<PAGE>
United States
Securities and Exchange Commission
Washington, DC 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934
For the quarter ended December 31, 1999
Commission File Number 000-27663
SATYAM INFOWAY LIMITED
(Exact name of registrant as specified in its charter)
Not Applicable
(Translation of registrant's name into English)
Republic of India
(Jurisdiction of incorporation or organization)
Maanasarovar Towers
271-A, Anna Salai, Teynampet, Chennai 600 018, India
(91) 44-435-3221
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F. Form 20F X Form 40F
------- --------
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes No X
------- --------
If "Yes" is marked, indicate below the file number assigned to registrant in
connection with Rule 12g3-2(b). Not applicable.
<PAGE>
Currency of Presentation and Certain Defined Terms
Unless the context otherwise requires, references herein to "we," "us," the
"company" or "Satyam Infoway" are to Satyam Infoway Limited, a limited liability
company organized under the laws of the Republic of India. References to "U.S."
or the "United States" are to the United States of America, its territories and
its possessions. References to "India" are to the Republic of India. We are a
majority-owned subsidiary of Satyam Computer Services Limited, a leading Indian
information technology services company which is traded on the principal Indian
stock exchanges ("Satyam Computer Services"). "Satyam" is a trademark owned by
Satyam Computer Services, which has licensed the use of the "Satyam" trademark
to us subject to specified conditions. "Satyam Online," "Satyam:Net" and
"satyamonline.com" are trademarks used by us for which we have registration
applications pending in India. Each trademark, trade name or service mark of
any other company appearing in this Report on Form 6-K ("Quarterly Report")
belongs to its holder.
In this Quarterly Report, all references to "Indian rupees," "rupees" and
"Rs." are to the legal currency of India and all references to "U.S. dollars,"
"dollars" and "$" are to the legal currency of the United States. References to
a particular "fiscal" year are to our fiscal year ended March 31 of that year.
For your convenience, this Quarterly Report contains translations of some
Indian rupee amounts into U.S. dollars which should not be construed as a
representation that those Indian rupee or U.S. dollar amounts could have been,
or could be, converted into U.S. dollars or Indian rupees, as the case may be,
at any particular rate, the rate stated below, or at all. Except as otherwise
stated in this Quarterly Report, all translations from Indian rupees to U.S.
dollars contained in this Quarterly Report have been based on the noon buying
rate in the City of New York on December 31, 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 December 31, 1999 was Rs.43.51 per $1.00.
Our financial statements are prepared in Indian rupees and presented in
accordance with United States generally accepted accounting principles ("U.S.
GAAP"). Solely for your convenience, our financial statements have been
translated into U.S. dollars. In this Quarterly Report, any discrepancies in
any table between totals and the sums of the amounts listed are due to rounding.
Information contained in our websites, including our principal website,
satyamonline.com, is not part of this Quarterly Report.
Forward-looking Statements May Prove Inaccurate
IN ADDITION TO HISTORICAL INFORMATION, THIS QUARTERLY REPORT CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE REFLECTED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT
MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
IN THE SECTION ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS QUARTERLY REPORT.
YOU ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH REFLECT MANAGEMENT'S ANALYSIS ONLY AS OF THE DATE HEREOF. IN
ADDITION, YOU SHOULD CAREFULLY REVIEW THE OTHER INFORMATION IN THIS QUARTERLY
REPORT AND IN OUR PERIODIC REPORTS AND OTHER DOCUMENTS FILED WITH THE UNITED
STATES SECURITIES AND EXCHANGE COMMISSION (THE "SEC") FROM TIME TO TIME.
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
SATYAM INFOWAY LIMITED
CONSOLIDATED BALANCE SHEETS
(Expressed in Indian Rupees, except share data and as otherwise stated)
<TABLE>
<CAPTION>
ASSETS
-----------------------------------------------------------------------
December 31, 1999 December 31, 1999 March 31, 1999 March 31, 1999
-----------------------------------------------------------------------
Rs. US $ Rs. US $
-- ---- --- ---
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents 1,717,009,677 39,462,415 125,547,453 2,885,485
Accounts receivable, net of allowances
of Rs.501,839 and Rs 2,420 as of March
31, 1999 and December 31, 1999
respectively 151,585,615 3,483,926 45,087,639 1,036,259
Due from officers and employees 3,419,672 78,595 573,143 13,173
Inventories 14,290,670 328,446 6,758,190 155,325
Investments 13,850,375 318,326 - -
Deferred tax assets 1,460,415 33,565 - -
Other current assets 204,174,566 4,692,589 73,688,213 1,693,593
-----------------------------------------------------------------------
Total current assets 2,105,790,990 48,397,862 251,654,638 5,783,835
Plant and equipment--net 489,730,194 11,255,578 162,833,876 3,742,447
Intangible asset 1,718,013,661 39,485,491 8,916,052 204,920
Deferred taxes 333,988 7,676
Other assets 65,689,838 1,509,764 31,483,855 723,600
-----------------------------------------------------------------------
Total assets 4,379,558,671 100,656,371 454,888,421 10,454,802
-----------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt 71,666,666 1,647,131 144,750,000 3,326,821
Current installments of capital lease
obligations 1,980,863 45,527 596,740 13,715
Trade accounts payable 114,027,617 2,620,722 17,275,480 397,046
Due to parent company 11,371,201 261,347 3,980,370 91,482
Accrued expenses 52,298,381 1,201,985 19,028,671 437,340
Deferred revenue 121,402,400 2,790,218 71,506,440 1,643,448
Taxes payable 5,708,350 131,196 -
Deferred tax liability 4,347,397 99,917 -
Advances from customers 12,748,355 292,998 11,747,346 269,992
Other current liabilities 5,987,173 137,605 4,476,322 102,880
-----------------------------------------------------------------------
Total current liabilities 401,538,403 9,228,646 273,361,369 6,282,724
Non-current liabilities:
Long-term debt, excluding current
installments 29,934,395 687,989 113,750,000 2,614,342
Capital lease obligations, excluding
current installments 3,332,986 76,603 159,244 3,660
Other liabilities 10,300,000 236,727 - -
-----------------------------------------------------------------------
Total liabilities 445,105,784 10,229,965 387,270,613 8,900,726
-----------------------------------------------------------------------
Minority interest 9,202,201 211,496
Stockholders' equity
Common stock, Rs 10 par value;
25,000,000 and 25,000,000 Equity
Shares authorized as of March
31, 1999 and December 31, 1999; issued
and outstanding Equity Shares
15,750,000 and 21,782,250 as of
March 31, 1999 and December 31, 1999 217,822,500 5,006,263 157,500,000 3,619,858
Additional paid-in capital 4,296,361,131 98,744,223 226,636,200 5,208,830
Accumulated deficit during development
stage - - - -
Deferred Compensation - Employee Stock
offer Plan (72,920,606) (1,675,950) (1,581,249) (36,342)
Accumulated deficit (516,897,057) (11,879,960) (314,937,143) (7,238,270)
Accumulated other comprehensive income 884,718 20,334 - -
------------------------------------------------------------------------
Total stockholders' equity 3,925,250,686 90,214,910 67,617,808 1,554,076
------------------------------------------------------------------------
------------------------------------------------------------------------
Total liabilities and stockholders'
equity 4,379,558,671 100,656,371 454,888,421 10,454,802
------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements
<PAGE>
SATYAM INFOWAY LIMITED
CONSOLIDATED STATEMENTS OF INCOME
(Expressed in Indian Rupees, except share data and as otherwise stated)
<TABLE>
<CAPTION>
Three months ended December 31, Nine months ended December 31,
----------------------------------------------------------------------------------------
1999 1999 1998 1999 1999 1998
Rs. US $ Rs. Rs. US $ Rs.
