<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 6-K
Report of Foreign Private Issuer Pursuant to Rule
13a-16 or 15d-16 of the Securities Exchange Act of 1934
For the quarter ended September 30, 2000
Commission File Number 000-27663
SATYAM INFOWAY LIMITED
(Exact name of registrant as specified in its charter)
Not Applicable
(Translation of registrant's name into English)
Republic of India
(Jurisdiction of incorporation or organization)
Maanasarovar Towers
271-A, Anna Salai, Teynampet, Chennai 600 018, India
(91) 44-435-3221
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F. Form 20F [X] Form 40 F [ ]
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [ ] No [X]
If "Yes" is marked, indicate below the file number assigned to registrant in
connection with Rule 12g3-2(b). Not applicable.
<PAGE> 2
CURRENCY OF PRESENTATION AND CERTAIN DEFINED TERMS
Unless the context otherwise requires, references herein to "we," "us,"
the "company," "SIFY" or "Satyam Infoway" are to Satyam Infoway Limited, a
limited liability company organized under the laws of the Republic of India.
References to "U.S." or the "United States" are to the United States of America,
its territories and its possessions. References to "India" are to the Republic
of India. We are a majority-owned subsidiary of Satyam Computer Services
Limited, a leading Indian information technology services company which is
traded on the major Indian stock exchanges ("Satyam Computer Services").
"Satyam" is a trademark owned by Satyam Computer Services, which has licensed
the use of the "Satyam" trademark to us subject to specified conditions.
"Sify.com," "Satyam Online," "Satyam:Net" and "satyamonline.com" are
trademarks used by us for which we have registration applications pending in
India. All other trademarks or tradenames used in this Report on Form 6-K
("Quarterly Report") are the property of their respective owners.
In this Quarterly Report, references to "$," "Dollars" or "U.S. Dollars"
are to the legal currency of the United States, and reference to "Rs.," "rupees"
or "Indian Rupees" are to the legal currency of India. References to a
particular "fiscal" year are to our fiscal year ended March 31 of such year.
For your convenience, this Quarterly Report contains translations of
some Indian rupee amounts into U.S. dollars which should not be construed as a
representation that those Indian rupee or U.S. dollar amounts could have been,
or could be, converted into U.S. dollars or Indian rupees, as the case may be,
at any particular rate, the rate stated below, or at all. Except as otherwise
stated in this Quarterly Report, all translations from Indian rupees to U.S.
dollars contained in this Quarterly Report have been based on the noon buying
rate in the City of New York on September 30, 2000 for cable transfers in Indian
rupees as certified for customs purposes by the Federal Reserve Bank of New
York. The noon buying rate on September 30, 2000 was Rs.46.06 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, some of the information contained in our
financial statements has 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,
www.sify.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 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 OF THIS REPORT. 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. OUR FILINGS WITH THE SEC
ARE AVAILABLE ON ITS WEBSITE, WWW.SEC.GOV.
<PAGE> 3
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
------------------------------------------------
MARCH 31, SEPTEMBER 30, SEPTEMBER 30,
2000 2000 2000
-------------- -------------- -------------
RS. RS. US $
-------------- -------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents 7,307,624,832 3,130,127,190 67,957,603
Accounts receivable, net of allowances
of Rs.2,420,628 and Rs.8,420,628 as
of March 31, 2000 and September 30,
2000 respectively 245,029,816 554,173,567 12,031,558
Due from officers and employees 6,387,228 9,699,721 210,589
Inventories 18,184,123 43,816,206 951,285
Investments 22,610,768 20,562,107 446,420
Investments in affiliate -- 1,706,167,820 37,042,289
Deferred tax assets 113,531 118,692 2,577
