,879 3,273,661
Plant and equipment and intangibles
5,807,119 133,221 8,105,546 185,950
-------------------------------------------------------------------------------
Total deferred tax assets 101,397,513 2,326,164 150,804,425 3,459,611
Less: Valuation allowance (101,397,513) (2,326,164) (150,804,425) (3,459,611)
-------------------------------------------------------------------------------
Net deferred tax assets - - - -
===============================================================================
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
16
<PAGE>
liabilities, projected future taxable income and tax planning strategies in
making this assessment. Based upon the level of historical taxable income
and projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes that it is more
likely than not the Company will not realize the benefit of these
deductible differences. Under Indian law, loss carry-forwards from a
particular year may be used to offset taxable income over the next eight
years.
12. Common Stock
------------
Dividends: Should the Company declare and pay dividends, such
dividends will be paid in Indian rupees.
Indian law mandates that any dividend can be declared out of
distributable profits only after the transfer of up to 10% of net income
computed in accordance with current regulations to a general reserve.
Also, the remittance of dividends outside India is governed by Indian law
on foreign exchange. Such dividend payments are also subject to applicable
withholding taxes.
13. Stock Purchase Plan
-------------------
In fiscal 1999, the Company entered into an agreement with Satyam
Computer Services and the South Asia Regional Fund ("SARF"). Under the
terms of this agreement, the Company agreed to issue warrants to Satyam
Computer Services and SARF. Each warrant entitles the registered holder
thereof to subscribe for and be allotted one Equity Share in the Company.
The warrants are exercisable at a price calculated at a multiple of eight
times the fully diluted earnings per share, subject to a minimum price of
the higher of: (a) 66% of the fair market value of a share as determined
by three merchant bankers acceptable to shareholders, and (b) par value of
the shares subscribed. These warrants are exercisable anytime: (a)
between June 30, 2001 through June 30, 2003; or (b) if the Company decides
to sell any of its shares prior to June 30, 2001; or (c) on a date not
later than the date on which the Company files an application for listing
or petitions for voluntary liquidation. As of September 30, 1999, the
Company had issued 150,000 and 600,000 warrants to Satyam Computer Services
and SARF respectively. In September 1999, we also issued an aggregate of
481,000 equity shares to Sterling, for a purchase price of $5.0 million. In
October 1999, we issued an aggregate of 150,000 and 600,000 equity shares
to Satyam Corporation Services and SARF respectively upon exercise of the
aforementioned warrants.
14. Employee Post Retirement Benefits
---------------------------------
Contribution to the gratuity plan managed by the Life Insurance
Corporation of India in fiscal 1999 was Rs.319,606. No contribution has
been made for the quarter ended September 30, 1999 as the amount had not
fallen due on the Balance Sheet date.
In addition the Company contributed Rs.679,830, Rs.2,122,963
(US$48,860) and Rs.2,296,978 (US$52,965) to the provident fund managed by
Government of India in fiscal 1998, 1999, and quarter ended September 30,
1999 respectively.
17
<PAGE>
15. Other Expense
-------------
Other expense, net, consists of the following:
<TABLE>
<CAPTION>
March 31, March 31, September 30, September 30,
---------- ---------- ------------- -------------
1999 1999 1999 1999
---------- ---------- ------------- -------------
Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest expense 27,754,615 636,718 20,770,936 476,506
Other finance charges - - 787,455 18,065
Interest income (609,020) (13,971) (953,193) (21,867)
Internet management fees
- - (500,000) (11,470)
Other income (358,875) (8,232) (17,241) (395)
------------------------------------------------------------
26,786,720 614,515 20,087,957 460,839
============================================================
</TABLE>
16. Commitments and Contingencies
-----------------------------
The Company had outstanding performance guarantees for various
statutory purposes totaling Rs.22,144,000 (US$509,643) and Rs.23,096,600
(US $529,860) as of March 31, 1999 and September 30, 1999, respectively.
These guarantees are generally provided to government agencies, primarily
the Telegraph Authority, as security for compliance with and performance of
terms and conditions contained in the Internet Service Provider license
granted to the Company, and Videsh Sanchar Nigam Limited, towards the
supply and installation of an electronic commerce platform, respectively.
These guarantees may be invoked by the governmental agencies if they suffer
any losses or damage by reason of breach of any of the covenants contained
in the license.
As of September 30, 1999, the Company had contractual commitments of
Rs.38,617,583 (US$885,928) for capital expenditures relating to new network
infrastructure.
17. Related Party Transactions
--------------------------
An analysis of transactions with Satyam Computer Services is set out
below.
<TABLE>
<CAPTION>
March 31, March 31, March 31, March 31, September 30, September 30,
--------- --------- --------- --------- -------------- --------------
1997 1998 1999 1999 1999 1999
--------- --------- --------- --------- -------------- --------------
Rs. Rs. Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
the year 710,976 34,989,440 1,508,887 34,615 3,980,370 91,608
Advances received
towards working capital 5,297,155 5,590,982 1,308,714 30,023 3,631,370 83,307
Advance received against
equity 28,981,309 38,453,000 92,700,000 2,126,634 52,000,000 -
Allocation of facilities
costs - - 636,747 14,607 2,363,055 25,487
Expenses incurred on
behalf of the Company - - 809,922 18,580 52,076 1,199
Purchases from Satyam
Computer Services - - 800,000 18,352 - -
Allotment of equity - (75,000,000) (93,783,900) (2,151,506) - -
Interest income received - (2,524,535) - - - -
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------
Balance at the end of the
year 34,989,440 1,508,887 3,980,370 91,305 62,026,871 126,163
=======================================================================================
</TABLE>
Advance against equity represents interest free advances received from
Satyam Computer Services to be adjusted against subsequent issues of common
stock. There are no other terms against which such advances have been made. The
Company received temporary advances from Satyam Computer Services to meet its
working capital requirements in fiscal 1997 through 1999. Of these, advances
amounting to Rs.7,565,690 and Rs.1,083,900 were settled by the issue of 756,569
and 108,390 equity shares of Rs.10 each in fiscal 1998 and 1999 respectively and
is disclosed in the statement of cash flows as a non-cash financing activity.
The fair value of each equity share on the dates of issuance of these shares
equaled their face value.
The Company made sales to Satyam Computer Services for cash amounting
to Rs.390,000 (US$8,947) and Rs.9,039,000 (US$207,364) during the year March 31,
1999 and quarter ended September 30, 1999 respectively. The Company also paid
Satyam Computer Services Rs.757,141 towards training and consulting fees in
fiscal 1998.
During fiscal 1998, the Company placed short term deposits with Satyam
Computer Services at a rate of 18% per annum for periods ranging between three
to six months.
Particulars of significant related transactions with other affiliated
companies are set out below.
<TABLE>
<CAPTION>
March 31, March 31, March 31, March 31, September 30, September 30,
--------- --------- --------- --------- ------------- --------------
1997 1998 1999 1999 1999 1999
--------- --------- --------- --------- ------------- --------------
Rs. Rs. Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Sales to affiliates - - 45,000 1,032 - -
Purchases of software/cables
from affiliates - 1,370,938 800,000 18,352 - -
</TABLE>
No interest is charged by Satyam Computer Services on the balances
payable to them. The balances payable to Satyam Computer Services as of March
31, 1998, 1999 and September 30, 1999 were as follows:
<TABLE>
<CAPTION>
March 31, March 31, March 31, September 30, September 30,
--------- --------- --------- ------------- -------------
1998 1999 1999 1999 1999
--------- --------- --------- ------------- -------------
Rs. Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Due to Satyam Computer
Services 1,508,887 3,980,370 91,314 62,026,871 1,422,961
</TABLE>
No amounts were receivable from Satyam Computer Services as of March
31, 1998, March 31, 1999 and September 30, 1999. Included in other current
assets is an amount of Rs.190,104 (US$4,375) and Rs.241,426 (US$5,539)
receivable from affiliates as of March 31, 1999 and September 30, 1999
respectively. No other amounts were receivable from or payable to affiliates as
of March 31, 1998, 1999 and September 30, 1999.