------------ ----------- ------------ ------------- ----------- -------------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues:.............................. 184,682,108 4,244,590 22,013,765 392,909,169 9,030,319 57,372,490
Cost of revenues....................... (77,685,221) (1,785,457) (18,152,244) (184,795,363) (4,247,193) (31,549,258)
----------------------------------------------------------------------------------------
Gross profit/(loss).................... 106,996,887 2,459,133 3,861,521 208,113,806 4,783,126 25,823,232
----------------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative
expenses.............................. 171,158,559 3,933,775 52,473,324 380,365,208 8,742,018 133,653,386
Amortization of goodwill............... 28,998,120 666,470 - 28,998,120 666,470 -
Amortization of deferred stock
compensation expense.................. 6,162,079 141,624 - 6,644,118 152,703 -
----------------------------------------------------------------------------------------
Total operating expenses............... 206,318,758 4,741,869 52,473,324 416,007,446 9,561,191 133,653,386
----------------------------------------------------------------------------------------
Operating Profit / (loss).............. (99,321,871) (2,282,736) (48,611,803) (207,893,640) (4,778,065) (107,830,154)
Other (expense)/ income, net........... 27,589,206 634,089 (7,537,235) 7,501,249 172,403 (17,602,191)
----------------------------------------------------------------------------------------
Profit / (Loss) before taxes........... (71,732,665) (1,648,647) (56,149,038) (200,392,391) (4,605,662) (125,432,345)
Income taxes........................... (716,599) (16,470) - (716,599) (16,470) -
Minority Interest...................... (850,924) (19,557) - (850,924) (19,557) -
----------------------------------------------------------------------------------------
Net loss............................... (73,300,188) (1,684,674) (56,149,038) (201,959,914) (4,641,689) (125,432,345)
========================================================================================
Loss per Equity Share.................. (3.55) (0.08) (4.65) (11.61) (0.27) (12.45)
============ ========== =========== ============ ========== ============
Weighted Equity Shares used in
computing loss per equity share....... 20,643,962 20,643,962 12,065,427 17,401,245 17,401,245 10,074,768
</TABLE>
<TABLE>
<CAPTION>
Year ended March 31,
---------------------------
1999 1999
Rs. US $
------------- -----------
---------------------------
<S>..................................... <C> <C>
Revenues:.............................. 103,343,832 2,375,174
Cost of revenues....................... (63,651,265) (1,462,911)
---------------------------
Gross profit/(loss).................... 39,692,567 912,263
---------------------------
Operating expenses:
Selling, general and administrative
expenses.............................. 200,212,761 4,601,534
Amortisation of goodwill
Amortisation of deferred stock
compensation expense.................. 68,751 1,580
---------------------------
Total operating expenses............... 200,281,512 4,603,114
---------------------------
Operating Profit / (loss).............. (160,588,945) (3,690,851)
Other (expense)/ income, net........... (26,786,720) (615,645)
---------------------------
Profit / (Loss) before taxes........... (187,375,665) (4,306,496)
Income taxes........................... - -
Minority Interest...................... - -
Dividend paid.......................... - -
---------------------------
Net loss............................... (187,375,665) (4,306,496)
===========================
Net loss............................... (17.31) (0.40)
============ ==========
Weighted Equity Shares used in
computing loss per equity share....... 10,824,826 10,824,826
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SATYAM INFOWAY LIMITED
STATEMENTS OF CONSOLIDATED STOCKHOLDERS EQUITY
(Expressed in Indian Rupees, except share data and as otherwise stated)
<TABLE>
<CAPTION>
Deferred
Other Compensation-
Common Stock Accumulated Compre- Employee
--------------------------- Additional Paid deficit during hensive Stock offer
Shares Par Value In Capital development stage Income plan
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of March 31, 1996 230 2,300 - (634,213) -
Net loss - - - (26,336,901) -
--------------------------------------------------------------------------------
Balance as of March 31, 1997 230 2,300 - (26,971,114) -
Common stock issued to the parent Company 7,500,000 75,000,000 - - -
Net loss - - - (100,590,364) -
--------------------------------------------------------------------------------
Balance as of March 31, 1998 7,500,230 75,002,300 - (127,561,478) -
Deficit transfer - - - 127,561,478 -
Common stock issued to the parent Company 4,879,770 48,797,700 44,986,200 - -
Other issues of common stock 3,370,000 33,700,000 180,000,000 - -
Net loss - - - - -
Compensation related to stock option grants - - 1,650,000 - (1,650,000)
Amortisation of compensation related to stoc k
option grants - - - - 68,751
--------------------------------------------------------------------------------
Balance as of March 31, 1999 15,750,000 157,500,000 226,636,200 - (1,581,249)
Deficit transfer - - - -
Common stock issued to the parent Company 150,000 1,500,000 76,620,000
Other issues of common stock, net 5,882,250 58,822,500 3,915,121,456 - -
Net loss - - - - -
Compensation related to stock option grants - - 77,983,475 - (77,983,475)
Amortisation of compensation related to stoc k
option grants - - - - 6,644,118
Other comprehensive income 884,718
--------------------------------------------------------------------------------
Balance as of December 31, 1999 (unaudited) 21,782,250 217,822,500 4,296,361,131 - 884,718 (72,920,606)
Balance as of March 31, 1999 (in US$) 15,750,000 3,619,858 5,208,830 - - (36,342)
Balance as of December 31, 1999 (in US$)
(unaudited) 21,782,250 5,006,263 98,744,223 - 20,334 (1,675,950)
</TABLE>
<TABLE>
<CAPTION>
Total
Accumulated Stockholders'
deficit Equity
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance as of March 31, 1996 - (631,913)
Net loss - (26,336,901)
---------------------------------------------------------
Balance as of March 31, 1997 - (26,968,814)
Common stock issued to the parent Company - 75,000,000
Net loss - (100,590,364)
---------------------------------------------------------
Balance as of March 31, 1998 - (52,559,178)
Deficit transfer (127,561,478) -
Common stock issued to the parent Company - 93,783,900
Other issues of common stock - 213,700,000
Net loss (187,375,665) (187,375,665)
Compensation related to stock option grants - -
Amortisation of compensation related to stock
option grants - 68,751
---------------------------------------------------------
Balance as of March 31, 1999 (314,937,143) 67,617,808
Deficit transfer - -
Common stock issued to the parent Company - 78,120,000
Common stock issued during the period - 3,973,943,956
Net loss (201,959,914) (201,959,914)
Compensation related to stock option grants - -
Amortisation of compensation related to stock
option grants - 6,644,118
Other comprehensive income - 884,718
---------------------------------------------------------
Balance as of December 31, 1999 (unaudited) (516,897,057) 3,925,250,686
Balance as of March 31, 1999 (in US$) (7,238,270) 1,554,075
Balance as of December 31, 1999 (in US$)
(unaudited) (11,879,960) 90,214,909
</TABLE>
<PAGE>
SATYAM INFOWAY LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in Indian Rupees, except share data and as otherwise stated)
<TABLE>
<CAPTION>
Nine months ended December 31, Year ended March 31,
-------------------------------------------------------------------------
1999 1999 1998 1999 1999
-------------------------------------------------------------------------
Rs. US$ Rs. Rs. US $
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net loss (201,959,914) (4,641,690) (125,432,345) (187,375,665) (4,306,496)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation of plant and equipment 77,381,515 1,778,477 26,726,301 46,714,402 1,073,647
Amortization of technical knowhow fees 1,791,473 41,174 1,784,589 2,379,450 54,687
Amortization of deferred stock compensation expense 6,644,118 152,703 - 68,751 1,580
Amortization of goodwill 28,998,120 666,470 - - -
Profit on sale of investments (99,150) (2,279) - - -
Deferred income tax 463,998 10,664 - - -
Loss on sale of plant and equipment - - 37,627 37,627 865
Minority interest 850,924 19,557
Changes in assets and liabilities:
Accounts receivable (net) (103,614,831) (2,381,403) (18,252,158) (43,142,156) (991,546)
Inventories (7,532,480) (173,121) (4,411,740) (6,758,190) (155,325)
Other current assets (126,470,405) (2,906,697) (34,027,830) (62,710,053) (1,441,279)
Other assets (33,239,653) (763,954) (16,172,432) (21,218,607) (487,672)
Due to parent company 7,390,831 169,865 1,192,057 1,387,583 31,891
Accrued expenses 33,269,710 764,646 8,152,675 15,343,146 352,635
Deferred revenue 48,475,140 1,114,115 30,851,209 71,506,440 1,643,448
Trade accounts payable 96,752,137 2,223,676 2,292,255 1,804,178 41,466
Deferred tax liability - - - - -
Taxes payable 252,601 5,806 - - -
Advances from customers (376,700) (8,658) 3,187,960 10,106,054 232,270
Other current liablities 1,120,671 25,757 199,306 1,047,118 24,066
Dues from officers and employees (4,570,841) (105,053) (499,054) (577,841) (13,281)
Other liabilities 10,300,000 236,727 - - -
----------------------------------------------------------------------------
Net cash used in operating activities (164,172,736) (3,773,218) (124,371,580) (171,387,763) (3,939,044)
----------------------------------------------------------------------------
Cash flows from investing activities:
Expenditure on plant and equipment (403,743,294) (9,279,322) (79,945,949) (146,134,547) (3,358,643)
Expenditure on technical know how - - - - -
Purchase consideration for acquisition, net of cash (1,738,824,930) (39,963,800) - - -
acquired
Proceeds from sale of plant and equipment - - 135,000 135,000 3,103
Proceeds from sale of investments 576,800 13,257 - - -
----------------------------------------------------------------------------
Net cash used in investing activities (2,141,991,424) (49,229,865) (79,810,949) (145,999,547) (3,355,540)
----------------------------------------------------------------------------
Cash flows from financing activities:
Principal payments of long-term debt (157,833,333) (3,627,519) - - -
Proceeds from issuance of long-term debt 25,718 591 116,500,000 136,000,000 3,137,210
Principal payments under capital lease obligations 3,370,043 77,454 (1,446,184) (12,044,704) (276,826)
Net proceeds from issuance of common stock 4,052,063,956 93,129,487 97,483,900 307,483,900 7,066,971
Due to parent company - - - 1,083,900 24,912
----------------------------------------------------------------------------
Net cash provided by financing activities 3,897,626,384 89,580,013 212,537,716 433,023,096 9,952,267
----------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,591,462,224 36,576,930 8,355,187 115,635,786 2,657,683
Cash and cash equivalents at the beginning of the year 125,547,453 2,885,485 9,911,667 9,911,667 227,802
----------------------------------------------------------------------------
Cash and cash equivalents at the end of the year 1,717,009,677 39,462,415 18,266,854 125,547,453 2,885,485
----------------------------------------------------------------------------
Supplementary Information
Cash paid towards interest 26,083,111 599,474 10,064,956 27,754,615 637,890
Supplemental schedule of non cash financing activity
Additional common stock issued upon conversion of
amounts payable to parent company - - - 1,083,900 24,912
Capital leases 5,699,159 130,985 161,443 161,443 3,710
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Indian Rupees, except share data and as otherwise stated)
(Information as of December 31, 1999 and for the nine months ended December 31,
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 34 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 December 31, 1999, Satyam
Computer Services held approximately 57.5% of the voting control of the
Company represented by 12,529,800 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 nine months ended December 31, 1999 have been translated into
United States dollars at the noon buying rate in New York City on December
31, 1999 for cable transfers in Indian rupees, as certified for customs
purposes by the Federal Reserve Bank of New York of US$1 = Rs.43.51. 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 December 31, 1999 or at any other date.
