<PAGE>
As filed with the Securities and Exchange Commission on February 3, 2000.
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM F-1
REGISTRATION STATEMENT
Under
The Securities Act Of 1933
---------------
Satyam Infoway Limited
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant's name into English)
<TABLE>
<S> <C> <C>
Republic of India 7379 Not Applicable
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
Maanasarovar Towers
271-A, Anna Salai, Teynampet, Chennai 600 018, India, (91) 44-435-3221
(Address, including zip code, and telephone number, including area code, of the
Registrant's principal executive offices)
---------------
CT Corporation System
111 8th Avenue, New York, New York 10011, (212) 894-8940
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
<TABLE>
<S> <C>
Anthony J. Richmond, Esq. Richard J. B. Price, Esq.
Latham & Watkins Shearman & Sterling
135 Commonwealth Drive 6 Battery Road #25-03
Menlo Park, California 94025 Singapore 049909
(650) 328-4600 (011-65) 230-3800
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
---------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
---------------
CALCULATION OF REGISTRATION FEE CHART
<TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<CAPTION>
Proposed
Proposed Maximum
Title of Each Class of Maximum Aggregate Amount of
Securities to be Amount to be Offering Price Offering Registration
Registered Registered(1) Per Share(2) Price(2) Fee
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity shares, par value
Rs.10 per share, each
represented by four
American Depositary
Shares(3)............. 862,500 $150.52 $129,823,500 $34,274
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) Includes 112,500 equity shares represented by 450,000 American Depositary
Shares that the Underwriters have the option to purchase to cover
overallotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee, in accordance with Rule 457(c) promulgated under the
Securities Act of 1933. The calculation of the registration fee is based on
$37.63, which was the average of the high and low sale prices of the
American Depositary Shares on the Nasdaq National Market on January 31,
2000.
(3) American Depositary Shares evidenced by American Depositary Receipts
issuable upon deposit of the equity shares registered hereby are registered
pursuant to a separate registration statement on Form F-6 (333-10982)
---------------
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This registration statement includes two prospectuses, which are identical
except for the alternate cover page, underwriting section and rear cover page,
which are provided immediately in front of Part II.
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 3, 2000
PROSPECTUS
3,000,000 American Depositary Shares
[SATYAM LOGO]
SATYAM INFOWAY LIMITED
Representing 750,000 Equity Shares
-----------
Satyam Infoway Limited is offering up to 3,000,000 American Depositary
Shares, or ADSs, of Satyam Infoway outside India, including in the United
States. This prospectus relates to an offering by the U.S. underwriters of up
to 1,800,000 ADSs in the United States and Canada. Additional underwriters are
offering up to 1,200,000 ADSs outside the United States and Canada. Each ADS
represents one-fourth of one equity share. Our ADSs are listed for trading on
the Nasdaq National Market under the symbol "SIFY." On February 2, 2000, the
last reported sale price of our ADSs was $47.25 per ADS.
-----------
Investing in the American Depositary Shares involves risks which are
described in the Risk Factors beginning on page 9.
-----------
<TABLE>
<CAPTION>
Price Underwriting
to discounts and Proceeds
public commissions to us
------ ------------- --------
<S> <C> <C> <C>
Per ADS........................................ $ $ $
Total.......................................... $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Satyam Infoway has granted to the underwriters the right to purchase up to an
additional 450,000 ADSs at the public offering price, less discount and
commissions, within 30 days from the date of this prospectus to cover
overallotments.
-----------
Merrill Lynch & Co. Salomon Smith Barney
February , 2000
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and we are not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
<PAGE>
Three panels of graphical information regarding Satyam Infoway Limited
consisting of:
. a graphical presentation of Satyam Infoway's network covering 34
cities in India;
. sample web pages from some of Satyam Infoway's content sites,
including satyamonline.com and specialty sites related to cars,
movies and shopping; and
. a list of business-to-business services provided by Satyam Infoway.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 9
Forward-Looking Statements............................................... 25
Conventions Which Apply to This Prospectus............................... 25
Currency of Presentation................................................. 25
Enforcement of Civil Liabilities......................................... 26
Reports to Our Security Holders.......................................... 27
Use of Proceeds.......................................................... 28
Dividend Policy.......................................................... 29
Price Range of our ADSs.................................................. 29
Capitalization........................................................... 30
Exchange Rates........................................................... 31
Selected Historical Financial Data....................................... 32
Unaudited Pro Forma Financial Data....................................... 34
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 39
Business................................................................. 51
Management............................................................... 71
Principal Shareholders................................................... 76
Certain Transactions..................................................... 77
Description of Equity Shares............................................. 78
Description of American Depositary Shares................................ 83
Restrictions on Foreign Ownership of Indian Securities................... 90
Government of India Approvals............................................ 93
Taxation................................................................. 95
Shares Eligible for Future Sale.......................................... 100
Underwriting............................................................. 102
Legal Matters............................................................ 105
Experts.................................................................. 105
Change of Accountants.................................................... 105
Additional Information................................................... 106
Index to Satyam Infoway Limited Financial Statements..................... F-1
Index to IndiaWorld Communications Private Limited Financial Statements.. F-21
</TABLE>
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information found in greater detail elsewhere in
this prospectus. In addition to this summary, we urge you to read the entire
prospectus carefully, especially the risks of investing in our ADSs discussed
under "Risk Factors," before deciding to buy our ADSs.
Satyam Infoway Limited
Our Business
We are the second largest national provider of Internet access and Internet
services to consumers and businesses in India, based on number of customers as
of December 31, 1999. Our customers primarily use our services to communicate,
transmit and share information, access on-line content and conduct business
remotely using our private data network or the Internet. Our Internet and
network services include the following:
. Consumer Internet Access Services. We offer dial-up Internet access, e-
mail and web page hosting to consumers in India through convenient on-
line registration and user-friendly software. In November 1998 after the
deregulation of the Internet service provider market in India, we
launched our Internet service provider business and became the first
private Internet service provider in India. The largest national Internet
service provider is VSNL, which is majority controlled by the Indian
government.
. On-line Portal and Content Offerings. We operate an on-line portal,
satyamonline.com, that functions as a principal entry point and gateway
for accessing the Internet by providing useful web-related services and
links. We also offer related content sites specifically tailored to
Indian interests worldwide for news, personal finance, movies, music and
automobiles. In November 1999, we acquired 24.5%, and an option to
acquire the remaining 75.5%, of the outstanding shares of IndiaWorld
Communications Private Limited, a leading provider of Internet content
and services in India. We have recently formed alliances with a number of
partners, including ICICI Bank, Citibank and Bank of Madura, to offer
banking products through satyamonline.com and to develop payment gateways
to facilitate electronic commerce and other activities through our
websites. During January 2000, our eight websites generated approximately
19 million page views and IndiaWorld Communications' 13 websites
generated approximately 18 million page views. Upon completion of our
acquisition of IndiaWorld Communications, we estimate that the aggregate
number of page views generated by our 21 websites will be less than the
combined number of page views of our and IndiaWorld Communications'
websites immediately prior to completion of the acquisition.
. Corporate Network and Technology Services. We offer dial-up and dedicated
Internet access, private network services, business-to-business
electronic commerce solutions and website development and hosting
services to businesses in India. Initiated in April 1998, our corporate
network and technology services division has formed strategic
partnerships with a number of leading technology and electronic commerce
companies, including UUNet Technologies, Inc. (formerly CompuServe
Network Services), Sterling Commerce and Open Market.
As of September 30, 1999, we had an accumulated deficit of approximately
Rs.443.6 million ($10.2 million). For the fiscal year ended March 31, 1999 and
the six months ended September 30, 1999, our net loss was approximately
Rs.187.4 million ($4.3 million) and Rs.128.7 million ($3.0 million),
respectively.
Our Customers
As of January 31, 2000, we had more than 129,000 consumer Internet access
subscribers and more than 350 corporate customers. Our corporate network and
technology services customers are in a variety of industries, including
financial services, publishing, retail, shipping and manufacturing. Our five
largest corporate customers based on revenue for the six months ended September
30, 1999 were Carborandum
1
<PAGE>
Universal Limited, CDC Advisors Private Limited, Gray Cell, IBP Co. Limited and
Stock Holding Corporation of India Limited. The customers listed above
accounted for approximately 24% of our corporate network and technology
services division revenues in the six months ended September 30, 1999.
Our Network
We currently operate India's largest national private data network utilizing
Internet protocol, which is an Internet industry standard for tracking Internet
addresses, routing outgoing messages and recognizing incoming messages. We own
and operate points of presence in 34 of the largest metropolitan areas in
India. Points of presence are telecommunications facilities located in a
particular market which allow our customers to connect to the Internet through
a local telephone call. We plan to have points of presence in 40 cities in
India by April 2000, which we believe will allow us to provide Internet access
service via a local telephone call to approximately 85% of the installed
personal computer base in India. Our private network infrastructure provides
the platform for national delivery of Internet access to consumers as well as
the backbone for our broad range of corporate network and technology services.
For example, our network provides an alternative to government telecom
providers for corporations that wish to establish virtual private networks,
which provide secure transmission of data using Internet protocol over our
private network infrastructure, and electronic data interchanges. Our Internet
service provider license permits us to establish and maintain our own direct
international Internet connections via satellite links or transoceanic cable
systems as an alternative to government-provided Internet gateways. We believe
that as the size and capacity of our network infrastructure grows, its large
scale and national coverage will create economies of scale for us and barriers
to entry for our competitors.
Our Market Opportunity
The market for Internet access and electronic commerce, both worldwide and
in India, is expanding rapidly. For example, International Data Corporation
estimates:
. the installed personal and network computer base in India will grow at a
rate that averages 44% annually from 1.9 million in 1998 to 8.2 million
in 2002;
. Internet users in India will grow at a rate that averages 94% annually
from 0.5 million in 1998 to 6.6 million in 2002; and
. Internet commerce revenues in India will grow at a rate that averages
261% annually from $3.0 million in 1998 to $499 million in 2002.
Internet usage is expected to grow rapidly in the Indian market as
deregulation continues, network bandwidth becomes less expensive, the installed
base of personal and network computers increases, alternative Internet-access
devices become available and Internet connectivity becomes increasingly
important for on-line news and content and electronic commerce transactions. We
believe that our company is well positioned to take advantage of this
significant market opportunity in India. The market in India is, however,
presently at a very early stage of development and involves significant
business, competitive and other risks.
The International Data Corporation market data presented above and elsewhere
in this prospectus shows International Data Corporation's estimates derived
from a combination of vendor, user and other market sources and therefore may
differ from numbers claimed by specific vendors using different market
definitions or methods. There can be no assurances that any of these projected
amounts will be achieved.
2
<PAGE>
Our Growth Strategy
Our goal is to become the premier provider of Internet access, on-line
content and network services to consumers and businesses in India. Our
principal business strategies to accomplish this objective are:
. Increase penetration in our existing markets by expanding awareness of
the Satyam Online brand name to capitalize on our first mover advantage
in India;
. Expand our products and services with new technologies to enable our
customers to use the Internet more effectively;
. Strengthen our Internet portal and other Internet content websites with
more content tailored to Indian interests worldwide, such as the content
we expect to obtain in our acquisition of IndiaWorld Communications;
. Increase our range of electronic commerce services to build our online
presence and pursue additional revenue opportunities;
. Expand customer distribution channels through strategic partnerships to
take advantage of the sales and marketing capabilities of our strategic
partners;
. Invest in the continued enhancement and expansion of our network
infrastructure to support customer growth, enter new markets and
accommodate increased customer usage; and
. Pursue selective strategic investments, partnerships and acquisitions to
expand our customer base, increase utilization of our network and add new
technologies to our product mix.
Our Organization
We were incorporated under the laws of the Republic of India on December 12,
1995. Our principal executive offices are located at Maanasarovar Towers, 271-
A, Anna Salai, Teynampet, Chennai 600 018, India, and our telephone number is
(91) 44-435-3221. Information contained in our websites, including our
principal website, satyamonline.com, is not part of this prospectus. We are,
and after the offering will continue to be, 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" is a trademark owned by Satyam Computer Services, which has licensed
the use of the "Satyam" trademark to us subject to specified conditions. For
additional information regarding this license, please see "Business--
Intellectual Property." "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 prospectus belongs to its holder.
Recent Developments
IndiaWorld Communications. On November 29, 1999, we purchased 24.5% of the
outstanding shares of IndiaWorld Communications for a cash purchase price of
Rs.1,222 million ($28.0 million). In connection with the acquisition, the
shareholders of IndiaWorld Communications granted us an option to acquire the
remaining 75.5% of the outstanding shares of IndiaWorld Communications for a
cash purchase price of Rs.3,765 million ($87.0 million) exercisable between
April 1, 2000 and September 30, 2000, provided that the exercise price will
increase at a rate of 16% per annum after July 1, 2000 if the option is not
exercised prior to that date. We have made a Rs.513 million ($12.0 million)
non-refundable deposit towards the exercise price of the option. We intend to
use a portion of the proceeds from this offering to exercise our option to
purchase the remaining 75.5% of the outstanding shares of IndiaWorld
Communications, although this offering is not conditioned on the completion of
the IndiaWorld Communications acquisition.
3
<PAGE>
IndiaWorld Communications is a leading provider of Internet content and
services in India. During January 2000, IndiaWorld Communications' network of
13 websites generated over 18 million page views. Our acquisition of IndiaWorld
Communications provides us with additional content sites tailored to Indian
interests worldwide. Upon completion of the acquisition, we intend to operate
IndiaWorld Communications' 13 websites, together with our existing eight
websites, under our satyamonline.com portal. For additional information
regarding IndiaWorld Communications, please see "Business--Service Offerings--
On-line Portal and Content Offerings."
Additional Partners. In November and December 1999, we entered into
memoranda of understanding to form joint ventures with a number of partners,
including the following:
. ICICI Bank. We formed a strategic alliance with ICICI Bank to offer
online savings accounts, electronic bill payment and other retail banking
products and services over the Internet.
. Bank of Madura. We formed a strategic alliance with Bank of Madura to
develop an electronic commerce portal offering products and services to
Indians living abroad.
. Citibank. We formed a strategic alliance with Citibank to develop a
secure payment gateway for business to consumer transactions.
. RPG Netcom. We formed a strategic alliance with RPG Netcom to develop
broadband Internet services to consumers and businesses over RPG Netcom's
cable television network in Calcutta.
For additional information regarding these alliances, please see "Business--
Service Offerings--On-line Portal and Content Offerings" and "--Consumer
Internet Access Services."
ADS Split. On December 20, 1999, we announced a 4-for-1 split of our ADSs.
Effective January 10, 2000, holders of our ADSs became entitled to three
additional ADSs for each ADS held. Unless we indicate otherwise, all
information in this prospectus reflects the 4-for-1 split of our ADSs. No
change was made in the number of equity shares outstanding.
Preliminary Unaudited Results of Operations. Based on our preliminary
unaudited results of operations prepared in accordance with Indian GAAP for the
fiscal quarter ended December 31, 1999, we recognized approximately Rs. 214.3
million in revenues for the fiscal quarter ended December 31, 1999. Our net
loss, on a preliminary unaudited basis in accordance with Indian GAAP, was
approximately Rs. 48.1 million for the fiscal quarter ended December 31, 1999.
We are in the process of preparing financial statements in accordance with U.S.
GAAP for the fiscal quarter ended December 31, 1999. These Indian GAAP results
are not directly comparable to the U.S. GAAP data included in this prospectus.
For purposes of preparing our financial statements, the principal differences
between Indian GAAP and U.S. GAAP are the treatment of the following:
. depreciation;
. employee stock options;
. organizational expenses; and
. our investment in IndiaWorld Communications.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
American Depositary Shares offered
by Satyam Infoway................................... 3,000,000 ADSs
The ADSs............................................. Each American Depositary Share represents
one-fourth of one equity share, par value
Rs.10 per share. The ADSs will be evidenced
by American Depositary Receipts.
Equity shares to be outstanding after this offering.. 22,532,250 equity shares
ADSs to be outstanding after this offering........... 22,205,000 ADSs
Use of proceeds...................................... To purchase the remaining 75.5% of IndiaWorld
Communications' outstanding shares, to fund
network infrastructure expansion and
enhancements, to develop content for our
Internet portal business, to advertise and
promote our brand and for general corporate
purposes, including possible strategic
investments, partnerships and acquisitions.
For additional information regarding the use
of proceeds from this offering, please see
"Use of Proceeds."
Nasdaq National Market symbol........................ SIFY
</TABLE>
The 22,532,250 equity shares to be outstanding after this offering are based
on the 21,782,250 equity shares outstanding as of December 31, 1999 and include
the 750,000 equity shares represented by ADSs sold by us in this offering. The
equity shares to be outstanding after this offering exclude the following:
. any equity shares represented by the ADSs to be issued pursuant to the
underwriters' overallotment option; and
. 225,000 equity shares issuable upon the exercise of options outstanding
under our stock option plan at a weighted-average exercise price of
approximately Rs.795 per share as of December 31, 1999.
The 22,205,000 ADSs to be outstanding after this offering are based on the
19,205,000 ADSs outstanding as of December 31, 1999 and include the 3,000,000
ADSs sold by us in this offering. The ADSs to be outstanding after this
offering exclude any ADSs to be issued pursuant to the underwriters'
overallotment option. All ADS amounts in this prospectus have been adjusted to
reflect the 4-for-1 split of our ADSs effective January 10, 2000.
Our stockholders have approved an offering of up to $150 million of equity
shares represented by ADSs.
5
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
You should read the following summary historical and pro forma financial
data in conjunction with our financial statements and the related notes,
"Selected Historical Financial Data," "Unaudited Pro Forma Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. Our financial statements are
prepared in Indian rupees and presented in accordance with U.S. GAAP for the
fiscal years ended March 31, 1997, 1998 and 1999 and the six months ended
September 30, 1999. Financial statements for the year ended March 31, 1999 and
the six months ended September 30, 1999 also have been translated into U.S.
dollars. The pro forma consolidated statements of operations give effect to our
acquisition of IndiaWorld Communications as if the IndiaWorld Communications
acquisition had occurred at the beginning of each period presented. The pro
forma as adjusted consolidated balance sheet gives effect to the ADSs issued
and warrants exercised in connection with our initial public offering of ADSs
in October 1999, the IndiaWorld Communications acquisition and the completion
of this offering as if our initial public offering, the IndiaWorld
Communications acquisition and the completion of this offering had occurred as
of September 30, 1999.
The summary unaudited pro forma financial data does not purport to be
indicative of our results of operations had we completed our acquisition of
IndiaWorld Communications on the assumed dates, nor are the results intended to
be indicative of our future results of operation. For additional information
regarding the pro forma adjustments and the pro forma as adjusted data, please
"Unaudited Pro Forma Financial Data."
The summary consolidated historical financial and other data includes a
presentation of EBITDA. EBITDA represents earnings (loss) before depreciation
and amortization, interest income and expense, income tax expense (benefit) and
extraordinary items. EBITDA is presented because we believe some investors find
it to be a useful tool for measuring a company's ability to fund capital
expenditures or to service future debts. EBITDA is not determined in accordance
with generally accepted accounting principles and should not be considered in
isolation or as an alternative to net income as an indicator of operating
performance or as an alternative to cash flow as a measure of liquidity.
Because EBITDA excludes interest expense and capital expenditures, negative
EBITDA would limit our ability to fund capital expenditures and service future
debt obligations. Our EBITDA is not comparable to that of other companies which
may determine EBITDA differently.
6
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended March 31, Six Months Ended September 30,
------------------------------------------------------ -------------------------------------
1997 1998 1999 1999 1998 1999 1999
-------------- ----------- ----------- ------------ ---------- ----------- ------------
Indian rupees U.S. dollars Indian rupees U.S. dollars
---------------------------------------- ------------ ----------------------- ------------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Revenues........... Rs. -- Rs. 6,805 Rs. 103,344 $ 2,371 Rs. 35,359 Rs. 208,227 $ 4,777
Cost of revenues... -- 19,498 63,651 1,460 19,036 107,110 2,457
-------------- ----------- ----------- ---------- ---------- ----------- ----------
Gross profit
(loss)............ -- (12,693) 39,693 911 16,323 101,117 2,320
Operating expenses:
Selling, general
and
administrative
expenses........ 25,801 61,017 151,120 3,466 54,987 161,113 3,696
Advances written
off............. -- -- -- -- -- -- --
Depreciation and
amortization.... 536 19,383 49,162 1,128 19,729 48,576 1,114
Total operating
expenses....... 26,337 80,400 200,282 4,594 74,716 209,689 4,810
-------------- ----------- ----------- ---------- ---------- ----------- ----------
Operating loss..... (26,337) (93,093) (160,589) (3,684) (58,393) (108,572) (2,490)
-------------- ----------- ----------- ---------- ---------- ----------- ----------
Interest expense,
net............... -- (7,498) (27,146) (623) (10,618) (20,605) (473)
Other income....... -- 3,809 359 8 -- 517 12
Income taxes....... -- -- -- -- -- -- --
-------------- ----------- ----------- ---------- ---------- ----------- ----------
Net loss........... Rs. (26,337) Rs.(100,590) Rs.(187,376) $ (4,299) Rs.(69,011) Rs.(128,660) $ (2,951)
============== =========== =========== ========== ========== =========== ==========
Net loss per equity
share............. Rs.(114,508.27) Rs. (121.66) Rs. (17.31) $ (0.40) Rs. (7.61) Rs. (8.16) $ (0.19)
Weighted average
equity shares used
in computing net
loss per equity
share............. 230 826,805 10,824,826 10,824,826 9,074,000 15,773,656 15,773,656
Other Financial
Data:
EBITDA............. Rs. (25,801) Rs. (73,709) Rs.(111,068) $ (2,548) Rs.(38,665) Rs. (59,479) $ (1,365)
Capital
expenditures...... 3,230 77,070 146,135 3,352 41,565 280,614 6,438
Net cash provided
by
(used in):
Operating
activities...... (30,426) (73,950) (171,388) (3,932) (50,355) 32,496 745
Investing
activities...... (3,230) (77,070) (146,000) (3,349) (41,565) (280,614) (6,438)
Financing
activities...... 35,138 159,449 433,023 9,934 108,674 159,185 3,652
<CAPTION>
Pro Forma
----------------------------------------
Fiscal Year
Ended
March 31, Six Months Ended
1999 September 30, 1999
-------------- -------------------------
Indian rupees U.S. dollars
--------------------------- ------------
<S> <C> <C> <C>
Statement of
Operations Data:
Revenues........... Rs. 117,302 Rs. 218,615 $ 5,015
Cost of revenues... (71,091) (111,824) (2,565)
-------------- ------------ ------------
Gross profit
(loss)............ 46,211 106,791 2,450
Operating expenses:
Selling, general
and
administrative
expenses........ 154,129 163,328 3,747
Advances written
off............. 1,834 -- --
Depreciation and
amortization.... 1,048,417 548,357 12,579
Total operating
expenses....... 1,204,380 711,685 16,326
-------------- ------------ ------------
Operating loss..... (1,158,169) (604,894) (13,876)
-------------- ------------ ------------
Interest expense,
net............... (27,165) (20,656) (474)
Other income....... 969 626 14
Income taxes....... 978 994 23
-------------- ------------ ------------
Net loss........... Rs.(1,185,343) Rs.(625,918) $ (14,359)
============== ============ ============
Net loss per equity
share............. Rs. (69.21) Rs. (28.36) $ (0.65)
Weighted average
equity shares used
in computing net
loss per equity
share............. 17,126,076 22,074,906 22,074,906
Other Financial
Data:
EBITDA............. Rs. (108,783) Rs. (55,911) $ (1,283)
Capital
expenditures......
Net cash provided
by
(used in):
Operating
activities......
Investing
activities......
Financing
activities......
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
As of September 30, 1999
-------------------------------------------------------
IndiaWorld
Satyam Communications
Infoway Actual Actual Pro Forma As Adjusted
-------------- -------------- -------------------------
Indian rupees U.S. dollars
------------------------------------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ Rs. 36,614 Rs.1,270 Rs.4,257,809 $ 97,679
Working capital
(deficit).............. (189,378) 3,489 4,034,036 92,545
Total assets............ 705,719 17,098 9,927,870 227,756
Long-term debt,
including current
installments........... 136,500 -- 136,500 3,132
Total stockholders'
equity (deficit)....... 156,190 4,772 9,366,015 214,866
</TABLE>
8
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RISK FACTORS
Any investment in our ADSs involves a high degree of risk. You should
consider carefully the following information about these risks, together with
the other information contained in this prospectus, before you decide to buy
our ADSs. If any of the following risks actually occur, our business, results
of operations and financial condition would likely suffer. In any such case,
the market price of our ADSs could decline, and you may lose all or part of
the money you paid to buy our ADSs.
Risks Related to Investments in Indian Companies
We are incorporated in India, and 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.
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 Kargill. 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.
9
<PAGE>
Indian law and the terms of our Internet service provider license contain
restrictive provisions that limit our ability to raise capital, to issue
equity securities in consideration for acquisitions we may make 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 or to issue equity securities in consideration for
acquisitions we may make. 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 currently held by foreign
investors. After this offering, we expect that approximately 43% of our equity
interests will be held by foreign investors. As a result of the 49% limit on
foreign equity ownership, we will not be permitted to sell more than an
additional 6% 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.
For additional information regarding our sources of capital, please see
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Expenditures." For
additional information regarding foreign ownership restrictions, please see
"Business--Government Regulation" and "Restrictions on Foreign Ownership of
Indian Securities."
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 are not traded publicly in India, but are only traded on Nasdaq
through the ADSs as described in this prospectus. 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.
Under current Indian regulations and practice, the approval of the Reserve
Bank of India is required for the sale of equity shares underlying ADSs by a
non-resident of India to a resident of India as well as for renunciation of
rights to a resident of India, unless the sale of equity shares underlying the
ADSs is through a recognized stock exchange or in connection with the offer
made under the regulations regarding takeovers.
10
<PAGE>
Since exchange controls still exist in India, the Reserve Bank of India will
approve the price at which the equity shares are transferred based on a
specified formula, and a higher price per share may not be permitted. Holders
who seek to convert the rupee proceeds from a sale of equity shares in India
into foreign currency and repatriate that foreign currency from India will have
to obtain Reserve Bank of India approval for each transaction. We cannot assure
you that any required approval from the Reserve Bank of India or any other
government agency can be obtained.
Because we operate our business in India, exchange rate fluctuations may
affect the value of our ADSs independent of our operating results.
The exchange rate between the rupee and the U.S. dollar has changed
substantially in recent years and may fluctuate substantially in the future.
During the three-year period from January 1, 1997 through December 31, 1999,
the value of the rupee against the U.S. dollar declined by approximately 21%.
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 and the Telecom Regulatory Authority of India, or
TRAI, maintain 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 or the TRAI sets a price floor, we may not be able to attract
and retain subscribers. Likewise, if the government or the TRAI 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 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. For additional information regarding government regulation, please
see "Business--Government Regulation."
11
<PAGE>
The global financial crisis could cause our business or the price of our ADSs
to suffer.
Financial turmoil in several Asian countries, Russia and elsewhere in the
world in 1998 and 1999 has adversely affected market prices in the world's
securities markets, including the United States and Indian markets, for
securities of companies which operate in those developing economies. Continued
or increased financial downturns in these countries could cause further
decreases in prices for securities of companies located in developing
economies, such as our company.
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 the Telecom Regulatory Authority of India 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.
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 62.8 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.
12
<PAGE>
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 virtually no
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
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
13
<PAGE>
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. For additional
information regarding our limited operating history, please see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements included elsewhere in this prospectus.
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. For additional information regarding our history of losses, please see
"Selected Historical Financial Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
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, and has proposed additional reductions in its rates.
. Longer service history. VSNL has offered Internet service provider
services since August 1995 whereas we have offered Internet service
provider services only since November 1998.
. Access to network infrastructure. Because VSNL is controlled by the
government of India, it has direct access to network infrastructure which
is owned by the Indian government.
. Greater financial resources. VSNL has significantly greater total assets
and annual revenues than our company.
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 November
30, 1999, approximately 175 companies had obtained Internet service provider
licenses in India, including 25 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
14
<PAGE>
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 RediffontheNet. We also
compete with foreign content providers as well as with traditional print and
television media companies. We expect competition from foreign content
providers to increase as the Indian market develops.
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. For
additional information regarding competition in our markets, please see
"Business--Competition."
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.
"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
15
<PAGE>
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;
. 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, including our joint ventures with ICICI Bank, Citibank, Bank
of Madura and RPG Netcom and our planned acquisition of IndiaWorld
Communications;
. 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.
16
<PAGE>
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.
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 November 30, 1999, we had 518 employees, an increase of 111%
from the 246 employees we had as of November 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.
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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
attract additional qualified personnel, could disrupt the implementation of
our growth strategy, upon which the success of our business depends. For
additional information regarding our key personnel and other employees, please
see "Management" and "Business--Employees."
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, Open Market and Sterling Commerce 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 may not complete our planned acquisition of IndiaWorld Communications, in
which case we may not be able to apply the net proceeds from this offering
effectively.
We may not complete our planned acquisition of IndiaWorld Communications.
We currently anticipate using approximately $75.0 million of the net proceeds
from this offering to exercise our option to purchase the remaining 75.5% of
the outstanding shares of IndiaWorld Communications. However, the completion
of this offering is not contingent upon the completion of the acquisition,
which will not be completed until at least April 1, 2000. We will only be able
to proceed with the acquisition if the conditions set forth in the option
agreement are satisfied or waived. There is no assurance that these conditions
will be satisfied or waived. We may also choose not to proceed with the
acquisition if there is any material adverse change in the business of
IndiaWorld Communications. As a result, if we are not able to or choose not to
complete our planned acquisition of IndiaWorld Communications, our management
must apply the net proceeds from this offering towards other uses which may be
less productive than the acquisition of IndiaWorld Communications'
13 websites. If we are unable to utilize the proceeds of this offering
effectively, our operating results would be adversely affected and the price
of our ADSs is likely to fall.
IndiaWorld Communications is engaged in a trademark dispute with a company
based in the United States and that dispute, if resolved unfavorably, could
diminish the value of the business we are acquiring, impose costs on us or
have other undesirable effects.
We and IndiaWorld Communications have been contacted by a party located in
the United States which has alleged that the activities of IndiaWorld
Communications infringe with a United States trademark for the term
"IndiaWorld," and associated logos and trade dress purportedly owned by this
third party. We have been advised by the current majority owners of IndiaWorld
Communications that no such infringement has taken place and that they have
commenced legal action in federal court in New York to cancel the United
States trademark which they believe was improperly granted and to assert other
claims. Our contract with the majority owners of IndiaWorld Communications
includes an indemnity for past infringement. Further, we presently do
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not believe that the disputed marks are material to the business strategy that
we intend to implement after the acquisition is completed as this dispute does
not at this time pertain to the key assets of IndiaWorld Communications,
including the webites samachar.com, khel.com, khoj.com, dhan.com and
bawarchi.com. Nonetheless, any dispute of this type creates uncertainty as to
the possible outcome, including whether or not our indemnity will be effective
in protecting us, and also could divert management time and attention away
from the business.
We face risks associated with our joint ventures with ICICI Bank, Citibank,
Bank of Madura and RPG Netcom and our planned acquisition of IndiaWorld
Communications and with other 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.
In November 1999, we acquired 24.5% of the outstanding shares of IndiaWorld
Communications, together with an option to acquire IndiaWorld Communications'
remaining outstanding shares between April 1, 2000 and September 1, 2000. In
November and December 1999, we also formed alliances with ICICI Bank,
Citibank, Bank of Madura and RPG Netcom. These transactions were only recently
entered into and none of these ventures is yet operational. We may acquire or
make investments in other complementary businesses, technologies, services or
products, or enter into additional strategic partnerships with parties who can
provide access to those assets, if appropriate opportunities arise in the
future. From time to time we have had discussions and negotiations with a
number of companies regarding our acquiring, investing in or partnering with
their businesses, products, services or technologies, and we regularly engage
in such discussions and negotiations in the ordinary course of our business.
Some of those discussions also contemplate the other party making an
investment in our company. We may not identify suitable acquisition,
investment or strategic partnership candidates in the future, or if we do
identify suitable candidates, we may not complete those transactions on
commercially acceptable terms or at all. We may experience difficulty in
integrating the services of ICICI Bank, Citibank, Bank of Madura and RPG
Netcom with our services, and these alliances may not provide all or a portion
of the anticipated benefits. We could have difficulty in assimilating
IndiaWorld Communications' personnel, operations, technology and software, or
that of another company we acquire, with our company. In addition, the key
personnel of IndiaWorld Communications, or such other company, may decide not
to work for us. If we make other types of acquisitions, we could have
difficulty in integrating the acquired products, services or technologies into
our operations. These difficulties could disrupt our ongoing business,
distract our management and employees and increase our expenses which could
adversely affect our operating results and cause the price of our ADSs to
decline. Furthermore, we may incur indebtedness or issue additional equity
securities to pay for any future acquisitions. The issuance of additional
equity securities would dilute the ownership interests of the holders of our
ADSs.
Satyam Computer Services will control our company and may have interests
which conflict with those of our other shareholders or holders of our ADSs.
Satyam Computer Services will beneficially own approximately 56% of our
equity shares following this offering. As a result, it will be 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;
. issuing additional shares of capital stock, except for pro rata issuances
to existing shareholders;
. commencing any new line of business; or
. commencing a liquidation.
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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.
For additional information regarding our arrangements with Satyam Computer
Services and South Asia Regional Fund, please see "Management--Board
Composition" and "Principal Shareholders."
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 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.
For additional information regarding our intellectual property rights, please
see "Business--Intellectual Property."
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Our platform infrastructure and its scalability are not proven, and our
current systems may not accommodate increased use while maintaining acceptable
overall performance.
Currently, only a relatively limited number of 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.
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. As the Internet
becomes accessible by cellular telephones, personal data assistants, television
set-top boxes and other consumer electronic devices, and becomes deliverable
through other means involving coaxial cable or wireless transmission mediums,
we will have to develop new technology or modify our existing technology to
accommodate these developments. Our pursuit of these technological advances,
whether directly through internal development or by third party license, may
require substantial time and expense. We may be unable to adapt our Internet
service business to alternate delivery means and new technologies may not be
available to us at all.
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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 will have broad discretion in using the proceeds from this
offering and therefore investors will be relying on the judgment of our
management to invest those funds effectively.
Our management will have broad discretion with respect to the expenditure
of the net proceeds from this offering. We intend to use the net proceeds to
acquire the remaining 75.5% of the outstanding shares in IndiaWorld
Communications between April 1, 2000 and September 30, 2000, 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 additional possible strategic investments, partnerships and acquisitions.
Except for the approximately $75.0 million required to exercise our option to
purchase the remaining shares of IndiaWorld Communications, 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 will be relying on the judgment of our
management regarding the application of these proceeds. This offering is not
contingent on the completion of the IndiaWorld Communications acquisition. For
additional information regarding the expenditure of the net proceeds from this
offering, please see "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Expenditures."
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. At an extraordinary general meeting held on January 10,
2000, our shareholders adopted a special resolution waiving their preemptive
rights in connection with this offering for the issuance of up to $150 million
of equity shares represented by ADSs. 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. For additional information regarding the ability of holders of
ADSs to exercise preemptive rights, please see "Description of Equity Shares--
Preemptive Rights and Issue of Additional Shares."
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Holders of ADSs may be restricted in their ability to exercise voting rights.
As a holder of ADSs, you generally will 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. For additional information regarding
the voting rights of holders of equity shares, please see "Description of
Equity Shares--Voting Rights."
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 has been and may continue to be highly volatile.
The market price of our ADSs has fluctuated widely and may continue to do
so. For example, since our initial public offering in October 1999 through
February 1, 2000 and, after giving effect to the 4-for-1 split of our ADSs in
January 2000, the trading price of our ADSs has ranged from a high of $61.25
per ADS to a low of $7.50 per ADS. Many factors could cause the market price of
our ADSs to rise and fall. Some of these factors include:
. our failure to exercise our option to purchase the remaining shares of
IndiaWorld Communications or our failure to integrate successfully the
operations of the two companies;
. actual or anticipated variations in our quarterly operating results;
. announcement of technological innovations;
. conditions or trends in the Internet and electronic commerce industries;
. the perceived attractiveness of investment in Indian companies;
. acquisitions and alliances by us or others in the industry;
. changes in estimates of our performance or recommendations by financial
analysts;
. market conditions in the industry and the economy as a whole;
. introduction of new services by us or our competitors;
. changes in the market valuations of other Internet service companies;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
. additions or departures of key personnel; and
. other events or factors, many of which are beyond our control.
The financial markets in the United States and other countries have
experienced significant price and volume fluctuations, and the market prices of
technology companies, particularly Internet-related companies, have been and
continue to be extremely volatile. 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. For additional information regarding our
arrangements with the underwriters, please see "Underwriting."
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An active or liquid market for the ADSs is not assured, particularly in light
of Indian legal restrictions on equity share conversion and foreign ownership
of an Internet service provider.
We cannot predict the extent to which an active, liquid public trading
market for our ADSs will exist. Active, liquid trading markets generally result
in lower price volatility and more efficient execution of buy and sell orders
for investors. Liquidity of a securities market is often a function of the
volume of the underlying shares that are publicly held by unrelated parties.
Although ADS holders are entitled to withdraw the equity shares underlying the
ADSs from the depositary at any time, there is no public market for our equity
shares in India or the United States. 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 currently
have an aggregate of 21,782,250 equity shares and 19,205,000 ADSs outstanding,
giving effect to the 4-for-1 split of our ADSs in January 2000. All of our ADSs
currently outstanding and all of the ADSs to be sold in this offering 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 and certain of our shareholders has 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 Merrill Lynch & Co. for a period of 90 days from the date of this
prospectus. For additional information regarding possible future sales of our
securities, please see "Underwriting" and "Shares Eligible for Future Sale."
Forward-looking statements contained in this prospectus may not be realized.
This prospectus 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 prospectus. We do not intend to
update any of the forward-looking statements after the date of this prospectus
to conform such statements to actual results.
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FORWARD-LOOKING STATEMENTS
We have included statements in this prospectus which contain words or
phrases such as "may," "will," "will likely result," "believe," "expect," "will
continue," "anticipate," "estimate," "intend," "plan," "contemplate," "seek
to," "future," "objective," "goal," "project," "should" and similar expressions
or variations of such expressions, that are "forward-looking statements."
Actual results may differ materially from those suggested by the forward-
looking statements due to risks or uncertainties associated with our
expectations with respect to, but not limited to, our ability to implement our
strategy, our growth and expansion, our acquisition of IndiaWorld
Communications and the outcome of any disputes with third parties.
In addition, other factors that could cause results to differ materially
from those estimated by the forward-looking statements contained in this
document include, but are not limited to, general economic and political
conditions in India, Southeast Asia, and other countries which have an impact
on our business activities, changes in Indian and foreign laws, regulations and
taxes, changes in competition and other factors beyond our control, including
the factors described in "Risk Factors" contained in this prospectus.
CONVENTIONS WHICH APPLY TO THIS PROSPECTUS
Unless we indicate otherwise, all information in this prospectus reflects
the following:
. the 4-for-1 split of our ADSs in January 2000;
. no exercise by the underwriters of their overallotment option to purchase
up to 450,000 additional ADSs representing 112,500 equity shares; and
. no exercise of outstanding employee stock options.
CURRENCY OF PRESENTATION
In this prospectus, 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. For the
convenience of the reader, this prospectus 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 prospectus, all translations from Indian rupees to U.S. dollars
contained in this prospectus 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 and those of IndiaWorld Communications are prepared
in Indian rupees and presented in accordance with U.S. GAAP for the fiscal
years ended March 31, 1997, 1998 and 1999 and the six months ended September
30, 1999. Solely for your convenience, our financial statements and those of
IndiaWorld Communications as of and for the year ended March 31, 1999 and the
six months ended September 30, 1999 have been translated into U.S. dollars. In
this prospectus, any discrepancies in any table between totals and the sums of
the amounts listed are due to rounding.
For historical information regarding rates of exchange between Indian rupees
and U.S. dollars, please see "Exchange Rates."
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ENFORCEMENT OF CIVIL LIABILITIES
Our company is a limited liability company under the laws of the Republic of
India. All of our directors and executive officers, and several of the experts
named in this prospectus, reside outside the United States, and virtually all
of our assets and the assets of those persons are located outside the United
States. As a result, it may be difficult for investors to effect service of
process upon those persons within the United States or to enforce against us or
those persons in U.S. courts judgments obtained in U.S. courts, including
judgments predicated on the civil liability provisions of the federal
securities laws of the United States.
India is not a party to any international treaty relating to the recognition
or enforcement of foreign judgments. We have been advised by M.G. Ramachandran,
our Indian legal counsel, that in India the statutory basis for recognition of
foreign judgments is found in Section 13 of the Indian Code of Civil Procedure,
1908, or Indian Civil Code, which provides that a foreign judgment shall be
conclusive as to any matter directly adjudicated upon except:
. where the judgment has not been pronounced by a court of competent
jurisdiction;
. where the judgment has not been given on the merits of the case;
. where the judgment appears on the face of the proceedings to be founded
on an incorrect view of international law or a refusal to recognize the
law of India in cases where such law is applicable;
. where the proceedings in which the judgment was obtained were opposed to
natural justice;
. where the judgment has been obtained by fraud; or
. where the judgment sustains a claim founded on a breach of any law in
force in India.
Section 44A of the Indian Civil Code provides that where a foreign judgment
has been rendered by a court in any country or territory outside India which
the government of India has by notification declared to be a reciprocating
territory, it may be enforced in India by proceedings in execution as if the
judgment had been rendered by the relevant court in India. The United States
has not been declared by the government of India to be a reciprocating
territory for purposes of Section 44A. Accordingly, a judgment of a court in
the United States may be enforced in India only by a suit upon the judgment,
not by proceedings in execution. The suit must be brought in India within three
years from the date of the judgment in the same manner as any other suit filed
to enforce a civil liability in India. It is unlikely that a court in India
would award damages on the same basis as a foreign court if an action is
brought in India. Furthermore, it is unlikely that an Indian court would
enforce foreign judgments if it viewed the amount of damages awarded as
excessive or inconsistent with Indian practice. We have also been advised by M.
G. Ramachandran that a party may file suit in India against us, our directors
or our executive officers as an original action predicated upon the provisions
of the federal securities laws of the United States. To our knowledge, no such
suit has ever been brought in Indian courts. As a result, it may be difficult
for investors to enforce a judgment obtained in a court in the United States,
or to bring an original action in an Indian court, based on the civil liability
provisions of the federal securities laws of the United States against us or
our directors, executive officers or experts who reside outside the United
States.
26
<PAGE>
REPORTS TO OUR SECURITY HOLDERS
We are subject to the information requirements of the Securities Exchange
Act of 1934, as amended, applicable to foreign private issuers. As a result, we
are required to file reports, including annual reports on Form 20-F, reports on
Form 6-K and other information with the Securities and Exchange Commission. We
intend to submit to the SEC quarterly reports on Form 6-K which will include
unaudited quarterly financial information, for the first three quarters of each
fiscal year, in addition to our annual report on Form 20-F which will include
audited annual financial information. We also intend to file these reports
within the same time periods that apply to the filing by domestic issuers of
quarterly reports on Form 10-Q and annual reports on Form 10-K. The SEC's rules
generally require that domestic issuers file a quarterly report on Form 10-Q
within 45 days after the end of the first three fiscal quarters and file an
annual report on Form 10-K within 90 days after the end of each fiscal year.