Prepaid expenses 251,537,335 361,271,589 7,843,500
Other current assets 166,430,957 340,901,034 7,401,238
-------------- -------------- -----------
TOTAL CURRENT ASSETS 8,017,918,590 6,166,837,926 133,887,059
Plant and equipment--net 915,020,689 1,913,642,815 41,546,739
Goodwill and other intangible assets 1,630,417,553 4,558,278,579 98,963,929
Deferred taxes 268,606 633,779 13,760
Other assets 70,378,149 125,214,498 2,718,508
-------------- -------------- -----------
TOTAL ASSETS 10,634,003,587 12,764,607,597 277,129,995
============== ============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of long-term
debt 40,266,667 -- --
Current installments of capital
lease obligations 2,104,379 3,638,462 78,994
Trade accounts payable 170,587,041 237,366,137 5,153,412
Due to parent company 17,114,393 20,085,884 436,081
Accrued expenses 66,613,282 228,890,890 4,969,407
Deferred revenue 150,494,236 214,087,186 4,648,007
Taxes payable 2,285,000 1,410,000 30,612
Deferred tax liability 5,611,551 3,181,762 69,079
Advances from customers 20,652,522 34,863,717 756,920
Other current liabilities 38,670,073 38,594,421 837,914
-------------- -------------- -----------
TOTAL CURRENT LIABILITIES 514,399,144 782,118,459 16,980,426
NON-CURRENT LIABILITIES:
Long-term debt, excluding current
installments 168,860,111 960,111 20,845
Capital lease obligations,
excluding current installments 4,305,547 7,597,502 164,948
Other liabilities 10,300,000 21,009,874 456,141
-------------- -------------- -----------
TOTAL LIABILITIES 697,864,802 811,685,946 17,622,360
-------------- -------------- -----------
MINORITY INTEREST 8,298,211 -- --
STOCKHOLDERS' EQUITY
Common stock, Rs 10 par value;
25,000,000 Equity Shares authorized
as of March 31, 2000 and
September 30, 2000; Issued and
outstanding Equity Shares -
22,249,425 as of March 31, 2000 and
23,069,105 as of September 30, 2000 222,494,250 230,691,050 5,008,490
Additional paid-in capital 10,520,953,486 13,376,037,104 290,404,627
Deferred Compensation - Employee
Stock Offer Plan (120,224,615) (165,568,552) (3,594,628)
Accumulated deficit (696,833,862) (1,490,070,394) (32,350,638)
Accumulated other comprehensive
income 1,451,315 1,832,443 39,784
-------------- -------------- -----------
TOTAL STOCKHOLDERS' EQUITY 9,927,840,574 11,952,921,651 259,507,635
-------------- -------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' 10,634,003,587 12,764,607,597 277,129,995
EQUITY ============== ============== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
<PAGE> 4
SATYAM INFOWAY LIMITED
CONSOLIDATED STATEMENTS OF INCOME
(EXPRESSED IN INDIAN RUPEES, EXCEPT SHARE DATA AND AS OTHERWISE STATED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, SIX MONTHS ENDED SEPTEMBER 30,
------------------------------------------- --------------------------------------------
1999 2000 2000 1999 2000 2000
RS. RS. US $ RS. RS. US $
----------- ------------ ----------- ------------ -------------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES: 127,433,809 435,161,346 9,447,706 208,227,061 756,839,080 16,431,591
Cost of revenues (68,213,512) (273,490,812) (5,937,708) (107,110,142) (470,294,924) (10,210,485)
----------- ------------ ----------- ------------ -------------- -----------
GROSS PROFIT/(LOSS) 59,210,297 161,670,534 3,509,998 101,116,919 286,544,156 6,221,106
----------- ------------ ----------- ------------ -------------- -----------
OPERATING EXPENSES:
Selling, general and
administrative expenses 125,074,890 544,391,727 11,819,186 209,206,649 914,336,052 19,850,978
Amortisation of goodwill -- 328,625,495 7,134,726 -- 415,619,855 9,023,445
Amortisation of deferred stock
compensation expense 275,789 28,412,289 616,854 482,039 47,280,235 1,026,492
----------- ------------ ----------- ------------ -------------- -----------
TOTAL OPERATING EXPENSES 125,350,679 901,429,511 19,570,766 209,688,688 1,377,236,142 29,900,915
----------- ------------ ----------- ------------ -------------- -----------
Operating loss (66,140,382) (739,758,977) (16,060,768) (108,571,769) (1,090,691,986) (23,679,809)