The Company grants interest free advances to officers and employees.
Such loans are repayable over fixed periods ranging from one to sixty months. As
of March 31, 1998, 1999 and September 30, 1999, the amounts recoverable from
officers and employees were Rs.232,302, Rs.810,143 (US$18,585) and Rs.4,586,699
(US$105,224) respectively, of which Rs.87,302, Rs.573,143 (US$13,148) and
Rs.2,624,487 (US$60,208) respectively were recoverable within one year from
those dates.
19
<PAGE>
18. Segment Reporting
-----------------
In accordance with the provisions of SFAS 131, Disclosures about Segments
of an Enterprise and Related Information, the Company has determined that
it has three operating segments:
. Internet Access Services, providing Internet access services to
subscribers;
. Corporate Services, providing dial up and dedicated Internet access, e-
commerce, electronic data interchange, e-mail and other messaging
services, virtual private networks, and web based solutions to
businesses, web page hosting to individuals; and
. Online Portal Services, operating an Internet portal and offering
related content sites.
These operating segments were identified from the structure of the
Company's internal organization. Currently, the chief operating decision-
maker of the Company receives and reviews information relating to segment
revenues only. Products and services revenues are presented below.
<TABLE>
<CAPTION>
March 31, March 31, March 31, March 31, September 30, September 30,
---------- --------- --------- --------- ------------- -------------
1997 1998 1999 1999 1999 1999
---------- --------- --------- --------- ------------- -------------
Rs. Rs. Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Internet access services - - 13,310,800 306,348 111,140,665 2,549,683
Corporate services - 6,805,020 89,973,032 2,070,725 94,573,113 2,169,606
Online portal services - - 60,000 1,381 2,513,283 57,657
----------------------------------------------------------------------------------------------
Revenues - 6,805,020 3,343,832 2,378,454 208,227,061 4,776,946
==============================================================================================
</TABLE>
SFAS 131 also requires that an enterprise report a measure of profit or loss and
total assets for each reportable segment. Certain expenses such as bandwidth
costs (telecommunication), depreciation on plant and machinery, etc., which form
a significant component of total expenses, are not specifically allocable to
these business segments as the services are used interchangeably between
reportable segments. Management believes that it is not practical to provide
segment disclosures relating to segment costs and expenses, and consequently
segment profits or losses, since a realistic allocation cannot be made. The
fixed assets used in the Company's business are not identifiable to any
particular reportable segment and can be used interchangeably among segments.
Consequently, management believes that it is not particle to provide segment
disclosures relating to total assets since a realistic analysis among the
various operating segments is not possible.
19. Employee Stock Offer Plan
-------------------------
In fiscal 1999, the Company established the Employee Stock Offer Plan
("ESOP") which provides for the issuance of 825,000 warrants to eligible
employees. The warrants were issued to an employee welfare trust (the "Trust")
at Rs.1 each on September 28, 1999. The Trust holds the warrants and transfers
them to eligible employees over a period of three years. The warrants are to be
transferred to employees at Rs.1 each and each warrant entitles the holder to
purchase one equity share at an exercise price to be determined by the
Compensation Committee of the Board of Directors. The warrants and the equity
shares received upon the exercise of warrants are subject to progressive vesting
over a three-year period from the date of issue of warrants to employees. The
warrants allotted and the underlying equity shares are not subject to any
repurchase obligations by the Company. During fiscal 1999, the Company had also
granted 5,000 warrants to a single employee of the Company at an exercise price
of Rs.70 and during the quarter ended September 30, the Trust has allotted
147,000 warrants to eligible employees at the exercise price based on the date
of joining of the concerned employee.
The fair value of each warrant is estimated on the date of grant using
the Black-Scholes model with the following assumptions:
20
<PAGE>
<TABLE>
<CAPTION>
March 31, September 30,
---------- -------------
1999 1999
---- ----
(unaudited)
<S> <C> <C>
Dividend yield % 0.00% 0.00%
Expected life 3 years 3 years
Risk free interest rates 11.00% 11.00%
Volatility 0.01% 0.01%
</TABLE>
(20) Year 2000
---------
Certain organizations anticipate that they will experience operational
difficulties at the beginning of the Year 2000 as a result of computer programs
being written using two digits rather than four to define the applicable year.
The Company's plan for the Year 2000 calls for compliance verification with
external vendors supplying the Company software, testing in-house engineering
and manufacturing software tools, testing software in the Company's products for
the Year 2000, and communication with significant suppliers to determine the
readiness of third parties remediation of their own Year 2000 issues.
To date, the Company has not encountered any material Year 2000 issues
concerning its respective computer programs. The Company estimates that the
development of its contingency plan will be substantially completed by November
1999. All costs associated with the Company's plan for the Year 2000 are being
expensed as incurred. The costs associated with the Year 2000 are not expected
to have a material adverse effect on the Company's business, financial condition
and results of operations. Nevertheless there is uncertainty concerning the
potential costs and effects associated with any Year 2000 compliance.
21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
You are cautioned that this discussion contains forward-looking
statements that involve risks and uncertainties. When used in this
discussion, the words "anticipate," "believe," "estimate," "intend," "will"
and "expect" and other similar expressions as they relate to us or our
business are intended to identify such forward-looking statements. We
undertake no obligation to update publicly or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise. Actual results, performances or achievements could differ
materially from those expressed or implied in such forward-looking
statements. Factors that could cause or contribute to such differences
include those described under the heading "Risk Factors" in the Prospectus
filed with the SEC and the "Risks Related to Our Business" discussed
elsewhere in this Quarterly Report. You are cautioned not to place undue
reliance on these forward-looking statements. You should read the
following discussion and analysis in conjunction with our financial
statements included herein and the notes thereto.
Overview
We were incorporated in December 1995 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. Satyam Computer
Services, our parent company, is a leading Indian information technology
services company traded on the principal Indian stock exchanges.
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 UUNet Technologies Inc. (formerly CompuServe Network
Services), Open Market, Inc. and Sterling Commerce, Inc. 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 agreed to sell 3,000,000 equity shares to South
Asia Regional Fund, an investment fund managed by Commonwealth Development
Corporation for Rs.210.0 million ($4.8 million). We used the funds from
this private financing primarily to develop our consumer Internet access
business, expand our network and develop our on-line content business.
In October 1998, we initiated our on-line content offerings with two
websites: carnaticmusic.com and indiaupdate.com. We also started
development of satyamonline.com, our on-line 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,
Satyam Online, on November 22, 1998 and became the first private national
Internet service provider in India. We began offering Satyam Online
Internet access and related services to India's consumer market as a
complement to the network services offered to our business customers. Our
Satyam Online service was the first in India to offer ready-to-use CD-ROMs
enabling on-line registration and immediate usage.
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 an initial public offering (the "IPO")
and issued 4,801,250 American Depositary Shares ("ADSs", each representing
one equity share) at a price of $18.00 per share.
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We received approximately $80.4 million in cash, net of underwriting
discounts, commissions and other offering costs.