These reports and other information filed or to be filed by us can be inspected
and copied at the public reference facilities maintained by the SEC at:
. Judiciary Plaza
450 Fifth Street, N.W.
Room 1024
Washington, D.C. 20549;
. Seven World Trade Center
13th Floor
New York, New York 10048; and
. Northwestern Atrium Center
500 West Madison Street
Suite 1400
Chicago, Illinois 60661-2511.
Copies of these materials can also be obtained from the Public Reference
Section of the SEC, 450 Fifth Street, N.W., Washington D.C. 20549, at
prescribed rates.
The SEC maintains a website at www.sec.gov that contains reports, proxy and
information statements, and other information regarding registrants that make
electronic filings with the SEC using its EDGAR system. As a foreign private
issuer, we are not required to use the EDGAR system, but we currently do so in
order to make our reports available over the Internet.
Our periodic reports and other information may also be inspected at the
offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
As a foreign private issuer, we are exempt from the rules under the Exchange
Act prescribing the furnishing and content of proxy statements, and our
executive officers, directors and principal shareholders are exempt from the
reporting and short-swing profit recovery provisions contained in Section 16 of
the Exchange Act.
We will furnish the depositary referred to under "Description of American
Depositary Shares" with annual reports, which will include annual audited
consolidated financial statements prepared in accordance with U.S. GAAP, and
quarterly reports, which will include unaudited quarterly consolidated
financial information prepared in accordance with U.S. GAAP. The depositary has
agreed with us that, at our request, it will promptly mail these reports to all
registered holders of ADSs. We will also furnish to the depositary all notices
of shareholders' meetings and other reports and communications that are made
generally available to our shareholders. The depositary will arrange for the
mailing of these documents to record holders of ADSs. For further details on
the responsibilities of the depositary and the information to be made available
to persons who purchase our ADSs in this offering, please see "Description of
American Depositary Shares" and "Additional Information."
27
<PAGE>
USE OF PROCEEDS
The net proceeds from this offering, after deducting underwriting discounts
and the estimated offering expenses payable by us, are estimated to be
approximately $123.3 million, or $141.9 million if the underwriters'
overallotment option is exercised in full, assuming an offering price of
$43.44 per ADS, the last reported sale price on February 1, 2000. We currently
estimate that we will use the proceeds from this offering as follows:
. approximately $75 million to acquire the remaining 75.5% of the
outstanding shares of IndiaWorld Communications;
. approximately $15 million to fund network infrastructure expansion and
enhancements; and
. the balance of the proceeds from this offering to develop content for our
Internet portal business, to advertise and promote our brand and for
general corporate purposes, including additional possible strategic
investments, partnerships and acquisitions.
In the ordinary course of our business we regularly engage in discussions and
negotiations relating to potential investments, strategic partnerships and
acquisitions. As of the date of this prospectus, we have no agreements
regarding any material transaction of this sort other than the pending
transaction with IndiaWorld Communications and the other pending transactions
described in this prospectus.
Our stockholders have approved an offering of up to $150 million of equity
shares represented by ADSs.
Except for the approximately $75 million required to exercise our option to
purchase the remaining shares of IndiaWorld Communications between April 1,
2000 and September 30, 2000, we have not yet finalized the amount of net
proceeds expected to be used specifically for the purposes specified above.
Further, this offering is not contingent on the completion of the IndiaWorld
Communications acquisition. In the unexpected event that transaction is not
completed, we will use the proceeds from this offering for general corporate
purposes. Accordingly, management will have significant flexibility in
applying the net proceeds of this offering. Management will not, however, be
able to use the proceeds to purchase real estate or to purchase securities on
stock exchanges as specified by the Ministry of Finance. We will be required
to submit to the Reserve Bank of India and the Ministry of Finance quarterly
statements with regard to the periodic repatriation of the net proceeds of
this offering. Pending any use, as described above, we intend to invest the
net proceeds in dollar or rupee denominated high quality, interest-bearing
instruments, provided that the government of India may require us to
repatriate the proceeds of this offering, which means converting the proceeds
into rupees and holding them in India.
28
<PAGE>
DIVIDEND POLICY
We have not declared or paid any cash dividends on our equity shares since
inception and do not expect to pay any cash dividends for the foreseeable
future. We currently intend to retain future earnings, if any, to finance the
expansion of our business. Investors seeking cash dividends should not purchase
our ADSs.
Under Indian law, a corporation may pay dividends upon a recommendation by
its Board of Directors and approval by a majority of its shareholders. Any
future cash dividends on our equity shares represented by ADSs will be paid to
the depositary in rupees and will generally be converted into dollars by the
depositary and distributed to holders of ADSs, net of the depositary's fees and
expenses. For additional information regarding the payment of dividends, please
see "Description of American Depositary Shares--Dividends and Distributions."
PRICE RANGE OF OUR ADSs
The following table sets forth, for the periods indicated, the reported high
and low trading prices for our ADSs on the Nasdaq National Market:
<TABLE>
<CAPTION>
Price Range
-------------
High Low
------ ------
<S> <C> <C>
Calendar Year 1999
Fourth Quarter (beginning October 19)....................... $43.75 $ 7.50
Calendar Year 2000
First Quarter (through February 1).......................... $61.25 $35.00
</TABLE>
The initial public offering of our ADSs was priced on October 18, 1999 at a
price of $4.50 per ADS.
On February 2, 2000, the last reported sale price of our ADSs was $47.25 per
ADS.
29
<PAGE>
CAPITALIZATION
The following table sets forth, as of September 30, 1999, the cash, short-
term debt and capitalization of our company on:
. an actual basis;
. a pro forma basis giving effect to our initial public offering of
19,205,000 ADSs (representing 4,801,250 equity shares) in October 1999
and the concurrent exercise of warrants to purchase an aggregate of
750,000 equity shares; and
. a pro forma as adjusted basis giving further effect to the sale by us of
3,000,000 ADSs (representing 750,000 equity shares) in this offering at
an assumed offering price of $43.44 per ADS (based on the closing price
of our ADSs on February 1, 2000), the payment of Rs.4,989.9 million
towards the acquisition of IndiaWorld Communications and the acquisition
of IndiaWorld Communications as if such acquisition had occurred on
September 30, 1999.
This information should be read in conjunction with our financial statements
and the related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of September 30, 1999
--------------------------------------------------------------------
Actual Pro Forma Pro Forma As Adjusted
-------------------- ---------------------- ----------------------
Indian U.S. Indian U.S. Indian U.S.
rupees dollars rupees dollars rupees dollars
---------- -------- ------------ -------- ------------ --------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ Rs. 36,614 $ 840 Rs.3,871,928 $ 88,826 Rs.4,257,809 $ 97,679
========== ======== ============ ======== ============ ========
Short-term debt:
Current installments
of long-term debt.... Rs. 45,500 $ 1,044 Rs. 45,500 $ 1,044 Rs. 45,500 $ 1,044
Current installments
of capital lease
obligations.......... 2,008 46 2,008 46 2,008 46
---------- -------- ------------ -------- ------------ --------
Total short-term
debt............... Rs. 47,508 $ 1,090 Rs. 47,508 $ 1,090 Rs. 47,508 $ 1,090
========== ======== ============ ======== ============ ========
Long-term debt:
Long-term debt,
excluding current
installments......... Rs. 91,000 $ 2,088 Rs. 91,000 $ 2,088 Rs. 91,000 $ 2,088
Capital lease
obligations,
excluding current
installments......... 3,709 85 3,709 85 4,618 106
---------- -------- ------------ -------- ------------ --------
Total long-term
debt............... 94,709 2,173 94,709 2,173 95,618 2,194
Stockholders' equity:
Equity shares, Rs.10
par value; 25,000,000
shares authorized;
16,231,000 shares
issued and
outstanding actual;
21,782,250 shares
issued and
outstanding pro
forma; 22,532,250
shares issued and
outstanding pro forma
as adjusted.......... 162,310 3,724 217,823 4,997 225,323 5,169
Additional paid-in
capital................ 455,496 10,450 4,235,297 97,162 9,602,308 220,287
Deferred compensation--
employee stock offer
plan................... (18,019) (413) (18,019) (413) (18,019) (413)
Accumulated deficit..... (443,597) (10,177) (443,597) (10,177) (443,597) (10,177)
---------- -------- ------------ -------- ------------ --------
Total stockholders'
equity............. 156,190 3,583 3,991,504 91,569 9,366,015 214,866
---------- -------- ------------ -------- ------------ --------
Total
capitalization..... Rs.250,899 $ 5,756 Rs.4,086,213 $ 93,742 Rs.9,461,633 $217,060
========== ======== ============ ======== ============ ========
</TABLE>
30
<PAGE>
EXCHANGE RATES
The following table sets forth, for the fiscal years indicated, information
concerning the number of Indian rupees for which one U.S. dollar could be
exchanged based on the average of the noon buying rate in the City of New York
on the last day of each month during the period for cable transfers in Indian
rupees as certified for customs purposes by the Federal Reserve Bank of New
York:
<TABLE>
<CAPTION>
Fiscal Year Ended March 31, Period End Average High Low
--------------------------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 (from December 12, 1995)........ Rs .34.35 Rs. 35.21 Rs. 38.05 Rs. 34.10
1997................................. 35.88 35.70 34.15 26.85
1998................................. 39.53 37.37 40.40 35.71
1999................................. 42.50 42.27 43.60 39.41
2000 (through February 1, 2000)...... 43.62 43.26 43.82 42.20
</TABLE>
31
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
You should read the following selected historical financial data in
conjunction with our financial statements and the related notes, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Unaudited Pro Forma Financial Data" included elsewhere in this prospectus. The
statement of operations data for the fiscal years ended March 31, 1997, 1998
and 1999 and the balance sheet data as of March 31, 1998 and 1999 are derived
from our audited financial statements included elsewhere in this prospectus
which have been audited by KPMG, India, independent accountants. The statement
of operations data for the six months ended September 30, 1999 and the balance
sheet data as of September 30, 1999 are derived from our unaudited financial
statements. Our unaudited financial statements have been prepared on
substantially the same basis as our audited financial statements and, in the
opinion of our management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
operations for such periods. Our financial statements are prepared in Indian
rupees and presented in accordance with U.S. GAAP for the fiscal years ended
March 31, 1997, 1998 and 1999 and the six months ended September 30, 1999.
Financial statements for the year ended March 31, 1999 and the six months ended
September 30, 1999 also have been translated into U.S. dollars.
The selected historical financial data for the period from December 12, 1995
(Inception) through March 31, 1996 are not presented because we had just begun
operations. Our revenues and total operating expenses for the period from
December 12, 1995 (Inception) through March 31, 1996 were approximately Rs.0
and Rs.634,000, respectively. As of March 31, 1996, our total assets were
approximately Rs.98,000.
The selected consolidated historical financial and other data includes a
presentation of EBITDA. EBITDA represents earnings (loss) before depreciation
and amortization, interest income and expense, income tax expense (benefit) and
extraordinary items. EBITDA is presented because we believe some investors find
it to be a useful tool for measuring a company's ability to fund capital
expenditures or to service future debts. EBITDA is not determined in accordance
with generally accepted accounting principles and should not be considered in
isolation or as an alternative to net income as an indicator of operating
performance or as an alternative to cash flow as a measure of liquidity.
Because EBITDA excludes interest expense and capital expenditures, negative
EBITDA would limit our ability to fund capital expenditures and service future
debt obligations. Our EBITDA is not comparable to that of other companies which
may determine EBITDA differently.
32
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended March 31, Six Months Ended September 30,
------------------------------------------------------ --------------------------------------
1997 1998 1999 1999 1998 1999 1999
-------------- ----------- ----------- ------------ ---------- ------------ ------------
Indian rupees U.S. dollars Indian rupees U.S. dollars
---------------------------------------- ------------ ------------------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ Rs. -- Rs. 6,805 Rs. 103,344 $ 2,371 Rs. 35,359 Rs. 208,227 $ 4,777
Cost of revenues........ -- 19,498 63,651 1,460 19,036 107,110 2,457
-------------- ----------- ----------- ---------- ---------- ------------ ----------
Gross profit (loss)..... (12,693) 39,693 911 16,323 101,117 2,320
Operating expenses:
Selling, general and
administrative
expenses.............. 25,801 61,817 151,120 3,466 54,987 161,113 3,696
Depreciation and
amortization.......... 536 19,383 49,162 1,128 19,729 48,576 1,114
-------------- ----------- ----------- ---------- ---------- ------------ ----------
Total operating
expenses............ 26,337 80,400 200,282 4,594 74,716 209,684 4,810
-------------- ----------- ----------- ---------- ---------- ------------ ----------
Operating loss.......... (26,337) (93,093) (160,589) (3,684) (58,393) (108,572) (2,490)
-------------- ----------- ----------- ---------- ---------- ------------ ----------
Interest expense, net... -- (7,498) (27,146) (623) (20,605) (473)
Other income............ -- -- 359 28 -- 517 12
-------------- ----------- ----------- ---------- ---------- ------------ ----------
Income taxes............ -- -- -- -- -- -- --
-------------- ----------- ----------- ---------- ---------- ------------ ----------
Net loss................ Rs. (26,337) Rs.(100,590) Rs.(187,376) $ (4,299) Rs.(69,011) Rs. (128,660) $ (2,951)
-------------- ----------- ----------- ---------- ---------- ------------ ----------
Net loss per equity
share.................. Rs.(114,508.27) Rs. (121.66) Rs. (17.31) $ (0.40) Rs. (7.61) Rs. (8.16) $ (0.19)
Weighted equity shares
used in computing net
loss per equity share.. 230 826,805 10,824,826 10,824,826 9,074,000 15,773,656 15,773,656
Other Financial Data:
EBITDA.................. Rs. (25,801) Rs. (73,709) Rs.(111,068) $ (2,548) Rs.(38,665) Rs. (59,479) $ (1,365)
Capital expenditures.... 3,230 77,070 146,135 3,352 41,565 280,614 6,438
Net cash provided by
(used in):
Operating activities... (30,426) (73,950) (171,388) (3,932) (50,355) 32,496 745
Investing activities... (3,230) (77,070) (146,000) (3,349) (41,565) (280,614) (6,438)
Financing activities... 35,138 159,449 433,023 9,934 108,674 159,185 3,652
</TABLE>
<TABLE>
<CAPTION>
As of September 30, 1999
-----------------------------------------------------
As of March 31, Satyam IndiaWorld
------------------------------------------------ Infoway Communications Pro Forma
1997 1998 1999 1999 Actual Actual As Adjusted
---------- ---------- ---------- ------------ ----------- -------------- -------------------------
Indian rupees U.S. dollars Indian rupees U.S. dollars
---------------------------------- ------------ ---------------------------------------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents.......... Rs. 1,482 Rs. 9,912 Rs.125,547 $ 2,889 Rs. 36,614 Rs. 1,270 Rs.4,257,809 $ 97,679
Working capital
(deficit)............ (33,628) (5,355) (21,706) (500) (189,378) 3,489 4,034,036 92,545
Total assets.......... 11,970 107,632 454,888 10,469 705,719 17,098 9,927,870 227,756
Long-term debt,
including current
installments......... -- 134,455 259,256 5,967 136,500 -- 136,500 3,132
Total stockholders'
equity (deficit)..... (26,969) (52,559) 67,618 1,556 156,190 4,772 9,366,015 214,866
</TABLE>
33
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
You should read the following unaudited pro forma financial data in
conjunction with our financial statements and the related notes, "Selected
Historical Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus. The unaudited pro forma financial data presents our unaudited pro
forma consolidated statements of operations for the year ended March 31, 1999
and the six months ended September 30, 1999 and our unaudited pro forma
consolidated balance sheet as of September 30, 1999. The pro forma consolidated
statements of operations give effect to our acquisition of IndiaWorld
Communications as if the IndiaWorld Communications acquisition had occurred at
the beginning of each period presented. The pro forma as adjusted consolidated
balance sheet gives effect to the ADSs issued and warrants exercised in
connection with our initial public offering of ADSs in October 1999, the
IndiaWorld Communications acquisition and the completion of this offering as if
our initial public offering, the IndiaWorld Communications acquisition and the
completion of this offering had occurred as of September 30, 1999.
The unaudited pro forma financial data appearing herein do not purport to
represent what our results of operations would have been had the IndiaWorld
Communications acquisition in fact occurred at the beginning of the periods
indicated or to project our results of operations for the present year or for
any future period or our financial position on September 30, 1999 or any other
date. These pro forma financial statements are based on the assumptions set
forth in the notes to such statements and should be read in conjunction with
our related financial statements and notes thereto, and those of IndiaWorld
Communications, included elsewhere in this prospectus.
34
<PAGE>
SATYAM INFOWAY LIMITED
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Satyam IndiaWorld Pro Forma
Infoway Communications Adjustments Pro Forma Consolidated
------------ -------------- ------------ -------------------------------
Indian rupees U.S. dollars
------------------------------------------------------------ ------------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Revenues................ Rs. 103,344 Rs. 13,958 Rs. Rs. 117,302 $ 2,691
Cost of revenues........ 63,651 7,440 71,091 1,631
------------ ---------- -------------- ----------
Gross profit............ 39,693 6,518 46,211 1,060
------------ ---------- -------------- ----------
Operating expenses:
Selling, general and
administrative
expenses.............. 151,120 3,009 154,129 3,536
Advances written off... -- 1,834 1,834 42
Depreciation and
amortization.......... 49,162 1,276 997,979 (A) 1,048,417 24,052
------------ ---------- ------------ -------------- ----------
Total operating
expenses............... 200,282 6,119 997,979 1,204,380 27,630
------------ ---------- ------------ -------------- ----------
Operating
income/(loss).......... (160,589) 399 (997,979) (1,158,169) (26,570)
Other (expense)/income,
net.................... (26,787) 591 (26,196) (601)
------------ ---------- ------------ -------------- ----------
Net income/(loss) before
taxes.................. (187,376) 990 (997,979) (1,184,365) (27,171)
------------ ---------- ------------ -------------- ----------
Provision for income
taxes.................. -- 978 (978) (22)
------------ ---------- ------------ -------------- ----------
Net (loss)/income....... Rs. (187,376) Rs. 12 Rs. (997,979) Rs. (1,185,343) $ (27,193)
============ ========== ============ ============== ==========
Net (loss)/income per
equity share........... Rs. (17.31) Rs. (69.21) $ (1.59)
============ ============== ==========
Weighted shares used in
computing net
(loss)/income per
equity share........... 10,824,826 17,126,076 (B) 17,126,076
============ ============== ==========
</TABLE>
35
<PAGE>
SATYAM INFOWAY LIMITED
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Satyam IndiaWorld Pro Forma
Infoway Communications Adjustments Pro Forma Consolidated
------------ -------------- ------------ -----------------------------
Indian rupees U.S. dollars
---------------------------------------------------------- ------------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Revenues................ Rs. 208,227 Rs. 10,388 Rs. Rs. 218,615 $ 5,015
Cost of revenues........ 107,110 4,714 111,824 2,565
------------ ---------- ------------ ----------
Gross profit............ 101,117 5,674 106,791 2,450
------------ ---------- ------------ ----------
Operating expenses:
Selling, general and
administrative
expenses.............. 161,113 2,215 163,328 3,747
Depreciation and
amortization.......... 48,576 791 498,990 (A) 548,357 12,579
------------ ---------- ------------ ------------ ----------
Total operating
expenses............... 209,689 3,006 498,990 711,685 16,326
Operating
income/(loss).......... (108,572) 2,668 (498,990) (604,894) (13,876)
Other (expense)/income,
net.................... (20,088) 58 (20,030) (460)
------------ ---------- ------------ ------------ ----------
Net income/(loss) before
taxes.................. (128,660) 2,726 (498,990) (624,924) (14,336)
------------ ---------- ------------ ------------ ----------
Provision for income
taxes.................. -- (994) (994) (23)
------------ ---------- ------------ ------------ ----------
Net (loss)/income....... Rs. (128,660) Rs. 1,732 Rs. (498,990) Rs. (625,918) $ (14,359)
============ ========== ============ ============ ==========
Net (loss)/income per
equity share........... Rs. (8.16) Rs. (28.35) $ (0.65)
============ ============ ==========
Weighted shares used in
computing net
(loss)/income per
equity share........... 15,773,656 22,074,906 (B) 22,074,906
</TABLE>
36
<PAGE>
SATYAM INFOWAY LIMITED
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Pro Forma Adjustments
Satyam IndiaWorld ------------------------------
Infoway Communications IPO Acquisition Pro Forma As Adjusted
----------- -------------- ------------- ------------ --------------------------
Indian rupees U.S. dollars
------------------------------------------------------------------------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents............ Rs. 36,614 Rs. 1,270 Rs. 3,835,314 C Rs. 384,611 (D) Rs.4,257,809 $ 97,679
Accounts receivable, net
of allowances.......... 102,281 2,368 104,649 2,401
Due from officers and
employees.............. 2,625 -- 2,625 61
Inventories............. 10,086 -- 10,086 231
Investments............. -- 7,060 7,060 162
Deferred tax assets..... -- 2,122 2,122 49
Other current assets.... 104,736 2,086 106,822 2,451
----------- ---------- ------------- ------------ ------------ --------
Total current assets... 256,342 14,906 3,835,314 384,611 4,491,173 103,035
Plant and equipment--
net.................... 396,544 695 397,239 9,113
Goodwill................ -- -- 4,985,128 (E) 4,985,128 114,364
Intangible asset........ 7,726 -- 7,726 177
Deferred tax assets..... -- 337 337 8
Other assets............ 45,107 1,160 46,267 1,061
----------- ---------- ------------- ------------ ------------ --------
Total assets........... Rs. 705,719 Rs. 17,098 Rs. 3,835,314 Rs.5,369,739 Rs.9,927,870 $227,757
=========== ========== ============= ============ ============ ========
Current liabilities:
Current installments of
long-term debt......... Rs 45,500 Rs -- Rs 45,500 $ 1,044
Current installments of
capital lease
obligation............. 2,008 -- 2,008 46
Short term borrowings... 59,475 -- 59,475 1,364
Trade accounts payable.. 116,241 -- 116,241 2,667
Due to parent company... 62,027 -- 62,027 1,423
Accrued expenses........ 35,320 144 35,464 814
Deferred revenue........ 111,653 4,168 115,821 2,657
Provision for taxes..... -- 4,264 4,264 98
Deferred tax
liabilities............ -- 1,656 1,656 38
Dividend payable........ -- -- -- --
Advances from
customers.............. 9,497 1,185 10,682 245
Deferred tax liability.. -- -- -- --
Other current
liabilities............ 3,999 -- 3,999 92
----------- ---------- ------------ --------
Total current
liabilities........... 445,720 11,417 457,137 10,488
Non-current liabilities:
Long-term debt,
excluding current
installments........... 91,000 -- 91,000 2,088
Capital lease
obligations, excluding
current installments... 3,709 909 4,618 106
Other liabilities....... 9,100 -- 9,100 209
----------- ---------- ------------ --------
Total liabilities...... 549,529 12,326 561,855 12,891
=========== ========== ============ ========
Stockholders' equity
Common stock, Rs.10 par
value.................. 162,310 2,000 55,513 (C) 5,500 (D)(F) 225,323 5,169
Additional paid-in
capital................ 455,496 -- 3,779,801 (C) 5,367,011 (D) 9,602,308 220,287
Deferred compensation--
employee stock offer
plan................... (18,019) -- -- -- (18,019) (413)
Retained earnings /
(deficit).............. (443,597) 286 (286)(F) (443,597) (10,177)
Accumulated other
comprehensive income... 2,486 -- (2,486)(F) -- --
----------- ---------- ------------- ------------ ------------ --------
Total stockholders'
equity................ 156,190 4,772 3,835,314 5,369,739 9,366,015 214,866
----------- ---------- ------------- ------------ ------------ --------
Total liabilities and
stockholders' equity.. Rs. 705,719 Rs. 17,098 Rs. 3,835,314 Rs.5,369,739 Rs.9,927,870 $227,757
=========== ========== ============= ============ ============ ========
</TABLE>
37
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SATYAM INFOWAY LIMITED
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
A Reflects the amortization of goodwill relating to the IndiaWorld
Communications acquisition on a straight-line basis over a period of five
years.
B Reflects the issuance of (a) 19,205,000 ADSs (representing 4,801,250 equity
shares) in connection with our initial public offering of ADSs in October
1999, (b) 750,000 equity shares upon the exercise of warrants in connection
with our initial public offering and (c) 3,000,000 ADSs (representing
750,000 equity shares) in this offering, as if such transactions had
occurred at the beginning of each period.
C Reflects net proceeds of (i) Rs.3,444.7 million from the sale of 19,205,000
ADSs (representing 4,801,250 equity shares) in our initial public offering
of ADSs in October 1999 and (ii) Rs.390.6 million from the exercise of
warrants to purchase 750,000 equity shares by Satyam Computer Services and
South Asia Regional Fund contemporaneous with our initial public offering.
D Reflects proceeds from the assumed sale of 3,000,000 ADSs (representing
750,000 equity shares) in this offering at an assumed price of $43.44 per
ADS (based on the closing price of our ADSs on February 1, 2000), net of
estimated offering discounts and expenses of approximately $7.0 million, and
the payment of Rs.4,989.9 million towards the IndiaWorld Communications
acquisition.
E Reflects the estimated goodwill arising from the IndiaWorld Communications
acquisition calculated as the excess of the purchase price of Rs.4,989.9
million over the fair market value of the net assets acquired estimated at
Rs.4.8 million.
F Reflects the elimination of the equity of IndiaWorld Communications upon its
acquisition by our company.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of Satyam Infoway should be read in conjunction with the financial
statements and the related notes included elsewhere in this prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties. For additional information regarding these risks and
uncertainties, please see "Risk Factors."
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, Open Market and Sterling Commerce, 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 and issued
19,205,000 ADSs (representing 4,801,250 equity shares) at a price of $4.50 per
share. We received approximately $80.4 million, net of underwriting discounts,
commissions and other offering costs.
In November 1999, we purchased 24.5% of the outstanding shares of IndiaWorld
Communications for a cash purchase price of Rs.1,222 million ($28.0 million).
In connection with this purchase, we acquired an option to purchase the
remaining 75.5% of the outstanding shares in IndiaWorld Communications for a
cash purchase price of Rs.3,765 million ($87.0 million). We may exercise this
option between April 1, 2000 and
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<PAGE>
September 30, 2000, provided that the exercise price will increase at a rate of
16% per annum from and after July 1, 2000 if the option is not exercised prior
to that date. We have made a Rs.513 million ($12.0 million) non-refundable
deposit towards the exercise of the option. We currently anticipate that we
will exercise the option to acquire the remaining outstanding shares of
IndiaWorld Communications in April 2000. For United States GAAP reporting
purposes, the financial statements of IndiaWorld Communications will be
consolidated with our financial statements. Upon exercise of the option, the
acquisition will be treated as a purchase. We plan to amortize goodwill on a
straight line basis over a period of five years. Most of the purchase price is
expected to represent goodwill.
IndiaWorld Communications recognized Rs.14.0 million ($320,201) and Rs.10.4
million ($238,303) in revenues for the year ended March 31, 1999 and the six
months ended September 30, 1999, respectively. IndiaWorld Communications
derives its revenues primarily from third-party advertising, web design and
hosting fees and, to a lesser extent, commissions from electronic commerce
transactions on its websites. IndiaWorld Communications' cost of revenues were
Rs.7.4 million ($170,682) and Rs.4.7 million ($108,135), respectively, during
these periods. IndiaWorld Communications had net income of Rs.11,256 ($258) and
Rs.1.7 million ($39,742), respectively, during these periods.
We currently operate India's largest private data network utilizing Internet
protocol with points of presence in 34 of the largest metropolitan areas in
India. As of January 31, 2000, we had more than 350 corporate customers for our
private network services and more than 129,000 subscribers for our Satyam
Online services. During January 2000, our eight websites generated
approximately 19 million page views and IndiaWorld Communications' 13 websites
generated approximately 18 million page views. Upon completion of our
acquisition of IndiaWorld Communications, we estimate that the aggregate number
of page views generated by our 21 websites will be less than the combined
number of page views of our and IndiaWorld Communications' websites immediately
prior to completion of the acquisition.
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 and our expenses of purchasing software from Sterling Commerce and
Open Market are denominated in U.S. dollars. Our foreign exchange loss was
Rs.0, Rs.5,613, Rs.615,189 ($14,158) and Rs.111,399 ($5,756) for fiscal 1997,
1998 and 1999 and the six months ended September 30, 1999, respectively.
Revenues
For reporting purposes, we classify our revenues into three divisions:
. consumer Internet access services;
. on-line portal and content offerings; and
. corporate network and technology services.
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. This increase in
consumer Internet access services division revenues as a percentage of total
revenues is due to the introduction of our consumer Internet access services in
November 1998.
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
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period in which the advertisements are hosted on our websites. This division
does not currently constitute a material portion of our total revenues.
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% revenues in fiscal 1999
and the six months ended September 30, 1999, respectively.
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 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.
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. IndiaWorld Communications' cost of revenues are mainly attributable to
payments to VSNL for web hosting and bandwidth services.
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.
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.
A total of 825,000 equity shares are reserved for issuance under our
Associate Stock Option Plan. As of December 31, 1999, we had granted an
aggregate of 225,000 options under our ASOP with a weighted average exercise
price equal to approximately Rs.795 per equity share. We recorded non-cash
compensation charges related
41
<PAGE>
to these grants in the aggregate amount of approximately Rs.36.9 million
($846,000) to be recognized over a three-year period in accordance with vesting
provisions. An additional 74,020 options with an exercise price equal to
Rs.5,904 ($135.45) per equity share were granted in January 2000.
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
150,000 subscribers in order to achieve positive EBITDA based on our current
network of 34 points of presence. As we expand our network to 40 points of
presence, we estimate that this minimum number of subscribers will increase to
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, we incurred
negative cash flow from operations of approximately Rs.30.4 million, Rs.74.0
million and Rs.171.4 million ($3.9 million), respectively. For the six months
ended September 30, 1999, our cash flow from operations was Rs.32.5 million
($0.7 million), respectively. Giving pro forma effect to our acquisition of
IndiaWorld Communications, we would have incurred negative cash flow from
operations of approximately Rs.169.0 million ($3.9 million) and Rs.34.8 million
($0.8 million), respectively, for the fiscal year ended March 31, 1999 and the
six months ended September 30, 1999. For the fiscal years ended March 31, 1997,
1998 and 1999 and the six months 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.128.7 million ($3.0 million), respectively. Giving pro
forma effect to our acquisition of IndiaWorld Communications, we would have
incurred net losses of approximately Rs.1.2 million (less than $0.1 million)
and Rs.0.6 million (less than $0.1 million), respectively, for the fiscal year
ended March 31, 1999 and the six months ended September 30, 1999. 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).
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
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the amount of Rs.21.3 million, a Rs.12.7 million increase in sale of hardware
and software, a Rs.7.4 million increase in revenues from UUNet Technologies on
account of increased utilization of the network by the customers of UUNet
Technologies 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 53.8% of revenues for the six months ended September 30,
1998, representing an increase of Rs.88.1 million, or 464%. 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.8.0 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.2.8 million.
Selling, general and administrative expenses. Selling, general and
administrative expenses were Rs.161.1 million ($3.7 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 193%. This
increase was primarily attributable to a growth in staff from 246 as of
September 30, 1998 to 518 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 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.48.6
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.28.9 million, or 147%. 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.20.8 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.10.2
million, or 96%. 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 ($3.0 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.
Year ended March 31, 1999 compared to the year ended March 31, 1998
Revenues. We recognized Rs.103.3 million ($2.4 million) in revenues for the
year ended March 31, 1999, as compared to Rs.6.8 million for the year ended
March 31, 1998, representing an increase of Rs.96.5 million. Fiscal 1999
revenues exclude Rs.71.5 million ($1.6 million) of deferred income representing
consumer access subscriptions which had been purchased but not yet used by the
consumer subscribers. This increase was primarily attributable to the
introduction of our business network services in April 1998 and consumer
Internet access services in November 1998. From March 31, 1998 to March 31,
1999, our number of corporate customers grew from approximately 30 to more than
300, and our number of subscribers grew to more than 29,000.
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Cost of Revenues. Cost of revenues were Rs.63.7 million ($1.5 million) or
62% of revenues for the year ended March 31, 1999, compared to Rs.19.5 million
or 287% of revenues for the year ended March 31, 1998, representing an increase
of Rs.44.2 million, or 227%. This increase was primarily attributable to a
Rs.10.5 million increase in software and hardware purchased for resale, a
Rs.7.9 million increase in leased line charges due to the increased capacity of
our network backbone, Rs.1.8 million towards web development charges and a
Rs.23.9 million increase in direct personnel costs for web development and
customer technical support.
Selling, general and administrative expenses. Selling, general and
administrative expenses were Rs.151.2 million ($3.5 million) for the year ended
March 31, 1999, compared to Rs.61.0 million for the year ended March 31, 1998,
representing an increase of Rs.90.2 million, or 148%. This increase was
primarily attributable to a growth in staff from 140 as of March 31, 1998 to
340 as of March 31, 1999 resulting in an increase in employee expenses of
Rs.11.5 million, a Rs.11.5 million increase in marketing expenses relating to
the launch of our consumer Internet access services division, and increases in
travel expenses of Rs.6.9 million, office rental expenses of Rs.1.3 million and
professional and consultant fees of Rs.10.4 million.
Depreciation and amortization. Depreciation and amortization was Rs.49.1
million ($1.1 million) for the year ended March 31, 1999, compared to Rs.19.4
million for the year ended March 31, 1998, an increase of Rs.29.7 million, or
153%. This increase was primarily attributable to capital expenditures of
Rs.146.1 million during the year ended March 31, 1999, including the purchase
of routers, modems, ports, servers and other capital equipment in connection
with the addition of eight points of presence to our network.
Interest expense. Interest expense was Rs.27.8 million ($0.6 million) for
the year ended March 31, 1999, compared to Rs.11.3 million for the year ended
March 31, 1998, representing an increase of Rs.16.5 million, or 146%. This
increase was attributable to increased interest payments from additional
borrowings of Rs.136.5 million during the year under a new term loan.
Other income. Other income was Rs.1.0 million (less than $0.1 million) for
the year ended March 31, 1999, compared to Rs.3.8 million for the year ended
March 31, 1998, representing a decrease of Rs.2.8 million, or 280%. This
decrease was primarily attributable to reduced interest income as excess funds
were deployed in the business.
Net loss. Our net loss was Rs.187.4 million ($4.3 million) for the year
ended March 31, 1999, compared to a net loss of Rs.100.6 million for the year
ended March 31, 1998.
Year ended March 31, 1998 compared to the year ended March 31, 1997
Revenues. We recognized Rs.6.8 million in revenues for the year ended March
31, 1998 from network service charges related to paid customer trials for our
private network services projects and the sale of hardware and software. We
recognized no revenues for the year ended March 31, 1997.
Cost of Revenues. Cost of revenues was Rs.19.5 million for the year ended
March 31, 1998, consisting primarily of costs of hardware and software
purchased for resale of Rs.3.5 million and leased line costs of Rs.16.0
million. We had no cost of revenues for the year ended March 31, 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses were Rs.61.0 million for the year ended March 31, 1998,
compared to Rs.25.8 million for the year ended March 31, 1997, representing an
increase of Rs.35.2 million. This increase was primarily attributable to a
growth in staff from 33 as of March 31, 1997 to 140 as of March 31, 1998
resulting in an increase in employee expenses of Rs.14.5 million and increases
in travel expenses of Rs.3.5 million, office rental expenses of Rs.2.6 million,
and general office expenses of Rs.9.1 million related to the development of our
consumer Internet access services division.
Depreciation and amortization. Depreciation and amortization was Rs.19.4
million for the year ended March 31, 1998, compared to Rs.0.5 million for the
year ended March 31, 1997, representing an increase of
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Rs.18.9 million. This increase was primarily attributable to capital
expenditures of Rs.77.1 million during the year ended March 31, 1998, including
the purchase of routers, modems, ports, servers and other capital equipment in
connection with the expansion of our network.
Interest expense. Interest expense was Rs.11.3 million for the year ended
March 31, 1998, consisting of interest on privately placed debentures. We had
no interest expense for the year ended March 31, 1997.
Other income. Other income was Rs.3.8 million for the year ended March 31,
1998, consisting of interest income from short-term deposits. We had no other
income for the year ended March 31, 1997.
Net loss. Our net loss was Rs.100.6 million for the year ended March 31,
1998, compared to Rs.26.3 million for the year ended March 31, 1997.
Quarterly Results of Operations Data
The following table sets forth selected unaudited quarterly statements of
operations data for each of the four fiscal quarters ended September 30, 1999
both in Rupees and as a percentage of revenues. Our management believes this
data has been prepared substantially on the same basis as the audited financial
statement included elsewhere in this prospectus, including all necessary
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of such data. You should read this quarterly data in
conjunction with our financial statements and the related notes included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------
December 31, September 30,
1998 March 31, 1999 June 30, 1999 1999
----------------- ----------------- ---------------- -----------------
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ Rs.22,014 100.0% Rs.45,971 100.0% Rs.80,803 100.0% Rs.127,424 100.0%
Cost of revenues........ 18,152 82.5 26,464 57.6 38,897 48.1 68,213 53.5
--------- ------ --------- ------ --------- ----- ---------- -----
Gross profit (loss)..... 3,862 17.5 19,507 42.4 41,906 51.9 59,211 46.5
Operating expenses:
Selling, general and
administrative
expenses.............. 38,767 176.1 57,365 124.7 62,831 77.6 98,558 77.3
Depreciation and
amortization.......... 13,707 62.3 15,728 34.2 21,507 26.6 26,793 21.0
--------- ------ --------- ------ --------- ----- ---------- -----
Total operating
expenses............. 52,474 238.4 73,093 158.9 84,338 104.2 125,351 98.4
Operating loss.......... (48,612) (220.9) (53,586) (116.5) (42,432) (52.3) (66,140) 51.9
Interest expense........ (7,877) (35.8) (9,261) (20.1) (9,625) (11.9) (10,980) 8.7
Other income............ 340 1.5 628 1.4 308 0.4 210 0.3
--------- ------ --------- ------ --------- ----- ---------- -----
Net loss................ Rs.56,149 255.2% Rs.62,219 135.2% 51,749 63.8% 76,910 60.4%
========= ====== ========= ====== ========= ===== ========== =====
</TABLE>
A high percentage of our operating expenses, particularly personnel and
facilities, are fixed in advance of any particular quarter. As a result,
unanticipated variations in the number and timing of consumer subscribers and
corporate customers, as well as the introduction of new product and service
offerings may cause significant variations in operating results in any
particular quarter. Due to the rapidly evolving nature of our business and our
limited operating history, we believe that period-to-period comparisons of
revenues and operating results are not necessarily meaningful and you should
not rely upon them as indications of future performance.
As indicated in the quarterly data, revenues increased substantially during
the quarters ended March 31, 1999, June 30, 1999 and September 30, 1999,
primarily as a result of the rapid growth in the number of subscribers for our
Satyam Online Internet access service. The number of Satyam Online subscribers
increased from approximately 4,700 on December 31, 1998 to approximately 28,500
on March 31, 1999 to approximately 60,000 on June 30, 1999 to more than 87,000
on September 30, 1999. The number of corporate customers also increased from
approximately 130 on December 31, 1998 to approximately 170 on March 31, 1999
to more than 300 on June 30, 1999 to 350 on September 30, 1999. Cost of
revenues as a percentage of revenues
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decreased from 82.5% for the quarter ended December 31, 1998 to 57.6% for the
quarter ended March 31, 1999 to 48.1% for the quarter ended June 30, 1999
before increasing to 53.5% for the quarter ended September 30, 1999. The high
cost of revenues as a percent of revenues for the quarter ended December 31,
1998 reflects the higher operating costs associated with our expanded network
backbone. During this quarter, we increased the capacity of our network
backbone from 64Kbps to 2Mbps. The decrease in cost of revenues as a percentage
of revenues during the quarters ended March 31, 1999 and June 30, 1999 reflects
operating efficiencies generated by spreading the fixed costs of our network
operations over a larger customer base. The increase in cost of revenues as a
percentage of revenues during the quarter ended September 30, 1999 reflects the
higher operating costs associated with our expanded network backbone. Selling,
general and administrative expenses increased over the four quarters as a
result of the aggressive marketing and promotion activities used to launch our
Satyam Online service nationally in India as well as an increase in our
employee base. Our number of employees increased from 246 at September 30, 1998
to 518 at September 30, 1999. Selling, general and administrative expenses as a
percentage of revenue decreased from 176.1% for the quarter ended December 31,
1998, to 124.7% for the quarter ended March 31, 1999, to 77.6% for the quarter
ended June 30, 1999, to 77.3% for the quarter ended September 30, 1999,
reflecting efficiencies generated from our larger revenue and customer base.
Depreciation and amortization increased over the four quarters as a result of
the purchase of additional routers, modems, ports, servers and other capital
equipment in connection with the expansion of our network. Interest expense
increased over the four quarters as a result of increased borrowings used to
fund the expansion of our operations.
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, we received Rs.38.5 million and
Rs.307.5 million ($7.1 million), respectively, in net proceeds from the private
sale of equity shares.
In July 1999, we agreed to sell 481,000 equity shares to Sterling Commerce
for $5.0 million. We completed this transaction in September 1999 and used the
funds for general corporate purposes, primarily the repayment of debt.
In October 1999, we completed our initial public offering and issued
19,205,000 ADSs (representing 4,801,250 equity shares) at a price of $4.50 per
share. We received approximately $80.4 million in cash, net of underwriting
discounts, commissions and other offering costs. We used approximately $28.0
million of these proceeds to purchase 24.5% of the outstanding shares of
IndiaWorld Communications and an additional $12.0 million as a non-refundable
deposit towards the exercise of our option to acquire the remaining 75.5% of
the outstanding shares of IndiaWorld Communications. We also used approximately
$12.0 million of these proceeds to fund network expansion and enhancements and
to advertise and promote our brand. We intend to use the balance of the
proceeds from our initial public offering for general corporate purposes.
Pending this use we have invested these proceeds in high quality, interest
bearing instruments. This offering is not conditioned on the completion of the
IndiaWorld Communications acquisition.