The financial statements of the Company have been consolidated with
the accounts of IndiaWorld Communications from December 1, 1999 (see Note
22). All significant inter-company balances have been eliminated.
(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.
<PAGE>
1. Summary of Significant Accounting Policies, (continued)
------------------------------------------
(e) Revenue Recognition
-------------------
Revenues from corporate network services which include providing e-
commerce solutions, electronic data interchange and other network based
services are recognized upon actual usage of such services by customers and
is based on either the time for which the network is used or the volume of
data transferred or both. The Company enters into contracts with its
corporate customers for the use of its networks on both a time and usage
basis. In accordance with the terms of these contracts, customers are
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.
<PAGE>
(g) Plant and Equipment
-------------------
Plant and equipment are stated at cost. Plant and equipment under
capital leases are stated at the present value of minimum lease payments.
The Company computes depreciation for all plant and equipment using the
straight-line method. Leasehold improvements are amortized on a straight-
line basis over the shorter of the primary lease period or estimated useful
life of the asset. The estimated useful lives of assets are as follows:
Plant and machinery......................... 5 years
Computer equipment.......................... 2 years
Office equipment............................ 5 years
Furniture and fixtures...................... 5 years
Vehicles.................................... 5 years
System software............................. 3 years
The Company purchases certain application software for internal use.
It is estimated that such software has a relatively short useful life,
usually less than one year. The Company, therefore, charges to income the
cost of acquiring such software, entirely at the time of acquisition.
Deposits paid towards the acquisition of plant and equipment outstanding at
each balance sheet date and the cost of plant and equipment not put to use
before such date are disclosed under Construction-in-progress.
(h) Intangible Asset
----------------
The Company entered into a five year agreement effective September
1997 with Sterling Commerce International Inc ("Sterling") whereby Sterling
agreed to grant the Company certain rights to market, provide, install,
facilitate, maintain and support Sterling's proprietary electronic commerce
technology. In consideration for granting this proprietary technology, the
Company paid Sterling a licensing fee of $300,000, which was capitalized.
The Company currently amortizes this fee over five years, this being the
initial period over which it is entitled to use the electronic commerce
technology. The amortization related to the license is included under
"Depreciation and amortization" and is classified in the Income Statement
under the caption "Selling, general and administrative expenses."
(i) Earnings Per Share
------------------
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings Per Share. In accordance
with SFAS No. 128, basic earnings per share is computed using the weighted
average number of common shares outstanding during the period. Diluted
earnings per share is computed using the weighted average number of common
and dilutive common equivalent shares outstanding during the period, using
the treasury stock method for options and warrants, except where the
results would be anti-dilutive.
<PAGE>
(j) Income Taxes
------------
Income taxes are accounted for using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. The measurement of deferred tax assets
is reduced, if necessary, by a valuation allowance for any tax benefits of
which future realization is uncertain.
(k) Retirement Benefits to Employees
--------------------------------
Provident fund: In accordance with Indian law, all employees receive
benefits from a provident fund, which is a defined contribution plan. Both
the employee and employer each make monthly contributions to the plan equal
to 12% of the covered employee's basic salary. The Company has no further
obligations under the plan beyond its monthly contributions.
Gratuity: In addition to the above benefits, the Company provides for
gratuity, a defined benefit retirement plan (the "Gratuity Plan") covering
all employees. The Gratuity Plan commenced on April 1, 1997. The plan
provides a lump sum payment to vested employees at retirement or
termination of employment in an amount based on the respective employee's
salary and the years of employment with the 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.
(m) Interim information (unaudited)
-------------------------------
Interim information presented in the consolidated financial statements
has been 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 the financial position, result of
operations, and cash flows for the periods shown, is in accordance with the
generally accepted accounting principles.
<PAGE>
2. Cash and Cash Equivalents
The cost and fair values for cash and cash equivalents as of March 31,
1999 and December 31, 1999, are set out below.
<TABLE>
<CAPTION>
March 31, March 31, December 31, December 31,
1999 1999 1999 1999
---------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Rs. US$ Rs. US$
(unaudited) (unaudited)
Cost and fair values
Cash and cash equivalents 125,547,453 2,885,485 1,717,009,677 39,462,415
</TABLE>
Cash and cash equivalents include deposits of Rs.7,261,200
(US$166,886) and Rs.7,642,877 (US$175,658) as of March 31, 1999 and
December 31, 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 and December 31, 1999 also include deposits of
Rs.115,000,000 (US$2,643,071) and Rs. 1,665,680,000 (US$ 38,282,694)
placed with banks as short-term deposits.
3. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, 1999 March 31, December 31, December 31,
1999 1999 1999 1999
------------------- -------------- --------------------- ----------------------
Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
CD-ROMs 120,192 2,762 826,373 18,993
Communication hardware 3,288,496 75,580 9,719,679 223,390
Application software 3,349,502 76,983 3,765,897 86,552
Others -- -- 382,811 8,798
6,758,190 155,325 14,694,760 337,733
------------------------------------------------------------------------------------
Valuation allowance -- -- 404,090 9,288
------------------------------------------------------------------------------------
6,758,190 155,325 14,290,670 328,446
====================================================================================
</TABLE>
4. Other Current Assets
--------------------
Other current assets consist of the following:
<TABLE>
<CAPTION>
March 31, March 31, December 31, December 31,
1999 1999 1999 1999
---------------- ---------------- -------------------- --------------------
Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Withholding taxes - - 1,298,291 29,839
Advance for expenses 1,617,959 37,186 10,774,657 247,636
Prepaid expenses 70,329,478 1,616,398 189,012,138 4,344,108
Prepaid telephone rentals 296,250 6,809 321,750 7,395
Advance tax payments 959,516 22,053 2,137,112 49,118
Due from associate company 190,104 4,369 276,864 6,363
Other advances 294,906 6,778 353,754 8,130
--------------------------------------------------------------------------
73,688,213 1,693,593 204,174,566 4,692,589
==========================================================================
</TABLE>
<PAGE>
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, December 31, December 31,
1999 1999 1999 1999
----------------- ----------------- -------------------- --------------------
Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Leasehold improvements 6,164,699 141,685 15,183,131 348,957
Plant and machinery 101,558,254 2,334,136 326,890,885 7,513,006
Computer equipment 72,577,533 1,668,066 99,016,983 2,275,729
Office equipment 1,727,654 39,707 3,194,215 73,413
Furniture and fixtures 7,665,644 176,181 12,038,047 276,673
Vehicles 161,443 3,710 9,205,364 211,569
System software 20,022,142 460,173 26,388,590 606,495
Construction-in-progress 18,977,088 436,155 145,156,884 3,336,173
-------------------------------------------------------------------------------------
228,854,457 5,259,813 637,074,099 14,642,016
Accumulated depreciation (66,020,581) (1,517,366) (147,343,905) (3,386,438)
-------------------------------------------------------------------------------------
162,833,876 3,742,447 489,730,194 11,255,578
=====================================================================================
</TABLE>
Depreciation expense amounted to Rs.46,714,402 (US$1,073,648) and
Rs.77,381,515 (US$1,778,477) for fiscal years 1999 and for the nine months
ended December 31, 1999, respectively.
6. Technical know-how fees as of March 31, 1999 and December 31,1999, net of
accumulated amortization of Rs.2,981,198 (US$68,518), and Rs.4,772,671
(US$109,691) respectively amounted to Rs.8,916,052 (US$204,920) and
Rs.7,124,579 (US$163,746) respectively.