Other (expense)/income, net (10,770,650) 137,163,531 2,977,932 (20,087,957) 314,466,476 6,827,323
Loss before taxes, equity in losses
of affiliate and interest (76,911,032) (602,595,446) (13,082,836) (128,659,726) (776,225,510) (16,852,486)
Taxes -- -- -- -- 325,333 7,063
Equity in losses of affiliate -- (12,295,929) (266,955) -- (17,718,832) (384,690)
Minority Interest -- -- -- -- 382,479 8,304
----------- ------------ ----------- ------------ -------------- -----------
NET LOSS (76,911,032) (614,891,375) (13,949,791) (128,659,726) (793,236,530) (17,221,809)
=========== ============ =========== ============ ============== ===========
NET LOSS PER EQUITY SHARE (4.87) (26.88) (0.58) (8.16) (35.16) (0.76)
=========== ============ =========== ============ ============== ===========
Weighted Equity Shares used in
computing loss per equity share 15,797,054 22,876,541 22,876,541 15,773,656 22,562,982 22,562,982
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
SATYAM INFOWAY LIMITED
STATEMENTS OF CONSOLIDATED STOCK HOLDERS EQUITY
(EXPRESSED IN INDIAN RUPEES, EXCEPT SHARE DATA AND AS OTHERWISE STATED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL PAID DEFICIT DURING
SHARES PAR VALUE IN CAPITAL DEVELOPMENT STAGE
----------- ----------- --------------- -----------------
<S> <C> <C> <C> <C>
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 issuance of common stock 3,370,000 33,700,000 180,000,000 --
Net loss -- -- -- --
Compensation related to stock option grants -- -- 1,650,000 --
Amortisation of compensation related to stock
option grants -- -- -- --
----------- ----------- -------------- ------------
BALANCE AS OF MARCH 31, 1999 15,750,000 157,500,000 226,636,200 --
Deficit transfer -- -- -- --
Common stock issued to the parent Company 150,000 1,500,000 76,620,000 --
Common stock issued during the period 6,349,425 63,494,250 10,078,427,094 --
Net loss -- -- -- --
Compensation related to stock option grants -- -- 139,270,192 --
Amortisation of compensation related to stock
option grants -- -- -- --
Other comprehensive income, net of tax
----------- ----------- -------------- ------------
BALANCE AS OF MARCH 31, 2000 22,249,425 222,494,250 10,520,953,486 --
Net loss (unaudited)
Common stock issued during the period 819,680 8,196,800 2,762,459,446
Compensation related to stock option grants
(unaudited) 92,624,172
Amortisation of compensation related to stock
option grants (unaudited)
Other comprehensive income, net of tax (unaudited)
----------- ----------- -------------- ------------
BALANCE AS OF SEPTEMBER 30, 2000 (UNAUDITED) 23,069,105 230,691,050 13,376,037,104 --
BALANCE AS OF MARCH 31, 2000 (IN US$) 22,249,425 5,097,234 241,029,862 --
BALANCE AS OF SEPTEMBER 30, 2000 (IN US$)
(UNAUDITED) 23,069,105 5,008,490 290,404,627 --
</TABLE>
<TABLE>
OTHER DEFERRED COMPENSATION-
COMPREHENSIVE EMPLOYEE STOCK ACCUMULATED STOCKHOLDERS'
INCOME OFFER PLAN DEFICIT EQUITY
------------- ---------------------- -------------- --------------
<S> <C> <C> <C> <C>
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 -- -- 93,784,900
Other issuance of common stock -- -- 213,700,000
Net loss -- (187,375,665) (187,375,665)
Compensation related to stock option grants (1,650,000) -- --
Amortisation of compensation related to stock
option grants 68,751 -- 68,751
------------- ------------ -------------- --------------
BALANCE AS OF MARCH 31, 1999 (1,581,249) (314,937,143) 67,617,808
Deficit transfer -- -- --
Common stock issued to the parent Company -- -- 78,120,000
Common stock issued during the period -- -- 10,141,921,344
Net loss -- (381,896,719) (381,896,719)
Compensation related to stock option grants (139,270,192) -- --
Amortisation of compensation related to stock
option grants 20,626,826 -- 20,626,826
Other comprehensive income, net of tax 1,451,315 1,451,315
------------- ------------ -------------- --------------
BALANCE AS OF MARCH 31, 2000 1,451,315 (120,224,615) (696,833,862) 9,927,840,574
Net loss (unaudited) (793,236,530) (793,236,530)
Common stock issued during the period 2,770,656,246
Compensation related to stock option grants
(unaudited) (92,624,172) 0
Amortisation of compensation related to stock