We currently operate India's largest private data network utilizing
Internet protocol with points of presence in 25 of the largest metropolitan
areas in India as of September 30, 1999. As of September 30, 1999, we had
more than 300 corporate customers for our private network services and more
than 87,000 subscribers for our Satyam Online services. During September
1999, our six websites generated approximately 12.0 million page views.
We conduct our business in India and most of our revenues and expenses
are denominated in Indian rupees. However, our revenues generated from
UUNet Technologies Services, Inc. and our expenses of purchasing software
from Sterling Commerce, Inc. and Open Market, Inc. are denominated in U.S.
dollars. Our foreign exchange loss was Rs.0, Rs.5,613, Rs.615,189 ($14,158)
and Rs.17,945 ($412) for fiscal 1997, 1998 and 1999 and the quarter ended
September 30, 1999, respectively.
Revenues
For reporting purposes, we classify our revenues into three divisions:
. consumer Internet access services;
. corporate network and technology services; and
. on-line portal and content offerings.
Our consumer Internet access services division derives its revenues
primarily from prepaid dial-up subscriptions. We offer our prepaid
subscriptions in a number of time period and pricing plans through ready-
to-use CD-ROMs sold to our distribution partners. Our distribution
partners resell the CD-ROMs to consumers for on-line registration and
immediate Internet access. Revenues are recognized ratably as the prepaid
subscription is used with any unused portion recognized as revenues at the
expiration date of the subscription. We also generate revenues through
international roaming and e-mail registration fees. Our consumer Internet
access services division accounted for approximately 12.9% and 53.4% of our
revenues in fiscal 1999 and the six months ended September 30, 1999,
respectively.
Our corporate network and technology 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 and web-based solutions. Our corporate private network
customers typically enter into one-year arrangements that provide for an
initial installation fee and recurring service fees. Web development 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
small portion of our revenues through the sale of third-party hardware.
Our corporate network and technology services division accounted for
approximately 87.1% and 45.4% of our revenues in fiscal 1999 and the six
months ended September 30, 1999, respectively.
Our on-line 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. This
division does not currently constitute a material portion of our total
revenues.
Expenses
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. We anticipate that our telecommunications costs will increase in
the near term as we expand our network and enter new markets. As
utilization of our
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network increases in future years, we expect to realize a reduction in per
unit data transmission costs due to our network's scalability and fixed
cost structure. 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. Cost of revenues for consumer
Internet access services also includes startup expenses for new subscribers
consisting primarily of the cost of CD-ROMs and other product media,
manuals and associated packaging and delivery costs.
Cost of revenues for the corporate network and technology services
division is divided into three groups: corporate Internet access, corporate
network and electronic commerce products, and web development. Cost of
revenues for the corporate Internet access subdivision consists of
telecommunications costs necessary to provide service, customer support
costs and the cost of providing network operations. Cost of revenues for
corporate network and electronic commerce 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 web development, website hosting and co-location includes
direct labor and associated telecommunications costs.
The cost of revenues for the on-line 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 executives, financial and administrative personnel;
sales, marketing, advertising and other brand building costs; travel costs;
and occupancy and overhead costs. As we expand the scope of our
operations, we expect selling, general and administrative expenses to
continue to increase for the foreseeable future. We intend to continue to
add more points of presence to our network and hire new sales and marketing
personnel for each of our new markets. We also have and intend to continue
to increase marketing expenses to build our brand awareness in order to
increase our subscriber base. Our business plan assumes these costs will
negatively impact our financial results in the short term but will be
offset by anticipated increases in revenues from overall subscriber growth.
On September 28, 1999, we granted to employees in India options to
acquire 147,000 equity shares at a weighted average exercise price of
Rs.335 per share. We presently estimate that we will record a non-cash
compensation charge related to these grants in the aggregate amount of
approximately Rs.18.6 million (approximately $427,000) 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. We depreciate our
intangible assets on a straight-line basis over five years. Our planned
significant capital expenditures for the expansion and enhancement of our
network infrastructure will substantially increase our depreciation
expenses in the near future.
We may face significant competitive pricing pressure from VSNL, the
government-controlled provider of international telecommunications services
in India, and a number of new competitors that are entering India's
recently opened Internet service provider market. In the face of expected
increasing competition, we do not anticipate being able to maintain our
present subscriber retention rates as our subscriber base grows.
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 revenues base and achieve further operating
efficiencies. We presently estimate that our consumer Internet access
division requires a minimum of 100,000 subscribers in order to achieve
positive EBITDA based on our current network. As we expand our network to
40 points of presence, we estimate that this minimum number of subscribers
will increase to
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200,000. These estimates are based on the present business environment in
India, including current pricing, marketing and service cost conditions,
all of which are subject to change.
For the fiscal years ended March 31, 1997, 1998 and 1999 and the
quarter ended September 30, 1999, we incurred negative cash flow from
operations of approximately Rs.30.4 million, Rs.74.0 million, Rs.171.3
million ($3.9 million) and Rs.32.5 million ($7.5 million), respectively.
For the fiscal years ended March 31, 1997, 1998 and 1999 and the quarter
ended September 30, 1999, we incurred net losses of approximately Rs.26.3
million, Rs.100.6 million, Rs.187.4 million ($4.3 million) and Rs.76.9
million ($1.8 million), respectively. We intend to substantially increase
our operating expenses and capital expenditures to expand and enhance our
network infrastructure and on-line content offerings. We expect to
experience significant negative cash flow from operations and to incur net
losses as a result of these investments. We believe that the investment in
our network infrastructure will enable us to achieve further economies of
scale as we expand our customer base. Although consumer Internet access and
corporate network and technology services account for the majority of our
revenues today, we expect our on-line portal and content offerings to
generate significant revenue growth through increased third-party
advertising and transaction and referral fees. However, we may not be able
to realize sufficient future revenues to offset our present investment in
network infrastructure and on-line content offerings or achieve positive
cash flow or profitability in the future. As of September 30, 1999, we had
an accumulated deficit of approximately Rs.443.6 million ($10.2 million).
Results of Operations
Quarter ended September 30, 1999 compared to quarter ended September 30,
1998
Revenues. We recognized Rs.127.4 million ($2.9 million) in revenues
for the quarter ended September 30, 1999, as compared to Rs.17.8 million
for the quarter ended September 30, 1998, representing an increase of
Rs.109.6 million, or 616%. This increase is primarily attributable to the
commencement of Internet access services in November 1998, which accounted
for Rs.71.0 million of revenues for the quarter ended September 30, 1999, a
Rs.24.8 million increase in revenues from corporate network services
resulting from an increase in the number of corporate customers
contributing to revenues in the amount of Rs.10.4 million, a Rs.7.4 million
increase in revenues from UUNet Technologies Inc. on account of increased
utilization of the network by UUNet Technologies Inc. and a Rs.12.8
million increase in revenues from new service offerings, including web-
based solutions.
Cost of revenues. Cost of revenues were Rs.68.2 million ($1.6
million) or 53.5% of revenues for the quarter ended September 30, 1999,
compared to Rs.12.0 million or 67.4% of revenues for the quarter ended
September 30, 1998, representing an increase of Rs.56.2 million, or 470%.
This increase was primarily attributable to a Rs.9.3 million increase in
the cost of hardware and software purchased for resale for our corporate
network and technology services customers that elect to source the
technology through us, a Rs.30.0 million increase in leased line costs
resulting from increasing the capacity of our network backbone from 64 kbps
to 2 Mbps and a Rs.15.0 million increase in direct personnel costs for web
development and customer technical support. Other expenses such as web
development, domain registration and royalty increased by Rs.1.8 million.