<PAGE>
7. Leases
------
The Company is obligated under capital leases that expire in fiscal
1999 through 2002 for certain items of computers and vehicles. The gross
amount and related accumulated amortization recorded under capital leases
were as follows:
<TABLE>
<CAPTION>
March 31, March 31, December 31, December 31,
1999 1999 1999 1999
------------------- ----------------- ------------------ -------------------
Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Computer equipment 14,156,489 325,362 1,649,789 37,917
Vehicles 161,443 3,710 5,860,602 134,696
------------------- ----------------- ------------------ -------------------
Total 14,317,932 329,072 7,510,391 172,613
====================================================================================
Accumulated depreciation (10,628,548) (244,278) (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 December 31, 1999 (unaudited)
are:
<TABLE>
<CAPTION>
March 31, December 31, 1999
-------------------- -------------------------
Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
2000 701,804 16,130 2,441,264 56,108
2001 166,461 3,826 2,099,352 48,250
2002 -- -- 1,161,337 26,691
--------------------------------------------------
Total minimum lease payments 868,265 19,956 5,701,953 130,809
Less: Amount representing interest (112,281) (2,581) (388,104) (8,904)
--------------------------------------------------
Present value of net minimum capital lease payments 755,984 17,375 5,313,849 121,905
Less: Current installments of obligations under capital (596,740) (13,715) (1,980,863) (45,443)
leases
Obligations under capital leases, excluding current
--------------------------------------------------
installments 159,244 3,660 3,332,986 76,462
==================================================
</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$261,664)in fiscal
1998 and 1999, respectively.
8. Other Assets
------------
Other assets consist of the following:
<TABLE>
<CAPTION>
March 31, March 31, December 31, December 31,
1999 1999 1999 1999
----------------- --------------- --------------------- ---------------------
Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Rent and maintenance deposits 8,239,345 189,366 29,187,979 670,834
Telephone deposits 17,308,000 397,794 26,970,539 619,870
Other deposits 392,197 9,014 2,197,257 50,500
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Prepaid telephone rentals 5,307,313 121,979 5,372,751 123,483
Staff advances recoverable after
one year 237,000 5,447 1,961,312 45,077
-------------------------------------------------------------------------------------
31,483,855 723,600 65,689,838 1,509,764
=====================================================================================
</TABLE>
9. Short term borrowings
------------------------
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. During the nine months ended December 31,
1999, the Company has availed the entire amount under this facility and has
repaid the same on respective due dates. 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. As of December 31, 1999, the
Company has not utilised the cash credit facility.
10. Long-term Debt
--------------
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31,
------------------ March 31, 1999 December 31, 1999 December 31, 1999
1999 1999 1999 1999
------------------ ----------------- ------------------- ------------------
Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Unsecured debentures 122,000,000 2,803,953 -- --
Term loan from Export Import Bank of 136,500,000 3,137,210 101,666,667 2,335,120
India
------------------------------------------------------------------------------------
Total long-term debt 258,500,000 5,941,163 101,666,667 2,335,120
Less: Current installments (144,750,000) (3,326,821) (71,666,666) (1,647,131)
------------------------------------------------------------------------------------
Long-term debt, excluding current
installments 113,750,000 2,614,342 29,934,395 687,989
====================================================================================
</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 December
31, 1999, the Company has availed an amount of Rs.136,500,000
(US$3,137,210) under this facility. During the quarter ended December 31,
1999, the Company repaid an amount of Rs. 35,833,333 to Export Import Bank
of India.
Aggregate maturities of long-term debt for each of the years
subsequent to December 31, 1999 are as follows: December 31, 2000 -
Rs.71,666,666 and December 31, 2001 - Rs.29,934,395.
<PAGE>
11 Income Taxes
------------
The Company has incurred book and tax operating losses since inception
and has not provided for any deferred income tax because of the uncertainty
associated with the realization of such deferred tax assets.
The composition of the deferred tax asset is as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1999
-------------------- -------------------
Rs. US$
<S> <C> <C>
Deferred tax assets
Operating loss carry forwards 95,590,394 2,196,975
Plant and equipment and intangibles 5,807,119 133,466
-----------------------------------------
Total deferred tax assets 101,397,513 2,330,441
Less: Valuation allowance (101,397,513) (2,330,441)
-----------------------------------------
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. During the fiscal year ended March
31, 1999, the Company had issued 150,000 and 600,000 warrants to Satyam
Computer Services and 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.
<PAGE>
14. Employee Post Retirement Benefits
---------------------------------
Contribution to the gratuity plan managed by the Life Insurance
Corporation of India in fiscal 1999 was Rs.319,606 (US$7,332). No
contribution has been made for the quarter ended December 31, 1999 as the
amount had not fallen due on the Balance Sheet date.
In addition the Company contributed Rs.2,122,963 (US$48,793) and
Rs.3,946,741 (US$90,709) to the provident fund managed by Government of
India in fiscal 1999, and nine months ended December 31, 1999
respectively.
15. Other Expense
----------------
Other expense, net, consists of the following:
<TABLE>
<CAPTION>
March 31, March 31, December 31, December 31,
--------- --------- ------------ ------------
1999 1999 1999 1999
---- ---- ---- ----
Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest expense 27,754,615 637,890 26,571,487 610,698
Other finance charges -- -- 1,017,739 23,391
Interest income (609,020) (13,997) (32,625,074) (749,829)
Internet management fees -- -- (2,400,000) (55,160)
Other income (358,875) (8,248) (65,401) (1,503)
----------------------------------------------------------------------------------
26,786,720 615,645 (7,501,249) (172,403)
==================================================================================
</TABLE>
16. Commitments and Contingencies
-----------------------------
The Company had outstanding performance guarantees for various
statutory purposes totaling Rs.22,144,000 (US$508,940) and Rs.23,057,400
(US$529,933) as of March 31, 1999 and December 31, 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 December 31, 1999, the Company had contractual commitments of
Rs.154,703,518 (US$3,555,585) for capital expenditures relating to new
network infrastructure.
<PAGE>
17. Related Party Transactions
--------------------------
An analysis of transactions with Satyam Computer Services is set out
below.
<TABLE>
<CAPTION>
March March 31, December December
------ --------- -------- -----------
31, 1999 1999 31, 1999 31, 1999
-------- -------- -------- -----------
Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Balance at beginning of the year
1,508,887 34,679 3,980,370 91,482
Advances received towards working
capital 1,308,714 30,078 3,295,326 75,737
Advance received against equity
92,700,000 2,130,545 78,120,000 1,795,449
Allocation of facilities costs
636,747 14,634 4,043,429 92,931
Expenses incurred on behalf of the
Company 809,922 18,615 52,076 1,197
Purchases from Satyam Computer
Services 800,000 18,387 -- --
Allotment of equity (93,783,900) (2,155,456) (78,120,000) (1,795,449)
Interest income received -- -- -- --
--------------- ------------ ------------- ------------
Balance at the end of the year 3,980,370 91,482 11,371,201 261,347
========================================================================
</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$8,963) and Rs.9,039,000 (US$207,745) during the year March 31,
1999 and nine months ended December 31, 1999 respectively.
Particulars of significant related transactions with other affiliated
companies are set out below.
<TABLE>
<CAPTION>
March March December December 31,
-------- -------- -------- ----------
31, 1999 31, 1999 31, 1999 1999
-------- -------- -------- ----
<S> <C> <C> <C> <C>
Rs. US$ Rs. US$
(unaudited) (unaudited)
Sales to affiliates 45,000 1,034 --- ---
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Purchase of
software/cables from 800,000 18,387 -- --
affiliates
</TABLE>
No interest is charged by Satyam Computer Services on the balances
payable to them. The balances payable to Satyam Computer Services as of
March 31, 1998, 1999 and December 31, 1999 were as follows:
<TABLE>
<CAPTION>
March 31, March 31, March 31, December 31, December 31,
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 91,482 11,371,201 261,347
</TABLE>
No amounts were receivable from Satyam Computer Services as of March
31, 1998, March 31, 1999 and December 31, 1999. Included in other current
assets is an amount of Rs.190,104 (US$4,369) and Rs.276,864 (US$6,363)
receivable from affiliates as of March 31, 1999 and December 31, 1999
respectively. No other amounts were receivable from or payable to
affiliates as of March 31, 1998, 1999 and December 31, 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, 1999 and December 31, 1999, the amounts
recoverable from officers and employees were Rs.810,143 (US$18,620) and
Rs.5,380,984 (US$123,672) respectively, of which Rs.573,143 (US$13,173) and
Rs.3,419,672 (US$78,595) respectively were recoverable within one year from
those dates.
18. Segment Reporting
-----------------
In accordance with the provisions of SFAS 131, Disclosures about Segments
of an Enterprise and Related Information, the Company has determined that
it has three operating segments:
. Internet Access Services, providing Internet access services to
subscribers;
. Corporate Services, providing dial up and dedicated Internet access, e-
commerce, electronic data interchange, e-mail and other messaging
services, virtual private networks, and web based solutions to
businesses, web page hosting to individuals; and
. Online Portal Services, operating an Internet portal and offering
related content sites.