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The following table summarizes our statements of cash flows for the periods
presented:
<TABLE>
<CAPTION>
Fiscal Year Ended March 31, Six Months Ended September 30,
-------------------------------------------------- -------------------------------------
1997 1998 1999 1999 1998 1999 1999
Indian rupees U.S. dollars Indian rupees U.S. dollars
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Net loss................ Rs.(26,337) Rs.(100,590) Rs.(187,376) $(4,299) Rs.(69,011) Rs.(128,660) $(2,952)
Net decrease (increase)
in working capital..... (4,625) 7,257 (33,212) (7,642) (1,073) 112,580 2,583
Other adjustments for
non-cash items......... 536 19,383 49,200 1,129 19,728 48,576 1,114
Net cash provided by
(used in) operating
activities............. (30,426) (73,950) (171,388) (3,932) (50,355) 32,496 745
Net cash provided by
(used in) investing
activities............. (3,230) (77,070) (145,999) (3,349) (41,565) (280,614) (6,438)
Net cash provided by
(used in) financing
activities............. 35,138 159,449 433,023 9,934 108,674 159,185 3,652
Net increase (decrease)
in cash and cash
equivalents............ 1,482 8,429 115,636 2,653 16,754 (88,933) (2,040)
</TABLE>
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 from operating activities for the six months ended September 30, 1999
was Rs.32.5 million ($0.7 million) despite a net loss of Rs.128.6 million ($3.0
million) primarily due to the increase in trade accounts payable by Rs.99.0
million ($2.3 million), increase in dues to parent company by Rs.58.0 million
($1.3 million). Cash used in investment activities during six months ended
September 30, 1999 was Rs.280.6 million ($6.4 million), principally as a result
of the purchase of routers, modems, ports, servers and other capital equipment
in connection with the expansion of our network and installing the ATM backbone
in six cities. Cash provided by financing activities was Rs.159.2 million ($3.7
million) for six months ended September 30, 1999, which consisted primarily of
Rs.216.7 million ($5.0 million) net proceeds raised in a private placement of
our equity shares to Sterling Commerce, and Rs.59.5 million ($1.4 million) of
proceeds from a short term loan from IDBI Bank, partially offset by repayment
of Rs.122.0 million ($2.8 million) of debentures to Citibank.
Our aggregate billings for six months ended September 30, 1999 were
approximately Rs.261.0 million ($6.0 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.208.2 million ($4.8 million) and deferred Rs.52.8 million ($1.2
million) of billings in six months ended September 30, 1999. Our deferred
revenues balance was Rs.111.7 million ($2.6 million) as of September 30, 1999.
Cash used in operating activities of Rs.171.4 million ($3.9 million) during
fiscal 1999 was primarily attributable to a net loss of Rs.187.4 million ($4.3
million), increases in accounts receivable of Rs.43.1 million ($1.0 million),
other current assets of Rs.62.7 million ($1.4 million) and other assets of
Rs.21.2 million ($0.5 million), partially offset by depreciation of plant and
equipment of Rs.46.7 million ($1.1 million) and an increase in deferred
revenues of Rs.71.5 million ($1.7 million). Cash used in investment activities
during fiscal 1999 was Rs.146.0 million ($3.4 million), principally as a result
of the purchase of routers, modems, ports,
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<PAGE>
servers and other capital equipment in connection with the expansion of our
network. Cash provided from financing activities was Rs.433.0 million ($10.0
million) for fiscal 1999, which consisted primarily of Rs.307.5 million ($7.1
million) of net proceeds raised in a private placement of our equity shares to
South Asia Regional Fund and Satyam Computer Services, and Rs.136.5 million
($3.1 million) of proceeds from a term loan from the Export Import Bank of
India.
Our aggregate billings for fiscal 1999 were approximately Rs.174.8 million.
In accordance with our revenue recognition policy, we recognized Rs.103.3
million and deferred Rs.71.5 million of billings in fiscal 1999.
Cash used in operating activities of Rs.74.0 million during fiscal 1998 was
primarily attributable to a net loss of Rs.100.6 million, partially offset by
depreciation of plant and equipment of Rs.18.8 million and an increase in trade
accounts payable of Rs.15.5 million. Cash used in investment activities during
fiscal 1998 was Rs.77.1 million, principally as a result of the purchase of
network equipment and software. Cash provided from financing activities was
Rs.159.4 million in fiscal 1998, which consisted primarily of Rs.122.0 million
of unsecured debentures issued to Citibank, N.A. and Rs.38.5 million of net
proceeds raised in a private placement of our equity shares to Satyam Computer
Services.
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 promote our brand and to repay debt. As of September 30, 1999, we
had spent approximately Rs.429.7 million ($9.9 million) to develop and deploy
our network infrastructure. We estimate that we will spend approximately Rs.869
million ($20 million) to extend our network infrastructure to 40 cities in
India by April 2000, a substantial portion of which has already been incurred.
As of September 30, 1999, we had aggregate commitments for capital expenditures
in an amount equal to approximately Rs.152.8 million ($3.5 million) of which we
had advanced approximately Rs.107.2 million ($2.5 million). We expect to incur
operating losses and negative cash flows from operations for the foreseeable
future. As of September 30, 1999, we had approximately Rs.36.6 million ($0.8
million) of cash and cash equivalents for our working capital needs, as
compared to Rs.26.7 million as of September 30, 1998. As of September 30, 1999,
we had Rs.78.5 million ($1.8 million) of capacity under our Rs.215.0 million
($4.9 million) term loan with the Export Import Bank of India.
We may use a portion of the proceeds from this offering for additional
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 will also consider
opportunities to acquire additional sources of content for our Internet portal.
In the ordinary course of our business we regularly engage in discussions and
negotiations relating to potential investments, strategic partnerships and
acquisitions. As of the date of this prospectus, we have no agreements
regarding any material transaction of this sort other than the pending
transaction with IndiaWorld Communications and the other pending transactions
described in this prospectus. We will continue to be 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 this offering 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 prospectus. 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%. For additional information, please see "Restrictions on
Foreign Ownership of Indian Securities." 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
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<PAGE>
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.
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 would 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, and the projected rate of inflation in India for 1999 is 9.3%.
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.
Debt Financing
In June 1998, we obtained from the Export Import Bank of India a term loan
of Rs.215.0 million. This term loan is secured by a first charge on our fixed
assets and is guaranteed by Satyam Computer Services. The loan bears interest
at a rate of 15.5% per annum and is repayable in six equal half-yearly
installments commencing on December 20, 1999. As of September 30, 1999, we had
borrowed approximately Rs.136.5 million under this facility. On December 20,
1999, we repaid Rs.35.8 million of the outstanding balance under this term
loan. We are currently in the process of negotiating with Export Import Bank of
India regarding the prepayment of the remaining outstanding balance under this
term loan.
In June 1999, we obtained from IDBI Bank Ltd. short term loan commitments
aggregating Rs.100.0 million and a short-term credit facility of Rs.10.0
million. We used the proceeds from the short-term loans and the short-term
credit facility to purchase telecommunication equipment, including Internet
switches, for our network, and in turn repaid this indebtedness with the
proceeds from the issuance of equity shares to Sterling Commerce.
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<PAGE>
Impact of the Year 2000
As of January 27, 2000, we had not experienced any Year 2000-related
disruption in the operation of our systems. Although most Year 2000 problems
should have become evident on January 1, 2000, additional Year 2000-related
problems may become evident only after that date. For example, some software
programs may have difficulty resolving the so-called "century leap year"
algorithm which will also occur in the Year 2000.
Impact of Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. SFAS 133
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. We currently do not engage or plan to engage in derivative instruments or
hedging activities.
50
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BUSINESS
Background
We are the second largest national provider of Internet access and Internet
services to consumers and businesses in India, based on number of customers as
of December 31, 1999. We offer Internet access to both consumers and corporate
customers. We also operate an on-line portal and other on-line services. We
provide private network services, business-to-business electronic commerce
solutions and website development and hosting services to businesses in India.
Our comprehensive range of products and services enables our consumer and
business customers to communicate, transmit and share information, access on-
line content and conduct business remotely using our private data network or
the Internet.
We began providing corporate network and electronic commerce services to
businesses in April 1998, and we currently have more than 350 corporate
customers. We launched our Internet service provider business in November 1998,
becoming the first private Internet service provider to begin service after the
Indian government, which controls the largest Internet service provider in
India, opened the market to private competition. As of January 31, 2000, we had
more than 129,000 subscribers for our consumer Internet access service, Satyam
Online.
We also operate an on-line portal, satyamonline.com, and related content
sites specifically tailored for Indian interests worldwide. In November 1999,
we acquired 24.5%, and an option to acquire the remaining 75.5%, of the
outstanding shares of IndiaWorld Communications Private Limited, a leading
provider of Internet content and services in India. We have recently formed
alliances with a number of partners, including ICICI Bank, Citibank and Bank of
Madura, to offer banking products through satyamonline.com and to develop
payment gateways to facilitate electronic commerce and other activities through
our websites.
During January 2000, our eight websites generated approximately 19 million
page views and IndiaWorld Communications' 13 websites generated approximately
18 million page views. Upon completion of our acquisition of IndiaWorld
Communications, we estimate that the aggregate number of page views generated
by our 21 websites will be less than the combined number of page views of our
and IndiaWorld Communications' websites immediately prior to completion of the
acquisition. We currently operate India's largest national private data network
utilizing Internet protocol, which is an Internet industry standard for
tracking Internet addresses, routing outgoing messages and recognizing incoming
messages. We own and operate points of presence in 34 of the largest
metropolitan areas in India. Points of presence are telecommunications
facilities located in a particular market which allow our customers to connect
to the Internet through a local telephone call.
We seek to become the premier provider of Internet services in the Indian
market. We believe that demand for our services is significant in India and
growing rapidly as consumers and businesses seek alternatives to the
communications services offered by India's government-controlled telecom
providers. We intend to continue to focus on providing superior network
performance and high levels of customer service and technical support to
increase our subscriber base and maximize customer satisfaction.
Industry Overview
Development of the Internet. According to International Data Corporation,
the total number of Internet users worldwide is expected to grow from
approximately 140 million in 1998 to 400 million in 2002. The International
Data Corporation market data presented above and elsewhere in this prospectus
shows International Data Corporation's estimates derived from a combination of
vendor, user and other market sources and therefore may differ from numbers
claimed by specific vendors using difference market definitions or methods.
There can be no assurances that this projected amount will be achieved. The
large and increasing number of home and office computers linked to the
Internet, advances in network design, increased availability of Internet-based
software and applications, the emergence of useful content and electronic
commerce
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technologies, and convenient, fast and inexpensive Internet access will drive
Internet growth and usage in the near future.
Special Communications Needs of Businesses. As the Internet becomes more
developed and reliable, businesses are increasingly utilizing the Internet for
functions critical to their core business strategies such as sales and
marketing, customer service and project coordination. The Internet presents a
compelling profit opportunity for businesses by enabling them to reduce
operating costs, access valuable information and reach new markets. To maintain
a significant presence on the Internet, businesses typically purchase Internet
access services and establish a website. Internet access provides a company
with its basic gateway to the Internet, allowing it to transfer e-mail, access
information and connect with employees, customers and suppliers. A website
provides a company with a tangible identity and an interactive presence on the
Internet. Many corporations are also converting their information systems and
databases to web-enabled systems. International Data Corporation estimates that
revenue from Internet web hosting services worldwide will grow at a rate that
averages 96.0% annually from $0.8 billion in 1998 to $11.8 billion in 2002.
International Data Corporation also estimates that revenue from electronic
commerce spending worldwide will grow at a rate that averages 98% annually from
$50 billion in 1998 to $774 billion in 2002.
The Opportunity in India. As with many developing nations, the
telecommunications infrastructure in India historically has been controlled by
government-controlled telecom providers. The resulting service has been and
remains inferior to service in developed countries. Consequently, the services
available and the penetration of those services into the base of businesses and
consumers in India has, to date, been limited. At the same time, however, the
Indian economy continues to modernize and expand, particularly in sectors such
as software development that are dependent on a reliable communications
network. The growth of these industries is leading to an increasing base of
personal computers and wired homes and businesses in India with a resulting
increased demand for Internet services. We believe these trends, which mirror
trends in more mature economies, will continue to develop in India. Set forth
below is a table comparing the penetration of computers and on-line access in
India compared to the United States and the Asia-Pacific region in 1998:
<TABLE>
<CAPTION>
Asia Pacific
India United States Region(1)
----- ------------- ------------
(in millions, except
percentages)
<S> <C> <C> <C>
Population(2)............................ 984.0 270.3 2,769.2
Internet users........................... 0.5 62.8 10.2
Internet users as a percentage of
population.............................. 0.0% 23.2% 0.4%
On-line devices.......................... 0.3 87.4 9.5
On-line devices as a percentage of
installed base.......................... 11.0% 54.5% 24.9%
</TABLE>
- --------
(1) Australia, Hong Kong, India, Indonesia, South Korea, Malaysia, New Zealand,
Philippines, China, Singapore, Taiwan, Thailand and Vietnam.
(2) 1998 population data from U.S. Census Bureau.
Source: International Data Corporation, 1999.
The ability to exploit the Internet service provider and other data service
markets in India is currently inhibited by bandwidth limitations imposed by
cost and technical obstacles. Bandwidth refers to the measurement of the volume
of data capable of being transported in a communications system in a given
amount of time. Bandwidth rates are commonly expressed in terms of Kbps
(kilobits per second, or thousands of bits of data per second) or Mbps
(megabits, or millions of bits of data per second). Generally, bandwidth
remains very expensive in India. Prices for bandwidth are set by two agencies
in India, the Department of Telecommunications and the Telecom Regulatory
Authority and have remained high due to, among other things, capacity
constraints. Further, limitations in network architecture limit consumer
telephone dial-up connection speeds to 28 Kbps and below, less than the 33 to
56 Kbps on conventional dial-up telephone lines, and significantly less than
the up to 1.5 Mbps on cable modems, in the United States. Improvements in the
public telecommunications infrastructure and private network expansion are
expected to diminish these
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<PAGE>
limitations over time. As network capacity increases worldwide and the cost to
transmit data over the Internet continues to decrease, we also expect the
demand for Internet access, on-line content and similar services to increase.
To date, a significant amount of the usage of Indian content sites on the
World Wide Web has been driven by Internet users outside of India. We expect
this growth in personal computers and Internet users to increase the demand for
Internet content directed towards domestic Indian consumers as well as the
amount of electronic commerce in India. Set forth below is a table summarizing
International Data Corporation's projections for Internet use and electronic
commerce revenue in India:
<TABLE>
<CAPTION>
Annualized
1998 2002 growth
---- ------ ----------
(in millions, except
annualized growth)
<S> <C> <C> <C>
Indian Internet users... 0.5 6.6 94%
Indian installed
personal and network
computer base.......... 1.9 8.2 44%
Indian Internet commerce
revenues............... $3.0 $499.3 263%
</TABLE>
- --------
Source: International Data Corporation, 1999
Private market participants have not been able to exploit the market
opportunities in India until recently because the regulatory environment in
India largely prevented any competition with the national government-controlled
telecom providers. Until November 1998, the only Internet service provider
permitted in India was VSNL, a government sponsored and majority owned entity,
which at that time had approximately 150,000 subscribers. VSNL began providing
Internet access on August 15, 1995. We estimate that VSNL had approximately
350,000 subscribers at September 30, 1999. On November 6, 1998, the government
opened the Indian Internet service provider market to private competition. As
of November 30, 1999, the Indian government had granted Internet service
provider licenses to 175 companies, including 25 national licenses, 60 regional
licenses and 90 local licenses. The licensees include cable television
operators and joint ventures between local companies and large international
telecom providers. Internet service provider licenses are granted for 15 years,
with only nominal license fees. Internet telephony is not permitted by the
current regulations. Currently, pricing of Internet service provider services
is not regulated by the government of India, although it has the power to elect
to do so.
Satyam Solution
We believe that the growth of the Internet and other network services in
India has been inhibited by relatively high costs and poor user experiences
caused by an inadequate telecommunications infrastructure and slow network
connection speeds. We are committed to expanding and enhancing our private
network backbone and to providing high quality technical support to attract
users to our services. We believe that our products and services provide our
customers with the ability to exchange information, communicate and transact
business over the Internet with speed, efficiency, reliability and security
superior to other Internet service providers. Key advantages of the Satyam
solution include:
. National private Internet protocol network backbone. We currently
operate India's only private national Internet protocol data network.
Our network provides the platform for the national delivery of Internet
access to consumers as well as the backbone for our full range of
corporate network and technology services. Our private network
infrastructure allows corporations to establish virtual private
networks and electronic data interchanges without dealing directly with
the government telecom providers. The planned development of our own
Internet gateways will further reduce our reliance on the government
telecom providers.
. Superior end-user performance and customer support. We provide a high
level of customer service, network performance and technical support to
maximize customer satisfaction. Currently, approximately one-third of
our employees are engaged in our customer service or technical support
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departments, which operate 24-hours-a-day, seven-days-a-week. Our
network engineers continually monitor network traffic and congestion
points to deliver consistent, high quality network performance. We plan
to maintain a relatively low ratio of subscribers to modems. As of
November 30, 1999, our subscriber to modem ratio was approximately ten
to one. Our strategy of providing superior network performance and
customer service is designed to result in significant customer growth
from referrals and industry recognition.
. Internet content and electronic commerce websites customized for the
Indian market. We view the Indian market as a series of specific market
segments with unique cultural and topical interests, rather than an
extension of a homogeneous, worldwide Internet market. We have
assembled a team of India-based employees familiar with the local
culture, language and business environments in our markets to develop
Internet content and electronic commerce websites tailored for the
Indian market. We regularly incorporate new and original third-party
content suited to our local and regional audiences to enhance our
customers' on-line experience and to attract new users both within
India and abroad. As a result of our local market knowledge, we have
been able to increase traffic flow to our websites and to create brand
awareness for the Satyam Online service. Our acquisition of IndiaWorld
Communications provides us with additional content sites tailored to
Indian interests worldwide.
. End-to-end network solutions for business customers. We provide our
business customers with a comprehensive range of Internet, connectivity
and private network solutions complemented by a broad base of web-based
business applications. Our corporate services range from dial-up and
dedicated Internet access, international roaming to virtual private
networks, web implementation and electronic commerce solutions. Our
end-to-end solutions enable our corporate customers to address their
networking and data communication needs efficiently without having to
assemble products and services from different value-added resellers,
Internet service providers and information technology firms.
. Strategic partnerships with industry leaders. We have developed
exclusive strategic relationships with leading Internet and
telecommunications manufacturers. For example, we are the exclusive
network partner for UUNet Technologies, providing its customers with
roaming services in India. Our exclusive arrangements with Sterling
Commerce and Open Market provide our customers access to cutting edge
business-to-business electronic data and communication applications and
Internet electronic commerce software.
Business Strategy
Our goal is to become the premier provider of Internet and network services
to consumers and businesses in India. Our principal business strategies to
accomplish this objective are:
. Increase penetration in our existing markets by expanding awareness of
the Satyam Online brand name to capitalize on our first mover advantage
in India. We intend to capitalize on our first-to-market advantage in
India to establish national service and a brand name in advance of
other private competitors. We are presently the largest national
independent Internet service provider in India, based on number of
subscribers. We currently operate in 34 cities in India and expect to
provide service in 40 cities by April 2000. We intend to accelerate
penetration within our existing markets and enter additional targeted
markets by creating awareness of the "Satyam Online" brand name. We
intend to make Satyam Online synonymous with superior Internet
connectivity and with on-line content tailored specifically for the
Indian market and Indian interests worldwide. Our marketing strategy
includes print, television and radio advertising, direct mailing
campaigns targeting personal computer owners, co-branding with
"cybercafes" and joint-marketing programs with leading schools and
universities in India.
. Expand our products and services with new technologies to enable our
customers to use the Internet more effectively. We continually seek to
expand the breadth of our product and service offerings with new
technologies. For example, we plan to open by April 2000 approximately
100 cybercafes to
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tap the large non-personal computer owner market in India. Our
cybercafes will prominently display the Satyam Online brand and offer a
full range of our Internet connectivity services. We intend to introduce
a number of other new products and services in the near future,
including e-mail designed for regional Indian dialects, a user
customized portal site, tele-voice mail, e-mail to fax, micro-payments
and a supply chain management product.
. Strengthen our Internet portal and other Internet content websites with
more India-specific content tailored to Indian interests worldwide. Our
portal, satyamonline.com, functions as an initial gateway to the
Internet, the user's starting point for web browsing and other Internet
services, for our consumer Internet service provider subscribers. The
Satyam Online portal is a media rich, user friendly, interactive
website offering hyperlinks to a wide variety of websites and services,
including our own websites. We believe that our acquisition of
IndiaWorld Communications will significantly enhance the content
offered on our websites. Our company and IndiaWorld Communications
combined have a total of 21 websites catering to a variety of Indian
interests within and outside of India. To achieve our goal of
developing the premier Internet portal focused on the Indian market, we
intend to continue to expand and improve the quality of
satyamonline.com, and are actively developing additional proprietary
websites oriented towards topical and cultural interests of Indians
worldwide. As the availability of Internet access expands in India, we
believe that increasing numbers of Internet users will be attracted to
our high quality websites and on-line content designed specifically for
the Indian consumer. We will seek to attract advertisers, electronic
commerce merchants and third-party content providers trying to reach
our users in order to generate additional revenues for Satyam Online.
. Increase our range of electronic commerce services to increase our
online presence and pursue additional revenue opportunities. We believe
that a significant opportunity exists in the electronic commerce
marketplace for Satyam Online. Our goal is to create a leading online
marketplace for consumers and businesses to buy and sell a variety of
products and services. To this end, we have entered into alliances with
ICICI Bank and Bank of Madura, two leading financial institutions in
India. We believe that to be successful we must offer consumers a blend
of content, commerce and customer service, delivered in a highly
reliable and personalized manner. We will continue to enter into
selective alliances with "blue chip" names in India in order to build
our presence in electronic commerce.
. Expand customer distribution channels through strategic partnerships to
take advantage of the sales and marketing capabilities of our strategic
partners. We intend to continue to expand our customer acquisition
channels, for both our consumer Internet access and corporate network
and technology services. We have arrangements with two leading personal
computer manufacturers, Compaq and Hewlett-Packard, to bundle our
Satyam Online Internet access service with the sale of their personal
computers in India. We are working with Philips Electronics to deploy a
television set-top box in India for accessing the Internet using phone
lines and are exploring other initiatives to provide Internet access
through devices other than personal computers. We have also formed
strategic alliances with computer and electronics retailers. We expect
to form additional strategic alliances and referral programs in the
future with selected telecommunication service and equipment suppliers,
network service companies, systems integrators, computer resellers and
retail chains in India.
. Invest in the continued enhancement and expansion of our network
infrastructure to support customer growth, enter new markets and
accommodate increased customer usage. We intend to continue to increase
the capacity and geographic reach of our network in order to support
subscriber growth, enter new markets and accommodate increased customer
usage. Our recently announced alliance to form a joint venture with RPG
Netcom to provide broadband cable services in Calcutta is one of our
first investments in alternative Internet access and is an initiative
to introduce lower cost access to the Internet. We are committed to
using proven technologies and equipment and to providing superior
network performance. We recently deployed asynchronous transfer mode,
or ATM, switches on six points of presence along our network. These ATM
switches enable us to allocate our network capacity more efficiently.
Our Internet service provider license permits us to establish and
maintain
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our own direct connections to the international Internet, either by
purchasing satellite earth stations or by leasing or purchasing capacity
on transoceanic fiber optic cables. We believe that as the size and
capacity of our network infrastructure grows, its large scale and
national coverage will create economies of scale and barriers to entry
for our competitors.
. Pursue selective strategic investments, partnerships and acquisitions
to expand our customer base, increase utilization of our network and
add new technologies to our product mix. We believe that our growth can
be supplemented by selective acquisitions of complementary businesses,
particularly third party websites and content providers for our portal,
satyamonline.com. As with our acquisition of IndiaWorld Communications,
we will continue to seek websites or portals which will complement or
otherwise improve the offerings of satyamonline.com. We will also
consider acquisitions of Internet service providers that have developed
local or regional points of presence and that have a significant or
growing subscriber base in our current or targeted markets. We believe
that as the Internet service provider market in India evolves,
customers will place greater emphasis on Internet service provider
performance, network coverage, reliability, value-added services and
customer support. As a result, smaller start-up Internet service
providers may be unable to remain competitive on a national or regional
basis, unless they significantly expand the scope of their operations.
These trends could lead to a future consolidation of Internet service
providers in India. In addition, we may seek to expand our market
presence in our corporate network business through the acquisition of
web hosting, data center, web implementation and/or systems integration
companies.
Service Offerings
We offer a wide range of Internet and other network services to meet the
needs of consumers and corporate customers. These services can be divided into
three categories:
. consumer Internet access services;
. on-line portal and content offerings; and
. corporate network and technology services.
Consumer Internet Access Services
We launched our consumer Internet service provider business on November 22,
1998, just 15 days after the government of India opened the market to private
competition. Within 45 days, we had initiated service in 12 cities, including
Ahmedabad, Bangalore, Bombay (Mumbai), Calcutta, Cochin, Coimbatore, Delhi,
Hyderabad, Ludhiana, Madras (Chennai), Pondicherry and Pune. We currently own
and operate points of presence in 34 of the largest metropolitan areas in
India. We plan to extend service to 40 cities by April 2000 which we believe
will allow us to provide Internet access services to approximately 85% of the
installed personal computer base in India. As of January 31, 2000, we had more
than 129,000 subscribers. Our expansion plan targets major metropolitan areas
and state capitals that we believe have a sufficient number of installed
personal computers to support a point of presence.
Our strategy is to offer better and more extensive services to our
subscribers than our competitors, with an emphasis on ease of use. With VSNL
and many of the regional access providers, the user must apply for service
and, frequently, wait one or more weeks for service to begin. Our subscribers
purchase a ready-to-use CD-ROM available at bookstores, computer stores and
universities, or bundled with a personal computer, to access our service
immediately. Our on-line registration process is available to initiate service
and purchase renewals. We also support our subscribers with a 24-hour-a-day,
seven-day-a-week call center staffed with trained technicians.
Our service offerings come in a number of packages, designed to attract
beginning Internet users and service the needs of advanced users. Our Discover
30 offering is a "starter pack" designed for anyone wishing to explore the
Internet or as a second connection for subscribers who primarily use one of
our competitors'
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services. Each of our other Discover offerings is designed for regular Internet
users. All of our Discover Internet access offerings are bundled with a package
of value-added products, including one megabyte of either POP3 or Imap e-mail,
a one page pre-templated web page and our 24-hour-a-day, seven-day-a-week
customer service. Our Discover offerings are offered only on a prepaid basis
and can be renewed on-line. Each Discover offering is bundled with
approximately Rs.6,500 ($149) retail value of licensed software, including
Viagrafix and E-safe. Viagrafix is an interactive computer-based tutorial
designed to introduce the Internet to new users. E-safe is a virus removal and
parental control tool. We also offer e-mail capability without Internet access.
Our consumer Internet service provider offerings include:
<TABLE>
<CAPTION>
Service Summary Description Initial Price Renewal Price
------- ------------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Discover 30 30 hours of Internet access over a 3-month period Rs.690 ($ 16) Not applicable
Discover 90 90 hours of Internet access over a 10-month period Rs.2,290 ($ 53) Rs.1,990 ($ 46)
Discover 180 180 hours of Internet access over a 12-month period Rs.3,790 ($ 87) Rs.3,490 ($ 80)
Discover 360 360 hours of Internet access over a 12-month period Rs.6,490 ($149) Rs.5,990 ($137)
Discover 600 600 hours of Internet access over a 12-month period Rs.8,990 ($206) Rs.8,490 ($195)
</TABLE>
The most common connection technique is for subscribers to dial-up to our
system using a personal computer configured with a modem. A subscriber who is
within local dialing range of one of our points of presence can access the
Internet with a local telephone call. In addition to paying for Internet
access, the customer is responsible for the cost of the call, which currently
is 1.3 rupees (3.0c) per 3 minutes. We estimate that substantially all of our
subscribers access our services with a local telephone call. Subscribers who
access our services with a long-distance telephone call are responsible for the
long-distance charges. In December 1999, we formed a strategic alliance with
RPG Netcom to develop broadband Internet services to consumers and businesses
over RPG Netcom's cable television network in Calcutta. We are also exploring
new technologies which use other devices, such as television set-top boxes,
cellular telephones and other wireless appliances, to provide Internet access.
We recently announced a collaboration with Indira Gandhi National Open
University to make trial Internet access available to 70,000 students of the
School of Information and Computer Science. Under the program, participating
students pay approximately 40% of our normal hourly access charges for 20 hours
of Internet access between the hours of 11:00 p.m. and 7:00 a.m. These students
comprised approximately 5,000 of our 60,000 subscribers as of June 30, 1999 and
our more than 87,000 subscribers as of September 30, 1999, and approximately
7,000 of our more than 118,000 subscribers as of December 31, 1999.
We believe that a critical element of consumer satisfaction is to have an
adequate number of access lines available to assure prompt and reliable
connection to our service. Telephone lines are in short supply in India, and
there is frequently a waiting period of one or more months to acquire
additional lines. We have ordered in advance a significant number of additional
lines to provide timely capacity additions as we grow our service. We plan to
maintain a relatively low ratio of subscribers to modems. When we commence
service in a city, we initially have approximately one modem-equipped line
available for each ten subscribers. As of November 30, 1999, our subscriber to
modem ratio was approximately ten to one.
Subscribers local to a call center can call our call center facility for
customer service and technical support through a local telephone number.
Subscribers can also e-mail their questions directly to a customer service and
technical support address at our company.
On-line Portal and Content Offerings
We operate an on-line portal, satyamonline.com, and multiple on-line content
sites that are tailored to needs of Indian interests worldwide. Our portal site
is designed to be the initial launch screen for all of our Satyam Online
customers, but can also be accessed by Internet users worldwide. We seek to
establish satyamonline.com as a leading Indian Internet portal. As a portal, we
provide a gateway to the Internet by offering information services, directory
tools, e-mail, contests, Internet chat and electronic commerce activities such
as online shopping and classified ads. We also allow the user to personalize
the satyamonline.com start page to include links to the user's most frequently
used features on the Internet, including particular search
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engines, free mail providers and favorite content sites. For online merchants,
we allow them to create their own e-commerce store hosted on our
satyamonline.com virtual shopping mall web page. Our customization features
encourage users to make satyamonline.com their first stop on the Internet and
allow us to provide special privileges and benefits to our Internet service
provider subscribers compared to users who access satyamonline.com through
another service provider. Our objective is to attract as many users as possible
to generate revenues from advertising, sponsorship fees and electronic commerce
transaction commissions.
In addition to satyamonline.com, our India-specific content sites include:
<TABLE>
<CAPTION>
Feature Website Description
------- ------- -----------
<C> <C> <S>
News and Features news.satyamonline.com Real-time news site with
domestic and international
news, weather and
entertainment.
Entertainment entertainment.satyamonline.com A comprehensive entertainment
guide that covers film,
television, music, culture,
people and performing arts.
Indian Movies movies.satyamonline.com Indian movie channel
featuring movie reviews,
archives, interviews, chats
and local movie listings.
Car and Auto carstreet.com Comparison shopping site for
automobiles.
Health appollohealth.satyamonline.com An online guide to healthy
living with responses to
health questions by qualified
doctors.
Carnatic Music carnaticmusic.com Indian classical music site
where users may chat with
artists, hear CD music clips
and buy concert tickets on-
line. This site also contains
a link to an on-line music
store.
Personal Finance walletwatch.com Personal finance site
featuring stock quotes,
portfolio manager, links to
brokerage firms and editorial
content.
Games gamermania.com A service that provides
online gaming, reviews, and
shopping.
</TABLE>
Today, there are probably more non-resident Indians, than Indians residing
domestically, with access to the Internet. As a result, many content sites,
including satyamonline.com, have more users located outside of India than
within. However, we believe that the market for content and services within
India will develop rapidly. To expand usage of our services domestically, we
believe that we must provide more services of daily value, such as the ability
to buy groceries or movie tickets on-line or to check an up-to-date movie
review before buying a ticket. New features that we expect to deploy in 2000
include instant messaging, travel services (including online booking), Web-
based calendaring and scheduling, a drug store, an auction service and a music
portal with streaming audio.
IndiaWorld Communications. On November 29, 1999, we purchased 24.5% of the
outstanding shares of IndiaWorld Communications for a cash purchase price of
Rs.1,222 million ($28.0 million). In connection with the acquisition, the
shareholders of IndiaWorld Communications granted us an option to acquire the
remaining 75.5% of the outstanding shares of IndiaWorld Communications for a
cash purchase price of Rs.3,765 million ($87.0 million) exercisable between
April 1, 2000 and September 30, 2000, provided that the exercise price will
increase at a rate of 16% per annum after July 1, 2000 if the option is not
exercised prior to that date. We have made a Rs.513 million ($12.0 million)
non-refundable deposit towards the exercise price of the option. We intend to
use a portion of the proceeds from this offering to exercise our option to
purchase the remaining 75.5% of the outstanding shares of IndiaWorld
Communications.
IndiaWorld is a leading provider of Internet content and services in India.
Incorporated in 1992, IndiaWorld has primarily focused on the Indian Internet
marketplace and has operated the website known as the IndiaWorld Network,
located at www.Indiaworld.co.in, since 1996. Since that time, IndiaWorld has
expanded its
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Internet operations to target both consumers and businesses. Our acquisition of
IndiaWorld Communications provides us with additional content sites tailored to
Indian interests worldwide. Upon completion of the acquisition, we intend to
hire IndiaWorld Communications' approximately 15 technology related employees
and to operate IndiaWorld Communications' 13 websites, together with our
existing eight websites, under the satyamonline.com portal.
The IndiaWorld Network is a leading online network specifically tailored to
Indian interests worldwide. During January 2000, IndiaWorld Communications'
network of 13 websites generated over 18 million page views. The IndiaWorld
Network consists of the following thirteen Indian-specific content sites:
<TABLE>
<CAPTION>
Feature Website Description
------- ------- -----------
<C> <C> <S>
News samachar.com News channel which provides a
comprehensive selection of
international, regional and local
news. Users can react to the
latest headlines through chats,
debates and polls.
Sports khel.com Sports channel, which presently
focuses on Cricket.
Search Engine khoj.com Search engine which utilizes
sophisticated search capabilities
to complete country-specific and
worldwide searches.
Community Information nagar.com Family and community website
targeting Indians. It offers free
email, homepages and a calendar
application.
Food bawarchi.com Food channel that allows users to
post, share and exchange Indian
cooking advice and recipes.
Personal Finance dhan.com Personal finance channel which
provides online financial
information and business news.
Indian Technology News indialine.com Technology channel which provides
news, trends, interviews and
developments in the Internet
marketplace.
Travel indiatravelog.com Travel channel that offers travel
guides, news, reviews, resources
and advice as well as a forum for
discussions on travel.
Indian History itihaas.com History channel which provides
historical information regarding
India.
Favorites manpasand.com Search engine which provides links
to popular websites for news,
business, Internet, investments,
entertainment and travel.
Asian News newsasia.com News channel which provides news
from leading Asian publications.
Indian Elections indiavotes.com Opinion poll site and coverage of
Indian elections.
News via Email IndiaWorld Headlines Free daily service that delivers
the top Indian news headlines via
email.
</TABLE>
IndiaWorld also offers comprehensive services to its corporate customers.
IndiaWorld offers end-to-end web development solutions, including web design,
development, implementation and hosting services, for large corporate customers
in India. Some of IndiaWorld's primary corporate clients include Tata Group,
Aditya Birla Group, ICICI, Kotak Group, Amul, Rajshri, BNP, IndusInd Bank,
Templeton, Alliance and ITC Threadneedle. IndiaWorld also develops Internet
applications for businesses. Some of these applications include NetServ, an
Internet messaging product, and Internet Kiosk Application. We believe that our
acquisition of IndiaWorld Communications, together with our alliances with
ICICI Bank, Bank of Madura and Citibank, position us to become a leading
electronic commerce company in India.
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Serwiz.com. In January 2000, we launched serwiz.com, a portal functioning as
a virtual marketplace to buy and sell professional services. Serwiz.com links
providers and consumers of a wide variety of services, including medical,
engineering, legal, architectural, accounting, payroll, veterinary, bank office
operations, insurance claims processing, content development, logistic
management, educational and research and development. We will receive a portion
of the electronic commerce revenue generated from these service offerings.
SeekandSourcE.com. In December 1999, we launched SeekandSourcE.com, a portal
that facilitates business to business commerce over the Internet.
SeekandSourcE.com links business customers, corporate purchasing managers,
manufacturers, suppliers and distributors together for the purpose of
completing corporate transactions and reducing associated transaction costs. In
conjunction with ICICI Bank, we plan to implement a payment settlement feature
whereby registered corporate users will be able to finalize settlement of
purchases made through SeekandSourcE.com from an ICICI Bank account.
ICICI Bank. In December 1999, we entered into a memorandum of understanding
with ICICI Bank to form a joint venture to offer online savings accounts,
electronic bill payment and other retail banking products and services over the
Internet. We anticipate we will receive a fee linked to these transactions.
ICICI Bank serves more than 250,000 accountholders through 60 branches across
throughout India and was the first bank in India to introduce banking over the
Internet.
Bank of Madura. In November 1999, we entered into a memorandum of
understanding with Bank of Madura to form a joint venture to develop an
electronic commerce portal offering products and services to Indians living
abroad. The portal will enable users to buy Indian goods and services, purchase
real estate in India, invest in Indian securities and arrange travel to and
within India as well as providing links to educational institutions and other
organizations serving public causes within India. The portal will also provide
news, syndicated columns, articles, links to India-related websites, discussion
boards, opinion polls and chat rooms. On February 1, 2000, we acquired a U.S.-
based website, www.return2india.com, which we will contribute to this venture
to form the core of the web initiative. At present, our capital obligation to
this venture is Rs.60 million ($1.4 million). We will receive a portion of the
electronic commerce revenue generated from these product and service offerings.
Founded in 1943, Bank of Madura operates 278 branches throughout India.
Citibank. In December 1999, we entered into a memorandum of understanding
with Citibank to form a joint venture to develop a secure payment gateway for
business to consumer transactions. We are using the software solutions of our
strategic partner Open Market to develop the gateway which we anticipate will
be integrated with our on-line portal, satyamonline.com. We will receive a
commission for the use of the payment gateway by consumers.
Corporate Network and Technology Services
We offer a comprehensive suite of technology products and network-based
services that provide our corporate customers with end-to-end Internet and
private network access. Our products and services enable our corporate
customers to offer a full range of business-to-business and electronic
commerce-related services.
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Our business services consist of the following:
Internet Access. We offer dial-up Internet access as well as a variety of
dedicated Internet access solutions which provide high-speed continuous access
to the Internet. Our dedicated Internet access services are provided to
corporate customers at speeds ranging from 28 Kbps to 128 Kbps. Our Venture 500
Plan provides dial-up access to the Internet tailored to corporate customers
requiring multiple e-mail identifications and includes our 24-hour-a-day,
seven-day-a-week customer service. A corporate customer which is within local
dialing range of one of our points of presence can access our services with a
local telephone call. We also offer an international roaming service which
caters to business executives who travel outside of India. Our principal
Internet access options for corporate customers include:
<TABLE>
<CAPTION>
Service Summary Description Pricing
------- ------------------- -------
<C> <S> <C>
Leased Line Dedicated high speed Internet
access at up to 64 Kbps Rs.500,000 ($11,471) annually
ISDN Dedicated high speed Internet
access at up to 128 Kbps Rs.350,000 ($8,029) annually
PSTN Dedicated Internet access at up to
28.8 Kbps Rs.180,000 ($4,129) annually
NetName Domain name registration Rs.5,000 ($115)
NetWorld 25 hours of Internet access over a
12-month period while roaming
outside India Rs.7,000 ($161)
NetMail Additional e-mail capability
without Internet access Rs.2,000 ($46)
</TABLE>
Private Network Services. We offer a wide variety of private network
services for our small to large corporate customers. Many companies today in
India have established private data communication networks, which are often
referred to as wide area networks, or WANs, and built on expensive leased
lines, to transfer
proprietary data between office locations. We were the first company in India
to offer a cost-effective replacement alternative to WANs using virtual private
networks which provide secure transmission of data using Internet protocol over
our private network infrastructure. Virtual private network products, often in
combination with a website, are also the basis for offering intranet and
extranet services. Intranets are corporate networks that rely on Internet-based
technologies to provide secure links between corporate offices and secure
access to company data. Extranets expand the network to selected business
partners through secure links on the Internet. We also allow a company to
outsource all of its WAN requirements to us. Our virtual private network
solutions offer internetworking without the wait periods created when obtaining
these services from the government provider. Our nationwide Lotus Notes
management system provides the software and framework for our customers to
utilize their private network systems to interlink their offices and exchange
information. We also support the Microsoft Exchange messaging system.
We are the exclusive network partner to UUNet Technologies in India, and
provide the India portion of UUNet Technologies' global network. Through our
partnership, we provide the ability for UUNet Technologies' customers traveling
in India to connect to their corporate network and systems resources using the
Internet. We offer Internet access through a local phone call in all locations
in India serviced by our network points of presence. Our service allows
Internet connectivity from India without incurring international telephone
charges. For providing our network services, we receive a portion of the fees
paid by UUNet Technologies' customers to UUNet Technologies when using its
service in India.
Business-to-Business Commerce Solutions. We deliver complete electronic data
interchange, or EDI, and business-to-business electronic commerce solutions to
our corporate customers through our relationships with key vendors of Internet-
related hardware, software and services. Our EDI solutions provide supply chain
integration and help coordinate the manufacturing and distribution process for
our corporate customers. Our electronic commerce solutions enable business-to-
business electronic commerce over our network or the Internet. We have an
exclusive agreement with Sterling Commerce to provide their EDI and electronic
commerce software and systems in India. These products include:
. The CONNECT product line that provides the software infrastructure for
moving and managing information inside and outside the enterprise;
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. The COMMERCE product line that provides value-added services to help
customers build, manage, and service global commerce business
communities;
. The GENTRAN product line that provides software for the integration of
business processes and the automation of business transactions; and
. EC Managed Services which offer businesses a full range of electronic
commerce outsourcing services and consulting solutions.
Web-based Solutions. We provide comprehensive website design, development,
implementation and hosting services. Since April 1998, we have developed over
700 websites which we believe makes us one of the largest website developers in
India. Our customers' websites range from basic informational sites to complex
interactive sites featuring sophisticated graphics, animation, sound and other
multimedia content. Our interactive development capabilities utilize tools such
as Hypertext Markup Language, or HTML, Virtual Reality Markup Language, or
VRML, computer animation, composting and motion capture. We have a dedicated
team of design and development personnel who are available for large-scale web
development projects. We have a long-term exclusive agreement with Open Market
to provide their electronic commerce products and services in India. These
products include:
. web-based Internet catalogs with database capabilities of various
sizes;
. Internet publishing software;
. a transaction engine that enables an organization to conduct commerce
over the Internet; and
. a payment gateway to facilitate commerce services to other service
providers or merchants.
We also offer web hosting accounts for companies and other organizations
that wish to create their own websites without maintaining their own web
servers and Internet connections. Our web hosting services feature state-of-
the-art web servers for high speed and reliability, high capacity connections
to the Internet and specialized customer support and security features. We also
offer co-location services for customers who prefer to own their servers, but
require the high performance and reliability of our Internet data center. Co-
location customers are typically larger enterprises employing more
sophisticated Internet hardware and software and having the expertise to
maintain their websites and related equipment.
Strategic Vendor Partnerships
We maintain a number of strategic relationships with key vendors of
Internet-related hardware, software and services. Several of these
relationships are exclusive to us in India, subject in some cases to minimum
sales thresholds. These relationships result in two significant benefits.
First, they provide us with the ability to offer valuable products and services
exclusively to our customers in India. In addition, these relationships help us
market our services by providing us with access to our partners' customer
bases. Our network and related services are focused on meeting the needs of
corporate customers, particularly in manufacturing and service organizations,
which have a need to coordinate their activities with satellite operations such
as dealers, distributors, agents and suppliers.