Selling, general and administrative expenses. Selling, general and
administrative expenses were Rs.98.3 million ($2.2 million) for the quarter
ended September 30, 1999, compared to Rs.33.2 million for the quarter ended
September 30, 1998, representing an increase of Rs.65.1 million, or 196.1%.
This increase was primarily attributable to a growth in staff from 246 as
of September 30, 1998 to 493 as of September 30, 1999 resulting in a
Rs.11.7 million increase in indirect personnel costs, a Rs.28.7 million
increase in selling and marketing expenses resulting from additional
expenditure in connection with marketing our Satyam Online business, a
Rs.4.6 million increase in travelling expenditures and a Rs.7.1 million
increase in cost of software.
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Depreciation and amortization. Depreciation and amortization was
Rs.26.8 million ($0.6 million) for the quarter ended September 30, 1999,
compared to Rs.10.9 million for the quarter ended September 30, 1998,
representing an increase of Rs.15.9 million, or 146%. The increase was
primarily attributable to capital expenditures associated with the
installation of six asynchronous transfer mode, or ATM, switches along our
network.
Interest expense. Interest expense was Rs.11.2 million ($0.3 million)
for the quarter ended September 30, 1999 as compared to Rs.5.6 million for
the quarter ended September 30, 1998, representing an increase of Rs.5.6
million, or 100%. This increase was primarily attributable to the drawdown
of Rs.136.5 million of our term loan with Exim Bank of India and Rs.100.0
million of our short-term loan from IDBI bank.
Other income. Other income was Rs.0.4 million (less than $0.1
million) for the quarter ended September 30, 1999 which was primarily
attributable to interest earned on short term deposits with banks. We had
no other income for the quarter ended September 30, 1998.
Net loss. Our net loss was Rs.76.9 million ($1.8 million) for the
quarter ended September 30, 1999, compared to a net loss of Rs.44.2 million
for the quarter ended September 30, 1998.
Six months ended September 30, 1999 compared to six months ended September
30, 1998
Revenues. We recognized Rs.208.2 million ($4.8 million) in revenues
for the six months ended September 30, 1999, as compared to Rs.35.4 million
for the six months ended September 30, 1998, representing an increase of
Rs.172.8 million, or 488%. This increase is primarily attributable to the
commencement of Internet access services in November 1998, which accounted
for Rs.111.1 million of revenues for the six months ended September 30,
1999, a Rs.41.4 million increase in revenues from corporate network
services resulting from an increase in the number of corporate customers
contributing to revenues in the amount of Rs.21.3 million, increase in sale
of hardware and software by Rs.12.7 million a Rs7.4 million, increase in
revenues from CompuServe on account of increased utilization of the network
by CompuServe and a Rs.20.3 million increase in revenues from new service
offerings, including web-based solutions.
Cost of revenues. Cost of revenues were Rs.107.1 million ($2.5
million) or 51.4% of revenues for the six months ended September 30, 1999,
compared to Rs.19.0 million or 53.7% of revenues for the six months ended
September 30, 1998, representing an increase of Rs.88.1 million, or 463.7
%. This increase was primarily attributable to a Rs.16.9 million increase
in the cost of hardware and software purchased for resale for our corporate
network and technology services customers that elect to source the
technology through us, a Rs.44.9 million increase in leased line costs
resulting from increasing the capacity of our network backbone from 64 kbps
to 2 Mbps and a Rs.22.9 million increase in direct personnel costs for web
development and customer technical support. Other expenses such as web
development, domain registration and royalty increased by Rs.2.8 million.
Selling, general and administrative expenses. Selling, general and
administrative expenses were Rs.161.1 million ($4.8 million) for the six
months ended September 30, 1999, compared to Rs.55.0 million for the six
months ended September 30, 1998, representing an increase of Rs.106.1
million, or 192.7%. This increase was primarily attributable to a growth
in staff from 246 as of September 30, 1998 to 493 as of September 30, 1999
resulting in a Rs.19.3 million increase in indirect personnel costs, a
Rs.35.5 million increase in selling and marketing expenses resulting from
additional expenditure in connection with marketing our Satyam Online
business, a Rs.8.2 million increase in travelling expenditures, a Rs.9.7
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million increase in cost of software, a Rs.5.8 million increase in repairs
and maintenance of plant and machinery, a Rs.4.0 million increase in
recruitment expenses and a Rs.5.4 million increase in rent.
Depreciation and amortization. Depreciation and amortization was
Rs.48.1 million ($1.1 million) for the six months ended September 30, 1999,
compared to Rs.19.7 million for the six months ended September 30, 1998,
representing an increase of Rs.28.4 million, or 144.2%. The increase was
primarily attributable to capital expenditures associated with the
installation of six ATM switches along our network.
Interest expense. Interest expense was Rs.21.6 million ($0.5 million)
for the six months ended September 30, 1999 as compared to Rs.10.6 million
for the six months ended September 30, 1998, representing an increase of
Rs.11.0 million, or 103.8%. This increase was primarily attributable to
the drawdown of Rs.136.5 million of our term loan with Exim Bank of India
and Rs.100 million of our short-term loan from IDBI Bank.
Other income. Other income was Rs.1.5 million (less than $0.1
million) for the six months ended September 30, 1999 which was primarily
attributable to interest earned on short term deposits with banks. We had
no other income for the six months ended September 30, 1998.
Net loss. Our net loss was Rs.128.7 million ($2.95 million) for the
six months ended September 30, 1999, compared to a net loss of Rs.69.0
million for the six months ended September 30, 1998.
Seasonality
Given the early stage of the development of the Internet in India, the
rapidly evolving nature of our business and our limited operating history,
we cannot predict to what extent, if at all, our operations will prove to
be seasonal.
Liquidity and Capital Expenditures
Since inception, we have financed our operations primarily through a
combination of equity sales and borrowings from institutions and banks.
During the fiscal years ended March 31, 1998 and 1999 and the six months
ended September 30, 1999, we received Rs.38.5 million, Rs.307.5 million
($7.1 million) and Rs.216.7 million ($5.0 million), respectively, in net
proceeds from the sale of equity shares.
In October 1999, we completed our IPO and issued 4,801,250 American
Depositary Shares (each representing one equity share) at a price of $18.00
per share. We received approximately $80.4 million in cash, net of
underwriting discounts, commissions and other offering costs.
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 on-line 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, as detailed below.
Cash used in operating activities of Rs.32.5 million ($0.7 million)
during the six months ended September 30, 1999 was primarily attributable
to a net loss of Rs.128.7 million, increases in accounts receivable of
Rs.57.2 million ($1.3 million), other current assets of Rs.31.0 million
($0.7 million), partially offset by depreciation of plant and equipment of
Rs.46.9 million ($1.1 million), an increase in deferred
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revenue by Rs.40.1 million ($0.9 million) and increase in trade accounts
payable by Rs.99.0 million ($2.3 million). Cash used in investment
activities during the six months ended September 30, 1999 was 280.6 million
($6.4 million), principally as a result of the purchase of network
equipment and software. Cash provided from financing activities was 159.2
million ($3.7 million) for the six months ended September 30, 1999, which
consisted primarily of the net proceeds from the issuance of common stock
Rs.216.7 million ($5.0 million) which was partially offset by the repayment
of debenture amounting to Rs.122.0 million ($2.8 million).