These operating segments were identified from the structure of the
Company's internal organization. Currently, the chief operating decision-
maker of the Company receives and reviews information relating to segment
revenues only. Products and services revenues are presented below.
<TABLE>
<CAPTION>
March March 31, December 31, December 31,
------- --------- ------------- -------------
31, 1999 1999 1999 1999
-------- -------- ------------- ------------
Rs. US$ Rs. US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Internet access services 13,310,800 305,925 208,914,246 4,801,523
Corporate services 89,973,032 2,067,870 174,591,768 4,012,681
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Online portal services 60,000 1,379 9,403,155 216,115
----------- --------- ----------- ----------
Revenues 103,343,832 2,375,174 392,909,169 9,030,319
-----------------------------------------------------------------------------
=============================================================================
</TABLE>
SFAS 131 also requires that an enterprise report a measure of profit or
loss and total assets for each reportable segment. Certain expenses such
as bandwidth costs (telecommunication), depreciation on plant and
machinery, etc., which form a significant component of total expenses, are
not specifically allocable to these business segments as the services are
used interchangeably between reportable segments. Management believes that
it is not practical to provide segment disclosures relating to segment
costs and expenses, and consequently segment profits or losses, since a
realistic allocation cannot be made. The fixed assets used in the
Company's business are not identifiable to any particular reportable
segment and can be used interchangeably among segments. Consequently,
management believes that it is not particle to provide segment disclosures
relating to total assets since a realistic analysis among the various
operating segments is not possible.
19. Employee Stock Offer Plan
-------------------------
In fiscal 1999, the Company established the Employee Stock Offer Plan
("ESOP") which provides for the issuance of 825,000 warrants to eligible
employees. The warrants were issued to an employee welfare trust (the
"Trust") at Rs.1 each. 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.
During fiscal 2000, 225,000 warrants were granted to associates
resulting in a deferred compensation of Rs.77,983,475.
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
<PAGE>
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
19,205,000 American Depositary Shares ("ADS"), adjusted for the 4-for-1 ADS
split effective January 2000. The Company sold these ADSs at US$4.50 per
ADS for Rs.3,750,736,500 (US$ 86,204,011) in cash. The related offering
costs of Rs.306,022,544 (US$ 7,033,384) 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 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$ 28,096,989). 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$ 11,792,691) and a second and final payment
of Rs. 3,254,300,000 (US$ 74,794,300) 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.
This transaction will be accounted for under the purchase method of
accounting. Accordingly, the financial statements of the Company have been
consolidated with the accounts of IndiaWorld as of December 1, 1999 by
virture of Satyam's ability, at its election, to effectively participate in
significant decisions that would be expected to be taken by IndiaWorld. 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 pro forma consolidated results of operations
are presented as if the acquisition was made at the beginning of the
periods presented. The pro forma consolidated results of operations
reflects the amortization of goodwill attributable to the acquisition. The
unaudited pro forma 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.
<PAGE>
<TABLE>
<CAPTION> Nine months ended December
Year ended March 31, 1999 31. 1999
Rs. US$ Rs. US$
<S> <C> <C> <C> <C>
Revenues 117,301,391 2,695,964 398,044,487 8,936,060
Net loss 1,184,357,637 27,220,355 172,857,750 14,344,033
Loss per equity share 109.41 2.51 39.63 0.91
Weighted Equity Shares used in computing loss
per Equity Share 10,824,826 10,824,826 17,401,245 17,401,245
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
You are cautioned that this discussion contains forward-looking
statements that involve risks and uncertainties. When used in this
discussion, the words "anticipate," "believe," "estimate," "intend," "will"
and "expect" and other similar expressions as they relate to us or our
business are intended to identify such forward-looking statements. We
undertake no obligation to update publicly or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise. Actual results, performances or achievements could differ
materially from those expressed or implied in such forward-looking
statements. Factors that could cause or contribute to such differences
include those described under the heading "Risk Factors" in the Prospectus
filed with the SEC and the "Risks Related to Our Business" discussed
elsewhere in this Quarterly Report. You are cautioned not to place undue
reliance on these forward-looking statements. You should read the
following discussion and analysis in conjunction with our financial
statements included herein and the notes thereto.
Overview
We were incorporated in December 1995 as an independent business unit
of Satyam Computer Services to develop and offer connectivity-based
corporate services allowing businesses in India to exchange information,
communicate and transact business electronically. Satyam Computer
Services, our parent company, is a leading Indian information technology
services company traded on the principal Indian stock exchanges.
From December 1995 through 1997, we focused on the development and
testing of our private data network. In 1997, we began forming strategic
partnerships with a number of leading technology and electronic commerce
companies, including UUNet Technologies Inc. (formerly CompuServe Network
Services), Open Market, Inc. and Sterling Commerce, Inc. in order to
broaden our product and service offerings to our corporate customers. In
March 1998, we obtained network certification for conformity with Indian
and international network operating standards from the Technical Evaluation
Committee of India. In April 1998, we began offering private network
services to businesses in India. Our initial products and services
included electronic data interchange, e-mail and other messaging services,
virtual private networks, and related customer support.
In October 1998, we agreed to sell 3,000,000 equity shares to South
Asia Regional Fund, an investment fund managed by Commonwealth Development
Corporation, for Rs.210.0 million ($4.8 million). We used the funds from
this private financing primarily to develop our consumer Internet access
business, expand our network, and develop our on-line content business.
In October 1998, we initiated our on-line content offerings with two
websites: carnaticmusic.com and indiaupdate.com. We also started
development of satyamonline.com, our on-line portal, and other related
content sites for personal finance, movies and automobiles with the goal of
offering a comprehensive suite of websites offering content specifically
tailored to Indian interests worldwide.
On November 6, 1998, the Indian government opened the Internet service
provider marketplace to private competition. Capitalizing on our existing
private data network, we launched our Internet service provider business,
Satyam Online, on November 22, 1998 and became the first private national
Internet service provider in India. We began offering Satyam Online
Internet access and related services to India's consumer market as a
complement to the network services offered to our business customers. Our
Satyam Online service was the first in India to offer ready-to-use CD-ROMs
enabling on-line registration and immediate usage.
In July 1999, we agreed to sell 481,000 equity shares to Sterling
Commerce for $5.0 million. We completed this transaction in September 1999
and used the funds for general corporate purposes, primarily the repayment
of debt.
In October 1999, we completed our initial public offering, or IPO, and
issued 19,205,000 American Depositary Shares, or (ADSs, each representing
one-fourth of one equity share, at a price of $4.50 per share. We received
approximately $79.2 million in cash, net of underwriting discounts,
commissions and other offering costs.
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 this purchase, we acquired an option
to
<PAGE>
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 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 have been
consolidated with our financial statements from and after November 29,
1999. The results of Indiaworld Communications were not material to our
results of operations for the quarter or nine months ended December 31,
1999. 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 ($320,790) and
Rs.10.4 million ($238,741) 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 ($170,995) and Rs.4.7
million ($108,334), respectively, during these periods. IndiaWorld
Communications had net income of Rs.11,256 ($259) and Rs.1.7 million
($39,815), 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 December 31, 1999, we had more than 350 corporate
customers for our private network services and more than 118,000
subscribers for our Satyam Online services. During November 1999, our
eight websites generated approximately 13.0 million page views and
IndiaWorld Communications' 13 websites generated approximately 13.0 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
the 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 ($14,139) and Rs.1,203,256
($27,655) for fiscal 1997, 1998 and 1999 and the nine months ended December
31, 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 51.5% of our
revenues in fiscal 1999 and the nine months ended December 31, 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
<PAGE>
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 44.4% of our revenues in fiscal 1999 and the nine
months ended December 31, 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, the government-
controlled provider of international telecommunications services in India,
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
<PAGE>
related to these grants in the aggregate amount of approximately Rs.80.0
million ($1.8 million) to be recognized over a three-year period in
accordance with vesting provisions .
We depreciate our tangible assets on a straight-line basis over the
useful life of assets, ranging from two to five years. 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 at least 200,000. These
estimates are based on the present business environment in India, including
current pricing, marketing and service cost conditions, all of which are
subject to change.
For the fiscal years ended March 31, 1997, 1998 and 1999 and the nine
months ended December 31, 1999, we incurred negative cash flow from
operations of approximately Rs.30.4 million, Rs.74.0 million, Rs.171.3
million ($3.9 million) and Rs.164.2 million ($3.8 million), respectively.