Our key partners are as follows:
UUNet Technologies. UUNet Technologies, a unit of MCI Worldcom, is a world-
wide provider of data services. We are the exclusive network partner to UUNet
Technologies in India, acting as the access gateway to its global network from
India. UUNet Technologies network business operates, manages and maintains a
global value-added enhanced data network. In April 1997, we entered into a
three-year agreement with Compuserve Network Services, the predecessor of UUNet
Technologies, pursuant to which each party provides dial-up access services
that are sent to the other party via an international network connection. Each
party surcharges its customers for traffic originated on the other party's
network, bills and collects the amount of such surcharge and remits a portion
thereof to the other party. The cost of the leased line connection between our
network and
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UUNet Technologies network is shared between the parties, and each party's
proprietary rights remain the sole and exclusive property of that party. Our
agreement with UUNet Technologies automatically renews at the end of the
initial term and each subsequent term for a period of one year provided there
is no default and the parties have satisfied their respective monetary
obligations, subject to each party's right to elect not to renew the agreement
by providing written notice to the other party at least six months prior to the
end of the initial or any succeeding term.
Sterling Commerce. Sterling Commerce is a leader in the market for business-
to-business electronic commerce software, including communications software,
electronic data interchange, or EDI, software and banking systems software. In
February 1997, we entered into a five-year agreement with Sterling Commerce
pursuant to which Sterling Commerce granted to us the exclusive right in India,
subject to minimum sales thresholds, to market, provide, sublicense, install,
facilitate, maintain and support the electronic commerce network services,
support services and other products developed by Sterling Commerce. We pay to
Sterling Commerce an annual maintenance fee and a percentage of invoiced
charges for Sterling Commerce's products purchased by our customers. We also
paid a license fee to Sterling Commerce in 1997. The license permits us to use
specified proprietary information, as well as trademarks, service marks and
tradenames, of Sterling Commerce in connection with advertising, promoting and
marketing Sterling Commerce's products in India. Our agreement with Sterling
Commerce terminates in 2002 provided that the parties may agree to renew the
term within 30 days of the end of the term, subject to Sterling Commerce's
right to terminate the agreement if we fail to meet any annual sales threshold.
To date, we have met all sales thresholds under our agreement with Sterling
Commerce.
Open Market. Open Market is a leading platform provider for Internet
commerce worldwide. In June 1997, we entered into a two-year distribution
agreement with Open Market pursuant to which Open Market made us its exclusive
distributor in India of some of its Internet commerce software products,
provided we continue to meet minimum sales thresholds. We purchase copies of
software from Open Market which we resell to our customers. Open Market pays us
a referral fee for software sold to our customers which is not covered by the
agreement. Open Market has granted us a license to use specified proprietary
information and trademarks in connection with our marketing of Open Market
software. Our agreement with Open Market automatically renewed on an exclusive
basis at the end of the initial term through September 2000 and will
automatically renew at the end of each subsequent term provided we continue to
meet minimum sales thresholds, subject to each party's right to elect not to
renew by providing written notice to the other party. Any such additional
extension may be on an exclusive or non-exclusive basis depending on whether we
continue to meet minimum sales thresholds. Open Market may terminate the
agreement if we fail to meet the minimum sales thresholds.
Customer Service and Technical Support
We believe that excellent customer support is critical to our success in
attracting and retaining subscribers. We currently provide customer service and
technical support via a local telephone call in all 34 cities in which we have
points of presence. Subscribers can also e-mail their questions directly to a
customer service and technical support address at our company.
Our customer service and technical support staff handles all questions
regarding a subscriber's account and the provision of our services and is
available 24-hours-a-day, seven-days-a-week. As of November 30, 1999, we had
approximately 175 customer service and technical support employees.
Corporate Customers
We have established a diversified base of corporate customers in a variety
of data intensive industries, including financial services, publishing, retail,
shipping and manufacturing. Our corporate customer base has grown to over 350
customers. Our largest corporate customers based on revenue for the six months
ended September 30, 1999 include Amtrex Hitachi Appliances Ltd., Aramex
Couriers, Carborundum Universal Ltd.,
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CDC Advisors Private Limited, Computer Associates India Pvt. Ltd., ECGC, ESPN
Software India Pvt. Ltd., GE Capital Services, India, GMR Vasavi Group, Gray
Cell, Hutchison Corporate Access, IBP Co. Limited, ITC Bhadrachalam Paperboards
Limited, Patel Roadways Limited, Philips India Limited, SEEC Technologies Asia
Pvt. Ltd., Stock Holding Corporation Of India Limited, Tata McGraw Hill
Publishing Company, Tata Telecom Limited and Toyota Kirloskar Motor Pvt. Ltd.
The customers listed above accounted for approximately 50%, with no single
customer accounting for more than 10%, of our revenues in the six months ended
September 30, 1999.
Sales and Marketing
Consumer Offerings. A key element of our business strategy is to increase
our brand awareness and market penetration among consumers through a number of
means including:
. an expanded advertising campaign focused primarily on print advertising
combined with a modest amount of television and radio advertising;
.direct mail; and
.free software to consumers who become subscribers.
In addition, we intend to establish cybercafes under the Satyam Online brand
name, and to enter into relationships with independent cybercafes to co-brand
our websites with their businesses, in order to expand access to our portal and
websites by consumers who do not own a personal computer or have Internet
access at home. We are also developing programs with Indian schools and
universities to provide Internet access to Satyam Online websites. For example,
we recently announced a collaboration with Indira Gandhi National Open
University to make trial Internet access available to 70,000 students of the
School of Information and Computer Science. Under this program, participating
students pay a reduced rate for 20 hours of Internet access during off-peak
hours. As of June 30 and September 30, 1999, students under this program
constituted approximately 5,000 of our subscribers, and as of November 30,
1999, students under this program constituted approximately 7,000 of our
subscribers. To increase Internet access and use of our websites by personal
computer buyers, we have entered into arrangements with personal computer
manufacturers and vendors, including Compaq and Hewlett-Packard, to have our
Internet access software bundled with their computers.
Corporate Offerings. The principal focus of our sales and marketing staff is
existing and potential corporate customers. We seek to penetrate this market
through trade publication ads, industry trade shows and seminars for the
benefit of industry associations and potential customers. As of November 30,
1999, we had 518 employees, 297 of whom were dedicated to sales and marketing.
We intend to hire approximately 120 new employees over the next year, most
of whom will be hired into our sales, marketing and customer support teams.
Each new point of presence which becomes operational will be staffed with
between two and five sales and support personnel to call on potential corporate
customers and service our existing customers.
Technology and Network Infrastructure
We currently operate India's largest national Internet protocol private data
network with points of presence in 34 cities. We own and operate our network
facilities and customer service operations which gives us greater control over
the utilization and quality of our network. We have designed and built our
network using advanced technologies and equipment which allows us to continue
to expand the geographic range of our network, integrate improved data
processing technologies and enhance speed and capacity with little or no
disruption to our customers.
Geographic Coverage. Through our national network of points of presence, our
consumer and business Internet access customers are able to access the Internet
in 34 of the largest markets in India via a local phone call. A point of
presence is commonly defined as the ability to access on-line services in a
market through a
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local telephone call or local leased lines. We have backbone points of presence
in Ahmedabad, Bangalore, Bombay (Mumbai), Calcutta, Cochin, Coimbatore, Delhi,
Hyderbad, Lucknow, Ludhiana, Madras (Chennai) and Pune. These backbone points
of presence, also called primary nodes, reside at the core of a larger Internet
protocol network with a meshed topology architecture. We also have additional
points of presence, or secondary nodes, in Belgaum, Bhopal, Bhubaneshwar,
Chandigarh, Davengere, Goa, Hubli, Indore, Jaipur, Jamnagar, Jamshedpur,
Mangalore, Nagpur, Pondicherry, Shimoga, Surat, Thiruvananthapuram, Tiruvalla,
Vadodara, Varanasi, Vijayawada and Vishakapatnam. Each point of presence
contains data communications equipment housed in a secure facility owned or
leased by our company located near a Department of Telecommunications or
Mahanagar Telephone Nigam Limited telephone switching station. Each point of
presence contains a modem bank which receives and aggregates incoming calls
from customers who access our system by modem connection through a local call
on the public telephone system. Our larger corporate customers access the point
of presence directly through leased lines. We plan to have points of presence
in 40 cities by April 2000.
Network Architecture. We ensure network reliability through several methods
and have invested in proven technologies. We use Cisco routers to route traffic
between nodes and an IGX WAN switch to terminate traffic. The routers and WAN
switches are interconnected using a high speed interface. Our applications and
network verification servers are manufactured by Hewlett-Packard.
The primary nodes on the backbone network are connected by up to 2 Mbps high
speed fiber optic lines that we lease from the Department of
Telecommunications. The secondary nodes are connected by multiple 64 Kbps
leased fiber optic lines. Each node is accessible from at least two other
nodes, allowing us to reroute traffic. We minimize the possibility that system
failures do not interrupt service by automatically activating an ISDN dial-up
on the backbone network in the event any segment goes down. We reduce our
exposure to failures on the local loop by usually locating our points of
presence within one segment of the central telephone exchange. To further
assure our network integrity, we are installing fiber optic connections
directly from each of our primary nodes to the central exchange.
We connect to the international Internet through international gateways in
Bangalore, Calcutta, Delhi, Bombay (Mumbai), Hyderabad and Madras (Chennai). We
currently use international gateways operated by VSNL, the government-
controlled provider of international telecommunications services in India. We
have applied to the government of India for approval to establish our own
international gateways to the Internet by purchasing or leasing satellite earth
stations and related satellite transponder capacity. As of February 1, 2000, we
had not yet received this approval from the government of India.
In addition to a fundamental emphasis on reliability, our network design
philosophy has focused on compatibility, interoperability and scalability. At
each level of data transmission, our network is fully compliant with ISO
standards. We use ethernet and Internet protocols to transmit data, thus
ensuring that our network is completely interoperable with other networks and
systems and that we may port any application onto our network. The modular
design of our network is fully scalable, allowing us to expand without changing
the network design or architecture, thus ensuring little or no service
disruption. Finally, we recently deployed Cisco ATM switches on six points of
presence along our network. These ATM switches allow us to allocate our
existing capacity more efficiently by offering frame relay and dedicated
bandwidth.
Network Operations Center. We maintain a network operation center located in
Madras (Chennai) and a back-up data facility in Bombay (Mumbai). This facility
houses our central network servers as well as our network staff which monitors
network traffic, service quality and equipment at all our points of presence to
ensure a reliable Internet service. Our network operations center is staffed
24-hours-a-day, seven-days-a-week. We have backup power generators and software
and hardware systems designed to prevent network downtime in the event of
system failures. In the future, we may add additional facilities to supplement
or add redundancy to our current network monitoring capability.
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Competition
General. We face competition in each of our markets and expect that this
competition will intensify as the market in India for Internet service provider
services, on-line content and corporate network services and technology
products develops and expands. We compete primarily on the basis of service,
reliability and customer support. Price and ease of use are also competitive
factors.
Internet Access Services. Our principal competitor is VSNL, the government-
controlled telecom provider. VSNL currently has significantly more subscribers
than we do because private companies, such as our company, were not permitted
to enter the Internet service provider market until November 1998. As of
November 30, 1999, 175 private parties, other than our company, have been
granted licenses to operate Internet service providers, 25 of which permit
operation on a national basis in the same manner that we are allowed under our
license. Two companies, Mantra Online and ETH, have launched private national
Internet service provider services as of November 30, 1999. We expect other
competitors to emerge in the future. We also expected prices to fall as more
competitors enter the market, although we also anticipate that bandwidth and
other costs will continue to decline as well. Further, we believe that it is
inevitable that the large, foreign providers of Internet service provider
services will eventually attempt to enter the Indian market through local joint
ventures or other means. Indian law currently limits foreign ownership of an
Internet service provider to 49%.
In addition, we could face competition from companies that develop new and
innovative techniques to access the Internet. Although growing rapidly,
International Data Corporation estimates that India had an installed base of
only approximately 1.9 million personal computers in 1998. Technology which
permits a connection to the Internet through alternative, less capital
intensive means is likely to be attractive to Indian consumers. A number of
companies, including several collaborating with our company, are planning
alternative Internet access devices, such as set-top boxes for televisions, to
create demand for Internet services in excess of that which could be supported
by the installed base of personal computers. The provider who develops this
technology is likely to have a significant advantage in the marketplace.
On-line Portal. There are several other companies in India that have
developed websites, including rediff.com and others, designed to act as
Internet portals. These sites currently have greater traffic than our site and
offer some features that we do not. Further, the dominant Internet portals
continue to be the on-line services and search engine companies based in the
United States, such as America Online, Microsoft Network, Yahoo!, Excite@Home,
Infoseek and Lycos. These companies have been developing specially branded or
co-branded products designed for audiences in specific markets. Although none
of these companies has developed a product designed for India yet, we believe
one or more of them is likely to do so, creating a new source of competition.
Corporate Network and Technology Services. Our competitors for many private
network services include government services, companies that have built and
operate their own private data networks, satellite communications agencies such
as Hughes, Comsat, HCL Comnet and Bharti BT, and terrestrial network providers
such as Sprint RPG (a joint venture between Sprint and RPG Group), Wipro
Communications Services and Global Electronic Commerce Services.
Many of our existing or potential competitors enjoy substantial competitive
advantages compared to our company, including:
. the ability to offer a wider array of services;
. larger production and technical staffs;
. greater name recognition and larger marketing budgets and resources;
. larger subscriber bases; and
. substantially greater financial, technical and other resources.
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To be competitive, we must respond promptly and effectively to the
challenges of technological change, evolving standards and our competitors'
innovations by continuing to enhance our products and services, as well as our
sales and marketing channels. Increased competition could result in loss of
market share, reduced prices or reduced margins, any of which could adversely
affect our business. Competition is likely to increase significantly as new
companies enter the market and current competitors expand their services.
Intellectual Property
Our intellectual property rights are important to our business. We rely on a
combination of copyright, trademark and trade secret laws, confidentiality
procedures and contractual provisions to protect our intellectual property. We
require employees, independent contractors and, when possible, suppliers to
enter into confidentiality agreements upon the commencement of their
relationships with our company. These agreements generally provide that
confidential information developed or made known during the course of a
relationship with our company be kept confidential.
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. 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
website 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 be 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.
We also rely on a variety of technologies that are licensed from third
parties, including UUNet Technologies, Sterling Commerce and Open Market. The
software developed by these and other companies is used in the satyamonline.com
website to perform key functions. These third-party licenses may not be
available to us on commercially reasonable terms in the future. The loss of any
of these licenses could delay the introduction of software enhancements,
interactive tools and other features until equivalent technology could be
licensed or developed. Any such delays could materially adversely affect our
business, results of operations and financial condition.
The trademark "Satyam" is owned by Satyam Computer Services, our parent
company, and licensed to our company for so long as Satyam Computer Services
continues to own at least 51% of our company. Upon the occurrence of a change
of control in our company, however, Satyam Computer Services may terminate our
license to use the "Satyam" trademark on two years prior written notice. We
have filed trademark applications for "Satyam Online," "Satyam:Net" and
"satyamonline.com" in India. These applications are currently pending, and we
plan to file applications for these marks in the United States. IndiaWorld
Communications is involved in a potential trademark dispute in the United
States. Please see "Risk Factors--IndiaWorld Communications is engaged in a
trademark dispute with a company based in the United States and that dispute,
if resolved unfavorably, could diminish the value of the business we are
acquiring, impose costs on us or have other undesirable effects."
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Government Regulation
Our business is subject to comprehensive regulation by the Ministry of
Communications through the Telecom Commission and the Department of
Telecommunications pursuant to the provisions of the Indian Telegraph Act of
1885, or Telegraph Act, the India Wireless Telegraphy Act, 1933, or Wireless
Act, and the terms of the Internet service provider license agreement we
entered into with the Department of Telecommunications under which we operate.
Pursuant to the Telegraph Act, the provision of any telecommunications services
in India requires a license from the government of India, obtained through the
Department of Telecommunications. While the Telegraph Act sets the legal
framework for regulation of the telecommunications sector and the Wireless Act
regulates the possession of wireless telegraphy equipment, much of the
supervision and regulation of our company is implemented more informally
through the general administrative powers of the Department of
Telecommunications, including those reserved to the Department of
Telecommunications and other governmental agencies under our license.
In March 1997, the government of India established the Telecom Regulatory
Authority, an independent regulatory authority under the provisions of the
Telecom Regulatory Authority of India Act. The Telecom Regulatory Authority is
an autonomous body consisting of a chairperson and at least two and not more
than four members, and has primary responsibility for the following:
. facilitating competition and promoting efficiency;
. protecting the interests of consumers;
. regulating revenue sharing among service providers;
. ensuring compliance with license conditions;
. setting and ensuring compliance with the time period applicable to
service providers for providing local and long-distance
telecommunications lines;
. ensuring technical compatibility and effective interconnectivity among
different service providers;
. settling differences between service providers;
. advising the government of India on matters relating to the development
of the telecommunications industry; and
. ensuring effective compliance with universal service obligations.
The Telecom Regulatory Authority also has the authority to, from time to
time, set the rates at which domestic and international telecommunications
services are provided in India. The Telecom Regulatory Authority does not have
authority to grant licenses to service providers or renew licenses, functions
which remain with the Department of Telecommunications. The Telecom Regulatory
Authority, however, has the following powers:
. to call on service providers to furnish information relating to their
operations;
. to appoint persons to make official inquiries;
. to inspect the books of service providers; and
. to issue directives to service providers to ensure their proper
functioning.
Failure to follow Telecom Regulatory Authority directives may lead to the
imposition of fines. Decisions of the Telecom Regulatory Authority may be
appealed to High Courts in India.
The authority of the Telecom Regulatory Authority has been the subject of
recent litigation, particularly with respect to its role in introducing new
telecommunications licensees and the scope of its authority to settle disputes
regarding the grant by the Department of Telecommunications of
telecommunications licenses. The Delhi High Court has held that the authority
of the Department of Telecommunications to issue or amend
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licenses is not subject to any prior recommendations of the Telecom Regulatory
Authority, and that any such recommendations are not mandatory. In addition,
the Delhi High Court determined that the Telecom Regulatory Authority does not
have jurisdiction to decide disputes regarding the grant or amendment of a
Department of Telecommunications license. The government of India has
formulated the New Telecom Policy, 1999, or NTP. The NTP was cleared by the
Union Cabinet in March 1999 and contemplates a new regime for the telecom
operators, a larger role for the Telecom Regulatory Authority, a restructuring
of the Department of Telecommunications and opening up of the market for long-
distance calls.
We began offering Internet access services on November 22, 1998, and we
operate 34 Internet access nodes. In November 1998, the government of India
opened the Internet service provider market to private competition, and the
Department of Telecommunications instituted a mandatory license requirement for
the provision of Internet services. We entered into a license agreement with
the Department of Telecommunications on November 12, 1998 with effect on the
same day, under which we were granted a license to provide national Internet
services on a non-exclusive basis. The terms of our license are generally
consistent with the policy for licensing Internet service providers. The term
of our license is 15 years. Our license can be revoked by the Department of
Telecommunications if we breach the terms and conditions of the license. The
Department of Telecommunications retains the right to take over our network and
to modify, revoke, terminate or suspend the terms and conditions of the license
at any time if, in its opinion, it is necessary or expedient to do so in the
interest of general public, or for the proper operation of the
telecommunications sector or for security considerations. The Department of
Telecommunications also retains the right to review the terms of our license
based on changes in national telecommunications policy. We are not allowed to
assign or transfer our rights under our license without the prior written
consent of the Department of Telecommunications. The license provides that the
total foreign equity in our company may not, at any time, exceed 49% of our
total equity. Telephony on the Internet is not permitted in India, and the
license requires us to take measures to ban carriage of telephone traffic over
the Internet. Our license also requires us to ensure that objectionable,
obscene and unauthorized content, or any other content, messages or
communications infringing copyrights, intellectual property rights and domestic
and international cyberlaws or which is inconsistent with the laws of India, is
not carried on our network. Although under the terms of our license we are free
to fix the prices we charge our subscribers, the Telecom Regulatory Authority
may set prices for the provision of Internet access services generally. We are
permitted to use encryption to safeguard information transmitted over our
network. However, if we use a higher level of encryption than that specified by
the government of India, our license requires us to deposit a set of keys with
the government of India. License fees are waived through October 31, 2003, and
a nominal license fee of Rs.1 per annum is payable from November 1, 2003. Our
obligations under the license are secured by a performance bank guarantee in
the amount of Rs.20.0 million ($0.5 million).
We may be required to import into India computer hardware and Internet
related software purchased from foreign manufacturers for business purposes.
These imports will be subject to the Export and Import Policy as declared by
the Ministry of Commerce. At the time of import, we will be required to pay a
customs duty pursuant to the Customs Tariff Act, 1975.
Foreign investors may wish to invest in our securities. For information
regarding restrictions on foreign investment in our company, please see
"Restrictions on Foreign Ownership of Indian Securities."
Employees
As of November 30, 1999, we had 518 employees. We currently anticipate
hiring an additional 120 employees, most of whom will be hired into our sales
and marketing and technical support and customer care teams, over the next
year. Of our current employees, 46 are administrative, 297 form our sales and
marketing staffs and 175 are dedicated to technical support and customer care.
None of our employees are represented by a union. We believe that our
relationship with our employees is good.
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Facilities
Our approximately 15,000 square foot corporate headquarters are located in
Madras (Chennai), India. We also have additional facilities located in
Ahmedabad, Bangalore, Belgaum, Bhopal, Bombay (Mumbai), Bhubaneshwar, Calcutta,
Chandigarh, Cochin, Coimbatore, Davengere, Delhi, Goa, Hubli, Hyderabad,
Indore, Jaipur, Jamnagar, Jamshedpur, Lucknow, Ludhiana, Madras (Chennai),
Mangalore, Nagpur, Pondicherry, Pune, Shimoga, Surat, Thiruvananthapuram,
Tiruvalla, Vadodara, Varanasi, Vijayawada and Vishakapatnam aggregating
approximately 64,000 square feet. As we expand our operations, we anticipate
leasing additional facilities in each city in which we develop a point of
presence. We lease all of our current facilities under leases with terms
ranging from 33 months to nine years.
Legal Proceeding
As of the date of this prospectus, Satyam Infoway is not a party to any
material legal proceedings.
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MANAGEMENT
The following table sets forth the name and, as of December 31, 1999, age
and position of each director and executive officer of our company.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
R. Ramaraj (1).............. 50 Chief Executive Officer and Director
T.R. Santhanakrishnan....... 42 Chief Financial Officer
A. Srinivasagopalan......... 55 Senior Vice President
George A. Ajit.............. 40 Vice President, Human Resources
Vice President, Electronic Commerce
Lalit Bhojwani.............. 44 Business
Padma Chandrasekaran........ 39 Vice President, On-line Business
Rustom Irani................ 38 Vice President, Technology
V.V. Kannan................. 41 Vice President, Cyber Cafes
Pradeep Lakshmanan.......... 51 Vice President, Internet Sales
N. Shekhar.................. 45 Vice President, Web Services
Rahul Swarup................ 40 Vice President, Technology
T. Suresh Kumar............. 46 General Manager, Network Control Group
K. Thiagarajan.............. 33 General Manager, Finance
B. Ramalinga Raju (1)(2).... 44 Chairman of the Board of Directors
Pranab Barua................ 46 Director
T.H. Chowdary............... 68 Director
Donald Peck (2)............. 47 Director
C. Srinivasa Raju........... 38 Director
S. Srinivasan (1)(2)........ 65 Director
</TABLE>
- --------
(1)Member of the Compensation Committee.
(2)Member of the Audit Committee.
R. Ramaraj has served as Chief Executive Officer of our company since April
1998. Mr. Ramaraj has served as a Director since August 1996, prior to which he
served as an advisor to our company since June 1996. From 1992 to 1996, Mr.
Ramaraj served as a Director of Sterling Cellular Limited, a mobile telephone
company based in India. Mr. Ramaraj is a Director of Universal Print Systems
Ltd., a publicly held printing company based in India. Mr. Ramaraj received a
B.Tech from Madras University and a P.G.D.M. from IIM Calcutta.
T.R. Santhanakrishnan has served as Chief Financial Officer of our company
since September 1999. From 1997 to 1999, Mr. Santhanakrishnan was Executive
Vice President, Finance of Sanmar Engineering Corporation. From 1990 to 1997,
he served in a senior financial position for Royal Dutch/Shell Oil Company. Mr.
Santhankrishnan received a degree in Commerce from the University of Madras and
is a member of the Institute of Chartered Accountants of India and the
Institute of Cost and Works Accountants of India.
A. Srinivasagopalan has served as Senior Vice President of our company since
February 1996. From 1993 to 1995, Mr. Srinivasagopalan held various management
positions with Abu Dhabi National Oil Co., an oil company based in the Middle
East. Mr. Srinivasagopalan received a B.E. from Madras University and a
P.G.D.M. from IIM Ahmedabad.
George A. Ajit has served as Vice President, Human Resources of our company
since May 1999. From 1998 to 1999, Mr. Ajit was Vice President, Human Resources
of Mobil India, an oil company. From 1996 to 1998, Mr. Ajit was General
Manager, Human Resources, of Mahindra Holidays and Resorts. From 1994 to 1996,
Mr. Ajit was Deputy General Manager, BioProducts Division of E.I.D. Parry, a
manufacturing company.
Lalit Bhojwani has served as Vice President, Electronic Commerce Business of
our company since July 1999. From 1997 to 1999, Mr. Bhojwani was Vice President
of Sales of DSS Mobile Communications Limited,
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a telecommunications company. Mr. Bhojwani received a B.E. degree from Mumbai
University and a P.G.D.B.M. from IIM, Ahmedabad.
Padma Chandrasekaran has served as Vice President, On-line Business of our
company since March 1996. From June 1995 to February 1996, Ms. Chandrasekaran
was General Manager, Business Development of ELNET Technologies, a messaging
company based in India. From 1993 to February 1994, she was Group Business
Manager of ICIM, Mumbai, a computer hardware company based in India. Ms.
Chandrasekaran received a B.Sc. in Statistics from Calcutta University, a
P.G.D.M. from IIM Ahmedabad and an MBA in Telecommunications Management from
the University of San Francisco.
Rustom Irani has served as Vice President, Technology of our company since
December 1999. From August 1999 to December 1999, Mr. Irani was Vice President,
Technology and Chief Information Officer of GE Capital International Services,
Hyderabad. From 1987 to August 1999, Mr. Irani was Vice President, Technology
of Citibank N.A.
V.V. Kannan has served as Vice President, Cyber Cafes of our company since
July 1999. From 1996 to 1999, Mr. Kannan was Vice President, Marketing of G.M.
Pens International Limited, a manufacturing company. From 1995 to 1996, he was
Vice President, Retail Sales of Real Value Marketing Sales Limited, and from
1992 to 1995, he was Marketing Manager of ITC Agri Business Division, a
manufacturing company. Mr. Kannan received a B.E. from Madras University and a
P.G.D.M. from IIM Calcutta.
Pradeep Lakshmanan has served as Vice President, Internet Sales of our
company since September 1998. From 1997 to 1998, Mr. Lakshmanan was Associate
Vice President of Amco Batteries Ltd., a battery manufacturing company based in
India. From 1991 to 1997, Mr. Lakshmanan was General Manager of Berger Paints
Limited, an international paint manufacturing company based in India. Mr.
Lakshmanan received B.Sc. in Chemical Engineering from Trichur Engineering
College.
N. Shekhar has served as Vice President, Web Services of our company since
July 1999. From 1995 to 1999, Mr. Shekhar was Chief Executive Officer of SSA
India Private Limited, a global enterprise resource planning company. Mr.
Shekhar received a B.E. from Bangalore University, an M.S. from the University
of Texas and an M.B.A. from San Jose State University.
Rahul Swarup has served as Vice President, Technology of our company since
September 1999. From 1989 to 1999, Mr. Swarup was Vice President of Citicorp
Global Technology Infrastructure. Mr. Swarup received a B.E. in Electrical
Engineering from Indian Institute of Technology, Kanpur.
T. Suresh Kumar has served as General Manager, Network Control Group of our
company since March 1999. From 1996 to 1999, Mr. Kumar was Corporate Manager,
Information Services of Compaq Computer Technologies, India Ltd., a technology
company. From 1994 to 1996, he was Senior Manager of W.S. Telesystems Ltd., a
manufacturing company. Mr. Kumar received a B.E. degree from Madras University.
K. Thiagarajan has served as General Manager, Finance of our company since
October 1997. From 1990 to 1997, Mr. Thiagarajan was Chief Financial Officer of
Coromandel Garments Limited, an export garment manufacturing company owned by
the House of Tata. Mr. Thiagarajan received a B.Com from Loyola College of
Madras and is a member of the Institute of Chartered Accountants of India and
the Institute of Cost and Works Accountants of India.
B. Ramalinga Raju is a co-founder of our company and has served as a
Director since 1995. Mr. B. Ramalinga Raju has served as the Chairman of the
Board of Directors since January 1996. Mr. B. Ramalinga Raju was the Chief
Executive Officer of Samrat Spinners Limited, a spinning mill, until 1995. Mr.
B. Ramalinga Raju is the Chief Executive Officer of Satyam Computer Services
and is a Director of Satyam Computer Services, Satyam Renaissance Consulting
Limited, Satyam Spark Solutions Limited, Gouthami Power Limited, Samrat
Spinners Limited and Maytas Infra Limited. Mr. B. Ramalinga Raju received an
M.B.A. in Business Management from Ohio State University.
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Pranab Barua has served as a Director of Satyam Infoway since April 1999.
Mr. Barua has been Chief Executive Officer of Reckitt & Coleman of India Ltd.,
a toiletries manufacturing company, and Regional Director of Reckitt & Coleman,
South Asia since July 1998. Prior to that, Mr. Barua served in various
management positions at Brooke Bond India Ltd.
T.H. Chowdary has served as a Director of our company since February 1996.
Mr. Chowdary is a Director of Renaissance Technologies Limited, a software
company based in India. Mr. Chowdary retired as the Chief Executive Officer of
VSNL, the government-controlled provider of international telecommunications
services in India, in 1987.
Donald Peck has served as a Director of Satyam Infoway since March 1999. Mr.
Peck has been with Commonwealth Development Corporation, a UK-based institution
investing in developing markets, since 1991. He has been based in India since
1995, initially as head of International Venture Capital Management, or IVCM,
and since April 1998 as Chief Executive Officer of CDC Advisors Private
Limited, a Commonwealth Development Corporation subsidiary providing advisory
services to IVCM. Mr. Peck received a PhD in Latin American Economic History
from Oxford University.
C. Srinivasa Raju has served as a Director of our company since February
1996. From 1994 to 1995, Mr. C. Srinivasa Raju was Chief Executive Officer of
Dun & Bradstreet Satyam Software Limited, a software services company based in
India. Mr. C. Srinivasa Raju is a Director of Satyam Computer Services, Satyam
Renaissance Consulting Limited and Satyam Enterprise Solutions Limited. Mr. C.
Srinivasa Raju received an M.S. from Utah State University.
S. Srinivasan has served as a Director of our company since February 1996.
From 1989 to 1995, Mr. Srinivasan was Chief Executive Officer of AT&T India
Limited. Mr. Srinivasan received a BE in Engineering and a PG in Management
from Madras University.
Board Composition
Our Articles of Association set the minimum number of directors at two and
the maximum number of directors at 12. We currently have seven directors. The
Companies Act and our Articles of Association require the following:
. at least two-thirds of our directors shall be subject to re-election by
our shareholders; and
. at least one-third of our directors who are subject to re-election
shall be up for re-election at each annual meeting of our shareholders.
Our Articles of Association provide that B. Ramalinga Raju shall be a
permanent director not subject to re-election. Our Articles of Association also
provide that South Asia Regional Fund, or SARF, is entitled to nominate one
director as long as it continues to own at least 7.5% of the issued ordinary
share capital of our company. B. Ramalinga Raju and C. Srinivasa Raju are
brothers-in-law. There are no other family relationships between any of the
directors or executive officers of our company.
On February 5, 1999, we entered into a Share Subscription and Shareholders'
Agreement, or Shareholders' Agreement, with Satyam Computer Services, South
Asia Regional Fund, or SARF, and Mr. B. Ramalinga Raju, the Chairman of our
Board of Directors, which was subsequently amended effective September 14,
1999. The Shareholders' Agreement provides, among other things, that:
. so long as SARF owns at least 5.0% of our issued ordinary share
capital, it is entitled to nominate one director to our Board of
Directors;
. so long as Satyam Computer Services owns at least 50.1% of our issued
ordinary share capital, it is entitled to nominate four directors to
our Board of Directors; and
. a quorum for a meeting of our Board of Directors shall be no less than
three directors.
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SARF's current nominee to our Board of Directors is Mr. Peck. Satyam Computer
Services' current nominees to our Board of Directors are Messrs. Ramaraj, B.
Ramalinga Raju, T.H. Chowdary and C. Srinivasa Raju.
Board Committees
The Audit Committee of the Board of Directors reviews, acts on and reports
to the Board of Directors with respect to various auditing and accounting
matters, including the recommendation of our independent auditors, the scope of
the annual audits, fees to be paid to the independent auditors, the performance
of our independent auditors and our accounting practices. The members of the
Audit Committee are Messrs. B. Ramalinga Raju, Srinivasan and Peck.
The Compensation Committee of the Board of Directors determines the
salaries, benefits and stock option grants for our employees, consultants,
directors and other individuals compensated by our company. The Compensation
Committee also administers our compensation plans. The members of the
Compensation Committee are Messrs. B. Ramalinga Raju, Ramaraj and Srinivasan.
Director Compensation
Our Articles of Association provide that each of our directors receives a
sitting fee not exceeding Rs.200 for every Board and Committee meeting. In
fiscal 1999, we did not pay any fees to our non-employee directors. Mr.
Ramaraj, who is employed as our Chief Executive Officer, does not receive any
additional compensation for his service on our Board of Directors. Directors
are reimbursed for travel and out-of-pocket expenses in connection with their
attendance at Board and Committee meetings.
Employment, Severance And Other Agreements
On May 18, 1998, our Board of Directors appointed Mr. Ramaraj as Chief
Executive Officer of Satyam Infoway for a term of five years effective April 1,
1998. Mr. Ramaraj's appointment as Chief Executive Officer was approved by our
shareholders as required under the Companies Act on July 3, 1998. Pursuant to
the terms of his appointment, Mr. Ramaraj receives a monthly salary of
Rs.83,250 ($1,916). Mr. Ramaraj also receives medical, vacation and other
benefits, including membership fees for up to two clubs.
Executive Compensation
The following table sets forth all compensation awarded to, earned by or
paid to R. Ramaraj, our Chief Executive Officer, during the fiscal year ended
March 31, 1999 for services rendered in all capacities to us during the fiscal
year ended March 31, 1999. Mr. Ramaraj was appointed Chief Executive Officer of
our company in April 1998. None of our other executive officers earned a
combined salary and bonus in excess of $100,000 during any of the last three
fiscal years. In accordance with the rules of the SEC, other compensation in
the form of perquisites and other personal benefits has been omitted because
the aggregate amount of such perquisites and personal benefits constituted less
than the lesser of $50,000 or 10% of the total of annual salary and bonuses in
fiscal 1999. The amounts in the following table are in dollars based on the
noon buying rate of Rs.43.59 per dollar on September 30, 1999. The total
remuneration received by our officers and directors for their services to us
for the fiscal year ended March 31, 1999 was approximately $105,700.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
------------- -----------------
Shares Underlying
Name and Principal Position Salary Bonus Options
--------------------------- ------- ----- -----------------
<S> <C> <C> <C>
R. Ramaraj, Chief Executive Officer.......... $22,918 -- --
</TABLE>
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<PAGE>
Option Grants In Last Year
There were no option grants to our Chief Executive Officer during the fiscal
year ended March 31, 1999. Of the 147,000 options granted to employees on
September 28, 1999, 7,500 options with an exercise price of Rs.350 per equity
share were granted to Mr. Ramaraj.
Fiscal Year-End Option Values
Our Chief Executive Officer did not exercise or hold any options during the
fiscal year ended March 31, 1999.
Employee Benefit Plans
We have an Associates Stock Option Plan, or ASOP, which provides for the
grant of options to employees of our company. The ASOP was approved by our
Board of Directors and our shareholders in March 1999. A total of 825,000
equity shares were reserved for issuance under the ASOP. As of December 31,
1999, we had granted an aggregate of 225,000 options under the ASOP with a
weighted average exercise price equal to approximately Rs.795 per equity share.
An additional 74,020 options with an exercise price equal to Rs.5,904 ($135.45)
per equity share were granted in January 2000.
The ASOP is administered by the Compensation Committee of our Board of
Directors. Pursuant to the provisions of the ASOP, the Satyam Infoway
Associates Trust, or Trust, is allotted options to purchase our equity shares
pursuant to resolutions passed at our general meetings. The Trust holds these
options for and on behalf of our employees. The Compensation Committee makes
recommendations to the Trust regarding employees who should be considered for
option grants. On the recommendation of the Compensation Committee, the Trust
will advise our company to transfer the options to identified employees, with
the right to convert the issued options into our equity shares at the rates
indicated in the options. The consideration for transfer of the options will be
Rs.1 per option to be paid by the employee before transfer of the options.
An employee holding options may apply for conversion of the options on a
date specified therein which is referred to as the conversion date. The options
are not transferable by an employee on or before the conversion date, except to
the Trust should the employee cease to be an employee by reason of resignation,
dismissal or termination of employment due to reasons of non-performance or
otherwise. On exercise of the option, the employee submits a letter of
conversion to the Trust for allotment of our equity shares in his or her name.
The Trust collects the consideration for conversion arrived at as a product of
number of options converted and the conversion price as reduced by the price of
the options paid by the employee for the number of options converted by the
employee. The equity shares transferred to the employee after conversion from
options is the absolute property of the employee and will be held by the
employee. Based on recent changes in government policy in India, we expect that
participants in the ASOP will be able to receive ADSs upon exercise of their
options.
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PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our equity shares as of December 31, 1999, and as adjusted to
reflect the sale of the ADSs offered hereby, by (1) each person or group of
affiliated persons who is known by us to beneficially own 5% or more of the
equity shares, (2) each director and our Chief Executive Officer and (3) all
directors and executive officers as a group. The table gives effect to equity
shares issuable within 60 days of December 31, 1999 upon the exercise of all
options and other rights beneficially owned by the indicated shareholders on
that date. Beneficial ownership is determined in accordance with the rules of
the SEC and includes voting and investment power with respect to equity shares.
Unless otherwise indicated, the persons named in the table have sole voting and
sole investment control with respect to all equity shares beneficially owned.
Mr. B. Ramalinga Raju is the Chief Executive Officer, Chairman of the Board of
Directors and a shareholder of Satyam Computer Services. Messrs. Satyam
Ramnauth and Pierre Guy Noel, directors of International Venture Capital
Management, which manages South Asia Regional Fund, exercise voting control and
dispositive power over the equity shares owned by South Asia Regional Fund. Mr.
Peck, a director of our company, is affiliated with South Asia Regional Fund.
<TABLE>
<CAPTION>
Equity Shares Equity Shares
Beneficially Owned Beneficially Owned
Prior to this After this
Offering Offering
------------------ ------------------
Beneficial Owner Number Percent Number Percent
---------------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Satyam Computer Services Limited....... 12,529,800 57.5% 12,529,800 55.6
Mayfair Centre, S P Road
Secunderabad 500 003
India
South Asia Regional Fund............... 3,600,000 16.5 3,600,000 16.0
Les Cascades Building
Edith Cavell Street
Port Louis
Mauritius
R. Ramaraj............................. 370,000 1.7 370,000 1.6
B. Ramalinga Raju...................... 100 * 100 *
Pranab Barua........................... -- -- -- --
T. H. Chowdary......................... -- -- -- --
Donald Peck............................ -- -- -- --
C. Srinivasa Raju...................... -- -- -- --
S. Srinivasan.......................... -- -- -- --
All directors and executive officers as
a group (19 persons).................. 370,100 1.7 370,100 1.6
</TABLE>
- --------
* Less than 1% of total.
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CERTAIN TRANSACTIONS
Satyam Computer Services is our parent company. In fiscal 1999 and the six
months ended September 30, 1999, we sold an aggregate of Rs.0.4 million (less
than $0.1 million) and Rs.9.0 million ($0.2 million), respectively, in services
to Satyam Computer Services and its affiliates. In fiscal 1998 and 1999 and the
six months ended September 30, 1999, we purchased an aggregate of Rs.1.4
million, Rs.3.0 million and Rs.1.2 million (less than $1.0 million),
respectively, in software and services from Satyam Computer Services and its
affiliates. In addition, we paid an aggregate of Rs.0.8 million in training and
consulting fees to Satyam Computer Services in fiscal 1998. We believe that the
foregoing transactions with Satyam Computer Services and its affiliates were on
terms no less favorable to our company than could have been obtained from
independent third parties.
Since fiscal 1997, Satyam Computer Services had made advances of working
capital to us. The aggregate of all advances we received from Satyam Computer
Services in fiscal 1997, 1998 and 1999 were Rs.5.3 million, Rs.5.6 million and
Rs.1.3 million (less than $0.1 million), respectively. As of the end of fiscal
1998 and 1999 and the six months ended September 30, 1999, our balances payable
to Satyam Computer Services were Rs.1.5 million, Rs.4.0 million (less than $0.1
million) and Rs.62.0 million ($1.4 million), respectively. In fiscal 1998, we
repaid an aggregate of Rs.7.6 million through the issuance to Satyam Computer
Services of an aggregate of 756,569 equity shares. In fiscal 1999, we repaid an
aggregate of Rs.1.1 million through the issuance to Satyam Computer Services of
an aggregate of 108,390 equity shares. As of the end of fiscal 1999 and the six
months ended September 30, 1999, we had a balance of Rs.0.2 million (less than
$0.1 million) and Rs.0.2 million (less than $0.1 million), respectively, in
receivables from affiliates of Satyam Computer Services. In fiscal 1998, we
placed short-term deposits with Satyam Computer Services at a rate of 18% per
annum for periods ranging from three to six months.
On February 5, 1999, we entered into a Share Subscription and Shareholders'
Agreement, or Shareholders' Agreement, with Satyam Computer Services, South
Asia Regional Fund, or SARF, and Mr. B. Ramalinga Raju, the Chairman of our
Board of Directors, which was subsequently amended effective September 14,
1999. Pursuant to the Shareholders' Agreement, Satyam Computer Services and
SARF purchased 750,000 and 3,000,000, respectively, of our equity shares at a
price equal to Rs.70 per equity share. The Shareholders' Agreement contains
provisions regarding our directors and management. For additional information
regarding how the Shareholders Agreement affects the compensation of our Board
of Directors, please see "Management--Board Composition." The Shareholders'
Agreement granted to SARF registration rights and, in the event of a sale of
our equity shares by Satyam Computer Services, "tag-along" rights. The
Shareholders' Agreement also grants to Satyam Computer Services and SARF
warrants to purchase up to an aggregate of 750,000 of our equity shares. Upon
the completion of our initial public offering, in October 1999, Satyam Computer
Services and SARF exercised these warrants for an exercise price equal to
approximately 67% of our initial public offering price, or $12.00 per share,
and we issued an aggregate of 150,000 and 600,000 equity shares to Satyam
Computer Services and SARF respectively upon exercise of these warrants. For
additional information regarding these warrants, please see "Description of
Equity Shares."