Our aggregate billings for the quarter ended September 30, 1999 were
approximately Rs.159.2 million. This amount represents amounts receivable
by us from our customers for services to be provided over various periods
of time. In accordance with our revenue recognition policy, we recognized
Rs. 127.4 million and deferred Rs.31.8 million of billings in the quarter
ended September 30, 1999. Our deferred revenues balance was Rs.111.7
million as of September 30, 1999.
As part of our business strategy, we intend to invest significant
amounts of capital over the next 12 to 24 months to fund network
infrastructure expansion and enhancements, to develop content for our
Internet portal business, to advertise and to promote our brand.
We may use a portion of the proceeds from our IPO for possible
strategic investments, partnerships and acquisitions. If appropriate
opportunities can be developed, we believe that our growth could be
accelerated by selective investments or acquisitions in India, particularly
in Internet service providers that have developed local or regional points
of presence in markets where we have not yet established a presence. We
may also consider opportunities to acquire sources of content for our
Internet portal. We have engaged in preliminary discussions involving
several transactions of this sort, but have no agreements as of the date of
this Quarterly Report. We expect to become more aggressive in our efforts
to identify one or more investment or acquisition opportunities. However,
we cannot assure you that we will be able to identify or complete any such
transaction on favorable terms, or at all.
We currently anticipate that our available cash resources combined
with the net proceeds from the IPO will be sufficient to meet our
anticipated working capital and capital expenditure requirements as
discussed above for at least 12 months after the date of this Quarterly
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. These restrictions provide that
the maximum total foreign equity investment in our company is 49%. If
additional funds are raised through the issuance of equity or convertible
debt securities, the percentage ownership of our shareholders and the
holders of our ADSs will be reduced and these securities may have rights,
preferences or privileges senior to those of our shareholders 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 otherwise
respond to competitive pressures will be significantly limited. Our
business, results of operations and financial condition could be materially
adversely affected by any such limitation.
Income Tax Matters
As of September 30, 1999, we had a net operating loss carryforward of
approximately Rs.443.6 million ($10.2 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.
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The statutory corporate income tax rate in India is currently 35.0%.
This tax rate is presently subject to a 10.0% surcharge resulting in an
effective tax rate of 38.5%. The Finance Minister of India has indicated
that the 10.0% surcharge will be effective for a period of only one year,
commencing April 1, 1999. However, we cannot assure you that the 10.0%
surcharge will be in effect for only one year 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 11.0%, including the presently applicable surcharge, of the total amount
of the dividend declared, distributed or paid. This tax is not paid by
shareholders 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 1996, 1997 and 1998 were 9.0%,
7.2% and 14.0%, 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 may review and
fix the prices we charge our subscribers at any time. If the Telecom
Regulatory Authority 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.
Impact of the Year 2000
Introduction. The term "Year 2000 issue" is a general term used to
describe the various problems that may result from the improper processing
of dates and date-sensitive calculations by computers and other machinery
as the year 2000 is approached and reached. These problems generally arise
from the fact that most of the world's computer hardware and software have
historically used only two digits to identify the year in a date, meaning
that the computer may fail to distinguish dates in the 2000's from dates in
the 1900's. If not corrected, these miscalculations could result in a
disruption of our operations.
State of Readiness. We are currently implementing a comprehensive
plan for us to become Year 2000 ready. Our overall readiness plan consists
of the following phases:
. preparing an inventory of all software and hardware items affected
by the Year 2000 issue;
. testing our internally developed software for quality assurance;
. contacting third-party vendors, licensors and providers of
hardware, software and services regarding their Year 2000
readiness;
. repairing or replacing components that are determined not to be
Year 2000 compliant; and
. creating contingency plans to address potential Year 2000 failures
that we cannot control or have not previously been able to detect
or repair.
Specific steps in our Year 2000 assessment which we have completed to
date include:
. retaining Satyam Enterprises, an affiliate of Satyam Computer
Services, to conduct a Year 2000 assessment of all of our network
hardware and software, including our computers, applications
software, power supply systems and relay switches;
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. identifying critical suppliers and communicating with them about
their plans and progress in addressing any Year 2000 problems they
may face; and
. performing Year 2000 simulations to verify performance by
artificially moving the date forward from December 31, 1999 to
January 1, 2000.
The Year 2000 readiness plan described above is being carried out
across the three critical areas where we believe the Year 2000 issue might
affect our business:
. software products which are supplied by us to our subscribers and
customers;
. our information and technology systems; and
. our non-information technology systems.
The results of the steps we have completed indicate that substantially
all of our information technology and non-information technology systems
are Year 2000 compliant. As a result, we do not anticipate upgrading or
modifying any major internal computers, applications or equipment. In
addition, we have contacted, and obtained verbal or written certification
of Year 2000 compliance from most of our private vendors, licensors and
providers of hardware, software and services. However, we do not
anticipate receiving Year 2000 compliance certification from the Department
of Telecommunications on which we are dependent for leased lines and
international gateways to the Internet. We cannot assure you that these
facilities are Year 2000 compliant.
Costs. We have not incurred any material expenses to date in
connection with the implementation of our Year 2000 program, and we
estimate that we will incur a total of Rs.2.0 million in expenses. These
costs will be expensed as incurred. We currently believe these costs will
not have a material effect on our financial condition, liquidity or results
of operations. To date, we have not deferred any specific information
technology projects due to our Year 2000 efforts.
Risks. We are not currently aware of any significant Year 2000
compliance problems which would materially harm our business, results of
operations or financial condition. During our remaining assessment, we may
discover Year 2000 compliance problems in our hardware, software or
computer systems that may require substantial repair or replacement. In
addition, material third-party software, hardware or services incorporated
into our systems may contain Year 2000 compliance problems that require
substantial repair and/or replacement. The failure to correct any material
Year 2000 problem, including a failure on the part of the Department of
Telecommunications to be Year 2000 compliant, could materially harm our
business, results of operations and financial condition for the following
reasons:
. new subscribers or customers may not be able to sign up for our
Internet services, resulting in reduced growth and lower
effectiveness of our marketing efforts;
. current subscribers or customers may have difficulty using our
services or receiving adequate customer support, which may result in
increased attrition, higher customer support costs and reduced
revenue; and
. we may be subject to claims of mismanagement, misrepresentation or
breach of contract and related litigation, which could be costly and
time-consuming to defend and, if defended unsuccessfully, could
result in the imposition of substantial fines or judgments.
We cannot assure you that governmental agencies, utility companies,
third-party service providers and others outside our control will be Year
2000 compliant. The failure by these entities to be Year 2000
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compliant could result in a systemic failure beyond our control, including,
for example, a prolonged failure of Internet, telecommunication and/or
electrical systems, which could also prevent us from providing our
services, or prevent users from accessing our services, either of which
would materially harm our business, results of operations and financial
condition.
Contingency Plans. We are still engaged in an ongoing Year 2000
assessment and have not yet developed any contingency plan. Contingency
planning will be conducted as our ongoing assessment and as feedback
received from third parties necessitates. We estimate that the development
of our contingency plan will be substantially completed by the end of
November 1999.
Risks Related to Our Business
Risks Related to Investments in Indian Companies
We are incorporated in India, and virtually all of our assets and our
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 related to the formation of a new government in
India 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 and in particular since 1991, 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 recently changed for the fifth time since 1996. The
prior government of India, formed in March 1998, announced policies and
took initiatives that supported the continued economic liberalization
policies that have been pursued by the previous governments. We cannot
assure you that these liberalization policies will continue in the future.
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.