For the fiscal years ended March 31, 1997, 1998 and 1999 and the nine
months ended December 31, 1999, we incurred net losses of approximately
Rs.26.3 million, Rs.100.6 million, Rs.187.4 million ($4.3 million) and
Rs.202.0 million ($4.6 million), respectively. Giving pro forma effect to
our acquisition of IndiaWorld Communications as if it had occurred at the
beginning of each period, we would have incurred net losses of
approximately Rs.0.8 million (less than $0.1 million) and Rs.0.7 million
(less than $0.1 million), respectively, for the fiscal year ended March 31,
1999 and the nine months ended December 31, 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 December 31, 1999, we had an accumulated deficit of approximately
Rs.516.9 million ($11.9 million).
Results of Operations
Quarter ended December 31, 1999 compared to quarter ended December 31,
1998
Revenues. We recognized Rs.184.7 million ($4.2 million) in revenues
for the quarter ended December 31, 1999, as compared to Rs.22.0 million for
the quarter ended December 31, 1998, representing an increase of Rs.162.7
million, or 739%. This increase is primarily attributable to the
commencement of Internet access services in November 1998, which accounted
for Rs.95.0 million of revenues for the quarter ended December 31, 1999, a
Rs.52.6 million increase in revenues from corporate network services
resulting from an increase in the number of corporate customers
contributing to revenues in the amount of Rs.25.7 million, a Rs.16.9
million increase in sale of hardware and software, a Rs.10.0 million
increase in revenues from UUNet Technologies Inc. on account of
<PAGE>
increased utilization of the network by UUNet, Rs.4.1 million revenue from
India World Communication and a Rs.14.6 million increase in revenues from
new service offerings, including web-based solutions.
Cost of revenues. Cost of revenues were Rs.77.7 million ($1.8
million) or 42.0% of revenues for the quarter ended December 31, 1999,
compared to Rs.18.2 million or 82.5% of revenues for the quarter ended
December 31, 1998, representing an increase of Rs.59.5 million, or 328%.
This increase was primarily attributable to a Rs.11.8 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.32.9 million increase in leased line costs
resulting from increasing the capacity of our network backbone from 64 kbps
to 2 Mbps and a Rs.12.7 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.0.7 million.
Selling, general and administrative expenses. Selling, general and
administrative expenses were Rs.140.0 million ($3.2 million) for the
quarter ended December 31, 1999, compared to Rs.38.8 million for the
quarter ended December 31, 1998, representing an increase of Rs.101.3
million, or 261.3%. This increase was primarily attributable to a growth
in staff from 296 as of December 31, 1998 to 535 as of December 31, 1999
resulting in a Rs.15.9 million increase in indirect personnel costs, a
Rs.55.5 million increase in selling and marketing expenses resulting from
additional expenditure in connection with marketing our Satyam Online
business, a Rs.11.0 million increase in travelling expenditures and a
Rs.3.7 million increase in rent.
Depreciation and amortization. Depreciation and amortization was
Rs.31.1 million ($0.7 million) for the quarter ended December 31, 1999,
compared to Rs.13.7 million for the quarter ended December 31, 1998,
representing an increase of Rs.17.4 million, or 127%. The increase was
primarily attributable to capital expenditures associated with the
installation of six ATM switches along our network and expanding the reach
of our network from 12 POPs in December 1998 to 34 in December 1999.
Interest expense. Interest income was Rs.25.9 million ($0.6 million)
for the quarter ended December 30, 1999 as compared to an interest expense
of Rs.7.8 million for the quarter ended December 31, 1998, representing an
increase of Rs.33.6 million, or 433%. This was primarily attributable
to an amount of Rs.33.7 million interest earned on deposits placed with
banks.
Other income. Other income was Rs.1.8 million (less than $0.1
million) for the quarter ended December 31, 1999 which was primarily
attributable to income earned from service partners. Other income for the
quarter ended December 31, 1998 was Rs.0.2 million.
Net loss. Our net loss was Rs.73.3 million ($1.7 million) for the
quarter ended December 31, 1999 compared to a net loss of Rs.56.1 million
for the quarter ended December 31, 1998.
<PAGE>
Nine months ended December 31, 1999 compared to nine months ended December
31, 1998
Revenues. We recognized Rs.392.9 million ($9.0 million) in revenues
for the nine months ended December 31, 1999, as compared to Rs.57.4 million
for the nine months ended December 31, 1999, representing an increase of
Rs.335.5 million, or 585%. This increase is primarily attributable to the
commencement of Internet access services in November 1998, which accounted
for Rs.206.1 million of revenues for the nine months ended December 31,
1999, a Rs.94.0 million increase in revenues from corporate network
services resulting from an increase in the number of corporate customers
contributing to revenues in the amount of Rs.47.0 million, a Rs.29.6
million increase in sale of hardware and software, a Rs.17.4 million
increase in revenues from UUNet Technologies on account of increased
utilization of the network by the customers of UUNet Technologies, Rs.4.1
million revenue from IndiaWorld Communications and a Rs.29.9 million
increase in revenues from new service offerings, including web-based
solutions.
Cost of revenues. Cost of revenues were Rs.184.8 million ($4.2
million) or 47% of revenues for the nine months ended December 31, 1999,
compared to Rs.31.5 million or 55% of revenues for the nine months ended
December 31, 1998, representing an increase of Rs.153.2 million, or 486%.
This increase was primarily attributable to a Rs.28.7 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.77.9 million increase in leased line costs
resulting from increasing the capacity of our network backbone from 64 Kbps
to 2 Mbps and a Rs.35.7 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.3.5 million.
Selling, general and administrative expenses. Selling, general and
administrative expenses were Rs.301.2 million ($6.9 million) for the nine
months ended December 31, 1999, compared to Rs.105.1 million for the nine
months ended December 31, 1998, representing an increase of Rs.196.1
million, or 186.5%. This increase was primarily attributable to a growth
in staff from 298 as of December 31, 1998 to 535 as of December 31, 1999
resulting in a Rs.35.2 million increase in indirect personnel costs, a
Rs.91.1 million increase in selling and marketing expenses resulting from
additional expenditure in connection with marketing our Satyam Online
access and Satyam online portal business, a Rs.19.3 million increase in
travelling expenditures, a Rs.10.2 million increase in cost of software, a
Rs.7.3 million increase in repairs and maintenance of plant and machinery,
a Rs.5.0 million increase in recruitment expenses and a Rs.9.6 million
increase in rent.
Depreciation and amortization. Depreciation and amortization was
Rs.79.2 million ($1.8 million) for the nine months ended December 31, 1999,
compared to Rs.28.5 million for the nine months ended December 31, 1998,
representing an increase of Rs.50.7 million, or 177%. The increase was
primarily attributable to capital expenditures associated with the
installation of six ATM switches along our network and expanding the reach
of our network from 12 POPs in December 1998 to 34 in December 1999.
Interest expense (net). Interest income was Rs.5 million ($0.1
million) for the nine months ended December 31, 1999 as compared to an
interest expense of Rs.17.8 million for the nine months ended December 31,
1998, representing a decrease in interest expense of Rs.22.8 million, or
128%. This change was primarily attributable to Rs.33.7 million of interest
earned on deposits placed with banks.
Other income. Other income was Rs.2.5 million (less than $0.1
million) for the nine months ended December 31, 1999 which was primarily
attributable to income earned from service partners. Other income for the
nine months ended December 31, 1998 was Rs.0.2 million.
Net loss. Our net loss was Rs.202.0 million ($4.6 million) for the
nine months ended December 31, 1999, compared to a net loss of Rs.125.4
million for the nine months ended December 31, 1998.
Seasonality
<PAGE>
Given the early stage of the development of the Internet in India, the
rapidly evolving nature of our business and our limited operating history,
we cannot predict to what extent, if at all, our operations will prove to
be seasonal.
Liquidity and Capital Expenditures
Since inception, we have financed our operations primarily through a
combination of equity sales and borrowings from institutions and banks.
During the fiscal years ended March 31, 1998 and 1999 and the nine months
ended December 31, 1999, we received Rs.38.5 million, Rs.307.5 million
($7.1 million) and Rs.4,052.1 million ($93.1 million), respectively, in net
proceeds from the sale of equity shares.
In July 1999, we agreed to sell 481,000 equity shares to Sterling
Commerce for $5.0 million. We completed this transaction in September 1999
and used the funds for general corporate purposes, primarily the repayment
of debt.
In October 1999, we completed our IPO and issued 19,205,000 ADSs (each
representing one-fourth of one equity share) 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.
Our principal capital and liquidity needs historically have related to
developing our network infrastructure and our corporate network and
electronic commerce products, establishing our customer service and support
operations, developing our sales and marketing activities and for general
working capital needs. Prior to 1998, our capital needs were primarily met
by funding from our parent company, Satyam Computer Services, and
borrowings from institutions and banks. As we placed greater emphasis on
expanding our network infrastructure and developing our consumer Internet
access and on-line portal and content services, we sought additional
capital from other sources, including vendor capital leases and other
vendor financing arrangements and through private placements of our
securities, as detailed below.