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DESCRIPTION OF EQUITY SHARES
The following are summaries of our Articles of Association and Memorandum of
Association and the Companies Act which govern our affairs. Our Articles of
Association provides that the regulations contained in Table "A' of the
Companies Act apply to Satyam Infoway. We have filed complete copies of our
Memorandum of Association and Articles of Association as well as Table "A' of
the Companies Act as exhibits to our registration statement on Form F-1 of
which this prospectus is a part. In this prospectus, all references to our
Articles of Association include the regulations of Table "A' of the Companies
Act incorporated into our Articles of Association.
General
Our authorized share capital is 25,000,000 equity shares, par value Rs.10
per share. As of December 31, 1999, 21,782,250 equity shares and options to
purchase an additional 230,700 equity shares were issued and outstanding.
The equity shares are our only class of share capital. However, our Articles
of Association and the Companies Act permit us to issue classes of securities
in addition to the equity shares. For the purposes of this prospectus,
"shareholder" means a shareholder who is registered as a member in the register
of members of our company.
A total of 825,000 equity shares are reserved for issuance under our ASOP.
As of December 31, 1999, we had granted an aggregate of 230,700 options under
our ASOP with a weighted average exercise price equal to approximately Rs.795
per equity share. An additional 74,020 options with an exercise price equal to
Rs.5,904 ($135.45) per equity share were granted in January 2000. The options
expire three years from the respective date of grant.
On February 5, 1999, we entered into a Share Subscription and Shareholders'
Agreement, or Shareholders' Agreement, with Satyam Computer Services, South
Asia Regional Fund, or SARF, and Mr. B. Ramalinga Raju, the Chairman of our
Board of Directors, which was subsequently amended effective September 14,
1999. The Shareholders' Agreement grants "tag-along" rights to SARF in the
event of a sale of our equity shares by Satyam Computer Services as well as
customary information and inspection rights. Sterling Commerce has similar
rights pursuant to the stockholders agreement in connection with the sale of
our equity shares to Sterling Commerce. The Shareholders' Agreement with SARF
provides that upon the occurrence of specified events. SARF may require Satyam
Computer Services to repurchase our equity shares owned by SARF. The
Shareholders' Agreements also granted to Satyam Computer Services and SARF
warrants to purchase up to an aggregate of 750,000 of our equity shares.
Pursuant to the warrants, Satyam Computer Services and SARF may purchase
150,000 and 600,000, respectively, of our equity shares. Upon the completion of
our initial public offering, in October 1999, Satyam Computer Services and SARF
exercised these warrants for an exercise price equal to approximately 67% of
our initial public offering price, or $12.00 per share, and we issued an
aggregate of 150,000 and 600,000 equity shares to Satyam Computer Services and
SARF respectively upon exercise of these warrants.
Dividends
Under the Companies Act, unless our Board of Directors recommends the
payment of a dividend, we may not declare a dividend. Similarly, under our
Articles, although the shareholders may, at the annual general meeting, approve
a dividend in an amount less than that recommended by the Board, they cannot
increase the amount of the dividend. In India, dividends generally are declared
as a percentage of the par value of a company's equity shares. The dividend
recommended by the Board, if any, and subject to the limitations described
above, is distributed and paid to shareholders in proportion to the paid up
value of their shares within 42 days of the approval by the shareholders at the
annual general meeting. Pursuant to our Articles, our Board has discretion to
declare and pay interim dividends without shareholder approval. With respect to
equity shares issued during a particular fiscal year (including any equity
shares underlying ADSs issued to the depositary in connection with the offering
or in the future), cash dividends declared and paid for such fiscal year
generally
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will be prorated from the date of issuance to the end of such fiscal year.
Under the Companies Act, dividends can only be paid in cash to the registered
shareholder at a record date fixed on or prior to the annual general meeting or
to his order or his banker's order.
Under the Companies Act, dividends may be paid out of profits of a company
in the year in which the dividend is declared or out of the undistributed
profits of previous fiscal years. Before declaring a dividend greater than 10%
of the par value of its equity shares, a company is required under the
Companies Act to transfer to its reserves a minimum percentage of its profits
for that year, ranging from 2.5% to 10% depending upon the dividend percentage
to be declared in such year. The Companies Act further provides that, in the
event of an inadequacy or absence of profits in any year, a dividend may be
declared for such year out of the company's accumulated profits, subject to the
following conditions:
. the rate of dividend to be declared may not exceed 10% of its paid up
capital or the average of the rate at which dividends were declared by
the company in the prior five years, whichever is less;
. the total amount to be drawn from the accumulated profits earned in the
previous years and transferred to the reserves may not exceed an amount
equivalent to 10% of its paid up capital and free reserves, and the
amount so drawn is to be used first to set off the losses incurred in
the fiscal year before any dividends in respect of preference or equity
shares are declared; and
. the balance of reserves after withdrawals shall not fall below 15% of
its paid up capital.
For additional information, please see "Dividend Policy." A tax of 11%,
including the presently applicable surcharge, of the total dividend declared,
distributed or paid for a relevant period is payable by our company. For
additional information, please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Bonus Shares
In addition to permitting dividends to be paid out of current or retained
earnings as described above, the Companies Act permits us to distribute an
amount transferred from the general reserve or surplus in our profit and loss
account to our shareholders in the form of bonus shares, which are similar to a
stock dividend. The Companies Act also permits the issuance of bonus shares
from a share premium account. Bonus shares are distributed to shareholders in
the proportion recommended by the Board. Shareholders of record on a fixed
record date are entitled to receive such bonus shares.
Preemptive Rights and Issue of Additional Shares
The Companies Act gives shareholders the right to subscribe for new shares
in proportion to their respective existing shareholdings unless otherwise
determined by a special resolution passed by a general meeting of the
shareholders. For approval, a special resolution must be approved by a number
of votes which is not less than three times the number of votes against the
special resolution. At an extraordinary general meeting held on January 10,
2000, our shareholders adopted a special resolution waiving their preemptive
rights in connection with this offering for the issue of up to $150 million of
equity shares represented by ADSs. If we issue additional equity shares in the
future and a special resolution is not approved by our shareholders, the new
shares must first be offered to the existing shareholders as of a fixed record
date. The offer must include: (1) the right, exercisable by the shareholders of
record, to renounce the shares offered in favor of any other person; and (2)
the number of shares offered and the period of the offer, which may not be less
than 15 days from the date of offer. If the offer is not accepted it is deemed
to have been declined. Our Board is authorized under the Companies Act to
distribute any new shares not purchased by the preemptive rights holders in the
manner that it deems most beneficial to our company.
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Annual General Meetings of Shareholders
We must convene an annual general meeting of shareholders within six months
after the end of each fiscal year and may convene an extraordinary general
meeting of shareholders when necessary or at the request of a shareholder or
shareholders holding at least 10% of our paid up capital carrying voting
rights. The annual general meeting of the shareholders is generally convened by
our Secretary pursuant to a resolution of the Board. Written notice setting out
the agenda of the meeting must be given at least 21 days (excluding the days of
mailing and receipt) prior to the date of the general meeting to the
shareholders of record. Shareholders who are registered as shareholders on the
date of the general meeting are entitled to attend or vote at such meeting.
The annual general meeting of shareholders must be held at our registered
office or at such other place within the city in which the registered office is
located; meetings other than the annual general meeting may be held at any
other place if so determined by the Board. Our registered office is located at
Mayfair Trade Center, Iind Floor, 1-8-303/36, S.P. Road, Secunderabad 500 003,
India.
Our Articles provide that a quorum for a general meeting is the presence of
at least five shareholders in person.
Voting Rights
At any general meeting, voting is by show of hands unless a poll is demanded
by a shareholder or shareholders present in person or by proxy holding at least
10% of the total shares entitled to vote on the resolution or by those holding
shares with an aggregate paid up capital of at least Rs.50,000. Upon a show of
hands, every shareholder entitled to vote and present in person has one vote
and, on a poll, every shareholder entitled to vote and present in person or by
proxy has voting rights in proportion to the paid up capital held by such
shareholders. Our Chairman of the Board has a deciding vote in the case of any
tie. For a description of voting of ADSs, please see "Description of American
Depositary Shares--Voting Rights."
Any shareholder may appoint a proxy. The instrument appointing a proxy must
be delivered to us at least 48 hours prior to the meeting. A proxy may not vote
except on a poll. A corporate shareholder may appoint an authorized
representative who can vote on behalf of the shareholder, both upon a show of
hands and upon a poll.
Ordinary resolutions may be passed by simple majority of those present and
voting at any general meeting for which the required period of notice has been
given. However, specified resolutions such as amendments to our Articles and
the Memorandum of Association, commencement of a new line of business, the
waiver of preemptive rights for the issuance of any new shares and a reduction
of share capital, require that votes cast in favor of the resolution (whether
by show of hands or poll) are not less than three times the number of votes, if
any, cast against the resolution.
Register of Shareholders; Record Dates; Transfer of Shares
We maintain a register of shareholders. For the purpose of determining the
shares entitled to annual dividends, the register is closed for a specified
period prior to the annual general meeting. The date on which this period
begins is the record date.
To determine which shareholders are entitled to specified shareholder
rights, we may close the register of shareholders. The Companies Act requires
us to give at least seven days' prior notice to the public before such closure.
We may not close the register of shareholders for more than thirty consecutive
days, and in no event for more than forty-five days in a year.
Following the introduction of the Depositories Act, 1996, and the repeal of
Section 22A of the Securities Contracts (Regulation) Act, 1956, which enabled
companies to refuse to register transfers of shares in some circumstances, the
equity shares of a public company are freely transferable, subject only to the
provisions of
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Section 111A of the Companies Act. Since we are a public company, the
provisions of Section 111A will apply to us. Our Articles currently contain
provisions which give our directors discretion to refuse to register a transfer
of shares in some circumstances. According to our Articles, our directors are
required to exercise this right in the best interests of our company. While our
directors are not required to provide a reason for any such refusal in writing,
they must give notice of the refusal to the transferee within one month after
receipt of the application for registration of transfer by our company. In
accordance with the provisions of Section 111A(2) of the Companies Act, our
directors may exercise this discretion if they have sufficient cause to do so.
If our directors refuse to register a transfer of shares, the shareholder
wishing to transfer his, her or its shares may file a civil suit or an appeal
with the Company Law Board, or CLB. Pursuant to Section 111A(3), if a transfer
of shares contravenes any of the provisions of the Securities and Exchange
Board of India Act, 1992 or the regulations issued thereunder or the Sick
Industrial Companies (Special Provisions) Act, 1985 or any other Indian laws,
the CLB may, on application made by the company, a depositary incorporated in
India, an investor, the Securities and Exchange Board of India or other
parties, direct the rectification of the register of records. The CLB may, in
its discretion, issue an interim order suspending the voting rights attached to
the relevant shares before making or completing its investigation into the
alleged contravention. Notwithstanding such investigation, the rights of a
shareholder to transfer the shares will not be restricted.
Under the Companies Act, unless the shares of a company are held in a
dematerialized form, a transfer of shares is effected by a duly stamped
instrument of transfer in the form prescribed by the Companies Act and the
rules thereunder together with delivery of the share certificates. For
additional information, please see "Taxation--Indian Taxation--Stamp Duty and
Transfer Tax." Our transfer agent is Citibank, N.A.--Mumbai branch.
Disclosure of Ownership Interest
Section 187C of the Companies Act requires beneficial owners of shares of
Indian companies who are not holders of record to declare to us details of the
holder of record and the holder of record to declare details of the beneficial
owner. Any person who fails to make the required declaration within 30 days may
be liable for a fine of up to Rs.1,000 for each day the declaration is not
made. Any lien, promissory note or other collateral agreement created, executed
or entered into with respect to any equity share by its registered owner, or
any hypothecation by the registered owner of any equity share, shall not be
enforceable by the beneficial owner or any person claiming through the
beneficial owner if such declaration is not made. Failure to comply with
Section 187C will not affect our obligation to register a transfer of shares or
to pay any dividends to the registered holder of any shares pursuant to which
the declaration has not been made. While it is unclear under Indian law whether
Section 187C applies to holders of ADSs, investors who exchange ADSs for the
underlying equity shares will be subject to the restrictions of Section 187C.
We plan to apply to the Department of Company Affairs for confirmation that the
provisions of Section 187C will not apply to our ADSs so long as the underlying
equity shares are registered in the name of the depositary bank. Additionally,
holders of ADSs may be required to comply with the notification and disclosure
obligations pursuant to the provisions of the deposit agreement to be entered
into by us, such holders and a depositary. For additional information regarding
the deposit agreement, please see "Description of American Depositary Shares."
Audit and Annual Report
At least 21 days before the annual general meeting of shareholders excluding
the days of mailing and receipt, we must distribute to our shareholders a
detailed version of our audited balance sheet and profit and loss account and
the related reports of the Board and the auditors, together with a notice
convening the annual general meeting. Under the Companies Act, we must file the
balance sheet and annual profit and loss account presented to the shareholders
within 30 days of the conclusion of the annual general meeting with the
Registrar of Companies in Andhra Pradesh, India, which is the state in which
our registered office is located. We must also file an annual return containing
a list of our shareholders and other information, within 60 days of the
conclusion of the meeting.
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Company Acquisition of Equity Shares
Under the Companies Act, approval of at least 75% of a company's
shareholders voting on the matter and approval of the High Court of the State
in which the registered office of the company is situated is required to reduce
a company's share capital. A company may, under some circumstances, acquire its
own equity shares without seeking the approval of the High Court. However, a
company would have to extinguish the shares it has so acquired within the
prescribed time period. Generally, a company is not permitted to acquire its
own shares for treasury operations. An acquisition by a company of its own
shares (without having to obtain the approval of the High Court) must comply
with prescribed rules, regulations and conditions as laid down in the Companies
Act and the Securities and Exchange Board of India (Buy-back of Securities)
Regulations, 1998, or Buy-back Regulations. However, the Buy-back Regulations
apply only to public companies listed on a recognized Indian stock exchange and
will therefore not apply to Satyam Infoway.
Liquidation Rights
Subject to the rights of creditors, employees and the holders of any shares
entitled by their terms to preferential repayment over the equity shares, if
any, in the event of our winding-up the holders of the equity shares are
entitled to be repaid the amounts of paid up capital or credited as paid up on
those equity shares. All surplus assets after payments due to the holders of
any preference shares at the commencement of the winding-up shall be paid to
holders of equity shares in proportion to their shareholdings.
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DESCRIPTION OF AMERICAN DEPOSITARY SHARES
Citibank, N.A. acts as the depositary bank for the American Depositary
Shares. Citibank's depositary offices are located at 111 Wall Street, New York,
New York 10005. American Depositary Shares are frequently referred to as "ADSs"
and represent ownership interests in securities that are on deposit with the
depositary bank. ADSs are normally represented by certificates that are
commonly known as American Depositary Receipts or "ADRs." The depositary bank
typically appoints a custodian to safekeep the securities on deposit. In this
case, the custodian is Citibank, N.A.--Mumbai Branch, located at 81 Dr. Annie
Besant Road, Worli, Mumbai India 400 018.
We have appointed Citibank as depositary bank pursuant to a deposit
agreement. A copy of the deposit agreement and any amendment to date is on file
with the SEC under cover of a Registration Statement on Form F-6 (Reg. No. 333-
10982). You may obtain a copy of the deposit agreement from the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
We are providing you with a summary description of the ADSs and your rights
as an owner of ADSs. Please remember that summaries by their nature lack the
precision of the information summarized and that a holder's rights and
obligations as an owner of ADSs will be determined by the deposit agreement and
not by this summary. We urge you to review the deposit agreement in its
entirety as well as the form of ADR attached to the deposit agreement.
Each ADS represents one-fourth of one equity share on deposit with the
custodian bank. An ADS will also represent any other property received by the
depositary bank or the custodian on behalf of the owner of the ADS but that has
not been distributed to the owners of ADSs because of legal restrictions or
practical considerations.
If you become an owner of ADSs, you will become a party to the deposit
agreement and therefore will be bound to its terms and to the terms of the ADR
that represents your ADSs. The deposit agreement and the ADR specify our rights
and obligations as well as your rights and obligations as owner of ADSs and
those of the depositary bank. As an ADS holder you appoint the depositary bank
to act on your behalf in certain circumstances. The deposit agreement is
governed by New York law. However, our obligations to the holders of equity
shares will continue to be governed by the laws of India, which may be
different from the laws in the United States.
As an owner of ADSs, you may hold your ADSs either by means of an ADR
registered in your name or through a brokerage or safekeeping account. If you
decide to hold your ADSs through your brokerage or safekeeping account, you
must rely on the procedures of your broker or bank to assert your rights as ADS
owner. Please consult with your broker or bank to determine what those
procedures are. This summary description assumes you have opted to own the ADSs
directly by means of an ADR registered in your name and, as such, we will refer
to you as the "holder." When we refer to "you," we assume the reader owns new
ADSs and will own ADSs at the relevant time.
Dividends and Distributions
As a holder, you generally have the right to receive the distributions we
make on the securities deposited with the custodian bank. Your receipt of these
distributions may be limited, however, by practical considerations and legal
limitations. Holders will receive such distributions under the terms of the
deposit agreement in proportion to the number of ADSs held as of a specified
record date.
Distributions of Cash
Whenever we make a cash distribution for the securities on deposit with the
custodian, we will notify the depositary bank. Upon receipt of such notice the
depositary bank will arrange for the funds to be converted into U.S. dollars
and for the distribution of the U.S. dollars to the holders.
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The conversion into U.S. dollars will take place only if practicable and if
the U.S. dollars are transferable to the United States. The amounts distributed
to holders will be net of the fees, expenses, taxes and governmental charges
payable by holders under the terms of the deposit agreement. The depositary
will apply the same method for distributing the proceeds of the sale of any
property (such as undistributed rights) held by the custodian in respect of
securities on deposit.
Distributions of Equity Shares
Whenever we make a free distribution of equity shares for the securities on
deposit with the custodian, we will notify the depositary bank and deposit the
applicable number of equity shares with the custodian. Upon receipt of such
notice, the depositary bank will either distribute to holders new ADSs
representing the equity shares deposited or modify the ADS-to-equity shares
ratio, in which case each ADS you hold will represent rights and interests in
the additional equity shares so deposited. Only whole new ADSs will be
distributed. Fractional entitlements will be sold and the proceeds of such sale
will be distributed as in the case of a cash distribution.
The distribution of new ADSs or the modification of the ADS-to-equity shares
ratio upon a distribution of equity shares will be made net of the fees,
expenses, taxes and governmental charges payable by holders under the terms of
the deposit agreement. In order to pay such taxes or governmental charges, the
depositary bank may sell all or a portion of the new equity shares so
distributed.
No such distribution of new ADSs will be made if it would violate a law
(e.g., the U.S. securities laws) or if it is not operationally practicable. If
the depositary bank does not distribute new ADSs as described above, it will
use its best efforts to sell the equity shares received and will distribute the
proceeds of the sale as in the case of a distribution of cash.
Distributions of Rights
Whenever we intend to distribute rights to purchase additional equity
shares, we will give prior notice to the depositary bank and we will assist the
depositary bank in determining whether it is lawful and reasonably practicable
to distribute rights to purchase additional ADSs to holders.
The depositary bank will establish procedures to distribute rights to
purchase additional ADSs to holders and to enable such holders to exercise such
rights if it is lawful and reasonably practicable to make the rights available
to holders of ADSs, and if we provide all of the documentation contemplated in
the deposit agreement (such as opinions to address the lawfulness of the
transaction). You may have to pay fees, expenses, taxes and other governmental
charges to subscribe for the new ADSs upon the exercise of your rights. The
depositary bank is not obligated to establish procedures to facilitate the
distribution and exercise by holders of rights to purchase new equity shares
directly rather than new ADSs.
The depositary bank will not distribute the rights to you if:
. we do not timely request that the rights be distributed to you or we
request that the rights not be distributed to you;
. we fail to deliver satisfactory documents to the depositary bank; or
. it is not reasonably practicable to distribute the rights.
The depositary bank will sell the rights that are not exercised or not
distributed if such sale is lawful and reasonably practicable. The proceeds of
such sale will be distributed to holders as in the case of a cash distribution.
If the depositary bank is unable to sell the rights, it will allow the rights
to lapse.
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Other Distributions
Whenever we intend to distribute property other than cash, equity shares or
rights to purchase additional equity shares, we will notify the depositary bank
in advance and will indicate whether we wish such distribution to be made to
you. If so, we will assist the depositary bank in determining whether such
distribution to holders is lawful and reasonably practicable.
If it is reasonably practicable to distribute such property to you and if we
provide all of the documentation contemplated in the deposit agreement, the
depositary bank will distribute the property to the holders in a manner it
deems practicable.
The distribution will be made net of fees, expenses, taxes and governmental
charges payable by holders under the terms of the deposit agreement. In order
to pay such taxes and governmental charges, the depositary bank may sell all or
a portion of the property received.
The depositary bank will not distribute the property to you and will sell
the property if:
. we do not request that the property be distributed to you or if we ask
that the property not be distributed to you;
. we do not deliver satisfactory documents to the depositary bank; or
. the depositary bank determines that all or a portion of the
distribution to you is not reasonably practicable.
The proceeds of such a sale will be distributed to holders as in the case of
a cash distribution.
Redemption
Whenever we decide to redeem any of the securities on deposit with the
custodian, we will notify the depositary bank. If it is reasonably practicable
and if we provide all of the documentation contemplated in the deposit
agreement, the depositary bank will mail notice of the redemption to the
holders.
The custodian will be instructed to surrender the shares being redeemed
against payment of the applicable redemption price. The depositary bank will
convert the redemption funds received into U.S. dollars upon the terms of the
deposit agreement and will establish procedures to enable holders to receive
the net proceeds from the redemption upon surrender of their ADSs to the
depositary bank. You may have to pay fees, expenses, taxes and other
governmental charges upon the redemption of your ADSs. If less than all ADSs
are being redeemed, the ADSs to be retired will be selected by lot or on a pro
rata basis, as the depositary bank may determine.
Changes Affecting Equity Shares
The equity shares held on deposit for your ADSs may change from time to
time. For example, there may be a change in nominal or par value, a split-up,
cancellation, consolidation or classification of such equity shares or a
recapitalization, reorganization, merger, consolidation or sale of assets.
If any such change were to occur, your ADSs would, to the extent permitted
by law, represent the right to receive the property received or exchanged in
respect of the equity shares held on deposit. The depositary bank may in such
circumstances deliver new ADSs to you or call for the exchange of your existing
ADSs for new ADSs. If the depositary bank may not lawfully distribute such
property to you, the depositary bank may sell such property and distribute the
net proceeds to you as in the case of a cash distribution.
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Issuance of ADSs upon Deposit of Equity Shares
Under current Indian laws and regulations, the 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, 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. For additional information, please see "Risk Factors--
Foreign investment restrictions and the lack of a public market for our equity
shares may impact the value of our ADSs."
If permitted under applicable law, the depositary bank may create ADSs on
your behalf if you or your broker deposit equity shares with the custodian. The
depositary bank will deliver these ADSs to the person you indicate only after
you obtain all necessary government approvals and pay any applicable issuance
fees and any charges and taxes payable for the transfer of the equity shares to
the custodian.
The issuance of ADSs may be delayed until the depositary bank or the
custodian receives confirmation that all required approvals have been given and
that the equity shares have been duly transferred to the custodian. The
depositary bank will only issue ADSs in whole numbers.
If you are permitted to make a deposit of equity shares, you will be
responsible for transferring good and valid title to the depositary bank. As
such, you will be deemed to represent and warrant that:
. the equity shares are duly authorized, validly issued, fully paid, non-
assessable and legally obtained;
. all preemptive (and similar) rights, if any, with respect to such
equity shares have been validly waived or exercised;
. you are duly authorized to deposit the equity shares;
. the equity shares presented for deposit are free and clear of any lien,
encumbrance, security interest, charge, mortgage or adverse claim, and
are not, and the ADSs issuable upon such deposit will not be,
"restricted securities" (as defined in the deposit agreement); and
. the equity shares presented for deposit have not been stripped of any
rights or entitlements.
If any of the representations or warranties are incorrect in any way, we and
the depositary bank may, at your cost and expense, take any and all actions
necessary to correct the consequences of the misrepresentations.
Withdrawal of Equity Shares Upon Cancellation of ADSs
As a holder, you will be entitled to present your ADSs to the depositary
bank for cancellation and then receive the corresponding number of underlying
equity shares at the custodian's offices, subject to the laws of India. In
order to withdraw the equity shares represented by your ADSs, you will be
required to pay to the depositary the fees for cancellation of ADSs and any
charges and taxes payable upon the transfer of the equity shares being
withdrawn. You assume the risk for delivery of all funds and securities upon
withdrawal. Once canceled, the ADSs will not have any rights under the deposit
agreement.
If you hold an ADR registered in your name, the depositary bank may ask you
to provide proof of identity and genuineness of any signature and certain other
documents as the depositary bank may deem appropriate before it will cancel
your ADSs. The withdrawal of the equity shares represented by your ADSs may be
delayed until the depositary bank receives satisfactory evidence of compliance
with all applicable laws and regulations. Please keep in mind that the
depositary bank will only accept ADSs for cancellation that represent a whole
number of securities on deposit.
You will have the right to withdraw the securities represented by your ADSs
at any time except for:
. Temporary delays that may arise because (i) the transfer books for the
equity shares or ADSs are closed, or (ii) equity shares are immobilized
on account of a shareholders' meeting or a payment of dividends.
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. Obligations to pay fees, taxes and similar charges.
. Restrictions imposed because of laws or regulations applicable to ADSs
or the withdrawal of securities on deposit.
The deposit agreement may not be modified to impair your right to withdraw
the securities represented by your ADSs except to comply with mandatory
provisions of law.
Voting Rights
As a holder, 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. The voting rights of holders of equity shares
are described in "Description of Equity Shares--Voting Rights."
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. In the event that voting takes
place by a show of hands, the depositary bank will cause the custodian to vote
all deposited securities in accordance with the instructions received by
holders of a majority of the ADSs for which the depositary bank receives voting
instructions.
Please note that 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 except as discussed above.
Fees and Charges
As an ADS holder, you will be required to pay the following service fees to
the depositary bank:
<TABLE>
<CAPTION>
Service Fees
------- ----
<S> <C>
Issuance of ADSs................................. Up to 5c per ADS issued
Cancellation of ADSs............................. Up to 5c per ADS canceled
Distribution of ADSs............................. Up to 2c per ADS issued
Distribution of cash dividends or other cash
distributions................................... Up to 2c per ADS held
</TABLE>
As an ADS holder you will also be responsible to pay certain fees and
expenses incurred by the depositary bank and certain taxes and governmental
charges such as:
. fees for the transfer and registration of equity shares (i.e., upon
deposit and withdrawal of equity shares);
. expenses incurred for converting foreign currency into U.S. dollars;
. expenses for cable, telex and fax transmissions and for delivery of
securities; and
. Taxes and duties upon the transfer of securities (i.e., when equity
shares are deposited or withdrawn from deposit).
We have agreed to pay certain other charges and expenses of the depositary
bank. Note that the fees and charges you may be required to pay may vary over
time and may be changed by us and by the depositary bank. You will receive
prior notice of such changes.
Amendments and Termination
We may agree with the depositary bank to modify the deposit agreement at any
time without your consent. We undertake to give holders 30 days' prior notice
of any modifications that would prejudice any of their substantial rights under
the deposit agreement (except in very limited circumstances enumerated in the
deposit agreement).
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You will be bound by the modifications to the deposit agreement if you
continue to hold your ADSs after the modifications to the deposit agreement
become effective. The deposit agreement cannot be amended to prevent you from
withdrawing the equity shares represented by your ADSs (except as permitted by
law).
We have the right to direct the depositary bank to terminate the deposit
agreement. Similarly, the depositary bank may in certain circumstances on its
own initiative terminate the deposit agreement. In either case, the depositary
bank must give notice to the holders at least 30 days before termination.
Upon termination, the following will occur under the deposit agreement:
. For a period of six months after termination, you will be able to
request the cancellation of your ADSs and the withdrawal of the equity
shares represented by your ADSs and the delivery of all other property
held by the depositary bank in respect of those equity shares on the
same terms as prior to the termination. During such six months' period
the depositary bank will continue to collect all distributions received
on the equity shares on deposit (i.e., dividends) but will not
distribute any such property to you until you request the cancellation
of your ADSs.
. After the expiration of such six months' period, the depositary bank
may sell the securities held on deposit. The depositary bank will hold
the proceeds from such sale and any other funds then held for the
holders of ADSs in a non-interest bearing account. At that point, the
depositary bank will have no further obligations to holders other than
to account for the funds then held for the holders of ADSs still
outstanding.
Books of Depositary
The depositary bank will maintain ADS holder records at its depositary
office. You may inspect such records at such office during regular business
hours but solely for the purpose of communicating with other holders in the
interest of business matters relating to the ADSs and the deposit agreement.
The depositary bank will maintain in New York facilities to record and
process the issuance, cancellation, combination, split-up and transfer of ADRs.
These facilities may be closed from time to time, to the extent not prohibited
by law.
Limitations on Obligations and Liabilities
The deposit agreement limits our obligations and the depositary bank's
obligations to you. Please note the following:
. We and the depositary bank are obligated only to take the actions
specifically stated in the depositary agreement without negligence or
bad faith.
. The depositary bank disclaims any liability for any failure to carry
out voting instructions, for any manner in which a vote is cast or for
the effect of any vote, provided it acts in good faith and in
accordance with the terms of the deposit agreement.
. The depositary bank disclaims any liability for any failure to
determine the lawfulness or practicality of any action, for the content
of any document forwarded to you on our behalf or for the accuracy of
any translation of such a document, for the investment risks associated
with investing in equity shares, for the validity or worth of the
equity shares, for any tax consequences that result from the ownership
of ADSs, for the credit worthiness of any third party, for allowing any
rights to lapse under the terms of the deposit agreement, for the
timeliness of any of our notices or for our failure to give notice.
. We and the depositary bank will not be obligated to perform any act
that is inconsistent with the terms of the deposit agreement.
. We and the depositary bank disclaim any liability if we are prevented
or forbidden from acting on account of any law or regulation, any
provision of our Articles of Association or Memorandum of Association,
any provision of any securities on deposit or by reason of any act of
God or war or other circumstances beyond our control.
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. We and the depositary bank disclaim any liability by reason of any
exercise of, or failure to exercise, any discretion provided for the
deposit agreement or in our Articles of Association or Memorandum of
Association or in any provisions of securities on deposit.
. We and the depositary bank further disclaim any liability for any
action or inaction in reliance on the advice or information received
from legal counsel, accountants, any person presenting equity shares
for deposit, any holder of ADSs or authorized representative thereof,
or any other person believed by either of us in good faith to be
competent to give such advice or information.
. We and the depositary bank also disclaim liability for the inability by
a holder to benefit from any distribution, offering, right or other
benefit which is made available to holders equity shares but is not,
under the terms of the deposit agreement, made available to you.
. We and the depositary bank may rely without any liability upon any
written notice, request or other document believed to be genuine and to
have been signed or presented by the proper parties.
Pre-Release Transactions
The depositary bank may, in certain circumstances, issue ADSs before
receiving a deposit of equity shares or release equity shares before receiving
ADSs. These transactions are commonly referred to as "pre-release
transactions." The deposit agreement limits the aggregate size of pre-release
transactions and imposes a number of conditions on such transactions (i.e., the
need to receive collateral, the type of collateral required, the
representations required from brokers, etc.). The depositary bank may retain
the compensation received from the pre-release transactions.
Taxes
You will be responsible for the taxes and other governmental charges payable
on the ADSs and the securities represented by the ADSs. We, the depositary bank
and the custodian may deduct from any distribution the taxes and governmental
charges payable by holders and may sell any and all property on deposit to pay
the taxes and governmental charges payable by holders. You will be liable for
any deficiency if the sale proceeds do not cover the taxes that are due.
The depositary bank may refuse to issue ADSs, to deliver transfer, split and
combine ADRs or to release securities on deposit until all taxes and charges
are paid by the applicable holder. The depositary bank and the custodian may
take reasonable administrative actions to obtain tax refunds and reduced tax
withholding for any distributions on your behalf. However, you may be required
to provide to the depositary bank and to the custodian proof of taxpayer status
and residence and such other information as the depositary bank and the
custodian may require to fulfill legal obligations. You are required to
indemnify us, the depositary bank and the custodian for any claims with respect
to taxes based on any tax benefit obtained for you.
Foreign Currency Conversion
The depositary bank will arrange for the conversion of all foreign currency
received into U.S. dollars if such conversion is practicable, and it will
distribute the U.S. dollars in accordance with the terms of the deposit
agreement. You may have to pay fees and expenses incurred in converting foreign
currency, such as fees and expenses incurred in complying with currency
exchange controls and other governmental requirements.
If the conversion of foreign currency is not practicable or lawful, or if
any required approvals are denied or not obtainable at a reasonable cost or
within a reasonable period, the depositary bank may take the following actions
in its discretion:
. convert the foreign currency to the extent practicable and lawful and
distribute the U.S. dollars to the holders for whom the conversion and
distribution is lawful and practicable;
. distribute the foreign currency to holders for whom the distribution is
lawful and practicable; and
. hold the foreign currency (without liability for interest) for the
applicable holders.
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RESTRICTIONS ON FOREIGN OWNERSHIP OF INDIAN SECURITIES
Shares of Indian companies represented by ADSs are required to be approved
for issuance to foreign investors by the Ministry of Finance under the Issue of
Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary
Receipt Mechanism) Scheme, 1993, as modified from time to time, notified by the
government of India. The Issue of Foreign Currency Convertible Bonds and
Ordinary Shares Scheme is distinct from other policies or facilities, as
described below, relating to investments in Indian companies by foreign
investors. The issuance of ADSs pursuant to the Issue of Foreign Currency
Convertible Bonds and Ordinary Shares Scheme also affords to holders of ADSs
the benefits of Section 115AC of the Indian Income-tax Act, 1961 for purposes
of the application of Indian tax law. For additional information, please see
"Taxation--Indian Taxation."
Foreign Direct Investment
In July 1991, the government of India commenced the liberalization process
and raised the limit on foreign equity holdings in Indian companies from 40% to
51% in high priority industries. The Foreign Investment Promotion Board
currently under the Ministry of Industry of the government of India was
thereafter formed to negotiate with large foreign companies wishing to make
long-term investments in India. Since then, the government of India has relaxed
the restrictions on foreign investment considerably. Our business is not deemed
to be a high priority industry. As a result, the maximum foreign equity
investment in an Indian company operating as an Internet service provider is
49%.
Under current Indian law, no prior approval of the Reserve Bank of India or
the Foreign Investment Promotion Board is required in respect of foreign equity
participation up to 50%, 51%, 74% or 100%, depending on industry category, in
high priority industries in a new issue of shares, including the purchase of
ADSs representing equity securities issued by Indian companies. However, within
a period of 30 days from the date of the investment being made, a declaration
in the prescribed form is required to be filed with the Reserve Bank of India.
For foreign direct investment in the high priority industries in excess of 50%,
51% or 74% (depending on the category of industry) or in the industries in
which direct foreign investment is permitted up to 100%, or for any issue of
equity securities to foreign investors by a company not in a high-priority
industry, approval of the Foreign Investment Promotion Board is required if the
amount of investment is up to Rs.6 billion ($142.9 million). Proposals in
excess of Rs.6 billion ($142.9 million) require the approval of the Cabinet
Committee on Foreign Investment. Proposals involving the public sector and
other sensitive areas require the approval of Cabinet Committee on Economic
Affairs. These facilities are designed for foreign direct investments by non-
residents of India who are not non-resident Indians, overseas corporate bodies
or foreign institutional investors, all of which we refer to as foreign direct
investors, and do not include transfers of shares from residents to non-
residents. The Department of Industrial Policy and Promotion, a part of the
Ministry of Industry, issued detailed guidelines in January 1997 for
consideration of foreign direct investment proposals by the Foreign Investment
Promotion Board. Under these guidelines, sector specific guidelines for foreign
direct investment and the levels of permitted equity participation have been
established. The issues to be considered by the Foreign Investment Promotion
Board and the Foreign Investment Promotion Board's areas of priority in
granting approvals are also set out in the guidelines. The basic objective of
the guidelines is to improve the transparency and objectivity of the Foreign
Investment Promotion Board's consideration of proposals. However, because the
guidelines are administrative and have not been codified as either law or
regulations, they are not legally binding with respect to any recommendation
made by the Foreign Investment Promotion Board or with respect to any decision
taken by the government of India in cases involving foreign direct investment.
The high priority industries referred to above are classified into the
following four categories under Annexure III to the New Industrial Policy,
1991:
. Part A lists three industries, comprised mainly of mining-related
industries, in which up to 50% foreign equity participation is
permitted;
. Part B lists 21 industries, including software development,
agricultural production, food product manufacturing, textile products,
paper and basic chemicals, in which up to 51% foreign equity
participation is permitted;
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. Part C lists seven industries, including medical equipment
manufacturing, iron ore manufacturing, land transport, water transport
and storage and warehousing services, in which up to 74% foreign equity
participation is permitted; and
. Part D lists two industries, including electricity generation,
transmission and distribution and construction, in which up to 100%
foreign equity participation is permitted.
In May 1994, the government of India announced that purchases by foreign
investors of ADSs and foreign currency convertible bonds of Indian companies
will be treated as foreign direct investment in the equity issued by Indian
companies for such offerings. Therefore, offerings that involve the issuance of
equity that results in foreign direct investors holding more than the
stipulated percentage of foreign direct investments (which depends on the
category of industry) in high priority industries or for any issue of equity to
foreign investors by companies not in high priority industries, would require
approval from the Foreign Investment Promotion Board. In addition, in
connection with offerings of any such securities to foreign investors, approval
of the Foreign Investment Promotion Board is required for Indian companies
whether or not the stipulated percentage limit would be reached, if the
proceeds therefrom are to be used for investment in non-high priority
industries. With respect to the activities of our company, Foreign Investment
Promotion Board approval is required for any foreign direct investment in our
stock. As a result, we will require Foreign Investment Promotion Board approval
before allotting the equity shares underlying the ADSs.
In November 1998, the Reserve Bank of India issued a notification to the
effect that foreign investment in preferred shares will be considered as part
of the share capital of a company and the provisions relating to foreign direct
investment in the equity shares of a company discussed above would apply.
Accordingly, no prior approval of the Reserve Bank of India or the Foreign
Investment Promotion Board would be required in respect of foreign investment
in the preferred stock of an Indian company up to 50%, 51%, 74% or 100% in high
priority industries. All other proposals for foreign investment in the
preferred stock of an Indian company will be processed by the Foreign
Investment Promotion Board. Investments in preferred shares are included as
foreign direct investment for the purposes of sectoral caps on foreign equity,
if such preferred shares carry a conversion option. If the preferred shares are
structured without a conversion option, they would fall outside the foreign
direct investment limit.
Notwithstanding the foregoing, the terms of our Internet service provider
license provide that the maximum total foreign equity investment in our company
is 49%.
Investment by Non-Resident Indians and Overseas Corporate Bodies Owned At Least
60% By Non-Resident Indians
A variety of special facilities for making investments in India in shares of
Indian companies is available to individuals of Indian nationality or origin
residing outside India, or non-resident Indians, and to overseas corporate
bodies, at least 60% owned by such persons, or overseas corporate bodies. These
facilities permit non-resident Indians and overseas corporate bodies to make
portfolio investments in shares and other securities of Indian companies on a
basis not generally available to other foreign investors. These facilities are
different and distinct from investments by foreign direct investors described
above.
Apart from portfolio investments in Indian companies, non-resident Indians
and overseas corporate bodies may also invest in Indian companies through
foreign direct investments. For additional information, please see "--Foreign
Direct Investment." Under the foreign direct investment rules, non-resident
Indians and overseas corporate bodies may invest up to 100% in high-priority
industries in which other foreign investors are permitted to invest only up to
50%, 51%, 74% or 100%, depending on the industry category.
Investment by Foreign Institutional Investors
In September 1992, the government of India issued guidelines which enable
foreign institutional investors, including institutions such as pension funds,
investment trusts, asset management companies, nominee companies and
incorporated/institutional portfolio managers, to make portfolio investments in
all the securities
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traded on the primary and secondary markets in India. Under the guidelines,
foreign institutional investors must obtain an initial registration from the
Securities and Exchange Board of India to make these investments. Foreign
institutional investors must also comply with the provisions of the Securities
and Exchange Board of India (Foreign Institutional Investors) Regulations,
1995. The initial registration enables the registered foreign institutional
investor to buy, subject to the ownership restrictions discussed below, and
sell freely securities issued by Indian companies whether or not they are
listed, to realize capital gains on investments made through the initial amount
invested in India, to subscribe or renounce rights offerings for shares, to
appoint a domestic custodian for custody of investments held and to repatriate
the capital, capital gains, dividends, income received by way of interest and
any compensation received towards sale or renunciation of rights offerings of
shares.
Apart from making portfolio investments in Indian companies as described
above, foreign institutional investors may make direct foreign investments in
Indian companies. For additional information, please see "--Foreign Direct
Investment."
Ownership Restrictions
The Securities and Exchange Board of India and Reserve Bank of India
regulations restrict portfolio investments in Indian companies by foreign
institutional investors, non-resident Indians and overseas corporate bodies,
all of which we refer to as foreign portfolio investors. The Reserve Bank of
India issued a circular in August 1998 stating that foreign institutional
investors in aggregate may hold no more than 30% of the equity shares of an
Indian company and non-resident Indians and overseas corporate bodies in
aggregate may hold no more than 10% of the shares of an Indian company through
portfolio investments. The Reserve Bank of India circular also states that no
single foreign institutional investor may hold more than 10% of the shares of
an Indian company and no single non-resident Indian or overseas corporate body
may hold more than 5% of the shares of an Indian company. The Foreign
Investment Promotion Board guidelines issued by the Foreign Investment
Promotion Board in January 1997 state that the total cap on foreign investment
in the telecommunications sector would be 49%. The Guidelines and General
Information for Internet Service Provider announced by the Telecom Commission
of the government of India in November 1998 also state that the total foreign
equity investment in a company acting as an Internet service provider would be
capped at 49%. This cap of 49% applies to foreign equity investment by foreign
portfolio investors and foreign direct investors in our company.
There is uncertainty under Indian law about the tax regime applicable to
foreign institutional investors that hold and trade ADSs. Foreign institutional
investors are urged to consult with their Indian legal and tax advisers about
the relationship between the foreign institutional investor regulations and the
ADSs and any equity shares withdrawn upon surrender of ADSs.
Under the Securities and Exchange Board of India (Substantial Acquisition of
Shares and Takeovers) Regulations, 1997 approved by the Securities and Exchange
Board of India in January 1997 and notified by the government of India in
February 1997, which replaced the Securities and Exchange Board of India
(Substantial Acquisition of Shares and Takeovers) Regulations, 1994, upon the
acquisition of more than 5% of the outstanding shares or voting rights of a
listed public Indian company, a purchaser is required to notify the company and
the company and the purchaser are required to notify all the stock exchanges on
which the shares of such company are listed. Upon the acquisition of 15% or
more of such shares or voting rights or a change in control of the company, the
purchaser is required to make an open offer to the other shareholders offering
to purchase at least 20% of all the outstanding shares of the company at a
minimum offer price as determined pursuant to the new regulations. Upon
conversion of ADSs into equity shares, an ADS holder will be subject to the new
regulations. However, since we are an unlisted company, the provisions of the
new regulations will not apply to us. If our shares are listed on an Indian
stock exchange in the future, the new regulations will apply to the holders of
our ADSs.