Economic sanctions imposed on India by the United States could restrict our
access to technology and limit our ability to construct our network and
operate our business.
In May 1998, the United States imposed economic sanctions against
India in response to India's testing of nuclear devices. Since then, the
United States has waived some of these sanctions subsequent to its
discussions with the government of India. The economic sanctions imposed
on India to date have not had a material impact on our company. However,
these sanctions, or additional sanctions, could restrict our access to
technology that is available only in the United States and that is required
to construct our network and operate our business. We cannot assure you
that any of these sanctions will continue to be waived, that additional
economic sanctions of this nature will not be imposed, or that these
sanctions or any additional sanctions that are imposed will not have a
material adverse effect on our business or on the market for our ADSs in
the United States.
Regional conflicts in South Asia could adversely affect the Indian economy
and cause our business to suffer.
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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 disputed Himalayan region of Kashmir. 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 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.
Indian law and the terms of our Internet service provider license contain
restrictive provisions that limit our ability to raise capital or to be
acquired which could prevent us from constructing our network and operating
our business or entering into a transaction that is in the best interests
of our shareholders.
Indian law and the terms of our Internet service provider license
constrain our ability to raise capital through the issuance of equity or
convertible debt securities. Guidelines issued by the Department of Policy
and Promotion, Ministry of Industry in January 1997 state that the maximum
foreign equity investment in an Indian company engaged in business in the
telecommunications sector is 49%. Additional guidelines issued in November
1998 provide that the maximum foreign equity investment in an Indian
company acting as an Internet service provider is also 49%. This 49% limit
applies to foreign equity investment in our company. Likewise, our
Internet service provider license provides that the total foreign equity in
our company may not, at any time, exceed 49% of our total equity.
Approximately 41% of our equity interests are held by foreign
investors. As a result of the 49% limit on foreign equity ownership, we
are not permitted to sell more than an additional 8% of our equity shares
to foreign investors in the future. We cannot assure you that other forms
of 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 our operations, take advantage of unanticipated
opportunities, develop or enhance our infrastructure or services, or
otherwise respond to competitive pressures would be significantly limited.
Our business, results of operations and financial condition could be
materially adversely affected by any such limitation. The 49% limit on
foreign equity ownership also restricts our ability to be acquired by a
non-Indian company because a foreign company is prohibited from acquiring a
majority of our equity shares. Likewise, the terms of our Internet service
provider license prevents us from transferring the license to a third
person. This may prevent us from entering into a transaction which would
otherwise be beneficial for our company and the holders of our equity
shares.
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 nor can we assure you that we will take steps to develop one. Our
equity securities do not trade publicly in India, but are only traded on
Nasdaq through the ADSs. Under current Indian laws and regulations, our
depositary cannot accept deposits of outstanding equity shares and issue
ADRs evidencing ADSs representing such equity shares without prior approval
of the government of India. 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. Under current Indian laws and regulations, you will
be prohibited from re-depositing those outstanding equity shares with our
depositary without prior approval of the government of India. 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.
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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. 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. Devaluations of the rupee will result in higher expenses to our
company for the purchase of capital equipment, such as 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 government of India 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 government sets a price floor, we may not
be able to attract and retain subscribers. Likewise, if the
government sets a price ceiling, we may not be able to generate
sufficient revenues to fund our operations.
. 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.23.1 million ($0.5 million) as of September 30, 1999.
These guarantees are generally provided to government agencies, primarily
the Telegraph Authority, as security for compliance with and performance of
terms and conditions contained in an Internet service provider license and
VSNL towards the supply and installation of an electronic commerce
platform. These guarantees may be seized by the governmental agencies if
they
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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.
Surcharges on Indian income taxes will increase our tax liability by an
additional 10% and decrease any profits we might have in the future.
The statutory corporate income tax rate in India is currently 35.0%.
This tax rate is presently subject to a 10.0% surcharge resulting in an
effective tax rate of 38.5%. The Finance Minister of India has indicated
that the 10.0% surcharge will be effective for a period of only one year,
commencing April 1, 1999. However, we cannot assure you that the 10.0%
surcharge will be repealed on April 1, 2000 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 tax of 11.0%,
including the presently applicable surcharge, of the total amount of the
dividend declared, distributed or paid at the corporate level. This tax is
not paid by shareholders nor is it a withholding requirement, but rather it
is a direct tax payable by the corporation.
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 Indian government and have remained high
due to, among other things, capacity constraints. Further, limitations in
network architecture in India limit Internet connection speeds to 28 Kbps
and below, less than the 33 to 56 Kbps connection speeds on conventional
dial-up telephone lines, and significantly less than the up to 1.5 Mbps
connection speed on cable modems, in the United States. These speed and
cost constraints may severely limit the quality and desirability of using
the Internet in India.
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.
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The market penetration rates of personal computers and on-line access
in India are far lower than such rates in the United States. For example,
according to International Data Corporation, in 1998 the Indian market
contained approximately 0.5 million Internet users compared to a total
population in India of 984.0 million, while the U.S. market contained
approximately 68.2 million Internet users compared to a total population in
the U.S. of 270.3 million. Alternate methods of obtaining access to the
Internet, such as through cable television modems or set-top boxes for
televisions, are currently unavailable 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.
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 very 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. Critical issues concerning the commercial
use of the Internet, such as legal recognition of electronic records,
validity of contracts entered into on-line and the validity of digital
signatures, remain unresolved. 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;
. need to deal with multiple and frequently incompatible vendors;
. lack of legal infrastructure relating to electronic commerce in
India;
. 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 substantially increase and
the legal infrastructure and network infrastructure in India are not
further developed, 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 very 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 very limited
operating history to evaluate our business. You must consider the risks
and difficulties
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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 on-line 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 business network and connectivity services, Internet service
provider and consumer portal. 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 subscribers for our Internet services and corporate
customers for our network 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
subscribers and other customers to attain profitability.
Since our founding, we have incurred significant losses and negative
cash flows. As of September 30, 1999, we had an accumulated deficit of
approximately $10.2 million. We have not been profitable and expect to
incur operating losses as we expand our services, invest in expansion of
our network infrastructure and sales and marketing staff, and advertise and
promote our brand. Our business plan assumes that consumers in India will
be attracted to and use Internet access services and content available on
the Internet in increasing numbers. Our business plan also assumes that
businesses in India will demand private network and related electronic
commerce services. 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.
Videsh Sanchar Nigam Limited, or VSNL, is a government-controlled
provider of international telecommunications services in India. VSNL is
also the largest Internet service provider in India with an estimated
350,000 subscribers as of September 30, 1999. VSNL enjoys significant
competitive advantages over our company, including the following:
. Lower rates. VSNL currently offers national Internet service
provider services at rates approximately 10% less than the fees we
charge our subscribers.
. 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.
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. Greater financial resources. VSNL has significantly greater total
assets and annual revenues than our company.
If we are unable to distinguish our Internet service provider services
from those of VSNL, these competitive advantages may prevent us from
attracting and retaining subscribers and generating advertising revenue.
This could result in loss of market share, price reductions or reduced
margins for our company's operations.
We may be required to 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.
We expect a significant number of new competitors to enter India's
recently liberalized Internet service provider market in the near future.
As of June 30, 1999, 129 companies had obtained Internet service provider
licenses in India, including 22 companies which have obtained licenses to
offer Internet service provider services throughout India. Some of these
companies, including WMI, Dishnet, Shrishti and KMR Online, currently offer
regional Internet service provider services. 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. In addition, although no
Internet service provider in India currently offers unlimited Internet
access for a fixed monthly fee or free Internet access, the unlimited
access pricing and free Internet access models have been implemented in
other markets. If these new entrants offer less costly or free Internet
access, or if one or more of them introduce an unlimited Internet access
pricing model to the Indian market, we may be forced to lower our prices in
order to attract and retain subscribers.