Cash used in operating activities for the nine months ended December
31, 1999 was Rs.164.2 million ($3.8 million) primarily attributable to a
net loss of Rs.202.0 million ($4.6 million), increases in accounts
receivable of Rs.103.6 million ($2.4 million), other current assets of
Rs.126.5 million ($2.9 million) and other assets Rs.33.2 million (0.8
million), partially offset by depreciation of plant and equipment of
Rs.77.4 million ($1.8 million), amortization of goodwill Rs.29.0 million
($0.7 million), an increase in trade accounts payable by Rs.96.8 million
($2.2 million) and an increase in deferred revenue of Rs.48.5 million ($1.1
million). Cash used in investment activities during nine months ended
December 31, 1999 was Rs.2,142.0 million ($49.2 million), principally as a
result of the purchase consideration paid for acquisition of IndiaWorld
Communications amounting to Rs. 1,738.8 million ($40.0 million) and an
amount of Rs.403.7 million ($9.3 million) towards 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.3,897.6 million ($89.6
million) for nine months ended December 31, 1999, which consisted primarily
of Rs.4,052.1 million ($93.1 million) net proceeds raised through fresh
issuance of common stock, partially offset by repayment of Rs.122.0 million
($2.8 million) of debentures to Citibank and repayment of Rs.35.5 million
($0.8 million) of term loan to Exim Bank.
Our aggregate billings for the quarter ended December 31, 1999 were
approximately Rs.190.8 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. 184.7 million and deferred Rs.4.2 million of billings in the quarter
ended December 31, 1999. Our deferred revenues balance was Rs.121.4
million as of December 31, 1999.
As part of our business strategy, we intend to invest significant
amounts of capital over the next 12 to 24 months to fund network
infrastructure expansion and enhancements, to develop content for our
Internet portal business, to advertise and to promote our brand and to
repay debt.
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We may use a portion of the proceeds from our IPO and pending a
follow-on 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 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 Quarterly Report, 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 the initial public 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 Quarterly Report. Our ability to raise funds through the sale of
equity is limited by foreign ownership restrictions imposed on us by Indian
law and the terms of our Internet service provider license. These
restrictions provide that the maximum total foreign equity investment in
our company is 49%. If additional funds are raised through the issuance of
equity or convertible debt securities, the percentage ownership of our
shareholders and the holders of our ADSs will be reduced and these
securities may have rights, preferences or privileges senior to those of
our shareholders and the holders of our ADSs. We cannot assure you that
additional financing will be available on terms favorable to us, or at all.
If adequate funds are not available or are not available on acceptable
terms, our ability to fund and expand our operations, take advantage of
unanticipated opportunities, develop or enhance Internet content, features
or services, or otherwise respond to competitive pressures will be
significantly limited. Our business, results of operations and financial
condition could be materially adversely affected by any such limitation.
Income Tax Matters
As of December 31, 1999, we had a net operating loss carryforward of
approximately Rs.202.0 million ($4.6 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
<PAGE>
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. 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.
Impact of the Year 2000
As of the date of this Report on Form 6-K, 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.
Risks Related to Our Business
Risks Related to Investments in Indian Companies
We are incorporated in India, and virtually all of our assets and our
employees are located in India. Consequently, our financial performance
and the market price of our ADSs will be affected by changes in exchange
rates and controls, interest rates, government of India policies, including
taxation policies, as well as political, social and economic developments
affecting India.
Political instability related to the formation of a new government in India
could halt or delay the liberalization of the Indian economy and adversely
affect business and economic conditions in India generally and our business
in particular.
During the past decade and in particular since 1991, the government of
India has pursued policies of economic liberalization, including
significantly relaxing restrictions on the private sector. Nevertheless,
the role of the Indian central and state governments in the Indian economy
as producers, consumers and regulators has remained significant. The
government of India recently changed for the fifth time since 1996. The
prior government of India, formed in March 1998, announced policies and
took initiatives that supported the continued economic liberalization
policies that have been pursued by the previous governments. We cannot
assure you that these liberalization policies will continue in the future.
The rate of economic liberalization could change, and specific laws and
policies affecting technology companies, foreign investment, currency
exchange rates and other matters affecting investment in our securities
could change as well. A significant change in India's economic
liberalization and deregulation policies could adversely affect business
and economic conditions in India generally and our business in particular.
<PAGE>
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.
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 presently held by
foreign investors. As a result of the 49% limit on foreign equity
ownership, we are not permitted to sell more than an additional 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.
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.
<PAGE>
Currently there is no public trading market for our equity shares in
India nor can we assure you that we will take steps to develop one. Our
equity securities do not trade publicly in India, but are only traded on
Nasdaq through the ADSs. Under current Indian laws and regulations, our
depositary cannot accept deposits of outstanding equity shares and issue
ADRs evidencing ADSs representing such equity shares without prior approval
of the government of India. If you elect to surrender your ADSs and
receive equity shares, you will not be able to trade those equity shares on
any securities market. Under current Indian laws and regulations, you will
be prohibited from re-depositing those outstanding equity shares with our
depositary without prior approval of the government of India. If in the
future a market for our equity shares is established in India or another
market outside of the United States, those shares may trade at a discount
or premium to the ADSs in part because of restrictions on foreign ownership
of the underlying shares.
Under current Indian regulations and practice, the approval of the
Reserve Bank of India is required for the sale of equity shares underlying
ADSs by a non-resident of India to a resident of India as well as for
renunciation of rights to a resident of India, unless the sale of equity
shares underlying the ADSs is through a recognized stock exchange or in
connection with the offer made under the regulations regarding takeovers.
Since exchange controls still exist in India, the Reserve Bank of India
will approve the price at which the equity shares are transferred based on
a specified formula, and a higher price per share may not be permitted.
Holders who seek to convert the rupee proceeds from a sale of equity shares
in India into foreign currency and repatriate that foreign currency from
India will have to obtain Reserve Bank of India approval for each
transaction. We cannot assure you that any required approval from the
Reserve Bank of India or any other government agency can be obtained.
Because we operate our business in India, exchange rate fluctuations may
affect the value of our ADSs independent of our operating results.
The exchange rate between the rupee and the U.S. dollar has changed
substantially in recent years and may fluctuate substantially in the
future. During the three-year period from 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.
<PAGE>
. 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 December 31,
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.
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
<PAGE>
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.
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.
<PAGE>
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 above. Failure to do so could lead to an inability
to attract and retain subscribers for our Internet services and corporate
customers for our network services as well as the loss of advertising
revenues.
We have a history of losses and negative cash flows and anticipate this to
continue because our business plan, which is unproven, calls for additional
subscribers and other customers to attain profitability.
Since our founding, we have incurred significant losses and negative
cash flows. As of December 31, 1999, we had an accumulated deficit of
approximately $11.9 million. We have not been profitable and expect to
incur operating losses as we expand our services, invest in expansion of
our network infrastructure and sales and marketing staff, and advertise and
promote our brand. Our business plan assumes that consumers in India will
be attracted to and use Internet access services and content available on
the Internet in increasing numbers. Our business plan also assumes that
businesses in India will demand private network and related electronic
commerce services. This business model is not yet proven in India, and we
cannot assure you that we will ever achieve or sustain profitability or
that our operating losses will not increase in the future.
Our ability to compete in the Internet service provider market is hindered
by the fact that our principal competitor is a government-controlled
provider of international telecommunications services in India which enjoys
significant competitive advantages over our company.
Videsh Sanchar Nigam Limited, or VSNL, is a government-controlled
provider of international telecommunications services in India. VSNL is
also the largest Internet service provider in India which we estimate had
around 350,000 subscribers as of December 31, 1999. This amount is only an
estimate because VSNL does not publicly disclose this information. 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.
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. 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 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.
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
<PAGE>
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 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;
<PAGE>
. 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.
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.
<PAGE>
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 December 31, 1999, we had 535 employees, an
increase of 80% from the 298 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.
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.
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
<PAGE>
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.
We may not complete our planned acquisition of IndiaWorld
Communications. 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.
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 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 websites 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 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, 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
<PAGE>
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 equity securities to pay for any future
acquisitions. The issuance of equity securities would dilute the ownership
interests of the holders of our ADSs.
Satyam Computer Services controls our company and may have interests which
conflict with those of our other shareholders or holders of our ADSs.
Satyam Computer Services beneficially presently owns approximately
57.5% of our equity shares. As a result, it is able to exercise control
over many matters requiring approval by our shareholders, including the
election of directors and approval of significant corporate transactions.
Under Indian law, a simple majority is sufficient to control all
shareholder action except for those items which require approval by a
special resolution. If a special resolution is required, the number of
votes cast in favor of the resolution must be not less than three times the
number of votes cast against it. Examples of actions that require a special
resolution include:
. altering our Articles of Association;
. issuing additional shares of capital stock, except for pro rata
issuances to existing shareholders;
. commencing any new line of business; or
. commencing a liquidation.
Circumstances may arise in which the interests of Satyam Computer
Services could conflict with the interests of our other shareholders or
holders 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.
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.
<PAGE>
Our intellectual property rights are important to our business. We
rely on a combination of copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect our
intellectual property.