Open market purchases of securities of Indian companies in India by foreign
direct investors or investments by non-resident Indians, overseas corporate
bodies and foreign institutional investors above the ownership levels set forth
above require government of India approval on a case-by-case basis.
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GOVERNMENT OF INDIA APPROVALS
The Ministry of Finance and the Ministry of Industry of the government of
India and the Reserve Bank of India have approved this offering. In addition,
we have obtained the required approval from the Ministry of Finance to enter
into the underwriting agreements and the depository agreement referred to
elsewhere in this prospectus. Various tax concessions are expected to be
available with respect to this offering in accordance with the provisions of
Section 115AC of the Indian Income-tax Act, 1961. Copies of the approvals from
the Ministry of Industry and the Reserve Bank of India will be made available
for public inspection at our corporate office or provided upon written request
to our Chief Financial Officer. For additional information, please see
"Taxation--Indian Taxation."
The Reserve Bank of India has granted our company general approvals which
permit:
. foreign investors to acquire ADSs and equity shares issued by us;
. us to issue the ADSs and transfer and register the equity shares in the
name of the depositary or its nominee;
. us to remit dividends on the equity shares issued by us and represented
by ADSs at market rates, as and when due subject to the payment of any
applicable Indian taxes;
. us to issue any rights or bonus equity shares represented by the ADSs
issued by us;
. us to repatriate in free foreign exchange the proceeds of a sale of the
equity shares received upon surrender of ADSs and any rights or bonuses
that may accrue in respect of the equity shares, subject to applicable
Indian taxes;
. us to export the equity shares from India for transfer thereof outside
of India upon withdrawal from the depositary facility; and
. the free transfer of the ADSs issued by us outside India between non-
residents of India.
Any person resident outside India desiring to sell equity shares received
upon surrender of ADSs or otherwise transfer such equity shares within India
should seek the advice of Indian counsel as to the requirements applicable at
that time. The Reserve Bank of India has approved the free transferability of
our ADSs outside India between two non-residents. Pursuant to the Indian
Foreign Exchange Regulation Act, 1973, a person resident in India is: (1) a
citizen of India who has not left India with an intention of staying outside
India; and (2) a non-citizen of India who stays in India for a purpose
indicating an intention to stay in India. Transfers of securities in Indian
companies or any renunciation of rights from a person resident outside India to
a person resident in India require approval from the Reserve Bank of India
under Section 19(5) of the Foreign Exchange Regulation Act. Currently, however,
no prior approval of the Reserve Bank of India is required in respect of such
sales if the company whose shares are being sold is listed in India and if such
sales are made through a recognized stock exchange in India at prevailing
market rates or in connection with my offer made under the regulations
regarding takeovers. In such cases, the sale proceeds may be repatriated after
payment of applicable taxes and stamp duties.
However, under current Indian law, the sale and transfer of our equity
shares withdrawn from the depositary to any person resident in India would
require additional approvals to be obtained from the Reserve Bank of India.
Under current regulations and practice, since we are not listed on any
recognized stock exchange in India, a person resident outside of India
intending to sell our securities within India or to a person resident in India
is required to apply for Reserve Bank of India approval by submitting a Form
TS1, which requires information as to the transferor, transferee, the
shareholding structure of our company, the proposed sale price per share and
other information. The proceeds from such transfers may be transferred outside
India after payment of applicable taxes and stamp duties. The Reserve Bank of
India will approve the price at which shares are to be transferred from a non-
resident holder of shares in our company to a person resident in India based on
a formula. The Reserve Bank of India is not required to respond to a Form TS1
application within any specific time period and may grant or deny the
application in its discretion.
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Prior to the effectiveness of the registration statement of which this
prospectus is a part, we will file an application with the Department of
Company Affairs to the effect that we are not required to file this prospectus
under the Companies Act. The Ministry of Finance may request that a copy of
this prospectus be filed with the Securities and Exchange Board of India and
the Registrar of Companies in Andhra Pradesh, which is the state in India where
our registered office is located.
The equity shares issued and outstanding prior to the offering are not
listed on any Indian stock exchanges, and no such listing is presently planned.
However, pursuant to the approval granted by the Ministry of Finance, we have
undertaken to list the equity shares on Indian Stock Exchanges within three
years from the time we first earn profits.
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TAXATION
Indian Taxation
General. The following is based on the opinion of M.G. Ramachandran
regarding the principal Indian tax consequences for holders of ADSs and equity
shares received upon withdrawal of such equity shares who are not resident in
India, whether of Indian origin or not. We refer to these persons as non-
resident holders. The following is based on the provisions of the Income-tax
Act, 1961, including the special tax regime contained in Section 115AC and the
Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through
Depository Receipt Mechanism) Scheme, 1993. The Income-tax Act is amended every
year by the Finance Act of the relevant year. Some or all of the tax
consequences of the Section 115AC may be amended or changed by future
amendments of the Income-tax Act.
This opinion is not intended to constitute a complete analysis of the
individual tax consequences to non-resident holders under Indian law for the
acquisition, ownership and sale of ADSs and equity shares by non-resident
holders. Personal tax consequences of an investment may vary for non-resident
holders in various circumstances and potential investors should therefore
consult their own tax advisers on the tax consequences of such acquisition,
ownership and sale, including specifically the tax consequences under the law
of the jurisdiction of their residence and any tax treaty between India and
their country of residence.
Residence. For purposes of the Income-tax Act, an individual is considered
to be a resident of India during any fiscal year if he or she is in India in
that year for:
. a period or periods amounting to 182 days or more; or
. 60 days or more and, in case of a citizen of India or a person of
Indian origin, who, being outside India, comes on a visit to India, is
in India for 182 days or more effective April 1, 1995 and in each case
within the four preceding years has been in India for a period or
periods amounting to 365 days or more.
A company is a resident of India if it is registered in India or the control
and the management of its affairs is situated wholly in India. Individuals and
companies that are not residents of India would be treated as non-residents for
purposes of the Income-tax Act.
Taxation of Distributions. Withholding tax on dividends paid to shareholders
no longer applies. However, the company paying the dividend would be subject to
a dividend distribution tax of 11% including the presently applicable
surcharge, of the total amount it distributes, declares or pays as a dividend.
This dividend distribution tax is in addition to the normal corporate tax of
38.5%, including the presently applicable surcharge. The surcharge was
introduced by the Finance Act, 1999.
Any distributions of additional ADSs, equity shares or rights to subscribe
for equity shares made to non-resident holders with respect to ADSs or equity
shares will not be subject to Indian tax. Similarly, the acquisition by a non-
resident holder of equity shares upon redemption of ADSs will not constitute a
taxable event for Indian income tax purposes. Such acquisition will, however,
give rise to a stamp duty as described below under "Stamp Duty and Transfer
Tax."
Taxation of Capital Gains. Any gain realized on the sale of our ADSs or
equity shares by a non-resident holder to any non-resident outside India is not
subject to Indian capital gains tax. However, because subscription rights are
not expressly covered by the Section 115AC, it is unclear, and M.G.
Ramachandran is therefore unable to give an opinion, as to whether capital gain
derived from the sale of subscription rights by a non-resident holder not
entitled to an exemption under a tax treaty to any non-resident outside India
will be subject to Indian capital gains tax. If such subscription rights are
deemed by the Indian tax authorities to be situated within India, the gains
realized on the sale of such subscription rights will be subject to customary
Indian taxation on capital gains as discussed below.
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Since the offering has been approved by the government of India under the
Issue of Foreign Currency Convertible Bonds and Ordinary Shares Scheme, non-
resident holders of the ADSs will have the benefit of tax concessions available
under Section 115AC. The effect of the Scheme in the context of Section 115AC
is unclear, and M.G. Ramachandran is therefore unable to give an opinion, as to
whether such tax treatment is available to a non-resident who acquires equity
shares outside India from a non-resident holder of equity shares after receipt
of the equity shares upon surrender of the ADSs. If concessional tax treatment
is not available, gains realized on the sale of such equity shares will be
subject to customary Indian taxation on capital gains as discussed below. The
Issue of Foreign Currency Convertible Bonds and Ordinary Shares Scheme provides
that if the equity shares are sold on a recognized stock exchange in India
against payment in Indian rupees, they will no longer be eligible for such
concessional tax treatment.
Subject to any relief provided pursuant to an applicable tax treaty, any
gain realized on the sale of equity shares to an Indian resident or inside
India generally will be subject to Indian capital gains tax which is to be
withheld at the source by the buyer. Under the Issue of Foreign Currency
Convertible Bonds and Ordinary Shares Scheme, the cost of acquisition of equity
shares received in exchange for ADSs will be the cost of the underlying shares
on the date that the depositary gives notice to the custodian of the delivery
of the equity shares in exchange for the corresponding ADSs. In the case of
companies listed in India, the cost of acquisition of the equity shares would
be the price of the equity shares prevailing on the Stock Exchange, Mumbai or
the National Stock Exchange on the date the depositary gives notice to the
custodian of the delivery of the equity shares in exchange for the
corresponding ADSs. However, the Issue of Foreign Currency Convertible Bonds
and Ordinary Shares Scheme and Section 115AC do not provide for determination
of the cost of acquisition for the purposes of computing capital gains tax
where the shares of the Indian company are not listed on the Stock Exchange,
Mumbai or the National Stock Exchange in India. Therefore, in the case of our
company, which is not listed on either the Stock Exchange, Mumbai or the
National Stock Exchange, M.G. Ramachandran is unable to give an opinion on the
mode of determination of the cost of acquisition of equity shares. Therefore,
the original cost of acquisition of the ADSs may be treated as the cost of
acquisition for the purposes of determining the capital gains tax. According to
the Issue of Foreign Currency Convertible Bonds and Ordinary Shares Scheme, a
non-resident holder's holding period for purposes of determining the applicable
Indian capital gains tax rate in respect of equity shares received in exchange
for ADSs commences on the date of the notice of the redemption by the
depositary to the custodian. The India-U.S. Treaty does not provide an
exemption from the imposition of Indian capital gains tax.
Under Section 115AC, taxable gain realized in respect of equity shares held
for more than 12 months, or long-term gain, is subject to tax at the rate of
10%. Taxable gain realized in respect of equity shares held for 12 months or
less, or short-term gain, is subject to tax at variable rates with a maximum
rate of 48%. If Section 115AC is not applicable, then a tax rate of 20% applies
to long-term capital gains. The actual rate of tax on short-term gain depends
on a number of factors, including the residential status of the non-resident
holder and the type of income chargeable in India.
Buy-back of Securities. Currently, Indian companies are not subject to any
tax in respect of the buy-back of their shares. However, the shareholders will
be taxed on any gain at the long-term or short-term, as applicable, capital
gains rates. For additional information, please see "--Taxation of Capital
Gains."
Stamp Duty and Transfer Tax. Upon issuance of the equity shares underlying
our ADSs, we will be required to pay a stamp duty of Rs.0.30 per share
certificate issued by us. However, for purposes of convenience, instead of
paying a stamp duty of Rs.0.30 per share certificate, we will pay a stamp duty
of Rs.1 per share certificate issued by us in respect of the underlying equity
shares. A transfer of ADSs is not subject to Indian stamp duty. However, upon
the acquisition of equity shares from the depositary in exchange for ADSs, the
non-resident holder will be liable for Indian stamp duty at the rate of 0.5% of
the market value of the ADSs or equity shares exchanged. A sale of equity
shares by a non-resident holder will also be subject to Indian stamp duty at
the rate of 0.5% of the market value of the equity shares on the trade date,
although customarily such tax is borne by the transferee.
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Wealth Tax. The holding of the ADSs in the hands of non-resident holders and
the holding of the underlying equity shares by the depositary as a fiduciary
will be exempt from Indian wealth tax. Non-resident holders are advised to
consult their own tax advisers in this context.
Gift Tax and Estate Duty. Indian gift tax was abolished in October 1998,
although it may be restored in the future. In India, there is no estate duty
law. As a result, no estate duty would be applicable to non-resident holders.
Non-resident holders are advised to consult their own tax advisors in this
context.
United States Federal Taxation
The following is a summary of the material U.S. federal income and estate
tax consequences that may be relevant with respect to the acquisition,
ownership and disposition of equity shares or ADSs. This summary addresses the
U.S. federal income and estate tax considerations of holders that are U.S.
persons, i.e., citizens or residents of the United States, partnerships or
corporations created in or under the laws of the United States or any political
subdivision thereof or therein, estates, the income of which is subject to U.S.
federal income taxation regardless of its source and trusts for which a U.S.
court exercises primary supervision and a U.S. person has the authority to
control all substantial decisions and that will hold equity shares or ADSs as
capital assets and holders that are not U.S. persons. We refer to these persons
as U.S. holders and non-U.S. holders, respectively. This summary does not
address tax considerations applicable to holders that may be subject to special
tax rules, such as banks, insurance companies, dealers in securities or
currencies, tax-exempt entities, persons that will hold equity shares or ADSs
as a position in a "straddle" or as part of a "hedging" or "conversion"
transaction for tax purposes, persons that have a "functional currency" other
than the U.S. dollar or holders of 10% or more, by voting power or value, of
the stock of our company. This summary is based on the tax laws of the United
States as in effect on the date of this prospectus and on United States
Treasury Regulations in effect or, in some cases, proposed, as of the date of
this prospectus, as well as judicial and administrative interpretations thereof
available on or before such date and is based in part on representations of the
depositary and the assumption that each obligation in the deposit agreement and
any related agreement will be performed in accordance with its terms. All of
the foregoing are subject to change, which change could apply retroactively and
could affect the tax consequences described below.
Each prospective investor should consult his, her or its own tax advisor
with respect to the U.S. Federal, state, local and foreign tax consequences of
acquiring, owning or disposing of equity shares or ADSs.
Ownership of ADSs. For U.S. federal income tax purposes, holders of ADSs
will be treated as the owners of equity shares represented by such ADSs.
Dividends. Distributions of cash or property (other than equity shares, if
any, distributed pro rata to all shareholders of our company, including holders
of ADSs) with respect to equity shares will be includible in income by a U.S.
holder as foreign source dividend income at the time of receipt, which in the
case of a U.S. holder of ADSs generally will be the date of receipt by the
depositary, to the extent such distributions are made from the current or
accumulated earnings and profits of our company. Such dividends will not be
eligible for the dividends received deduction generally allowed to corporate
U.S. holders. To the extent, if any, that the amount of any distribution by our
company exceeds our company's current and accumulated earnings and profits as
determined under U.S. federal income tax principles, it will be treated first
as a tax-free return of the U.S. holder's tax basis in the equity shares or
ADSs and thereafter as capital gain.
A U.S. holder will not be eligible for a foreign tax credit against its U.S.
federal income tax liability for Indian dividend distribution taxes paid by our
company, unless it is a U.S. company holding at least 10% of the Indian company
paying the dividends. U.S. holders should be aware that dividends paid by our
company generally will constitute "passive income" for purposes of the foreign
tax credit.
If dividends are paid in Indian rupees, the amount of the dividend
distribution includible in the income of a U.S. holder will be in the U.S.
dollar value of the payments made in Indian rupees, determined at a spot
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exchange rate between Indian rupees and U.S. dollars applicable to the date
such dividend is includible in the income of the U.S. holder, regardless of
whether the payment is in fact converted into U.S. dollars. Generally, gain or
loss, if any, resulting from currency exchange fluctuations during the period
from the date the dividend is paid to the date such payment is converted into
U.S. dollars will be treated as ordinary income or loss.
A non-U.S. holder of equity shares or ADSs generally will not be subject to
U.S. federal income tax or withholding tax on dividends received on equity
shares or ADSs unless such income is effectively connected with the conduct by
such non-U.S. holder of a trade or business in the United States.
Sale or Exchange of equity shares or ADSs. A U.S. holder generally will
recognize gain or loss on the sale or exchange of equity shares or ADSs equal
to the difference between the amount realized on such sale or exchange and the
U.S. holder's tax basis in the equity shares or ADSs, as the case may be. Such
gain or loss will be capital gain or loss, and will be long-term capital gain
or loss if the equity shares or ADSs, as the case may be, were held for more
than one year. Gain or loss, if any, recognized by a U.S. holder generally will
be treated as U.S. source gain or loss for U.S. foreign tax credit purposes.
A non-U.S. holder of equity shares or ADSs generally will not be subject to
U.S. federal income or withholding tax on any gain realized on the sale or
exchange of such equity shares or ADSs unless:
. such gain is effectively connected with the conduct by such non-U.S.
holder of a trade or business in the U.S.; or
. in the case of any gain realized by an individual non-U.S. holder, such
holder is present in the United States for 183 days or more in the
taxable year of such sale and other conditions are met.
Estate Taxes. An individual shareholder who is a citizen or resident of the
United States for U.S. federal estate tax purposes will have the value of the
equity shares or ADSs owned by such holder included in his or her gross estate
for U.S. federal estate tax purposes. An individual holder who actually pays
Indian estate tax with respect to the equity shares will, however, be entitled
to credit the amount of such tax against his or her U.S. federal estate tax
liability, subject to a number of conditions and limitations.
Backup Withholding Tax and Information Reporting Requirements. Under current
U.S. Treasury Regulations, dividends paid on equity shares, if any, generally
will not be subject to information reporting and generally will not be subject
to U.S. backup withholding tax. Information reporting will apply to payments of
dividends on, and to proceeds from the sale or redemption of, equity shares or
ADSs by a paying agent, including a broker, within the United States to a U.S.
holder, other than an "exempt recipient," including a corporation, a payee that
is a non-U.S. holder that provides an appropriate certification and other
persons. In addition, a paying agent within the United States will be required
to withhold 31% of any payments of the proceeds from the sale or redemption of
equity shares or ADSs within the United States to a holder, other than an
"exempt recipient," if such holder fails to furnish its correct taxpayer
identification number or otherwise fails to comply with such backup withholding
requirements.
Passive Foreign Investment Company. A non-U.S. corporation will be
classified as a passive foreign investment company for U.S. Federal income tax
purposes if either:
. 75% or more of its gross income for the taxable year is passive income;
or
. on average for the taxable year by value (or, if it is not a publicly
traded corporation and so elects, by adjusted basis) 50% or more of its
assets produce or are held for the production of passive income.
We do not believe that we satisfy either of the tests for passive foreign
investment company status. If we were to be a passive foreign investment
company for any taxable year, U.S. holders would be required to either:
. pay an interest charge together with tax calculated at maximum ordinary
income rates on "excess distributions," which is defined to include
gain on a sale or other disposition of equity shares;
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. if a qualified electing fund election is made, to include in their
taxable income their pro rata share of undistributed amounts of our
income; or
. if the equity shares are "marketable" and a mark-to-market election is
made, to mark-to-market the equity shares each taxable year and
recognize ordinary gain and, to the extent of prior ordinary gain,
ordinary loss for the increase or decrease in market value for such
taxable year.
The above summary is not intended to constitute a complete analysis of all
tax consequences relating to ownership of equity shares or ADSs. You should
consult your own tax advisor concerning the tax consequences of your particular
situation.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to our initial public offering in October 1999, there had not been a
public market for our ADSs or equity shares, and no prediction can be made as
to the effect, if any, that market sales of ADSs or equity shares or the
availability of ADSs for sale will have on the market price of the ADSs
prevailing from time to time. Nevertheless, sales of substantial amounts of
ADSs in the public market, or the perception that such sales could occur, could
adversely affect the market price of ADSs and could impair our future ability
to raise capital through the sale of our equity securities. For additional
information, please see "Risk Factors--The future sales of securities by our
company or existing shareholders may hurt the price of our ADSs."
Upon the closing of this offering, we will have an aggregate of 22,532,250
equity shares outstanding, assuming no exercise of the underwriters'
overallotment option or outstanding employee stock options. Of the outstanding
equity shares, the ADSs sold in our initial public offering and in this
offering will be freely tradable, except that any shares held by "affiliates"
as defined under Rule 144 under the Securities Act may only be sold in
compliance with the limitations described below. The remaining equity shares
were all issued in accordance with Regulation S, other than the 481,000 shares
issued to Sterling Commerce which were issued pursuant to Regulation D. None of
these shares may, under present law, be converted into ADSs without government
of India approval. If converted into ADSs, all equity shares issued in
accordance with Regulation S and held by non-affiliates may immediately be
resold, subject to any applicable lock-up periods. All equity shares issued in
accordance with Regulation D may be resold in accordance with Rule 144 after
complying with a holding period of at least one year and the other requirements
of that rule.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated), including an affiliate, who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of our initial public
offering, a number of shares that does not exceed the greater of 1.0% of the
then outstanding equity shares (including equity shares represented by ADSs)
(225,322 shares immediately after completion of this offering) or the average
weekly trading volume in the equity shares (including equity shares represented
by ADSs) during the four calendar weeks preceding the date on which notice of
such sale is filed, subject to certain restrictions. In addition, a person who
is not deemed to have been an affiliate of our company at any time during the
90 days preceding a sale and who has beneficially owned the shares proposed to
be sold for at least two years would be entitled to sell such shares under Rule
144(k) without regard to the requirements described above. Certain resales may
be permitted pursuant to Sections 903 and 904 of Regulation S even if the Rule
144 holding periods are not satisfied. Satyam Computer Services Limited and
South Asia Regional Fund may be deemed affiliates of our company. Therefore,
sales by them in the United States of the 16,129,800 equity shares owned by
them following this offering may continue to be subject to the volume
limitations of Rule 144.
In September 1999, we entered into a registration rights agreement with SARF
and Sterling Commerce relating to our company. Commencing 180 days after the
completion of our initial public offering in October 1999, each of SARF and
Sterling Commerce may make up to three requests of our company to register
their equity shares. In addition, SARF and Sterling Commerce have specified
rights to sell equity shares in connection with any public offering of our
equity shares in India or any other country, excluding the United States. The
registration rights agreement also grants to SARF and Sterling Commerce "piggy-
back" registration rights and contains other customary provisions. SARF also
has similar rights to require the listing of its shares in markets other than
the United States under specified circumstances.
Each of our executive officers and directors, together with Satyam Computer
Services and South Asia Regional Fund, have agreed not to offer, sell, contract
to sell or otherwise dispose of any equity shares or securities convertible
into, exchangeable for or representing the right to receive equity shares, for
a period of 90 days after the date of this prospectus without the prior written
consent of Merrill Lynch, Pierce, Fenner and Smith Incorporated, subject to
specified exceptions. These agreements do not cover (1) the grant of stock
options under our existing stock option plan or (2) equity shares issued upon
the conversion of convertible or exchangeable securities or the exercise of an
option or warrant outstanding as of the date of this prospectus.
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These securities holders will, upon consummation of the offering, own an
aggregate of approximately 16.5 million equity shares, or 72% of the then
outstanding equity shares.
We have agreed not to sell or otherwise dispose of any equity shares during
the 90-day period following the date of the prospectus, except we may issue,
and grant options to purchase, equity shares under our Associate Stock Option
Plan and other pre-existing agreements. In addition, we may issue equity shares
in connection with any acquisition of another company if the terms of such
issuance provide that such equity shares shall not be resold prior to the
expiration of the 90-day period referenced in the preceding sentence without
the prior written consent of Merrill Lynch. For additional information, please
see "Risk Factors--The future sales of securities by our company or existing
shareholders may hurt the price of our ADSs."
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UNDERWRITING
General
The offering consists of:
. the U.S. offering of 1,800,000 ADSs in the United States and Canada;
and
. the international offering of 1,200,000 ADSs outside the United States
and Canada.
Subject to the terms and conditions set forth in a purchase agreement
between us and each of the U.S. underwriters named below, for whom Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Salomon Smith Barney Inc. are
acting as representatives, we have agreed to sell to the U.S. underwriters, and
each of the U.S. underwriters severally and not jointly has agreed to purchase
from us, the number of ADSs set forth opposite its name below.
<TABLE>
<CAPTION>
Underwriter Number of ADSs
----------- --------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.............................................
Salomon Smith Barney Inc......................................
---------
Total....................................................... 1,800,000
=========
</TABLE>
In the purchase agreement, the several U.S. underwriters have agreed,
subject to the terms and conditions set forth in that agreement, to purchase
all of the ADSs being sold under the terms of the agreement if any of the ADSs
are purchased. In the event of a default by a U.S. underwriter, the purchase
agreement provides that, in certain circumstances, the purchase commitments of
non-defaulting U.S. underwriters may be increased or the purchase agreement may
be terminated.
We have also entered into a purchase agreement for the sale of 1,200,000
ADSs outside the United States and Canada. Merrill Lynch (Singapore) Pte. Ltd.
and Salomon Brothers International Limited are the representatives of the
underwriters for the international offering. The U.S. and international
offerings are contingent upon each other. The offering price and aggregate
underwriting commissions per ADS for the U.S. offering and the international
offering are identical.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or to contribute to payments the underwriters may be required
to make in respect of those liabilities.
The representatives have advised us that the underwriters propose initially
to offer the ADSs to the public at the public offering price set forth on the
cover page of this prospectus, and to dealers at such price less a concession
not in excess of $ per ADS. The underwriters may allow, and such dealers
may allow, a discount not in excess of $ per ADS to other dealers. After
the public offering, the public offering price, concession and discount may be
changed.
Overallotment Option
We have granted an option to the underwriters, exercisable for 30 days after
the date of this prospectus, to purchase up to an aggregate of an additional
450,000 ADSs at the public offering price set forth on the cover of this
prospectus, less the underwriting discount. The underwriters may exercise this
option solely to cover
102
<PAGE>
overallotments, if any, made on the sale of our ADSs offered hereby. The
representatives of the U.S. underwriters will decide on behalf of the
underwriters whether to exercise the option and whether to allocate any ADSs
covered by the option to the U.S. offering or the international offering. To
the extent that the underwriters exercise this option, each U.S. underwriter
will be obligated, subject to certain conditions, to purchase a number of
additional ADSs proportionate to such underwriter's initial amount reflected in
the foregoing table.
Commissions and Discounts
The following table shows the per ADS and total public offering price,
underwriting discount to be paid by us to the underwriters and the proceeds
before expenses to us. This information is presented assuming either no
exercise or full exercise by the underwriters of their overallotment option.
<TABLE>
<CAPTION>
Per Without With
ADS Option Option
--- ------- ------
<S> <C> <C> <C>
Public offering price................................... $ $ $
Underwriting discount................................... $ $ $
Proceeds, before expenses, to Satyam Infoway............ $ $ $
</TABLE>
The expenses of this offering, exclusive of the underwriting discount, are
estimated at $0.5 million and are payable by us. The underwriters have, subject
to the completion of this offering, agreed to reimburse us for certain expenses
incurred in connection with this offering.
The ADSs are being offered by the several underwriters, subject to prior
sale, when, as and if issued to and accepted by them, subject to approval of
certain legal matters by counsel for the underwriters and certain other
conditions. The underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part.
No Sales of Common Stock or Similar Securities
We and our executive officers and directors have agreed (subject to certain
exceptions) not to, directly or indirectly, without the prior written consent
of Merrill Lynch, Pierce, Fenner & Smith, Incorporated, on behalf of the
underwriters for a period of 90 days after the date of the prospectus, offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of, lend or otherwise dispose of or transfer any shares of our common
stock or securities convertible into or exchangeable or exercisable for or
repayable with our common stock, whether now owned or later acquired by the
person executing the agreement or with respect to which the person executing
the agreement later acquires the power of disposition, or file any registration
statement under the Securities Act relating to any shares of our common stock;
or enter into any swap or other agreement or any other agreement that
transfers, in whole or in part, the economic consequence of ownership of our
common stock whether any such swap or transaction is to be settled by delivery
of our common stock or other securities, in cash or otherwise.
Nasdaq National Market Listing
Our common stock is listed on the Nasdaq National Market under the symbol
"SIFY."
Price Stabilization and Short Positions
Until the distribution of our ADSs is completed, rules of the Commission may
limit the ability of the underwriters and selling group members to bid for an
purchase our ADSs. As an exception to these rules, the underwriters are
permitted to engage in transactions that stabilize the price of our ADSs. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of our ADSs.
103
<PAGE>
The underwriters may create a short position in our ADSs in connection with
the offering. This means that if they sell more ADSs than are set forth on the
cover page of this prospectus, the representatives may reduce that short
position by purchasing our ADSs in the open market. The representatives may
also elect to reduce any short position by exercising all or part of the over
allotment option described above.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our ADSs. In addition, neither we nor
any of the underwriters make any representation that the representatives will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
Other Relationships
Some of the underwriters and their affiliates have from time to time engaged
in, and may in the future engage in, investment banking and other commercial
dealings in the ordinary course of business with us. They have received
customary fees and commissions for these transactions. Merrill Lynch and
Salomon Smith Barney participated as representatives of the U.S. underwriters
in our initial public offering of American Depositary Shares in the United
States and Canada in October 1999, for which they received usual and customary
fees.
Passive Market Making
In connection with this offering, certain underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in our ADSs on the Nasdaq
National Market in accordance with Rule 103 of Regulation M under the Exchange
Act, during the business day prior to the pricing of the offering before the
commencement of offers or sales of our ADSs. Passive market makers must comply
with applicable volume and price limitations and must be identified as such. In
general, a passive market maker must display its bid at a price not in excess
of the highest independent bid of such security; if all independent bids are
lowered below the passive market makers bid, however, such bid must then be
lowered when certain purchase limits are exceeded.
Selling Restrictions
This prospectus does not constitute an offer or an invitation by, or on
behalf of, us or by or on behalf of the underwriters, to subscribe for or
purchase any of our equity shares or ADSs in any jurisdiction to any person to
whom it is unlawful to make such an offer or solicitation in that jurisdiction.
The distribution of this prospectus and the offering of our equity shares or
ADSs in certain jurisdictions may be restricted by law. Persons into whose
possession this prospectus comes are required by us and the underwriters to
inform themselves about and to observe any such restrictions.
104
<PAGE>
LEGAL MATTERS
The validity of the ADSs offered hereby will be passed upon for Satyam
Infoway Limited by Latham & Watkins, Menlo Park, California. The validity of
the equity shares represented by the ADSs offered hereby and the principal
Indian tax consequences for holders of ADSs and equity shares received upon
withdrawal of such equity shares who are not resident in India will be passed
upon by M.G. Ramachandran, New Delhi, India, Indian counsel for Satyam Infoway
Limited. Matters in connection with the offering will be passed upon on behalf
of the underwriters by Shearman & Sterling, Singapore and Bhaishanker Kanga and
Girdharlal, Mumbai, India, counsel for the Underwriters. Latham & Watkins may
rely upon M.G. Ramachandran with respect to matters governed by Indian law.
Certain employees of Latham & Watkins own an aggregate of 3,200 ADSs.
EXPERTS
The U.S. GAAP financial statements of Satyam Infoway Limited as of March 31,
1998 and 1999, and for each of the years in the three-year period ended March
31, 1999, have been included herein in reliance upon the report of KPMG, India,
independent accountants, appearing elsewhere herein, and upon the authority of
said firm as experts in auditing and accounting.
CHANGE OF ACCOUNTANTS
Effective May 1998, Bharat S. Raut and Company was engaged as the principal
independent accountants for Satyam Infoway for Indian GAAP reporting, replacing
Fraser & Ross, who resigned at that time. The change was approved by our
Directors and at the annual general meeting held on May 23, 1998.
In connection with the audits of the fiscal years ended March 31, 1996, 1997
and 1998, and for the interim period from April 1, 1998 through May 23, 1998,
there were no disagreements with Fraser & Ross on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures, which disagreements, if not resolved to the satisfaction of Fraser
& Ross, would have caused them to make reference to the matter in their report,
except that during the fiscal year ended March 31, 1998 Fraser & Ross qualified
its opinion regarding whether or not Section 58A of the Companies Act applied
to Satyam Infoway's issuance of debentures to Citibank. Section 58A prohibits
Indian companies, other than banks, from accepting "deposits" in an amount in
excess of 25% of their share capital. Fraser & Ross concluded that the
debentures should be classified as "deposits" while Satyam Infoway concluded
that they should be classified as a bank loan. The audit reports of Fraser &
Ross for the financial statements of Satyam Infoway as of and for the fiscal
years ended March 31, 1996, 1997 and 1998 did not contain any adverse opinion
or disclaimer of opinion, nor were they qualified or modified as to uncertainty
or audit scope, except for a qualification of the financial statements at March
31, 1998 prepared under Indian GAAP related to the treatment of the Citibank
debentures as described above.
105
<PAGE>
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form F-1, which
includes amendments, exhibits, schedules and supplements, under the Securities
Act of 1933, as amended, and the rules and regulations of the SEC, for the
registration of the ADSs and underlying equity shares offered by this
prospectus. Although this prospectus, which forms a part of the registration
statement, contains all material information included in the registration
statement, part of the registration statement has been omitted from this
prospectus as permitted by the rules and regulations of the SEC. A related
registration statement on Form F-6 has also been filed to register our ADSs as
represented by the ADRs. For further information with respect to our company
and the ADSs offered by this prospectus, please refer to the registration
statement. Although this prospectus contains all material terms of the
contracts or other documents referred to in this prospectus, the descriptions
of these contracts or other documents contained in this prospectus are not
necessarily complete.
You may read and copy all or any portion of the registration statement or
any other information that we file, or obtain a copy of those materials,
through facilities maintained by the SEC as described in the front of this
prospectus under the caption "Reports to our Security Holders."
106
<PAGE>
SATYAM INFOWAY LIMITED
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of KPMG, Independent Auditors....................................... F-2
Balance Sheets............................................................. F-3
Statements of Income....................................................... F-4
Statements of Stockholders' Equity......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Satyam Infoway Limited:
We have audited the accompanying balance sheets of Satyam Infoway Limited as
of March 31, 1998 and 1999, and the related statements of income, stockholders'
equity and cash flows for each of the years in the three-year period ended
March 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Satyam Infoway Limited as
of March 31, 1998 and 1999, and the results of its operations and its cash
flows for each of the years in the three-year period ended March 31, 1999, in
conformity with accounting principles generally accepted in the United States.
The United States dollar amounts are presented in the accompanying financial
statements solely for the convenience of the readers and are arithmetically
correct on the basis disclosed in footnote 1(b).
KPMG
Chennai, India
April 19, 1999, except as to Note 21
which is as of October 12, 1999 and Note 22 which is as of November 29, 1999
F-2
<PAGE>
SATYAM INFOWAY LIMITED
BALANCE SHEETS
(Expressed in Indian Rupees, except share data and as otherwise stated)
<TABLE>
<CAPTION>
As of
-----------------------------------------------------------------------------------
March 31, March 31, March 31, September 30, September 30, September 30,
1998 1999 1999 1998 1999 1999
Rs. Rs. US$ Rs. Rs. US$
------------ ------------ ---------- ------------- ------------- -------------
ASSETS (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents............ 9,911,667 125,547,453 2,880,188 26,665,719 36,614,429 839,973
Accounts receivable, net
of allowances of
Rs.Nil, 501,839 and
Rs.2,420,628 as of
March 31, 1998, 1999
and September 30,
1999................... 1,945,483 45,087,639 1,034,357 12,374,540 102,281,194 2,346,438
Due from officers and
employees.............. 87,302 573,143 13,148 171,860 2,625,388 60,229
Inventories............. -- 6,758,190 155,040 1,570,385 10,085,579 231,374
Other current assets.... 10,978,160 73,688,213 1,690,484 13,711,852 104,736,414 2,402,762
------------ ------------ ---------- ------------ ------------ -----------
Total current assets... 22,922,612 251,654,638 5,773,217 54,494,356 256,343,004 5,880,776
Plant and equipment-
net.................... 63,240,894 162,833,876 3,735,579 86,267,624 396,543,996 9,097,132
Intangible asset........ 11,295,502 8,916,052 204,544 10,105,777 7,726,327 177,250
Other assets............ 10,173,248 31,483,855 722,272 18,509,139 45,106,922 1,034,800
------------ ------------ ---------- ------------ ------------ -----------
Total assets........... 107,632,256 454,888,421 10,435,612 169,376,896 705,720,249 16,189,958
============ ============ ========== ============ ============ ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current liabilities of
long-term debt......... -- 144,750,000 3,320,716 122,000,000 45,500,000 1,043,817
Current installments of
capital lease
obligations............ 2,541,263 596,740 13,690 2,834,091 2,007,833 46,062
Short term borrowings... -- -- -- -- 59,474,802 1,364,414
Trade accounts payable.. 15,471,302 17,275,480 396,317 21,389,117 116,240,658 2,666,682
Due to parent company... 1,508,887 3,980,370 91,314 13,009,664 62,026,870 1,422,961
Accrued expenses........ 3,685,525 19,028,671 436,537 6,645,866 35,320,957 810,300
Deferred revenue........ -- 71,506,440 1,640,432 2,219,754 111,653,393 2,561,445
Advances from
customers.............. 1,641,292 11,747,346 269,496 612,275 9,497,868 217,891
Other current
liabilities............ 3,429,204 4,476,322 102,691 3,940,409 3,999,014 91,742
------------ ------------ ---------- ------------ ------------ -----------
Total current
liabilities........... 28,277,473 273,361,369 6,271,193 172,651,176 445,721,395 10,225,314
Non-current liabilities:
Long-term debt,
excluding current
installments........... 122,000,000 113,750,000 2,609,543 64,400,000 91,000,000 2,087,635
Capital lease
obligations, excluding
current installments... 9,913,961 159,244 3,653 8,895,487 3,708,733 85,082
Other liabilities....... -- -- -- -- 9,100,000 208,763
------------ ------------ ---------- ------------ ------------ -----------
Total liabilities...... 160,191,434 387,270,613 8,884,389 245,946,663 549,530,128 12,606,794
============ ============ ========== ============ ============ ===========
Stockholders' equity:
Common stock, Rs.10 par
value: 15,000,000,
25,000,000 and
25,000,000 equity
shares authorized as of
March 31, 1998, 1999
and September 30, 1999;
Issued and outstanding
equity shares--
7,500,230, 15,750,000
and 16,231,000 as of
March 31, 1998, 1999
and September 30,
1999................... 75,002,300 157,500,000 3,613,214 120,002,300 162,310,000 3,723,560
Additional paid-in
capital................ -- 226,636,200 5,199,270 -- 455,496,200 10,449,557
Accumulated deficit
during development
stage.................. (127,561,478) -- -- -- -- --
Deferred Compensation-
Employee Stock Offer
Plan................... -- (1,581,249) (36,275) -- (18,019,210) (413,379)
Accumulated deficit..... -- (314,937,143) (7,224,986) (196,572,067) (443,596,869) (10,176,574)
------------ ------------ ---------- ------------ ------------ -----------
Total stockholders'
equity................ (52,559,178) 67,617,808 1,551,223 (76,569,767) 156,190,121 3,583,164
------------ ------------ ---------- ------------ ------------ -----------
Total liabilities and
stockholders' equity.. 107,632,256 454,888,421 10,435,612 169,376,896 705,720,249 16,189,958
============ ============ ========== ============ ============ ===========
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
SATYAM INFOWAY LIMITED
STATEMENTS OF INCOME
(Expressed in Indian Rupees, except share data and as otherwise stated)
<TABLE>
<CAPTION>
Years ended March 31, Six months ended September 30,
--------------------------------------------------- --------------------------------------
1997 1998 1999 1999 1998 1999 1999
RS. Rs. Rs. US$ Rs. Rs. US$
----------- ------------ ------------ ---------- ----------- ------------- ----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............... -- 6,805,020 103,343,832 2,370,815 35,358,725 208,227,061 4,776,946
Cost of revenues....... -- (19,497,654) (63,651,265) (1,460,226) (19,035,621) (107,110,142) (2,457,218)
----------- ------------ ------------ ---------- ----------- ------------- ----------
Gross profit/(loss).... -- (12,692,634) 39,692,567 910,589 16,323,104 101,116,919 2,319,728
----------- ------------ ------------ ---------- ----------- ------------- ----------
<CAPTION>
Operating expenses:
<S> <C> <C> <C> <C> <C> <C> <C>
Selling, general and
administrative
expenses............. 26,336,901 80,399,677 200,212,761 4,593,087 74,715,761 209,206,649 4, 799,418
Amortization of
deferred stock
compensation
expense.............. -- -- 68,751 1,577 -- 482,039 11,058
----------- ------------ ------------ ---------- ----------- ------------- ----------
Total operating
expenses.............. 26,336,901 80,399,677 200,281,512 4,594,664 74,715,861 209,688,688 4, 810,476
----------- ------------ ------------ ---------- ----------- ------------- ----------
Operating loss......... (26,336,901) (93,092,311) (160,588,945) (3,684,077) (58,392,757) (108,57 1,769) (2,490,748)
Other expense, net..... -- (7,498,053) (26,786,720) (614,515) (10,617,833) (20,087,957) (460,839)
Net loss............... (26,336,901) (100,590,364) (187,375,665) (4,298,592) (69,010,490) (128,6 59,726) (2,951,587)
=========== ============ ============ ========== =========== ============= ==========
Loss per Equity Share.. (114,508.27) (121.66) (17.31) (0.40) (7.61) (8.16) (0.19)
=========== ============ ============ ========== =========== ============= ==========
Weighted Equity Shares
used in computing loss
per equity share...... 230 826,805 10,824,826 10,824,826 9,074,000 15,773,656 15,773,656
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
SATYAM INFOWAY LIMITED
STATEMENTS OF STOCK HOLDERS EQUITY
(Expressed in Indian Rupees, except share data and as otherwise stated)
<TABLE>
<CAPTION>
Deferred
Accumulated Compensation-
Common Stock Additional Deficit During Employee Total
---------------------- Paid In Development Stock Accumulated Stockholders'
Shares Par Value Capital Stage Offer Plan Deficit Equity
---------- ----------- ----------- -------------- ------------- ------------ -------------
<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..... 4,879,770 48,797,700 44,986,200 -- -- -- 93,783,900
Other issuances of
common stock........... 3,370,000 33,700,000 180,000,000 -- -- -- 213,700,000
Net loss................ -- -- -- -- -- (187,375,665) (187,375,665)
Compensation related to
stock option grants.... -- -- 1,650,000 -- (1,650,000) -- --
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 to
parent Company......... -- -- -- -- -- -- --
Other issuances of
common stock........... 481,000 4,810,000 211,940,000 -- -- -- 216,750,000
Net loss (unaudited).... -- -- -- -- -- (128,659,726) (128,659,726)
Compensation related to
stock option grants.... -- -- 16,920,000 -- (16,920,000) -- --
---------- ----------- ----------- ------------ ----------- ------------ ------------
Amortization of
compensation related to
stock option grants
(unaudited)............ -- -- -- -- 482,039 -- 482,039
---------- ----------- ----------- ------------ ----------- ------------ ------------
Balance as of September
30, 1999 (unaudited)... 16,231,000 162,310,000 455,496,200 -- (18,019,210) (443,596,869) 156,190,121
========== =========== =========== ============ =========== ============ ============
Balance as of March 31,
1999 (in US$).......... 361,321 3,613,214 5,199,270 -- (36,275) (7,224,986) 1,551,223
========== =========== =========== ============ =========== ============ ============
Balance as of September
30, 1999 (in US$)
(unaudited)............ 372,356 3,723,560 10,449,557 -- (413,379) (10,176,574) (3,583,164)
========== =========== =========== ============ =========== ============ ============
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
SATYAM INFOWAY LIMITED
STATEMENTS OF CASH FLOWS
(Expressed in Indian Rupees, except share data and as otherwise stated)
<TABLE>
<CAPTION>
Years ended March 31, Six months ended September 30,
--------------------------------------------------- -------------------------------------
1997 1998 1999 1999 1998 1999 1999
RS. Rs. Rs. US$ Rs. Rs. US$
----------- ------------ ------------ ---------- ----------- ------------ ----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss................ (26,336,901) (100,590,364) (187,375,665) (4,298,592) (69,010,590) (128,659,726) (2,951,587)
Adjustments to reconcile
net loss to net cash
provided by operating
activities:
Depreciation of plant
and equipment......... 535,975 18,781,598 46,714,402 1,071,677 18,538,672 46,903,904 1,076,024
Amortization of
technical know how
fees.................. -- 601,748 2,379,450 54,587 1,189,725 1,189,725 27,294
Amortization of
deferred stock
compensation expense.. -- -- 68,751 1,577 -- 482,039 11,058
Loss on sale of plant
and equipment......... -- -- 37,627 863 -- -- --
Changes in assets and
liabilities:
Accounts receivable
(net)................. -- (1,945,483) (43,142,156) (989,727) (10,429,057) (57,193,555) (1,312,080)
Inventories............ -- -- (6,758,190) (155,040) (1,570,385) (3,327,389) (76,333)
Other current assets... (4,710,247) (6,204,993) (62,710,053) (1,438,634) (2,733,692) (31,048,201) (712,278)
Other assets........... (2,780,684) (7,212,564) (21,218,607) (486,777) (8,335,891) (11,898,755) (272,970)
Due to parent company.. -- 1,508,887 1,387,583 31,833 11,500,777 58,046,500 1,331,647
Accrued expenses....... 2,743,173 942,352 15,343,146 351,988 2,960,341 16,292,286 373,762
Deferred revenue....... -- -- 71,506,440 1,640,432 2,219,754 40,146,953 921,013
Trade accounts
payable............... -- 15,471,302 1,804,178 41,390 5,917,815 98,965,178 2,270,364
Advances from
customers............. -- 1,641,292 10,106,054 231,843 (1,029,017) (2,249,478) (51,605)
Other current
liabilities........... 327,643 3,082,704 1,047,118 24,021 511,205 (477,308) (10,950)
Advances given to
officers and
employees............. (205,341) (26,961) (577,841) (13,256) (84,558) (3,776,557) (86,638)
Other liabilities...... -- -- -- -- -- 9,100,000 208,763
----------- ------------ ------------ ---------- ----------- ------------ ----------
Net cash used in
operating activities... (30,426,382) (73,950,482) (171,387,763) (3,931,815) (50,354,901) 32,495,616 745,484
----------- ------------ ------------ ---------- ----------- ------------ ----------
Cash flows from
investing activities:
Expenditure on plant and
equipment.............. (3,229,593 (65,172,385) (146,134,547) (3,352,479) (41,565,402) (280,614,024) (6,437,578)
Expenditure on technical
know how............... -- (11,897,250) -- -- -- -- --
Proceeds from sale of
plant and equipment.... -- -- 135,000 3,097 -- -- --
----------- ------------ ------------ ---------- ----------- ------------ ----------
Net cash used in
investing activities... (3,229,593) (77,069,635) (145,999,547) (3,349,382) (41,565,402) (280,614,024) (6,437,578)
----------- ------------ ------------ ---------- ----------- ------------ ----------
Cash flows from
financing activities:
Principal payments of
long-term debt......... -- (860,000) -- -- -- (122,000,000) (2,798,807)
Proceeds from issuance
of long-term debt...... 860,000 122,000,000 136,500,000 3,131,452 64,400,000 -- --
Proceeds from short term
loans.................. -- -- -- -- -- 59,474,802 1,364,414
Principal payments under
capital lease
obligations............ -- (1,701,265) (12,044,704) (276,318) (725,645) 4,960,582 113,801
Net proceeds from
issuance of common
stock.................. -- 38,453,000 307,483,900 7,054,001 45,000,000 216,750,000 4,972,471
Due to parent company... 34,278,465 1,557,559 1,083,900 24,866 -- -- --
----------- ------------ ------------ ---------- ----------- ------------ ----------
Net cash provided by
financing activities... 35,138,465 159,449,294 433,023,096 9,934,001 108,674,355 159,185,384 3,651,879
----------- ------------ ------------ ---------- ----------- ------------ ----------
Net increase/(decrease)
in cash and cash
equivalents............ 1,482,490 8,429,177 115,635,786 2,652,804 16,754,052 (88,933,024) (2,040,215)
Cash and cash
equivalents at the
beginning of the
year/quarter........... -- 1,482,490 9,911,667 227,384 9,911,667 125,547,453 2,880,188
----------- ------------ ------------ ---------- ----------- ------------ ----------
Cash and cash
equivalents at the end
of the year/quarter.... 1,482,490 9,911,667 125,547,453 2,880,188 26,665,719 36,614,429 839,973
=========== ============ ============ ========== =========== ============ ==========
Supplementary
Information
Cash paid towards
interest............... -- 11,307,320 27,754,615 636,720 10,064,956 20,770,936 476,507
Supplemental schedule of
non cash financing
activity
Additional common stock
issued upon conversion
of amounts payable to
parent company......... -- 7,565,690 1,083,900 24,866 -- -- --
Capital leases.......... -- 14,156,489 161,443 3,704 161,443 4,912,159 112,690
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS
(Expressed in Indian Rupees, except share data and as otherwise stated)
(Information as of September 30, 1999 and for the six months ended September
30, 1998 and 1999 is unaudited)
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
F-7
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 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:
<TABLE>
<S> <C>
Plant and machinery.................................................... 5 years
Computer equipment..................................................... 2 years
Office equipment....................................................... 5 years
Furniture and fixtures................................................. 5 years
Vehicles............................................................... 5 years
System software........................................................ 3 years
</TABLE>
F-8
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
(k) Retirement Benefits to Employees, (continued)
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
F-9
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
based on the respective employee's salary and the years of employment with the
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, 1998
and 1999 and September 30, 1999, are set out below.