Our on-line portal, satyamonline.com, faces significant competition from
well-established Indian content providers, including IndiaWorld and
RediffontheNet. We also compete with foreign content providers as well as
with traditional print and television media companies.
Our corporate and technology services business faces significant
competition from well-established companies, including Global E-Commerce
Limited, Sprint-RPG Limited and WIPRO-CSD.
Increased competition may result in reduced operating margins, 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
Satyam Online brand 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 Satyam Online
brand. We plan to increase substantially our 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.
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"Satyam" is a trademark owned by Satyam Computer Services Limited,
or 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 there is a change of control in our
company, 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 would require us to invest
significant funds in building a new brand name and could 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 number of subscribers to our Internet service provider service
and the level of Internet and other on-line service usage by those
subscribers determines the amount of revenues generated by our
consumer Internet access services division;
. advertising and electronic commerce activity on satyamonline.com
determines the amount of revenues generated by our on-line portal
and content offerings division; and
. the products developed by our strategic partners and the usage
thereof by our customers determines the amount of revenues
generated by our corporate network and technology services
division.
Our future revenues are difficult to forecast and, in addition to the
foregoing, will depend on the following:
. 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;
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. our capital expenditures and other costs relating to the expansion
of our operations could affect the completion of our network or
could require us to generate additional revenue in order to be
profitable;
. the timing and nature of any agreements we enter into with
strategic partners will determine the amount of revenues generated
by our corporate network and technology services division;
. 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;
. 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 increase our expenditures for our sales and marketing
operations, expand and develop content and enhance our technology and
infrastructure development. 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 quarter-to-quarter 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. Recently, several large Internet companies have suffered
highly publicized system failures which resulted in adverse reactions to
their stock prices, significant negative publicity and, in some instances,
litigation.
We have suffered service outages from time to time. We guarantee to
our corporate customers that our network will be operational 99% of the
time, 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.
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Security breaches could damage our reputation or result in liability to us.
Our facilities and infrastructure must remain secure and be perceived
by consumers 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 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 ability to attract
and retain customers for our service offerings.
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. As of September 30, 1999, we had 493 employees, an
increase of 122.0% from the 246 employees we had as of September 30, 1998.
We currently anticipate hiring an additional 120 employees during the
current fiscal year, most of whom will be hired into our sales, marketing
and customer support teams. 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 in India 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. R. Ramaraj, our Chief Executive Officer, and each of our
vice presidents. Substantially all of our employees are located in India,
and each of them 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 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
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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 UUNet Technologies Inc., Open Market, Inc.
and Sterling Commerce, Inc. are exclusive to us within the Indian market
with regard to specific products, so long as we maintain stated minimum
sales levels. If we were to lose exclusivity, we would likely be subject to
intense competition for these products and services. These arrangements can
be terminated by our partners in some circumstances. We also rely on 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 and technology services division to generate revenues
will be decreased significantly.
We face risks associated with potential acquisitions, investments,
strategic partnerships or other ventures, including whether any such
transactions can be located, completed and the other party integrated with
our business on favorable terms.
We may acquire or make investments in complementary businesses,
technologies, services or products, or enter into strategic partnerships
with parties who can provide access to those assets, if appropriate
opportunities arise. From time to time we have had discussions and
negotiations with 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, or if
we do identify suitable candidates, we may not complete those transactions
on commercially acceptable terms or at all. If we acquire another company,
we could have difficulty in assimilating that company's personnel,
operations, technology and software. In addition, the key personnel of the
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. Furthermore, we may incur indebtedness or issue
equity securities to pay for any future acquisitions. The issuance of
equity securities would dilute the ownership interests of the holders of
our ADSs. As of the date of this Quarterly Report, we have no agreement to
enter into any material investment or acquisition transaction. The Reserve
Bank of India or government of India must approve under the Foreign
Exchange Regulation Act, 1973, any acquisition by our company of any
company organized outside of India.
Satyam Computer Services controls our company and may have interests which
conflict with those of our other shareholders or holders of our ADSs.
Satyam Computer Services beneficially owns approximately 57.5% of our
equity shares. As a result, it is able to exercise control over many
matters requiring approval by our shareholders, including the election of
directors and approval of significant corporate transactions. Under Indian
law, a simple majority is sufficient to control all shareholder 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 be not 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;
41
<PAGE>
. issuing additional shares of capital stock, except for pro rata
issuances to existing shareholders;
. commencing any new line of business; or
. commencing a liquidation.
Circumstances may arise in which the interests of Satyam Computer
Services could conflict with the interests of our other shareholders or
holder of our ADSs. Satyam Computer Services could delay or prevent a
change in control of our company even if a transaction of that sort would
be beneficial to our other shareholders, 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.
The Year 2000 problem may adversely affect our company. We do not
anticipate receiving Year 2000 compliance certification from the Department
of Telecommunications, on which we are dependent for leased lines and
international gateways to the Internet.
Many existing computer systems and hardware and software products use
only two digits to identify a year in the date field and, consequently,
cannot distinguish 21st century dates from 20th century dates. This
defect, if uncorrected, could result in a system failure or miscalculations
causing disruptions of operations, including a temporary inability to
process transactions or engage in other normal business activities. We
maintain various internal computer systems and equipment and we rely
directly and indirectly on systems utilized by our suppliers for
telecommunications, utilities and electronic hardware and software
applications. We are in the process of assessing the Year 2000 readiness
of our systems. Satyam Enterprises, an affiliate of Satyam Computer
Services, has completed a Year 2000 assessment of all of our network
hardware and software, including our computers, application software,
generators and uninterruptible power supply systems and relay switches. We
have performed a Year 2000 simulation on our systems to test Year 2000
system readiness which, to date, has indicated no material problems. We
are in the process of contacting selected third-party vendors, licensors
and providers of hardware, software and services, including the government
telecom providers, regarding their Year 2000 readiness. We do not
anticipate receiving Year 2000 compliance certification from the Department
of Telecommunications, on which we are dependent for leased lines and
international gateways to the Internet. Any failure of the Department of
Telecommunications to be Year 2000 compliant could cause a substantial
disruption to our operations. We are still engaged in an ongoing Year 2000
assessment and have not yet developed any contingency plan.
We must make substantial 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 in India is a new business for private
markets entrants such as our company 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
42
<PAGE>
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 laws of India do 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, Indian statutory law does not protect service
marks. 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 our 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.
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 consumers use our
Internet service provider services and 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 on-line 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 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.
43
<PAGE>
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 on-line 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
the satyamonline.com 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 market for our service is
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.
If the Internet becomes accessible by screen-based telephones, television
or other consumer electronic devices or becomes deliverable through other
means such as coaxial cable or wireless transmission, 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.
Risk Related to the ADSs and Our Trading Market
Our management has broad discretion in using the proceeds from the IPO
and therefore investors are relying on the judgment of our management to
invest those funds effectively.
44
<PAGE>
Our management has broad discretion with respect to the expenditure of
the net proceeds from the IPO. We intend to use the net proceeds to fund
network infrastructure expansion and enhancements, to develop content for
our Internet portal business, to advertise and promote our brand, to repay
debt and for other general corporate purposes. We may also use a portion
of the proceeds for possible strategic investments, partnerships and
acquisitions. We have not yet finalized the amount of net proceeds to be
used specifically for each of these purposes, although we are not permitted
to use the proceeds to purchase real estate or to purchase securities on
stock exchanges as specified by the Ministry of Finance. Investors are
relying on the judgment of our management regarding the application of
these proceeds.