Our efforts to protect our intellectual property may not be adequate.
Our competitors may independently develop similar technology or duplicate
our products or services. Unauthorized parties may infringe upon or
misappropriate our products, services or proprietary information. In
addition, the laws of India do not protect proprietary rights to the same
extent as laws in the United States, and the global nature of the Internet
makes it difficult to control the ultimate destination of our products and
services. For example, Indian statutory law does not protect service
marks. The misappropriation or duplication of our intellectual property
could disrupt our ongoing business, distract our management and employees,
reduce our revenues and increase our expenses. In the future, litigation
may be necessary to enforce our intellectual property rights or to
determine the validity and scope of the proprietary rights of others. Any
such litigation could be time-consuming and costly.
We could be subject to intellectual property infringement claims as
the number of our competitors grows and the content and functionality of
our websites or other product or service offerings overlap with competitive
offerings. Defending against these claims, even if not meritorious, could
be expensive and divert our attention from operating our company. If we
become liable to third parties for infringing their intellectual property
rights, we could be required to pay a substantial damage award and forced
to develop non-infringing technology, obtain a license or cease selling the
applications that contain the infringing technology. We may be unable to
develop non-infringing technology or obtain a license on commercially
reasonable terms, or at all.
Our platform infrastructure and its scalability are not proven, and our
current systems may not accommodate increased use while maintaining
acceptable overall performance.
Currently, only a relatively limited number of consumers use our
Internet service provider services and Internet portal. We must continue
to expand and adapt our network infrastructure to accommodate additional
users, increasing transaction volumes and changing customer requirements.
We may not be able to project accurately the rate or timing of increases,
if any, in the use of our websites or expand and upgrade our systems and
infrastructure to accommodate such increases. Our systems may not
accommodate increased use while maintaining acceptable overall performance.
Service lapses could cause our users to use the on-line services of our
competitors.
We do not plan to pay dividends in the foreseeable future.
We do not anticipate paying cash dividends to the holders of our ADSs
in the foreseeable future. Accordingly, investors must rely on sales of
their ADSs after price appreciation, which may never occur, as the only way
to realize on their investment. Investors seeking cash dividends should
not purchase our ADSs.
Risks Related to the Internet
We may be liable to third parties for information retrieved from the
Internet.
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
<PAGE>
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 such as coaxial cable or
wireless transmission mediums, we will have to develop new technology or
modify our existing technology to accommodate these developments. Our
pursuit of these technological advances, whether directly through internal
development or by third party license, may require substantial time and
expense. We may be unable to adapt our Internet service business to
alternate delivery means and new technologies may not be available to us at
all.
Our product and service offerings may not be compatible with industry
standards developed in the future.
Our ability to compete successfully depends upon the continued
compatibility and interoperability of our services with products and
architectures offered by various vendors. Although we intend to support
emerging standards in the market for Internet access, industry standards
may not be established and, if they become established, we may not be able
to conform to these new standards in a timely fashion or maintain a
competitive position in the market. The announcement or introduction of
new products or services by us or our competitors and any change in
industry standards could cause customers to deter or cancel purchases of
existing products or services.
Risk Related to the ADSs and Our Trading Market
Holders of ADSs may be restricted in their ability to exercise preemptive
rights under Indian law and thereby may suffer future dilution of their
ownership position.
Under the Companies Act, 1956 of India, or Companies Act, a company
incorporated in India must offer its holders of equity shares preemptive
rights to subscribe and pay for a proportionate number of shares to
maintain their existing ownership percentages prior to the issuance of any
new equity shares, unless the preemptive rights have been waived by
adopting a special resolution by holders of three-fourths of the company's
shares which are voted on the resolution. U.S. holders of ADSs may be
unable to exercise preemptive rights for equity shares underlying ADSs
unless approval of the Ministry of Finance of the government of India is
obtained and a registration statement under the Securities Act of 1933, as
amended, is effective with respect to the rights or an exemption from the
registration requirements of the Securities Act is available. Our decision
to file a registration statement will depend on the costs and potential
liabilities associated with any given registration statement as well as the
perceived benefits of enabling the holders of our ADSs to exercise their
preemptive rights and any other factors that we deem appropriate to
consider at the time the decision must be made. We may elect not to file a
registration statement related to preemptive rights otherwise available by
law to our shareholders. In the case of future issuances, the new
securities may be issued to our depositary, which may sell the securities
for the benefit of the holders of the ADSs. The value, if any, our
depositary would receive upon the sale of such securities cannot be
<PAGE>
predicted. To the extent that holders of ADSs are unable to exercise
preemptive rights granted in respect of the equity shares represented by
their ADSs, their proportional interests in our company would be reduced.
Holders of ADSs may be restricted in their ability to exercise voting
rights.
As a holder of ADSs, you generally have the right under the deposit
agreement to instruct the depositary bank to exercise the voting rights for
the equity shares represented by your ADSs.
At our request, the depositary bank will mail to you any notice of
shareholders' meeting received from us together with information explaining
how to instruct the depositary bank to exercise the voting rights of the
securities represented by ADSs. If the depositary bank timely receives
voting instructions from a holder of ADSs, it will endeavor to vote the
securities represented by the holder's ADSs in accordance with such voting
instructions. However, the ability of the depositary bank to carry out
voting instructions may be limited by practical and legal limitations and
the terms of the securities on deposit. We cannot assure you that you will
receive voting materials in time to enable you to return voting
instructions to the depositary bank in a timely manner. Securities for
which no voting instructions have been received will not be voted.
The market price of our ADSs may be highly volatile.
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 11, 2000, the trading price of our ADSs has ranged from a
high of $103.38 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 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, may of which are beyond our control.
<PAGE>
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.
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.
Forward-looking statements contained in this Quarterly Report may not be
realized.
This Quarterly Report contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of the
risks faced by us described above and elsewhere in this Quarterly Report.
We do not intend to update any of the forward-looking statements after the
date of this Quarterly Report to conform such statements to actual results.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We conduct our business in India and most of our revenues and expenses
are denominated in Indian rupees. However, our revenues generated from
UUNet Technologies Inc. and our expenses of purchasing software from
Sterling Commerce, Inc. and Open Market, Inc. are denominated in U.S.
dollars. Our foreign exchange loss was Rs.0, Rs.5,613, Rs.615,189
($14,158) and Rs.1,091,867 ($25,095) for fiscal 1997, 1998 and 1999 and the
quarter ended December 31, 1999, respectively.
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
As of the date of this Quarterly Report, Satyam Infoway is not a party
to any material legal proceedings. Please see "Risks Related to Our Business -
We may not complete our planned acquisition of IndiaWorld Communications for a
description of a dispute to which IndiaWorld Communications is a party.
Item 2. Changes in Securities and Use of Proceeds
The effective date of our registration statement, filed on Form F-1
under the Securities Act of 1933 (File No. 333-10852) relating to our IPO
was October 18, 1999. We sold a total of 19,205,000 equity shares to an
underwriting syndicate, including the exercise of the 15% over-allotment.
The managing underwriters with respect to the U.S. offering were Merrill
Lunch & Co. and Salomon Smith Barney, and the managing underwriters with
respect to the international offering were Merrill Lynch International and
Salomon Smith Barney International. The IPO commenced and was completed on
October 22, 1999, at an initial public offering price of $4.50 per share.
We received approximately $80.4 million of net proceeds from the offering.
From the date of receipt, we invested the net proceeds in dollar or rupee
denominated high quality, interest-bearing instruments pending their use
for specific purposes. None of the net proceeds from the IPO were paid,
directly or indirectly to any of our directors, officers or general
partners or any of their associates, or to any persons owning ten percent
or more of any class of our equity securities, or any affiliates.
In addition to the IPO, we sold and issued the following securities
since September 30, 1999:
(1) In October 1999, we issued an aggregate of 750,000 equity shares
to South Asia Regional Fund and Satyam Computer Services upon the
exercise of warrants. These issuances were more fully described
in the registration statement related to our initial public
offering.
The issuances upon exercise of warrants were exempt under Regulation
S.
Item 6. Exhibits and Reports
(a) The exhibit index attached hereto is incorporated by reference to
this item.
(b) Our Report on Form 6-K, filed with the SEC on December 6, 1999,
relating to the IndiaWorld Communications transaction.
(c) Our Report on Form 6-K, filed with the SEC on November 12, 1999
relating to our quarterly results.
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
Exhibit Number Description of Document
-------------- -----------------------
27.1 Financial Data Schedule.
_______________
(b) Financial Statement Schedules
None.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunder duly organized.
Date: February 14, 2000 SATYAM INFOWAY LIMITED
By: /s/ R. Ramaraj
--------------------------
Name: R. Ramaraj
Title: Chief Executive Officer
/s/ T. R. Santhanakrishnan
-------------------------------
Name: T.R. Santhanakrishnan
Title: Chief Financial Officer
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0
0
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</TABLE>