<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>
Cost and fair values
Cash and cash
equivalents.......... 9,911,667 125,547,453 2,880,188 36,614,429 839,973
</TABLE>
Cash and cash equivalents include deposits of Rs.69,200, Rs.7,261,200
(US$166,579) and Rs.7,634,477 (US$175,143) as of March 31, 1998 and 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$2,638,220) placed with banks as short-
term deposits.
3. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, March 31, March 31, September 30, September 30,
1998 1999 1999 1999 1999
--------- --------- --------- ------------- -------------
Rs. Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
CD-ROMs................. -- 120,192 2,757 233,399 5,355
Communication hardware.. -- 3,288,496 75,442 6,704,770 153,814
Application software.... -- 3,349,502 76,841 3,551,500 81,475
------- --------- ------- ---------- -------
6,758,190 155,040 10,489,669 240,644
Valuation allowance..... -- 404,090 9,270
------- --------- ------- ---------- -------
-- 6,758,190 155,040 10,085,579 231,374
======= ========= ======= ========== =======
</TABLE>
F-10
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Other Current Assets
Other current assets consist of the following:
<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>
Advance for expenses.... 818,285 1,617,959 37,118 6,687,376 153,415
Prepaid expenses........ 9,398,921 70,329,478 1,613,432 95,711,812 2,195,729
Prepaid telephone
rentals................ 51,750 296,250 6,796 321,750 7,380
Advance tax payments.... 709,204 959,516 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 -- --
---------- ---------- --------- ----------- ---------
10,978,160 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, March 31, September 30, September 30,
1998 1999 1999 1999 1999
----------- ----------- ---------- ------------- -------------
Rs. Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Leasehold improvements.. 1,455,293 6,164,699 141,424 11,181,654 256,519
Plant and machinery..... 20,979,507 101,558,254 2,329,855 264,079,178 6,058,251
Computer equipment...... 41,055,959 72,577,533 1,665,004 85,481,928 1,961,045
Office equipment........ 1,299,341 1,727,654 39,634 2,343,596 53,765
Furniture and fixtures.. 4,636,715 7,665,644 175,857 10,353,130 237,512
Vehicles................ -- 161,443 3,703 6,071,147 139,278
System software......... 11,039,530 20,022,142 459,328 22,720,350 521,228
Construction-in-
progress............... 2,092,122 18,977,088 435,354 107,237,498 2,460,139
----------- ----------- ---------- ------------ ----------
82,558,467 228,854,457 5,250,159 509,468,481 11,687,737
Accumulated
depreciation........... (19,317,573) (66,020,581) (1,514,580) (112,924,485) (2,590,605)
----------- ----------- ---------- ------------ ----------
63,240,894 162,833,876 3,735,579 396,543,996 9,097,132
=========== =========== ========== ============ ==========
</TABLE>
Depreciation expense amounted to Rs.535,975, 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.
6. Technical Know-how Fees
Technical know-how fees as of March 31, 1998 and 1999 and September 30,1999,
net of accumulated amortization of Rs.601,748, Rs.2,981,198 (US$68,392), and
Rs.4,170,923 (US$95,685) respectively amounted to Rs.11,295,502, Rs.8,916,052
(US$204,544) and Rs.7,726,327 (US$177,250) respectively.
F-11
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Leases
The Company is obligated under capital leases that expire in fiscal 1999
through 2002 for certain items of computers and vehicles. The gross amount and
related accumulated amortization recorded under capital leases were as follows:
<TABLE>
<CAPTION>
March 31, March 31, March 31, September 30, September 30,
1998 1999 1999 1999 1999
---------- ----------- --------- ------------- -------------
Rs. Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Computer equipment...... 14,156,489 14,156,489 324,764 1,649,789 37,848
Vehicles................ -- 161,443 3,703 5,073,602 116,394
---------- ----------- -------- ---------- -------
Total................... 14,156,489 14,317,932 328,464 6,723,391 154,242
========== =========== ======== ========== =======
Accumulated
depreciation........... (3,526,065) (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$261,184)in fiscal 1998 and 1999,
respectively.
8. Other Assets
Other assets consist of the following:
<TABLE>
<CAPTION>
March 31, March 31, March 31, September 30, September 30,
1998 1999 1999 1999 1999
---------- ---------- --------- ------------- -------------
Rs. Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Rent and maintenance
deposits............... 5,948,129 8,239,345 189,019 12,342,790 283,157
Telephone deposits...... 2,334,000 17,308,000 397,064 24,965,712 572,739
Other deposits.......... 139,822 392,197 8,997 464,357 10,653
Prepaid telephone
rentals................ 1,606,297 5,307,313 121,755 5,372,751 123,257
Staff advances
recoverable after one
year................... 145,000 237,000 5,437 1,961,312 44,994
---------- ---------- ------- ---------- ---------
10,173,248 31,483,855 722,272 45,106,922 1,034,800
========== ========== ======= ========== =========
</TABLE>
F-12
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. Short term borrowings
Short term borrowings comprise the following:
<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>
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 Rs.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.
10. Long-term Debt
Long-term debt consists of the following:
<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>
Unsecured debentures.... 122,000,000 122,000,000 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.... 122,000,000 258,500,000 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........... 122,000,000 113,750,000 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$3,131,452) under this facility.
Aggregate maturities of long-term debt for each of the years subsequent to
September 30, 1999 are as follows: September 30, 2000--Rs.45,500,000, September
30, 2001--Rs.45,500,000 and September 30, 2002--45,500,000.
F-13
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. Income Taxes
The Company has incurred book and tax operating losses since inception and
has not provided for any deferred income tax because of the uncertainty
associated with the realization of such deferred tax assets.
The composition of the deferred tax asset is as follows:
<TABLE>
<CAPTION>
March 31, March 31, March 31, September 30, September 30,
1998 1999 1999 1999 1999
----------- ------------ ---------- ------------- -------------
Rs. Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Deferred tax assets
Operating loss carry
forwards............. 35,433,113 95,590,394 2,192,943 142,698,879 3,273,661
Plant and equipment
and intangibles...... 1,091,277 5,807,119 133,221 8,105,546 185,950
----------- ------------ ---------- ------------ ----------
Total deferred tax
assets................. 36,524,390 101,397,513 2,326,164 150,804,425 3,459,611
Less: Valuation
allowance.............. (36,524,390) (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 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
F-14
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
SARF respectively. In September 1999, the Company also issued an aggregate of
481,000 equity shares to Sterling Commerce, Inc., for a purchase price of $5.0
million. In October 1999, the Company issued an aggregate of 150,000 and
600,000 equity shares to Satyam Computer 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 1998 and 1999 was Rs.313,733 and Rs.319,606 (US$7,332). 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.266,328, Rs,679,830, Rs.679,830,
Rs.2,122,963 (US$48,860) and Rs.2,296,978 (US$52,965) to the provident fund
managed by Government of India in fiscal 1997, 1998, 1999, and quarter ended
September 30, 1999 respectively.
15. Other Expense
Other expense, net, consists of the following:
<TABLE>
<CAPTION>
March 31, March 31, March 31, March 31, September 30, September 30,
1997 1998 1999 1999 1999 1999
--------- ---------- ---------- ----------- ------------- -------------
Rs. Rs. Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Interest expense........ -- 11,307,320 27,754,615 636,718 20,770,936 476,506
Other finance charges... -- -- -- -- 787,455 18,065
Interest income......... -- (3,809,267) (609,020) (13,971) (953,193) (21,867)
Internet management
fees................... -- -- -- -- (500,000) (11,470)
Other income............ -- -- (358,875) (8,232) (17,241) (395)
------- ---------- ---------- ------- ---------- -------
-- 7,498,053 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.144,000, Rs.22,144,000 (US$509,643) and Rs.23,096,600
(US$529,860) as of March 31, 1998 and 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$885,928) for capital expenditures relating to new network
infrastructure.
F-15
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
17. Related Party Transactions
An analysis of transactions with Satyam Computer Services is set out below.
<TABLE>
<CAPTION>
March 31, March 31, March 31, March 31, September 30, September 30,
1997 1998 1999 1999 1999 1999
---------- ----------- ----------- ---------- ------------- -------------
Rs. Rs. Rs. US$ 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 91,314
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 1,192,934
Allocation of facilities
costs.................. -- -- 636,747 14,607 2,363,055 54,211
Expenses incurred on
behalf of the Company.. -- -- 809,922 18,580 52,076 1,195
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) -- -- -- --
---------- ----------- ----------- ---------- ---------- ---------
Balance at the end of
the year............... 34,989,440 1,508,887 3,980,370 91,305 62,026,871 1,422,961
========== =========== =========== ========== ========== =========
</TABLE>
Advance against equity represents interest free advances received from the
company's parent company, 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$207,364) during the year March 31,
1999 and quarter ended September 30, 1999 respectively. The Company also paid
Satyam Computer Services Rs.757,141 towards training and consulting fees in
fiscal 1998.
During fiscal 1998, the Company placed short term deposits with Satyam
Computer Services at a rate of 18% per annum for periods ranging between three
to six months.
Particulars of significant related transactions with other affiliated
companies are set out below.
<TABLE>
<CAPTION>
March March
March 31, March 31, 31, 31, September 30, September 30,
1997 1998 1999 1999 1999 1999
--------- --------- ------- ------ ------------- -------------
Rs. Rs. Rs. US$ 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>
F-16
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
17. Related Party Transactions, (continued)
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$60,229) respectively were recoverable within one year from
those dates.
18. Segment Reporting
In accordance with the provisions of SFAS 131, Disclosures about Segments of
an Enterprise and Related Information, the Company has determined that it has
three operating segments:
. Internet Access Services, providing Internet access services to
subscribers;
. Corporate Services, providing dial up and dedicated Internet access, e-
commerce, electronic data interchange, e-mail and other messaging
services, virtual private networks, and web based solutions to
businesses, web page hosting to individuals; and
. Online Portal Services, operating an Internet portal and offering related
content sites.
These operating segments were identified from the structure of the Company's
internal organization. Currently, the chief operating decision-maker of the
Company receives and reviews information relating to segment revenues only.
Products and services revenues are presented below.
<TABLE>
<CAPTION>
March 31, March 31, March 31, March 31, September 30, September 30,
1997 1998 1999 1999 1999 1999
--------- --------- ----------- --------- ------------- -------------
Rs. Rs. Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Internet access
services............... -- -- 13,310,800 305,364 111,140,665 2,549,683
Corporate services...... -- 6,805,020 89,973,032 2,064,075 94,573,113 2,169,606
Online portal services.. -- -- 60,000 1,376 2,513,283 57,657
------ --------- ----------- --------- ----------- ---------
Revenues................ -- 6,805,020 103,343,832 2,370,815 208,227,061 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
F-17
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
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. 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 of
the Company's equity shares at an exercise price of Rs.70 per share. 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 fair market value of each of the issued warrants
was determiend by the board of Directors to be Rs.400. The warrants allotted
and the underlying equity shares are not subject to any repurchase obligations
by the Company.
During fiscal 1999, 5,000 warrants were granted to a single employee
resulting in a deferred compensation of Rs.1,650,000 for the difference between
the exercise price and the fair market value of the common stock underlying the
warrants, as of the date the warrants were unconditionally made available to
the employee. Deferred compensation is amortized over the vesting period of the
warrants. The weighted average remaining useful life of the outstanding
warrants as of June 30, 1999 was 2.11 years.
The Company has adopted the pro forma disclosure provisions of SFAS No. 123.
Had compensation cost for the Company's stock-based compensation plan been
determined in a manner consistent with the fair value approach described in
SFAS No. 123, the Company's net loss would have been reduced to the pro forma
amounts indicated below.
<TABLE>
<CAPTION>
March 31, March 31,
1999 1999
------------ ----------
Rs. US$
<S> <C> <C>
Net loss
As reported.................................... (187,375,665) (4,298,592)
Adjusted pro forma............................. (187,378,430) (4,298,656)
Basic loss per share
As reported.................................... (17.31) (0.40)
Adjusted pro forma............................. (17.31) (0.40)
</TABLE>
The fair value of each warrant is estimated on the date of grant using the
Blade-Scholes model with the following assumptions:
<TABLE>
<CAPTION>
March 31,
1999
---------
<S> <C>
Dividend yield %................................................. 0.00%
Expected life.................................................... 3 years
Risk free interest rates......................................... 11.00%
Volatility....................................................... 0.01%
</TABLE>
F-18
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
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. 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. Subsequent Events
The Company entered into an agreement with Sterling Commerce, Inc. on July
19, 1999 for the sale of 481,000 equity shares of Rs.10 each for an aggregate
cash purchase price of $5,000,000. This agreement was concluded and the
proceeds were received on September 19, 1999 after obtaining the necessary
approvals from the Government of India. The proceeds of $5,000,000
(approximately equivalent to Rs.216.8 million) were principally applied to
entirely redeem 1,220,000 unsecured debentures of Rs.100 each aggregating to
Rs. 122 million issued to Citibank N.A., partially repay short term loans
obtained from IDBI amounting to Rs.50,000,000, and fund working capital
requirement.
22. Initial Public Offering ("IPO") and Acquisition of Business
In October 1999, the Company made an Initial Public Offering of 4,801,250
American Depositary Shares ("ADS"). The Company sold these ADSs at US$18 per
ADS for Rs.3,750,736,500 (US$86,045,802) in cash. The related offering costs of
Rs.306,022,544 (US$7,020,476) were offset against the proceeds of the issue.
The proceeds of the issue are intended to be used to fund the Company's network
infrastructure expansion and enhancements, develop content for the Company's
portal business and advertise and promote the Company's brand and for general
corporate purposes including strategic investments, partnerships and
acquisitions.
On November 29, 1999, Satyam entered into an agreement with the shareholders
of IndiaWorld Communications Private Limited ("IndiaWorld") to acquire 49,000
shares (equivalent to 24.5% of the voting control) of IndiaWorld for a
consideration of Rs. 1,222,500,000 (US$28,045,423). IndiaWorld is engaged in
the business of providing web-based solutions and advertising services. Satyam
also entered into an agreement with the shareholders of IndiaWorld as on the
same date for the option to purchase the remaining shares ("the option
agreement") in IndiaWorld. The terms of the option agreement provide that
Satyam has the option to acquire all of the remaining shares of IndiaWorld on
the payment of an initial non-refundable earnest money deposit of Rs.
513,100,000 (US$11,771,048) and a second and final payment of Rs. 3,254,300,000
(US$74,657,031) which is to be made on or before June 30, 2000. The non-
refundable earnest money deposit of Rs. 513,100,000 was paid on November 29,
1999. The option agreement also provides for an extension of the final payment
date to a date that is on or before September 30, 2000, by mutual consent of
Satyam and IndiaWorld. This extension is subject to the payment by Satyam of an
additional amount calculated at the rate of 16% per annum from July 1, 2000
through September 30, 2000 on the agreed consideration for the outstanding
shares. Management intends to exercise the option to acquire all of the
remaining shares of IndiaWorld on or before June 30, 2000.
F-19
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
This transaction will accounted for under the purchase method of accounting.
Accordingly, the financial statements of the Company will include the results
of IndiaWorld subsequent to the acquisition date. The estimated total cost in
excess of net assets acquired of approximately Rs. 5 billion (US$114.7 million)
will be amortized over five years.
The following unaudited proforma consolidated results of operations are
presented as if the acquisition was made at the beginning of the periods
presented. The proforma consolidated results of operations reflects the
amortization of goodwill attributable to the acquisition. The unaudited
proforma information is not necessarily indicative of the actual results that
would have occurred had the acquisition been made as of the beginning of the
periods presented or the future results of the combined operations.
<TABLE>
<CAPTION>
Year ended Six months ended
March 31, 1999 September 30, 1999
--------------------- ---------------------
Rs. US$ Rs. US$
(in thousands, exept share and per share
data)
<S> <C> <C> <C> <C>
Revenues.......................... 117,301 2,691 218,614 5,015
Net loss.......................... 1,185,343 27,193 625,918 14,159
Loss per equity share............. 109.50 2.51 39.68 0.91
Weighted Equity Shares used in
computing loss per Equity Share.. 10,824,826 10,824,826 15,773,656 15,773,656
</TABLE>
F-20
<PAGE>
INDIAWORLD COMMUNICATIONS PRIVATE LIMITED
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of KPMG, Independent Auditors....................................... F-22
Balance Sheets............................................................. F-23
Statements of Income....................................................... F-24
Statements of Stockholders' Equity......................................... F-25
Statements of Cash Flows................................................... F-26
Notes to Financial Statements.............................................. F-27
</TABLE>
F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
IndiaWorld Communications Private Limited:
We have audited the accompanying balance sheets of IndiaWorld Communications
Private Limited as of March 31, 1998 and 1999, and the related statements of
income, stockholders' equity and cash flows for each of the years in the three-
year period ended March 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of IndiaWorld Communications
Private Limited as of March 31, 1998 and 1999, and the results of its
operations and its cash flows for each of the years in the three-year period
ended March 31, 1999, in conformity with accounting principles generally
accepted in the United States.
The United States dollar amounts are presented in the accompanying financial
statements solely for the convenience of the readers and are arithmetically
correct on the basis disclosed in footnote 1(b).
KPMG
Mumbai, India
December 20, 1999
F-22
<PAGE>
INDIAWORLD COMMUNICATIONS PRIVATE LIMITED
BALANCE SHEETS
(Expressed in Indian Rupees, except share data and as otherwise stated)
<TABLE>
<CAPTION>
As of
------------------------------------------------------------
March 31, March 31, March 31, September 30, September 30,
1998 1999 1999 1999 1999
Rs. Rs. US$ Rs. US$
--------- ---------- --------- ------------- -------------
ASSETS (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents............ 683,505 778,062 17,850 1,269,751 29,129
Accounts receivable..... 572,683 984,555 22,586 2,368,071 54,326
Investments............. 860,300 1,622,000 37,210 7,059,595 161,954
Deferred tax asset...... 598,906 -- -- 2,122,160 48,685
Other current assets.... 856,768 1,780,206 40,840 2,085,983 47,855
--------- ---------- ------- ---------- -------
Total current assets.. 3,572,162 5,164,823 118,486 14,905,560 341,949
Plant and equipment--
net.................... 1,562,956 1,016,888 23,328 694,557 15,934
Deferred taxes.......... 406,084 311,571 7,148 337,100 7,733
Other assets............ 540,000 560,000 12,847 1,160,000 26,612
--------- ---------- ------- ---------- -------
Total assets.......... 6,081,202 7,053,282 161,809 17,097,217 392,229
========= ========== ======= ========== =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Capital lease
obligations............ 333,245 -- -- -- --
Accrued expenses........ 278,368 664,299 15,240 143,745 3,298
Deferred revenue........ 2,550,729 2,544,268 58,368 4,167,809 95,614
Provision for taxes..... 665,000 1,435,000 32,920 4,263,408 97,807
Deferred tax
liabilities............ 48,827 286,527 6,573 1,656,488 38,002
Dividend payable........ 200,000 200,000 4,589 -- --
Advances from
customers.............. 1,232,407 1,054,180 24,184 1,185,459 27,196
Other current
liabilities............ -- 16,990 390 -- --
--------- ---------- ------- ---------- -------
Total current
liabilities.......... 5,308,576 6,201,624 142,264 11,416,909 261,917
Non-current liabilities:
Long-term debt.......... -- 269,133 6,173 908,676 20,846
--------- ---------- ------- ---------- -------
Total liabilities..... 5,308,576 6,470,397 148,437 12,325,585 282,763
========= ========== ======= ========== =======
Stockholders' equity:
Common stock, Rs.10 par
value: 500,000 Equity
Shares authorized and
200,000 issued and
outstanding as of
March 31, 1998, 1999
and September 30,
1999................... 2,000,000 2,000,000 45,882 2,000,000 45,882
Accumulated
(deficit)/retained
earnings............... (958,323) (1,447,067) (33,197) 285,293 6,545
--------- ---------- ------- ---------- -------
Accumulated other
comprehensive income... (269,051) 29,952 687 2,486,339 57,039
--------- ---------- ------- ---------- -------
Total stockholders'
equity............... 772,626 582,885 13,372 4,771,632 109,466
--------- ---------- ------- ---------- -------
Total liabilities and
stockholders'
equity............... 6,081,202 7,053,282 161,809 17,097,217 392,229
========= ========== ======= ========== =======
</TABLE>
See accompanying notes to financial statements
F-23
<PAGE>
INDIAWORLD COMMUNICATIONS PRIVATE LIMITED
INCOME STATEMENTS
(Expressed in Indian Rupees, except share data and as otherwise stated)
<TABLE>
<CAPTION>
Six months ended
Years ended March 31, September 30,
----------------------------------------- ------------------------
1997 1998 1999 1999 1999 1999
Rs. Rs. Rs. US$ Rs. US$
--------- --------- ---------- ------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ 6,357,477 9,219,844 13,957,559 320,201 10,387,631 238,303
Cost of revenues........ 3,875,383 5,558,371 7,440,010 170,682 4,713,606 108,135
--------- --------- ---------- ------- ---------- -------
Gross profit............ 2,482,094 3,661,473 6,517,549 149,519 5,674,025 130,168
--------- --------- ---------- ------- ---------- -------
Operating expenses:
Selling, general and
administrative
expenses............. 2,583,636 3,202,787 4,285,134 98,305 3,005,043 68,939
Advances written off.... -- -- 1,833,541 42,063 -- --
--------- --------- ---------- ------- ---------- -------
Total Operating
Expenses............... 2,583,636 3,202,787 6,118,675 140,368 3,005,043 68,939
Operating income........ (101,542) 458,686 398,874 9,151 2,668,982 61,229
Other income, net....... 34,179 46,685 590,841 13,555 57,823 1,327
--------- --------- ---------- ------- ---------- -------
(Loss)/income before
income taxes........... (65,363) 505,371 989,715 22,706 2,726,805 62,556
Income taxes............ 14,202 (375,289) (978,459) (22,447) (994,445) (22,814)
--------- --------- ---------- ------- ---------- -------
Net (loss)/income....... (53,161) 130,082 11,256 259 1,732,360 39,742
========= ========= ========== ======= ========== =======
Net (loss)/income per
Equity Share........... (0.27) (0.65) 0.06 -- 8.66 0.20
========= ========= ========== ======= ========== =======
</TABLE>
See accompanying notes to financial statements
F-24
<PAGE>
INDIAWORLD COMMUNICATIONS PRIVATE LIMITED
STATEMENTS OF STOCK HOLDERS' EQUITY
(Expressed in Indian Rupees, except share data and as otherwise stated)
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Total
----------------- Comprehensive Comprehensive Accumulated Stockholders'
Shares Par Value Income Income Deficit Equity
------- --------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of March 31,
1997................... 200,000 2,000,000 (210,568) (688,405) 1,101,027
Comprehensive income
Net income............ 130,082 130,082 130,082
Unrealized loss on
investments, net..... (57,537) (57,537)
---------
Others................ (946) (946)
---------
Other comprehensive
income................ (58,483) (58,483)
---------
Comprehensive income
(loss)................. (71,599)
=========
Dividends............... (400,000) (400,000)
------- --------- --------- ---------- ---------
Balance as of March 31,
1998................... 200,000 2,000,000 (269,051) (958,323) 772,626
Comprehensive income
Net income............ 11,256 11,256 11,256
Unrealized gain on
investments, net..... 254,156 254,156
---------
Others................ 44,847 44,847
--------- ---------
Other comprehensive
income................ 299,003 299,003
---------
Comprehensive income
(loss)................. 310,259
=========
Dividends............... (500,000) (500,000)
------- --------- --------- ---------- ---------
Balance as of March 31,
1999................... 200,000 2,000,000 29,952 (1,447,067) 582,885
Comprehensive income
Net income............ 1,732,360 1,732,360 1,732,360
Unrealized gain on
investments, net..... 2,393,971 2,393,971
---------
Others................ 62,416 62,416
---------
Other comprehensive
income................ 2,456,387 2,456,387
---------
Comprehensive income
(loss)................. 4,188,747
------- --------- ========= --------- ---------- ---------
Balance as of September
30, 1999 (unaudited)... 200,000 2,000,000 2,486,339 285,293 4,771,632
======= ========= ========= ========== =========
Balance as of March 31,
1999 (in US$).......... 200,000 45,882 687 (33,197) 13,372
======= ========= ========= ========== =========
Balance as of September
30, 1999 (in US$)
(unaudited)............ 200,000 45,882 57,039 6,545 109,466
======= ========= ========= ========== =========
</TABLE>
See accompanying notes to financial statements
F-25
<PAGE>
INDIAWORLD COMMUNICATIONS PRIVATE LIMITED
STATEMENTS OF CASH FLOWS
(Expressed in Indian Rupees, except share data and as otherwise stated)
<TABLE>
<CAPTION>
Six months ended
Years ended March 31, September 30,
------------------------------------------- ------------------------
1997 1998 1999 1999 1999 1999
Rs. Rs. Rs. US$ Rs. US$
---------- ---------- ---------- ------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net (loss)/profit....... (53,161) 130,082 11,256 258 1,732,360 39,742
Adjustments to reconcile
net loss to net cash
provided by operating
activities:
Deferred income tax.... (214,202) (89,711) 208,459 4,782 (1,888,963) (43,220)
Profit on sale of
investments........... -- -- (539,115) (12,368) (95,714) (2,196)
Amounts written off--
other assets.......... -- -- 1,833,541 42,063 -- --
Depreciation of plant
and equipment......... 648,823 1,069,153 1,275,845 29,269 791,331 18,154
Changes in assets and
liabilities:
Accounts receivable
(net)............... (581,123) 422,839 (411,872) (9,449) (1,383,515) (31,739)
Other current
assets.............. (274,634) (516,289) (923,438) (21,185) (305,777) (7,015)
Other assets......... (379,000) (156,000) (20,000) (459) (600,000) (13,765)
Accrued expenses..... 27,653 (42,180) 385,931 8,854 (520,554) (11,943)
Deferred revenue..... 1,602,927 947,802 (6,461) (148) 1,623,541 37,246
Provision for income
taxes............... 200,000 465,000 770,000 17,665 2,878,408 66,034
Advances from
customers........... 736,480 495,927 (178,227) (4,089) 131,279 3,012
Other current
liabilities......... (25,800) -- 16,990 390 (16,990) (390)
---------- ---------- ---------- ------- ---------- -------
Net cash provided by
operating activities... 1,687,963 2,726,623 2,422,909 55,583 2,350,406 53,920
---------- ---------- ---------- ------- ---------- -------
Cash flows from
investing activities:
Expenditure on
investments......... (227,901) (656,818) (3,346,958) (76,782) (2,238,301) (51,349)
Proceeds from sale of
investments......... -- -- 2,406,046 55,106 310,967 7,134
Expenditure on plant and
equipment.............. (1,174,096) (1,015,660) (769,328) (17,649) (370,926) (8,509)
Net cash provided by
operating activities... (1,401,997) (1,672,478) (1,714,240) (39,325) (2,298,260) (52,724)
---------- ---------- ---------- ------- ---------- -------
Cash flows from
financing activities:
Proceeds from issuance
of long-term debt...... -- -- 269,133 6,174 639,543 14,672
Dividend payments made.. -- (220,000) (550,000) (12,618) (200,000) (4,588)
Principal payments under
capital lease
obligations............ -- (455,860) (333,245) (7,645) -- --
---------- ---------- ---------- ------- ---------- -------
Net cash provided
by/(used in) financing
activities............. -- (675,860) (614,112) (14,089) 439,543 10,084
---------- ---------- ---------- ------- ---------- -------
Net increase in cash and
cash equivalents....... 285,966 378,285 94,557 2,169 491,689 11,280
Cash and cash
equivalents at the
beginning of the year.. 19,254 305,220 683,505 15,680 778,062 17,850
---------- ---------- ---------- ------- ---------- -------
Cash and cash
equivalents at the end
of the year............ 305,220 683,505 778,062 17,849 1,269,751 29,130
========== ========== ========== ======= ========== =======
Supplementary
Information
Cash paid towards
taxes.................. -- 200,000 80,000 1,835 50,000 1,147
Supplemental schedule of
non cash financing
activities
Capital leases.......... -- 789,105 -- -- -- --
</TABLE>
See accompanying notes to financial statements
F-26
<PAGE>
INDIAWORLD COMMUNICATIONS PRIVATE LIMITED
NOTES TO FINANCIAL STATEMENTS
(Expressed in Indian Rupees, except share data and as otherwise stated)
1. Summary of Significant Accounting Policies and Practices
(a) Description of Business
IndiaWorld Communications Private Limited, (formerly Ravi Database
Consultants Private Limited) ("IndiaWorld" or the "Company") a subsidiary of CM
Jain Impex and Investments Private Limited, was incorporated on July 31, 1992
under the India Companies Act of 1956 (the "Act"). The Company is in the
business of providing web-based solutions and advertising services.
Headquartered at Mumbai, in India, the Company has a branch at New Delhi.
(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 for the six months ended September 30, 1999 have been translated into
United States dollars ("US$") 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 March 31, 1999 or 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 consist of cash and cash on deposit
with banks.
(e) Revenue Recognition
Revenues from web-site design and development are recognized upon completion
of the project once the customer's weblinks 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.
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
receivables is probable.
(f) Investments
The Company has evaluated its investment policies consistent with Statement
of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities, and determined that all of its
investment securities are to be classified as available-for-sale. Available-
for-sale
F-27
<PAGE>
INDIAWORLD COMMUNICATIONS PRIVATE LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Expressed in Indian Rupees, except share data and as otherwise stated)
securities are carried at fair value, with the unrealized gains and losses, net
of applicable income taxes, reported in the Statement of Stockholders' Equity
under the caption Other Comprehensive Income/(Loss). Realized gains and losses
and declines in value judged to be other-than-temporary on available-for-sale
securities are included in other income. The cost of securities sold is based
on the first-in first-out method. Interest and dividends on securities
classified as available-for-sale are included in other income.
(g) Plant and Equipment
Plant and equipment are stated at cost. A vehicle obtained under capital
lease obligation is stated at the present value of minimum lease payments. The
Company computes depreciation for all plant and equipment using the declining
balance method. The estimated useful lives of assets are as follows:
<TABLE>
<S> <C>
Computer equipment.................................................. 2 years
Furniture and fixtures.............................................. 5 years
Vehicles............................................................ 5 years
Plant and machinery................................................. 5 years
</TABLE>
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.
(h) 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 and tax credit 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
(i) Pensions and other post retirement benefits
Contributions to defined contribution plans are charged to income in the
period in which they accrue.
Current service costs for defined benefit plans are accrued in the period to
which they relate. Prior service costs, if any, resulting from amendments to
the plans are recognized and amortized over the remaining period of service of
the employees.
(j) Interim Information (Unaudited)
The interim information presented in these financial statements is prepared
by Management without audit and, in the opinion of Management includes all
adjustments of a normal recurring nature that are necessary for the fair
presentation of financial position, results of operations and cash flows for
the periods shown, in accordance with generally accepted accounting principles.
F-28
<PAGE>
INDIAWORLD COMMUNICATIONS PRIVATE LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Expressed in Indian Rupees, except share data and as otherwise stated)
(2) Cash and Cash Equivalents
The cost and fair values for cash and cash equivalents as of March 31, 1998
and 1999 and September 30, 1999, are set out below.
<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>
Cost and fair values
Cash and cash
equivalents........... 683,505 778,062 17,850 1,269,751 29,129
------- ------- ------ --------- ------
683,505 778,062 17,850 1,269,751 29,129
======= ======= ====== ========= ======
</TABLE>
(3) Other Current Assets
Other current assets consist of the following:
<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>
Withholding taxes....... 469,086 875,206 20,078 1,233,775 28,304
Prepaid expenses........ 125,000 625,000 14,338 -- --
Advance tax payments.... 200,000 280,000 6,424 225,000 5,162
Other advances.......... 62,682 -- -- 627,208 14,389
------- --------- ------ --------- ------
856,768 1,780,206 40,840 2,085,983 47,855
======= ========= ====== ========= ======
</TABLE>
Prepaid expenses consist mainly of un-expired portion of annual rentals paid
to the Videsh Sanchar Nigam Limited, for use of leased lines.
(4) Investments
The cost and fair values of investments as of March 31, 1998 and 1999 and
September 30, 1999 are set out below.
<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>
Cost.......... 1,318,237 1,322,718 30,345 2,990,252 68,599
Fair values... 860,301 1,622,000 37,210 7,059,595 161,954
</TABLE>
F-29
<PAGE>
INDIAWORLD COMMUNICATIONS PRIVATE LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Expressed in Indian Rupees, except share data and as otherwise stated)
(5) Plant and Equipment
Plant and equipment consists of the following:
<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>
Computer equipment...... 3,291,438 3,964,321 90,946 4,376,782 100,408
Furniture and fixtures.. 48,375 78,199 1,794 90,438 2,075
Vehicles................ 789,105 789,105 18,103 789,105 18,103
Plant and machinery..... 100,000 127,070 2,915 171,370 3,931
---------- ---------- ------- ---------- --------
4,228,918 4,958,695 113,758 5,427,695 124,517
---------- ---------- ------- ---------- --------
Accumulated
depreciation........... (2,665,962) (3,941,807) (90,430) (4,733,138) (108,583)
---------- ---------- ------- ---------- --------
1,562,956 1,016,888 23,328 694,557 15,934
========== ========== ======= ========== ========
</TABLE>
Depreciation expense amounted to Rs 648,823, Rs 1,069,153 and Rs 1,275,845
(US$ 29,269) for fiscal years 1997, 1998 and 1999 respectively and Rs 791,331
(US$ 18,154) for the six months period ended September 30, 1999.
(6) Leases
The Company was obligated during 1998 under a capital lease for Rs.798,105
for the purchase of a vehicle. The capital lease obligation was for a period of
one year and the Company met its full obligations under the lease before the
end of fiscal 1999.
(7) Other Assets
Other assets consist of the following:
<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>
Rent and maintenance
deposits............... 500,000 520,000 11,929 1,120,000 25,694
Other deposits.......... 40,000 40,000 918 40,000 918
------- ------- ------ --------- ------
540,000 560,000 12,847 1,160,000 26,612
======= ======= ====== ========= ======
</TABLE>
(8) Long-term Debt
Long term debt represents the interest free unsecured loan received from
Intel Asia Pacific Inc., towards the development of optimised content on a
website of the Company. The amount is repayable at the end of two years from
the date of the contract. As of March 31 and September 30, 1999, the Company
had received Rs. 301,430 (US$ 6,915) and Rs. 1,039,333 (US$ 23,843), which
amounts have been discounted at 12% for purposes of imputing interest on the
loan. The unamortized discount was Rs. 32,297 (US$ 741) and Rs. 130,657 (US$
2,997), at March 31 and September 30, 1999, respectively. Interest expense on
the loan amounted to Rs. 28,835 (US$ 662) and Rs. 51,434 (US$ 1,180) at March
31 and September 30, 1999, respectively. The unamortized discount will be
recognized as income over the course of the contract period.
F-30
<PAGE>
INDIAWORLD COMMUNICATIONS PRIVATE LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Expressed in Indian Rupees, except share data and as otherwise stated)
(9) Income Taxes
The provision for income tax comprises:
<TABLE>
<CAPTION>
March
March 31, March 31, September 30, September 30,
31, 1998 1999 1999 1999 1999
Rs Rs US$ Rs US$
-------- ------- --------- ------------- -------------
(unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Current taxes:
Domestic taxes........ 485,000 770,000 17,665 2,878,408 66,034
Deferred taxes:
Domestic taxes........ (198,205) 208,459 4,782 (1,883,363) (43,220)
Aggregate taxes....... 285,795 978,459 22,447 994,445 22,814
</TABLE>
All tax benefits have been allocated to the continuing operations of the
Company. The tax effects of significant temporary differences that resulted in
deferred tax assets and a description of the financial statement items that
created these differences are:
<TABLE>
<CAPTION>
March 31, March March 31, September 30, September 30,
1998 31, 1999 1999 1999 1999
Rs Rs US$ Rs US$
--------- -------- --------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Deferred tax assets
Unrealized loss of
investments........... 30,981 -- -- -- --
Plant and equipment.... 495,219 311,571 7,148 104,846 2,405
Deferred revenues...... 478,790 -- -- 2,181,164 50,038
Deferred expenses...... -- -- -- 173,250 3,975
--------- -------- ------ ---------- -------
Total deferred tax
assets............... 1,004,990 311,571 7,148 2,459,260 56,418
Deferred tax liabilities
Unrealized gain on
investments........... -- (136,853) (3,140) (1,498,665) (34,381)
Deferred revenues...... -- (35,924) (823) -- --
Deferred expenses...... (36,371) (113,750) (2,610) -- --
Others................. (12,456) -- -- (157,823) (3,621)
--------- -------- ------ ---------- -------
Total deferred tax
liabilities.......... (48,827) (286,527) (6,573) (1,656,488) (38,002)
--------- -------- ------ ---------- -------
Net deferred tax
assets................. 956,163 25,044 575 802,772 18,416
========= ======== ====== ========== =======
</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 realisation 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 liabilities, projected future taxable income
and tax planning strategies in making this assessment.