Holders of ADSs may be 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 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. 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 shareholders. 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.
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
shareholders' 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. Securities for
which no voting instructions have been received will not be voted.
The market price of our ADSs may be highly volatile, as has been the case
recently with many other newly-public Internet companies.
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
45
<PAGE>
companies, have been and continue to be extremely volatile. 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.
The IPO may not result in an active or liquid market for the ADSs,
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 the IPO will result in the
development of an active, liquid public trading market for our ADSs.
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. Under current Indian law, equity
shares may not be re-deposited into our depositary without prior approval
of the government of India. Therefore, the number of outstanding ADSs will
decrease to the extent that equity shares are withdrawn from our
depositary, which may adversely affect the market price and the liquidity
of the market for the ADSs. Furthermore, foreign ownership in our company,
which will include all ADSs, is limited to 49% under present Indian law.
This limitation means that, unless Indian law changes, 51% 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 shareholders 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 have an aggregate of 21,782,250 equity shares outstanding.
Of the outstanding equity shares, the 4,801,250 ADSs, representing
4,801,250 equity shares, sold in the IPO are freely tradable, other than
ADSs purchased by our affiliates. The remaining equity shares may be sold
in the United States only pursuant to a registration statement under the
Securities Act or an exemption from the registration requirements of the
Securities Act, including Regulation S. Each of our directors and
executive officers has and certain of our shareholders have agreed that he,
she or it will not offer, sell or agree to sell, directly or indirectly, or
otherwise dispose of any equity shares without the prior written consent of
the representatives of the U.S. underwriters for a period of 180 days from
the date of the prospectus relating to the IPO.
Forward-looking statements contained in this Quarterly Report may not be
realized.
This Quarterly 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 Quarterly Report.
We do not intend to update any of the forward-looking statements after the
date of this Quarterly Report to conform such statements to actual results.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We conduct our business in India and most of our revenues and expenses
are denominated in Indian rupees. However, our revenues generated from
UUNet Technologies Inc. and our expenses of purchasing software from
Sterling Commerce, Inc. and Open Market, Inc. are denominated in U.S.
dollars. Our
46
<PAGE>
foreign exchange loss was Rs.0, Rs.5,613, Rs.615,189 ($14,158) and
Rs.17,945 ($412) for fiscal 1997, 1998 and 1999 and the quarter ended
September 30, 1999, respectively.
47
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Part II - Other Information
Item 1. Legal Proceedings
As of the date of this Quarterly Report, we are not a party to any
material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
The effective date of our registration statement, filed on Form F-1
under the Securities Act of 1933 (File No. 333-10852) relating to our IPO
was October 18, 1999. We sold a total of 4,801,250 equity shares to an
underwriting syndicate, including the exercise of the 15% over-allotment.
The managing underwriters with respect to the U.S. offering were Merrill
Lunch & Co. and Salomon Smith Barney, and the managing underwriters with
respect to the international offering were Merrill Lynch International and
Salomon Smith Barney International. The IPO commenced and was completed on
October 22, 1999, at an initial public offering price of $18.00 per share.
We received approximately $80.4 million of net proceeds from the offering.
From the date of receipt, we invested the net proceeds in dollar or rupee
denominated high quality, interest-bearing instruments pending their use
for specific purposes. None of the net proceeds from the IPO were paid,
directly or indirectly to any of our directors, officers or general
partners or any of their associates, or to any persons owning ten percent
or more of any class of our equity securities, or any affiliates.
In addition to the IPO, we sold and issued the following securities
since June 30, 1999:
(1) In September 1999, we issued an aggregate of 481,000 equity
shares to Sterling Commerce, Inc. for a purchase price of $5.0
million.
(2) In October 1999, we issued an aggregate of 750,000 equity shares
to South Asia Regional Fund and Satyam Computer Services upon the
exercise of warrants.
The issuance to Sterling Commerce was exempt from registration under
Section 4(2) and Regulation D. The issuances upon exercise of warrants
were exempt under Regulation 5.
Item 4. Submission of matters to a vote of security holders
a. During the quarterly period ending September 30, 1999, we held an
Extraordinary General Meeting on September 8, 1999
b. At the meeting, the security holders present unanimously voted to
amend various clauses of our Articles of Association in order to issue
481,000 equity shares to Sterling Commerce for a purchase price of $5.0
million.
1. Under the Indian Companies Act, voting is by show of hands
unless a poll is demanded by a member or members present in person, or by
proxy holding at least one-tenth of the total shares entitles to vote on
the resolution or by those holding paid-up capital of at least Rs50,000.
Under our Articles of Association a member present by proxy shall be
entitled to vote only on a poll but not on a show of hands, unless such
member is a body corporate present by a representative in which case such
proxy shall have a vote on the show of hand as if it were a member.
2. Under the Indian Companies Act and as per our Articles of
Association, on a show of hands every member present in person shall have
one vote and upon a poll the voting rights of every member whether present
in person or by proxy, shall be in proportion to his share of the paid-up
capital of our company.
3. The votes represent the number of votes in a show of hands. No
poll was demanded during the meeting.
Item 6. Exhibits and Reports
(a) The exhibit index attached hereto is incorporated by reference to
this item.
(b) Satyam Infoway filed no reports on Form 8-K during the quarter
ended September 30, 1999.
48
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
<TABLE>
<CAPTION>
Exhibit Number Description of Document
- -------------- -----------------------
<C> <S>
27.1 Financial Data Schedule.
</TABLE>
(b) Financial Statement Schedules
None.
49
<PAGE>
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: November 12, 1999 SATYAM INFOWAY LIMITED
By: /s/ R. Ramaraj
--------------------
Name: R. Ramaraj
Title: Chief Executive Officer
/s/ T. R. Santhanakrishnan
--------------------------
Name: T.R. Santhanakrishnan
Title: Chief Financial Officer
50
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> INDIAN RUPEES
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-2000 MAR-31-1999
<PERIOD-START> JUL-01-1999 JUL-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<EXCHANGE-RATE> 43.59 43.59
<CASH> 36,614,429 26,665,719
<SECURITIES> 0 0
<RECEIVABLES> 102,281,194 45,087,639
<ALLOWANCES> 2,420,628 0
<INVENTORY> 10,085,579 1,570,385
<CURRENT-ASSETS> 256,343,004 54,494,356
<PP&E> 396,543,996 86,267,624
<DEPRECIATION> 46,903,904 18,538,672
<TOTAL-ASSETS> 705,720,249 169,376,896
<CURRENT-LIABILITIES> 445,721,394 172,651,176
<BONDS> 0 0
0 0
0 0
<COMMON> 162,310,000 120,002,300
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 705,720,249 169,376,896
<SALES> 127,428,809 17,801,006
<TOTAL-REVENUES> 127,423,809 17,801,006
<CGS> 68,213,512 11,961,540
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 10,770,650 5,912,422
<LOSS-PROVISION> 2,420,628 0
<INTEREST-EXPENSE> 20,770,936 10,064,956
<INCOME-PRETAX> (76,911,032) (44,182,343)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (76,911,032) (44,181,343)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (76,911,032) (44,181,343)
<EPS-BASIC> (4.87) (4.17)
<EPS-DILUTED> 0 0
</TABLE>