F-31
<PAGE>
INDIAWORLD COMMUNICATIONS PRIVATE LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Expressed in Indian Rupees, except share data and as otherwise stated)
<TABLE>
<CAPTION>
March 31, March 31, March 31, March 31, September 30. September 30,
1997 1998 1999 1999 1999 1999
Rs. Rs. Rs. Rs. US$ US$
--------- --------- --------- --------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net income before
taxes.................. (65,363) 505,371 989,715 22,705 2,726,805 62,555
Enacted tax rates in
India.................. 43% 35% 35% 35% 38.5% 38.5%
Computed expected tax
expense................ (28,107) 176,880 346,400 7,947 1,049,819 24,084
Advances written off.... -- -- 641,739 14,722 -- --
Tax disallowances....... 1,569 46,826 -- -- -- --
Others.................. -- -- (9,680) (222) (39,184) (899)
Effect of tax rate
change................. 12,336 151,583 -- -- (16,190) (371)
------- ------- ------- ------ --------- ------
Total income tax
expense/(benefit)...... (14,202) 375,289 978,459 22,447 994,445 22,814
======= ======= ======= ====== ========= ======
</TABLE>
(10) Common Stock
Dividends. The Company has declared and paid dividends in fiscal 1998 and
1999 of Rs 400,000 and Rs 500,000 (US $ 11,740) respectively.
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.
(11) Other Income
Other income (net) consists of the following:
<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>
Profit on sale of
investments (net)...... -- -- 539,115 12,368 95,715 2,196
Interest on loan........ -- 21,856 10,250 235 -- --
Others.................. 34,179 24,829 70,311 1,613 13,542 311
Interest expense........ -- -- (28,835) (661) (51,434) (1,180)
------ ------ ------- ------ ------- ------
34,179 46,685 590,841 13,555 57,823 1,327
====== ====== ======= ====== ======= ======
</TABLE>
(12) Commitments and Contingencies
The Company is currently engaged in a trademark dispute with a US based
company called ASAP Solutions, Inc. ("ASAP"), relating to the use of the name
"Indiaworld." ASAP contends that the activities of the Company infringe a US
trademark owned by ASAP for the term "Indiaworld" and associated logos.
Management, based on the opinion of counsel, is of the opinion that the
trademark was improperly granted to ASAP. The Company has commenced litigation
against ASAP in the United States to cancel the trademark and to assert other
claims. The potential costs associated with this trademark dispute cannot be
determined with any degree of certainty. Based on information presently
available, the Company does not expect this dispute to have a material adverse
impact on its competitive or financial position or its ongoing results of
operations.
F-32
<PAGE>
INDIAWORLD COMMUNICATIONS PRIVATE LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Expressed in Indian Rupees, except share data and as otherwise stated)
(13) Related Party Transactions
In fiscal 1998 the Company entered into an agreement with Netcore Solutions
Private Limited ("Netcore") formerly Ravi Software Private Limited, a company
under the common ownership, management and control of IndiaWorld. As per the
terms of the agreement, the Company was entitled to market and distribute a
messaging software solution called "Netserv" which was developed by Netcore.
Revenues earned from the sale of Netserv were to be retained by IndiaWorld to
the extent that they did not exceed Rs 1 million. Revenues in excess of Rs. 1
million were to be shared by Netcore and IndiaWorld in the ratio of 80:20.
Revenues earned by the Company from the sale of Netserv were Rs 840,000 and Rs
732,164 for the years ended March 31, 1998 and March 31, 1999 respectively.
The Company also agreed to provide Netcore free server space on its computer
systems for a period of one year from April 1, 1997. Management estimates that
the fair value of server space provided to Netcore was Rs 180,000. The
agreement was for a period of two years commencing from April 1, 1997.
The Company also entered into transactions with CM Jain Consultants Private
Limited, the holding company and with the spouse and relative of a director of
the Company. Significant transactions with these parties during the fiscal
years ended March 31 1997, 1998, 1999 and during the six months ended
September 30, 1999 are summarized below.
<TABLE>
<CAPTION>
March March
31, 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>
Rental charges.......... 360,000 540,000 780,000 17,894 450,000 10,323
Facility charges........ 192,500 320,219 690,000 15,829 240,000 5,506
Reimbursement of
expenses............... 68,764 -- 378,200 8,676 198,172 4,546
Consultancy charges..... 135,000 240,000 600,000 13,765 407,500 9,348
Lease rentals--Car...... 40,000 48,000 48,000 1,101 -- --
Deposits--motor car..... 25,000 -- -- -- -- --
Deposits--rental........ 350,000 150,000 -- -- -- --
Advances................ -- -- -- -- 400,000 9,176
</TABLE>
(14) Segment Reporting
In accordance with SFAS 131, Disclosures about Segments of an Enterprise and
Related Information, the Company has determined that it has three operating
segments:
. Web-site design and webpage hosting services, designing and
development of websites and webpage hosting for individuals and
corporate entities;
. Web-site advertising, sale of banner advertisements on the websites
created and hosted by the Company; and
. Corporate services, providing installation and customisation services
of mail server and proxy server software and messaging systems,
providing web based solutions to business.
F-33
<PAGE>
INDIAWORLD COMMUNICATIONS PRIVATE LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Expressed in Indian Rupees, except share data and as otherwise stated)
These operating segments were identified from the structure of the Company's
internal organisation. Currently the chief operating decision-maker of the
Company receives and reviews information relating to segment revenues only.
Revenues from services rendered by the Company 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>
Website design and
webpage hosting
services............... 4,103,083 5,552,942 6,225,352 142,816 2,635,555 60,462
Website advertising..... 948,338 1,570,190 4,956,485 113,707 5,379,766 123,418
Corporate services...... 1,306,056 2,096,712 2,775,722 63,678 2,372,310 54,423
--------- --------- ---------- ------- ---------- -------
Revenues................ 6,357,477 9,219,844 13,957,559 320,201 10,387,631 238,303
========= ========= ========== ======= ========== =======
</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
depreciation on computers, communication expenses and direct personnel cost
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 practical to provide
segment disclosures relating to total assets since a realistic analysis among
the various operating segments is not possible.
(15) Gratuity and Provident Fund
Gratuity. In accordance with Indian law, the Company provides for gratuity,
a defined benefit retirement plan (the "Gratuity Plan") covering all employees.
The plan provides a lump sum payment to vested employees at retirement or
termination of employment at an amount based on the respective employee's
salary and the years of employment with the Company. Gratuity is provided for
on the basis of an actuarial valuation. The entire balance of gratuity is
unfunded.
F-34
<PAGE>
INDIAWORLD COMMUNICATIONS PRIVATE LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Expressed in Indian Rupees, except share data and as otherwise stated)
The following table sets forth the funded status of the plan and the amounts
recognized in the Company's balance sheet:
<TABLE>
<CAPTION>
March 31, March 31, September 30, September 30,
1998 1999 1999 1999
Rs Rs Rs US$
--------- --------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Change in benefit obligation
Projected benefit obligation
("PBO') at the beginning of
the year...................... 26,224 72,282 73,583 1,688
Service cost................... 10,912 39,093 26,841 616
Interest cost.................. 3,145 8,642 4,393 101
Actuarial loss/(gain).......... 32,001 (46,434) 23,641 542
Benefits paid.................. -- -- -- --
------- ------- -------- ------
PBO at end of year............. 72,282 73,583 128,458 2,947
------- ------- -------- ------
Change in plan assets.......... -- -- -- --
Fair value of plan assets at
beginning of year............ -- -- -- --
Actual return on plan assets.. -- -- -- --
Employer contributions........ -- -- -- --
Benefits paid................. -- -- -- --
------- ------- -------- ------
Fair value of plan assets at
end of year................... -- -- -- --
------- ------- -------- ------
Funded status.................. (72,282) (73,583) (128,458) (2,947)
Unrecognized net actuarial
loss/(gain)................... (122) (46,556) (19,352) (444)
Unrecognized transition
obligation.................... 31,917 27,927 25,932 595
------- ------- -------- ------
Net amount recognized.......... (40,487) (92,212) (121,878) (2,796)
Amount recognized in balance
sheet consists of:
Accrued benefit cost.......... 40,487 92,212 121,878 2,796
The components of net gratuity
costs are reflected below:
Service cost.................. 10,912 39,093 26,841 616
Interest cost................. 3,145 8,642 4,393 101
Expected return on plan
assets....................... -- -- -- --
Amortization.................. 711 3,990 (1,569) (36)
------- ------- -------- ------
Net gratuity costs............. 14,768 51,725 29,666 681
======= ======= ======== ======
</TABLE>
Assumptions used in accounting for the gratuity plan were a discount rate of
12% and compensation levels to increase at the rate of 20% per annum for the
first three years, 15% per annum for the next three years and 10% per annum
thereafter.
(16) 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.
F-35
<PAGE>
INDIAWORLD COMMUNICATIONS PRIVATE LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Expressed in Indian Rupees, except share data and as otherwise stated)
To date, the Company has not encountered any material Year 2000 issues
concerning its respective computer programs. 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.
F-36
<PAGE>
Three panels of graphical information regarding Satyam Infoway Limited
consisting of:
.a graphical presentation of Satyam Infoway's network covering 34 cities
in India;
.sample web pages from Satyam Infoway's content sites;
.a picture of the Satyam Online CD-ROM;
.a list of products and services provided by Satyam Infoway;
.a picture of equipment in Satyam Infoway's data center; and
.a description of some of the features of Satyam Online
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,000,000 American Depositary Shares
[SATYAM LOGO]
SATYAM INFOWAY LIMITED
Representing 750,000 Equity Shares
----------------
PROSPECTUS
----------------
Merrill Lynch & Co.
Salomon Smith Barney
February , 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 3, 2000
OFFERING CIRCULAR
3,000,000 American Depositary Shares
[SATYAM LOGO]
SATYAM INFOWAY LIMITED
Representing 750,000 Equity Shares
-----------
Satyam Infoway Limited is offering up to 3,000,000 American Depositary
Shares, or ADSs, of Satyam Infoway outside India, including in the United
States. This offering circular relates to an offering by the international
underwriters of up to 1,200,000 ADSs outside the United States and Canada.
Additional underwriters are offering up to 1,800,000 ADSs in the United States
and Canada. Each ADS represents one-fourth of one equity share. Our ADSs are
listed for trading on the Nasdaq National Market under the symbol "SIFY." On
February 2, 2000, the last reported sale price of our ADSs was $47.25 per ADS.
-----------
Investing in the American Depositary Shares involves risks which are
described in the Risk Factors beginning on page 9.
-----------
<TABLE>
<CAPTION>
Price Underwriting
to discounts and Proceeds
public commissions to us
------ ------------- --------
<S> <C> <C> <C>
Per ADS........................................ $ $ $
Total.......................................... $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities, or determined if this offering
circular is truthful or complete. Any representation to the contrary is a
criminal offense.
Satyam Infoway has granted to the underwriters the right to purchase up to an
additional 450,000 ADSs at the public offering price, less discount and
commissions, within 30 days from the date of the offering circular to cover
overallotments.
-----------
Merrill Lynch International__________________ Salomon Smith Barney International
February , 2000
The information in this offering circular is not complete and may be changed.
We may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This offering circular is
not an offer to sell these securities and we are not soliciting an offer to
buy these securities in any jurisdiction where the offer or sale is not
permitted.
<PAGE>
UNDERWRITING
General
The offering consists of:
. the international offering of 1,200,000 ADSs outside the United
States and Canada; and
. the U.S. offering of 1,800,000 ADSs in the United States and Canada.
Subject to the terms and conditions set forth in a purchase agreement
between us and each of the international underwriters named below, for whom
Merrill Lynch (Singapore) Pte. Ltd. and Salomon Brothers International Limited
are acting as representatives, we have agreed to sell to the international
underwriters, and each of the international underwriters severally and not
jointly has agreed to purchase from us, the number of ADSs set forth opposite
its name below.
<TABLE>
<CAPTION>
Underwriter Number of ADSs
----------- --------------
<S> <C>
Merrill Lynch (Singapore) Pte. Ltd. ........................
Salomon Brothers International Limited......................
---------
Total..................................................... 1,200,000
=========
</TABLE>
In the purchase agreement, the several international underwriters have
agreed, subject to the terms and conditions set forth in that agreement, to
purchase all of the ADSs being sold under the terms of the agreement if any of
the ADSs are purchased. In the event of a default by an international
underwriter, the purchase agreement provides that, in certain circumstances,
the purchase commitments of non-defaulting international underwriters may be
increased or the purchase agreement may be terminated.
We have also entered into a purchase agreement for the sale of 1,800,000
ADSs in the United States and Canada. Merrill Lynch and Co. and Salomon Smith
Barney are the representatives of the underwriters for the U.S. offering. The
U.S. and international offerings are contingent upon each other. The offering
price and aggregate underwriting commissions per ADS for the U.S. offering and
the international offering are identical.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or to contribute to payments the underwriters may be required
to make in respect of those liabilities.
The representatives have advised us that the underwriters propose initially
to offer the ADSs to the public at the public offering price set forth on the
cover page of this prospectus, and to dealers at such price less a concession
not in excess of $ per ADS. The underwriters may allow, and such dealers may
allow, a discount not in excess of $ per ADS to other dealers. After the
public offering, the public offering price, concession and discount may be
changed.
Overallotment Option
We have granted an option to the underwriters, exercisable for 30 days after
the date of this prospectus, to purchase up to an aggregate of an additional
450,000 ADSs at the public offering price set forth on the cover of this
prospectus, less the underwriting discount. The underwriters may exercise this
option solely to cover overallotments, if any, made on the sale of our ADSs
offered hereby. The representatives of the U.S. underwriters will decide on
behalf of the underwriters whether to exercise the option and whether to
allocate any ADSs covered by the option to the U.S. offering or the
international offering. To the extent that the underwriters exercise this
option, each U.S. underwriter will be obligated, subject to certain conditions,
to purchase a number of additional ADSs proportionate to such underwriter's
initial amount reflected in the foregoing table.
102
<PAGE>
Commissions and Discounts
The following table shows the per ADS and total public offering price,
underwriting discount to be paid by us to the underwriters and the proceeds
before expenses to us. This information is presented assuming either no
exercise or full exercise by the underwriters of their overallotment option.
<TABLE>
<CAPTION>
Without With
Per ADS Option Option
------- ------- ------
<S> <C> <C> <C>
Public offering price.............................. $ $ $
Underwriting discount.............................. $ $ $
Proceeds, before expenses, to Satyam Infoway....... $ $ $
</TABLE>
The expenses of this offering, exclusive of the underwriting discount, are
estimated at $0.5 million and are payable by us. The underwriters have, subject
to completion of this offering, agreed to reimburse us for certain expenses
incurred in connection with this offering.
The ADSs are being offered by the several underwriters, subject to prior
sale, when, as and if issued to and accepted by them, subject to approval of
certain legal matters by counsel for the underwriters and certain other
conditions. The underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part.
No Sales of Common Stock or Similar Securities
We and our executive officers and directors have agreed (subject to certain
exceptions) not to, directly or indirectly, without the prior written consent
of Merrill Lynch, Pierce, Fenner & Smith, Incorporated, on behalf of the
underwriters for a period of 90 days after the date of the offering memorandum,
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of, lend or otherwise dispose of or transfer any shares of our common
stock or securities convertible into or exchangeable or exercisable for or
repayable with our common stock, whether now owned or later acquired by the
person executing the agreement or with respect to which the person executing
the agreement later acquires the power of disposition, or file any registration
statement under the Securities Act relating to any shares of our common stock;
or enter into any swap or other agreement or any other agreement that
transfers, in whole or in part, the economic consequence of ownership of our
common stock whether any such swap or transaction is to be settled by delivery
of our common stock or other securities, in cash or otherwise.
Nasdaq National Market Listing
Our common stock is listed on the Nasdaq National Market under the symbol
"SIFY."
Price Stabilization and Short Positions
Until the distribution of our ADSs is completed, rules of the Commission may
limit the ability of the underwriters and selling group members to bid for an
purchase our ADSs. As an exception to these rules, the underwriters are
permitted to engage in transactions that stabilize the price of our ADSs. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of our ADSs.
The underwriters may create a short position in our ADSs in connection with
the offering. This means that if they sell more ADSs than are set forth on the
cover page of this prospectus, the representatives may reduce that short
position by purchasing our ADSs in the open market. The representatives may
also elect to reduce any short position by exercising all or part of the over
allotment option described above.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our ADSs. In addition, neither we nor
any of the underwriters make any representation that the representatives will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
103
<PAGE>
Other Relationships
Some of the underwriters and their affiliates have from time to time engaged
in, and may in the future engage in, investment banking and other commercial
dealings in the ordinary course of business with us. They have received
customary fees and commissions for these transactions. Merrill Lynch
(Singapore) Pte. Ltd. and Salomon Brothers International Limited participated
as representatives of the international underwriters in our initial public
offering of American Depositary Shares outside the United States and Canada in
October 1999, for which they received usual and customary fees.
Passive Market Making
In connection with this offering, certain underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in our ADSs on the Nasdaq
National Market in accordance with Rule 103 of Regulation M under the Exchange
Act, during the business day prior to the pricing of the offering before the
commencement of offers or sales of our ADSs. Passive market makers must comply
with applicable volume and price limitations and must be identified as such. In
general, a passive market maker must display its bid at a price not in excess
of the highest independent bid of such security; if all independent bids are
lowered below the passive market makers bid, however, such bid must then be
lowered when certain purchase limits are exceeded.
Selling Restrictions
This offering circular does not constitute an offer or an invitation by, or
on behalf of, us or by or on behalf of the underwriters, to subscribe for or
purchase any of our equity shares or ADSs in any jurisdiction to any person to
whom it is unlawful to make such an offer or solicitation in that jurisdiction.
The distribution of this offering circular and the offering of our equity
shares or ADSs in certain jurisdictions may be restricted by law. Persons into
whose possession this offering circular comes are required by us and the
underwriters to inform themselves about and to observe any such restrictions.
104
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,000,000 American Depositary Shares
[SATYAM LOGO]
SATYAM INFOWAY LIMITED
Representing 750,000 Equity Shares
----------------
OFFERING CIRCULAR
----------------
Merrill Lynch International
Salomon Smith Barney International
February , 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Registrant in connection with the sale of
the ADSs being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fees and the Nasdaq National Market listing
fee.
<TABLE>
<CAPTION>
Amount
to be Paid
----------
<S> <C>
SEC registration fee................................................. $34,274
NASD filing fee...................................................... 15,500
Nasdaq National Market listing fee................................... *
Legal fees and expenses.............................................. *
Accounting fees and expenses......................................... *
Printing and engraving............................................... *
Blue sky fees and expenses (including legal fees).................... *
Reimbursement of offering expenses by underwriters................... *
Miscellaneous........................................................ *
-------
Total.............................................................. $ *
=======
</TABLE>
- --------
* To be provided by amendment.
Item 14. Indemnification of Directors and Officers
We expect to amend our Articles of Association to provide that our directors
and officers shall be indemnified by our company against loss in defending any
proceeding brought against officers and directors in their capacity as such, if
the indemnified officer or director receives judgment in his favor or is
acquitted in such proceeding. In addition, we expect to amend our Articles of
Association to provide that our company shall indemnify our officers and
directors in connection with any application pursuant to Section 633 of the
Companies Act, 1956 in which relief is granted by the court.
We expect to enter into indemnification agreements with our directors and
officers, pursuant to which our company will agree to indemnify them against a
number of liabilities and expenses incurred by such persons in connection with
claims made by reason of their being such a director or officer.
The form of underwriting agreement to be filed as Exhibit 1.1 to this
registration statement will also provide for indemnification of our company and
our officers and directors.
Our company has obtained directors and officers insurance providing
indemnification for a number of our directors, officers, affiliates, partners
or employees for specified errors and omissions.
Item 15. Recent Sales of Unregistered Securities
The registrant has sold and issued the following securities since December
12, 1995 (Inception):
(1) On December 12, 1995, we issued on aggregate of (a) 100 equity
shares to B. Ramalinga Raju, (b) 100 equity shares to B. Rama Raju and (c)
30 equity shares to Satyam Computer Services for a purchase price of
Rs.2,300.
(2) On August 13, 1997, we issued an aggregate of 1.3 million equity
shares to Satyam Computer Services for a purchase price of Rs.13.0 million.
(3) On March 30, 1998, we issued an aggregate of 6.2 million equity
shares to Satyam Computer Services for a purchase price of Rs.62.0 million.
II-1
<PAGE>
(4) On June 30, 1998, we issued an aggregate of 3.0 million equity
shares, to Satyam Computer Services for a purchase price of Rs.30.0
million.
(5) On September 25, 1998, we issued an aggregate of (a) 370,000 equity
shares to R. Ramaraj and (b) 1,130,000 equity shares to Satyam Computer
Services for a purchase price of Rs.15.0 million.
(6) On December 24, 1998, we issued an aggregate of 749,770 equity
shares to Satyam Computer Services for a purchase price of Rs.52.5 million.
(7) In March 1999, we issued (a) an aggregate of 3.0 million equity
shares to SARF for a purchase price of Rs.210.0 million and (b) warrants to
purchase an aggregate of 750,000 equity shares to SARF and Satyam Computer
Services.
(8) In September 1999, we issued an aggregate of 481,000 equity shares
to Sterling Commerce for a purchase price of $5.0 million.
(9) In October, we issued an aggregate of 750,000 equity shares to SARF
and Satyam Computer Services upon the exercise of warrants.
The sale of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Regulation S under the Securities Act,
except that the issuance described under (8) was deemed exempt in reliance on
Regulation D and Section 4(2) under the Securities Act.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits.
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
*1.1 Form of Underwriting Agreement.
3.1 Articles of Association of Satyam Infoway Limited. (1)
3.2 Memorandum of Association of Satyam Infoway Limited. (1)
3.3 Table "A' of the Companies Act, 1956. (1)
4.1 Share Subscription and Shareholders' Agreement, dated as of February 5,
1999, by and among Satyam Infoway Limited, Satyam Computer Services
Limited, South Asia Regional Fund and
Mr. B. Ramalinga Raju. (1)
4.2 Amendment No. 1 to Share Subscription and Shareholders' Agreement,
dated as of September 14, 1999, by and among Satyam Infoway Limited,
Satyam Computer Services Limited, South Asia Regional Fund and Mr. B.
Ramalinga Raju. (1)
4.3 Form of Deposit Agreement among Satyam Infoway Limited, Citibank, N.A.
and holders from time to time of American Depositary Receipts issued
thereunder (including as an exhibit, the form of American Depositary
Receipt). (3)
4.4 Amendment No. 1 to the Deposit Agreement.
4.5 Satyam Infoway Limited's Specimen Certificate for equity shares. (2)
4.6 Rupee Loan Agreement, dated as of July 3, 1998, by and between Satyam
Infoway Limited and Export-Import Bank of India. (1)
4.7 Letter Agreement, dated as of September 14, 1999, by and between Satyam
Infoway Limited and Sterling Commerce, Inc. (1)
4.8 Stockholders Agreement, dated as of September 14, 1999, by and among
Satyam Infoway Limited, Sterling Commerce, Inc. and Satyam Computer
Services Limited. (1)
4.9 Registration Rights Agreement, dated as of September 14, 1999, by and
among Satyam Infoway Limited, Sterling Commerce, Inc. and South Asia
Regional Fund. (1)
*5.1 Opinion of M. G. Ramachandran.
10.1 Associate Stock Option Plan (including Deed of Trust). (2)
10.2 Form of Indemnification Agreement. (2)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.3 License Agreement For Provision of Internet Service, dated as of
November 12, 1998, by and between Satyam Infoway Limited and the
Government of India, Ministry of Communications, the Department of
Telecommunications, Telecom Commission. (1)
10.4 Bank Guarantee, dated as of November 4, 1998. (1)
+10.5 UUNet Technologies Strategic Alliance Agreement, dated of April 18,
1997, by and between Satyam Infoway Limited and UUNet Technologies. (3)
+10.6 International Electronic Commerce Provider Agreement, dated as of
February 14, 1997, by and between Satyam Infoway Limited and Sterling
Commerce International Inc. (3)
+10.7 Amendment No. 1 to International Electronic Commerce Provider Agreement
by and between Satyam Infoway Limited and Sterling Commerce
International Inc. (3)
+10.8 Amendment No. 2 to International Electronic Commerce Provider Agreement
by and between Satyam Infoway Limited and Sterling Commerce
International Inc. (3)
10.9 Amendment No. 3 to International Electronic Commerce Provider
Agreement, dated as of September 14, 1999, by and between Satyam
Infoway Limited and Sterling Commerce International Inc. (2)
+10.10 Distribution Agreement, dated as of June 1997, by and between Satyam
Infoway Limited and Open Market, Inc. (3)
10.11 User Agreement, effective as of April 1, 1999 by and between Satyam
Infoway Limited and Satyam Computer Services Limited. (1)
10.12 Share Purchase Agreement, dated November 29, 1999, by and among Satyam
Infoway Limited, IndiaWorld Communications Private Limited, Mr. Rajeesh
Jain and the other shareholders of IndiaWorld Communications Private
Limited listed on the signature pages thereto. (4)
10.13 Agreement for Option to Purchase Shares, dated November 29, 1999, by
and among Satyam Infoway Limited, IndiaWorld Communications Private
Limited, Mr. Rajeesh Jain and the other shareholders of IndiaWorld
Communications Private Limited listed on the signature page thereto.
(4)
16.1 Letter from Fraser & Ross regarding Change in Certifying Accountant.
(2)
23.1 Consent of Latham & Watkins.
*23.2 Consent of M.G. Ramachandran (included in Exhibit 5.1).
23.3 Consent of KPMG, India, Independent Auditors.
*23.4 Consent of International Data Corporation.
24.1 Power of Attorney (included on Page S-1).
</TABLE>
- --------
* To be filed by amendment.
+ Registrant has requested confidential treatment pursuant to Rule 406 for a
portion of the referenced exhibit and has separately filed such exhibit with
the Commission.
(1) Previously filed as an exhibit to Amendment No. 1 to the Registration
Statement on Form F-1 (File No. 333-10852) filed with the Commission on
October 4, 1999 and incorporated herein by reference.
(2) Previously filed as an exhibit to Amendment No. 2 to the Registration
Statement on Form F-1 (File No. 333-10852) filed with the Commission on
October 13, 1999 and incorporated herein by reference.
(3) Previously filed as an exhibit to Amendment No. 3 to the Registration
Statement on Form F-1 (File No. 333-10852) filed with the Commission on
October 15, 1999 and incorporated herein by reference.
(4) Previously filed as an exhibit to the Form 6-K (File No. 000-27663) filed
with the Commission on December 3, 1999 and incorporated herein by
reference.
(b) Financial Statement Schedules
None.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-3
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424 (b)(1) or (4),
or 497(h) under the Securities Act of 1933, shall be deemed to be part of
this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and this offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Chennai,
State of Tamil Nadu, Country of India, on this 3rd day of February.
SAYAM INFOWAY LIMITED
By /s/ R. Ramaraj
_____________________________________
Name: R. Ramaraj
Title: Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints R.
Ramaraj and T.R. Santhanakrishnan, and each of them, as attorney-in-fact with
the power of substitution, for him or her in any and all capacities, to sign
any amendment to this registration statement (including post-effective
amendments and registration statements filed pursuant to Rule 462 and
otherwise), and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting to
said attorneys-in-fact, and each of them individually, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in connection therewith, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact or each of them individually, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ R. Ramaraj Chief Executive Officer and February 3, 2000
____________________________________ Director (Principal
R. Ramaraj Executive Officer)
/s/ T. R. Santhanakrishnan Chief Financial Officer February 3, 2000
____________________________________ (Principal Financial and
T. R. Santhanakrishnan Accounting Officer)
/s/ B. Ramalinga Raju Director February 3, 2000
____________________________________
B. Ramalinga Raju
Director
____________________________________
Pranab Barua
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Director
____________________________________
T. H. Chowdary
</TABLE>
<TABLE>
<S> <C> <C>
Director
____________________________________
Donald Peck
</TABLE>
<TABLE>
<S> <C> <C>
/s/ C. Srinivasa Raju Director February 3, 2000
____________________________________
C. Srinivasa Raju
</TABLE>
<TABLE>
<S> <C> <C>
/s/ S. Srinivasan Director February 3, 2000
____________________________________
S. Srinivasan
</TABLE>
<TABLE>
<S> <C> <C>
/s/ Donald J. Puglisi Authorized Representative in February 3, 2000
____________________________________ the United States
Donald J. Puglisi
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
*1.1 Form of Underwriting Agreement.
3.1 Articles of Association of Satyam Infoway Limited. (1)
3.2 Memorandum of Association of Satyam Infoway Limited. (1)
3.3 Table "A' of the Companies Act, 1956. (1)
4.1 Share Subscription and Shareholders' Agreement, dated as of February 5,
1999, by and among Satyam Infoway Limited, Satyam Computer Services
Limited, South Asia Regional Fund and
Mr. B. Ramalinga Raju. (1)
4.2 Amendment No. 1 to Share Subscription and Shareholders' Agreement,
dated as of September 14, 1999, by and among Satyam Infoway Limited,
Satyam Computer Services Limited, South Asia Regional Fund and Mr. B.
Ramalinga Raju. (1)
4.3 Form of Deposit Agreement among Satyam Infoway Limited, Citibank, N.A.
and holders from time to time of American Depositary Receipts issued
thereunder (including as an exhibit, the form of American Depositary
Receipt). (3)
4.4 Amendment No. 1 to the Deposit Agreement.
4.5 Satyam Infoway Limited's Specimen Certificate for equity shares. (2)
4.6 Rupee Loan Agreement, dated as of July 3, 1998, by and between Satyam
Infoway Limited and Export-Import Bank of India. (1)
4.7 Letter Agreement, dated as of September 14, 1999, by and between Satyam
Infoway Limited and Sterling Commerce, Inc. (1)
4.8 Stockholders Agreement, dated as of September 14, 1999, by and among
Satyam Infoway Limited, Sterling Commerce, Inc. and Satyam Computer
Services Limited. (1)
4.9 Registration Rights Agreement, dated as of September 14, 1999, by and
among Satyam Infoway Limited, Sterling Commerce, Inc. and South Asia
Regional Fund. (1)
*5.1 Opinion of M. G. Ramachandran.
10.1 Associate Stock Option Plan (including Deed of Trust). (2)
10.2 Form of Indemnification Agreement. (2)
10.3 License Agreement For Provision of Internet Service, dated as of
November 12, 1998, by and between Satyam Infoway Limited and the
Government of India, Ministry of Communications, the Department of
Telecommunications, Telecom Commission. (1)
10.4 Bank Guarantee, dated as of November 4, 1998. (1)
+10.5 UUNet Technologies Strategic Alliance Agreement, dated of April 18,
1997, by and between Satyam Infoway Limited and UUNet Technologies. (3)
+10.6 International Electronic Commerce Provider Agreement, dated as of
February 14, 1997, by and between Satyam Infoway Limited and Sterling
Commerce International Inc. (3)
+10.7 Amendment No. 1 to International Electronic Commerce Provider Agreement
by and between Satyam Infoway Limited and Sterling Commerce
International Inc. (3)
+10.8 Amendment No. 2 to International Electronic Commerce Provider Agreement
by and between Satyam Infoway Limited and Sterling Commerce
International Inc. (3)
10.9 Amendment No. 3 to International Electronic Commerce Provider
Agreement, dated as of September 14, 1999, by and between Satyam
Infoway Limited and Sterling Commerce International Inc. (2)
+10.10 Distribution Agreement, dated as of June 1997, by and between Satyam
Infoway Limited and Open Market, Inc. (3)
10.11 User Agreement, effective as of April 1, 1999 by and between Satyam
Infoway Limited and Satyam Computer Services Limited. (1)
10.12 Share Purchase Agreement, dated November 29, 1999, by and among Satyam
Infoway Limited, IndiaWorld Communications Private Limited, Mr. Rajeesh
Jain and the other shareholders of IndiaWorld Communications Private
Limited listed on the signature pages thereto. (4)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.13 Agreement for Option to Purchase Shares, dated November 29, 1999, by
and among Satyam Infoway Limited, IndiaWorld Communications Private
Limited, Mr. Rajeesh Jain and the other shareholders of IndiaWorld
Communications Private Limited listed on the signature page thereto.
(4)
16.1 Letter from Fraser & Ross regarding Change in Certifying Accountant.
(2)
23.1 Consent of Latham & Watkins.
*23.2 Consent of M.G. Ramachandran (included in Exhibit 5.1).
23.3 Consent of KPMG, India, Independent Auditors.
*23.4 Consent of International Data Corporation.
24.1 Power of Attorney (included on Page II-5).
</TABLE>
- --------
* To be filed by amendment.
+ Registrant has requested confidential treatment pursuant to Rule 406 for a
portion of the referenced exhibit and has separately filed such exhibit with
the Commission.
(1) Previously filed as an exhibit to Amendment No. 1 to the Registration
Statement on Form F-1 (File No. 333-10852) filed with the Commission on
October 4, 1999 and incorporated herein by reference.
(2) Previously filed as an exhibit to Amendment No. 2 to the Registration
Statement on Form F-1 (File No. 333-10852) filed with the Commission on
October 13, 1999 and incorporated herein by reference.
(3) Previously filed as an exhibit to Amendment No. 3 to the Registration
Statement on Form F-1 (File No. 333-10852) filed with the Commission on
October 15, 1999 and incorporated herein by reference.
(4) Previously filed as an exhibit to the Form 6-K (File No. 000-27663) filed
with the Commission on December 3, 1999 and incorporated herein by
reference.
(b) Financial Statement Schedules
None.
<PAGE>
EXHIBIT 4.4
- --------------------------------------------------------------------------------
SATYAM INFOWAY LIMITED
AND
CITIBANK, N.A.,
As Depositary
AND
HOLDERS AND BENEFICIAL OWNERS
OF AMERICAN DEPOSITARY SHARES EVIDENCED BY
AMERICAN DEPOSITARY RECEIPTS
ISSUED THEREUNDER
________________________________
AMENDMENT NO. 1
TO
DEPOSIT AGREEMENT
DATED AS OF JANUARY 6, 2000
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
AMENDMENT NO. 1 TO DEPOSIT AGREEMENT
AMENDMENT NO. 1 TO DEPOSIT AGREEMENT, dated as of January 6, 2000 (the
"Amendment"), by and among Satyam Infoway Limited, a limited liability company
organized under the laws of the Republic of India (the "Company"), Citibank,
N.A., a national banking association organized under the laws of the United
States of America and acting as depositary, and any successor depositary
hereunder (the "Depositary"), and all Holders and Beneficial Owners of American
Depositary Shares evidenced by American Depositary Receipts issued under the
Deposit Agreement.
W I T N E S S E T H T H A T
- - - - - - - - - - - - - -
WHEREAS, the parties hereto entered into that certain Deposit Agreement,
dated as of October 18, 1999 (the "Deposit Agreement"), for the creation of
American Depositary Receipts ("ADRs") evidencing American Depositary Shares
("ADSs") representing the Shares (as defined in the Deposit Agreement) so
deposited and for the execution and delivery of such ADRs evidencing such ADSs;
WHEREAS, the Company has instructed the Depositary to change the ratio of
Shares (as defined in the Deposit Agreement) to ADSs from (i) one (1) Share to
one (1) ADS to (ii) one fourth (1/4) of a Share to one (1) ADS, and desires to
amend the Deposit Agreement to reflect such change; and,
WHEREAS, pursuant to Section 6.1 of the Deposit Agreement, the Company and
the Depositary deem it necessary and desirable to amend the Deposit Agreement
and the form of ADR annexed thereto as Exhibit A for the purposes set forth
herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Depositary
hereby agree to amend the Deposit Agreement as follows:
ARTICLE I
DEFINITIONS
-----------
SECTION 1.01. DEFINITIONS. Unless otherwise defined in this Amendment,
-----------
all capitalized terms used, but not otherwise defined, herein shall have the
meaning given to such terms in the Deposit Agreement.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
ARTICLE II
AMENDMENTS TO DEPOSIT AGREEMENT
-------------------------------
SECTION 2.01. DEPOSIT AGREEMENT. All references in the Deposit Agreement
-----------------
to the term "Deposit Agreement" shall, as of the Effective Date (as herein
defined), refer to the Deposit Agreement, dated as of October 18, 1999, as
amended by this Amendment.
SECTION 2.02. CHANGE OF RATIO. All references made in the Deposit
---------------
Agreement to each American Depositary Share representing one (1) Share shall, as
of the Effective Date, refer to each American Depositary Share representing one
fourth (1/4) of a Share.
ARTICLE III
AMENDMENTS TO THE FORM OF ADR
-----------------------------
SECTION 3.01. CHANGE OF RATIO. All references to each American Depositary
---------------
Share representing one (1) Share made in the ADRs issued and outstanding as of
the Effective Date shall refer to each American Depositary Share representing
one fourth (1/4) of a Share.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
------------------------------
Section 4.01. REPRESENTATIONS AND WARRANTIES. The Company represents and
------------------------------
warrants to, and agrees with, the Depositary and the Holders, that:
(a) This Amendment, when executed and delivered by the Company, and the
Deposit Agreement and all other documentation executed and delivered by the
Company in connection therewith, will be and have been, respectively, duly
and validly authorized, executed and delivered by the Company, and
constitute the legal, valid and binding obligations of the Company,
enforceable against the Company in accordance with their respective terms,
subject to bankruptcy, insolvency, fraudulent transfer, moratorium and
similar laws of general applicability relating to or affecting creditors'
rights and to general equity principles; and
(b) In order to ensure the legality, validity, enforceability or
admissibility into evidence of this Amendment or the Deposit Agreement as
amended hereby, and any other document furnished hereunder or thereunder in
the Republic of India, neither of such agreements need to be filed or
recorded with any court or other authority in the Republic of India, nor
does any stamp or similar tax need to be paid in the Republic of India on
or in respect of such agreements; and
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
(c) All of the information provided to the Depositary by the Company in
connection with this Amendment is true, accurate and correct.
ARTICLE V
MISCELLANEOUS
-------------
SECTION 5.01. EFFECTIVE DATE. This Amendment is dated as of the date set
--------------
forth above and shall be effective as of such date (the "Effective Date").
SECTION 5.02. NEW ADRS. From and after the Effective Date, the
--------
Depositary shall arrange to have new ADRs printed or amended that reflect the
changes to the form of ADR effected by this Amendment. All ADRs issued
hereunder after the Effective Date, once such new ADRs are available, whether
upon the deposit of Shares or other Deposited Securities or upon the transfer,
combination or split-up of existing ADRs, shall be substantially in the form of
the specimen ADR attached as Exhibit A hereto. However, ADRs issued prior or
---------
subsequent to the date hereof, which do not reflect the changes to the form of
ADR effected hereby, do not need to be called in for exchange and may remain
outstanding until such time as the Holders thereof choose to surrender them for
any reason under the Deposit Agreement. The Depositary is authorized and
directed to take any and all actions deemed necessary to effect the foregoing.
SECTION 5.03. NOTICE OF AMENDMENT TO HOLDERS. The Depositary is hereby
------------------------------
directed to send notices informing the Holders of (i) the terms of this
Amendment, (ii) the Effective Date of this Amendment and (iii) that the Holders
shall be given the opportunity, but that it is unnecessary, to surrender
outstanding Receipts.
SECTION 5.04. INDEMNIFICATION. The Company agrees to indemnify and hold
---------------
harmless the Depositary (and any and all of its directors, employees and
officers) for any and all liability it or they may incur as a result of the
terms of this Amendment and the transactions contemplated herein, except to the
extent such liability is due to the negligence or bad faith of any of them.
SECTION 5.05. RATIFICATION. Except as expressly amended hereby, the
------------
terms, covenants and conditions of the Deposit Agreement, as originally
executed, shall remain in full force and effect.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
IN WITNESS WHEREOF, the Company and the Depositary have caused this
Amendment to be executed by representatives thereunto duly authorized as of the
date set forth above.
SATYAM INFOWAY LIMITED, as Company
By: /s/ R. Ramaraj
--------------
Name: R. Ramaraj
Title: Chief Executive Officer
CITIBANK, N.A., as Depositary
By: /s/ S.T. Yang
-------------
Name: S.T. Yang
Title: Vice President
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
FORM OF OPINION OF COUNSEL TO ISSUER TO BE RECEIVED UPON
AMENDMENT OF DEPOSIT AGREEMENT
The Issuer's local counsel opinion should address the following:
AUTHORITY AND GOOD STANDING
---------------------------
1. The Issuer has been duly incorporated and is a validly existing
corporation in good standing under the laws of the jurisdiction of its
incorporation with power and authority to enter into the Deposit Agreement,
dated as of October 18, 1999 and the Amendment No. 1 to the Deposit
Agreement (as so amended, the "Deposit Agreement") and to file the
Registration Statements on Form F-6 and Post-Effective Amendments to
Registration Statements on Form F-6 ( as so amended the "Registration
Statements") and Forms 20-F with the SEC and to engage in the transactions
contemplated therein. The execution of the Deposit Agreement and the
signing and filing of the Registration Statements with the SEC has been
duly authorized by all requisite corporate action by and/or on behalf of
the Issuer.
DUE EXECUTION AND LEGAL OBLIGATION
----------------------------------
2. The Deposit Agreement has been duly executed and delivered for and
on behalf of the Issuer by an officer of the Issuer duly elected or
appointed and thereunto duly authorized and constitutes the legal, valid
and binding agreement of the Issuer, enforceable against the Issuer in
accordance with its terms in the Republic of India except as may be limited
by bankruptcy, insolvency, moratorium or similar laws affecting creditors'
rights generally and general principles of equity. The Registration
Statements have been signed for and on behalf of the Issuer by officers
thereunto duly authorized and by directors duly elected or appointed.
CONSENTS, PERMITS, FILINGS
--------------------------
3. All requisite permissions, consents, approvals, authorizations and
orders (if any) have been obtained and all requisite filings (if any) have
been made in the Republic of India to enable the Issuer to enter into the
Deposit Agreement, to file the Registration Statements with the SEC and to
engage in the transactions contemplated therein.
LOCAL FORMALITIES
-----------------
4. Neither the Deposit Agreement, nor the Registration Statements nor
any other document or instrument delivered by the Issuer to the Depositary
needs to be recorded or filed with any agency or authority under Indian law
nor does any stamp or
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
similar tax need to be paid under Indian law to ensure the legality,
validity or admissibility into evidence of the Deposit Agreement.
NO CONFLICT
-----------
5. None of the terms of the Deposit Agreement violate or conflict
with, nor does the execution and delivery of the Deposit Agreement, the
filing of the Registration Statement or the consummation of the
transactions contemplated therein violate, or conflict with, the
Certificate of Incorporation of the Issuer, the Bylaws of the Issuer, or
any agreement to which the Issuer is a party or by which the Issuer is
bound.
NO VIOLATION OF LAW
-------------------
6. None of the terms nor the transactions contemplated by the Deposit
Agreement violate any law, rule, regulation, order, judgment,
administrative decree or regulation of the Republic of India or to which
the Issuer is subject.
ENFORCEABILITY
--------------
7. The Deposit Agreement is a valid, binding and enforceable contract
under the laws of the Republic of India. The Depositary will not (absent
negligence, bad faith or breach of contract and general principles of
agency) be subject to any potential liability under Indian law for taking
the actions contemplated in the Deposit Agreement.
- --------------------------------------------------------------------------------
7
<PAGE>
EXHIBIT 23.1
[LATHAM & WATKINS LETTERHEAD]
February 3, 2000
Re: Satyam Infoway Limited, Registration Statement on Form F-1 (the
"Registration Statement")
We hereby consent to the reference to our firm under the caption "Legal
Matters" in the prospectus included as a part of the Registration Statement and
any amendments thereto.
/s/ LATHAM & WATKINS
LATHAM & WATKINS
Attorneys at Law
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Satyam Infoway Limited:
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG
Chennai, India
February 3, 2000