option grants (unaudited) 47,280,235 47,280,235
Other comprehensive income, net of tax (unaudited) 381,127 381,127
------------- ------------ -------------- --------------
BALANCE AS OF SEPTEMBER 30, 2000 (UNAUDITED) 1,832,442 (165,568,552) (1,490,070,393) 11,952,921,651
BALANCE AS OF MARCH 31, 2000 (IN US$) 33,249 (2,754,287) (15,964,121) 22
BALANCE AS OF SEPTEMBER 30, 2000 (IN US$)
(UNAUDITED) 39,784 (3,594,628) (32,350,638) 259,507,635
</TABLE>
4
<PAGE> 6
SATYAM INFOWAY LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN INDIAN RUPEES, EXCEPT SHARE DATA AND AS OTHERWISE STATED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------
1999 2000 2000
---------- ---------- ----------
RS. RS. US$
---------- ---------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net loss (128,649,726) (793,236,530) (17,221,809)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 48,575,668 622,285,039 13,510,313
Share of loss in equity investees -- 17,718,832 384,690
Unrealised loss on investments -- 2,429,789 52,753
Loss on sale of plant and equipment -- 216,875 4,709
Minority interest -- (382,479) (8,304)
Changes in assets and liabilities: -- -- --
Accounts receivable (net) (57,193,555) (309,143,751) (6,711,762)
Inventories (3,327,389) (25,632,083) (556,493)
Prepaid expenses (83,450,153) (109,734,254) (2,382,420)
Other assets 40,503,197 (231,575,033) (5,027,682)
Due to parent company 58,046,500 2,971,491 64,513
Accrued expenses 16,292,286 162,277,608 3,523,179
Deferred revenue 40,146,953 63,592,950 1,380,655
Trade accounts payable 98,965,178 66,779,096 1,449,828
Taxes payable -- (3,675,123) (79,790)
Advances from customers (2,249,478) 14,211,195 308,537
Due from officers and employees (3,776,557) (3,312,493) (71,917)
Other liabilities 8,622,692 10,634,222 230,878
------------ -------------- -----------
NET CASH USED IN OPERATING ACTIVITIES 32,495,616 (513,574,649) (11,150,122)
------------ -------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditure on plant and equipment (280,614,024) (1,156,656,995) (25,111,963)
Expenditure on license fee -- (23,319,750) (506,291)
Expenditure on investment in affiliates -- (107,769,119) (2,339,755)
Purchase consideration for acquisition -- (2,173,136,500) (47,180,558)
Proceeds from sale of plant and equipment -- 300,000 6,513
------------ -------------- -----------
NET CASH USED IN INVESTING ACTIVITIES (280,614,024) (3,460,582,364) (75,132,054)
------------ -------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (122,000,000) (208,166,667) (4,519,467)
Proceeds from issuance of long-term debt -- -- --
Proceeds from short-term loans 59,474,802 -- --
Principal payments under capital lease obligations 4,960,582 4,826,038 104,777
Net proceeds from issuance of common stock 216,750,000 -- --
------------ -------------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 159,185,384 (203,340,629) (4,414,690)
------------ -------------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS (88,933,024) (4,177,497,642) (90,696,866)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 125,547,453 7,307,624,832 158,654,469
------------ -------------- -----------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 36,614,429 3,130,127,190 67,957,603
============ ============== ===========
SUPPLEMENTARY INFORMATION
Cash paid towards interest 20,770,936 16,142,248 350,461
Cash paid towards taxes -- -- --
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITY
Additional common stock issued upon conversion
of amounts payable to parent company -- 2,777,358,640 60,298,711
Capital leases 4,912,159 8,414,104 182,677
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 7
SATYAM INFOWAY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN INDIAN RUPEES, EXCEPT SHARE DATA AND AS OTHERWISE STATED)
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE PERIOD ENDED SEPTEMBER 30,
1999 AND 2000 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Preparation of Financial Statements
The accompanying financial statements have been prepared in
Indian Rupees (Rs.), the national currency of India. Solely for the
convenience of the reader, the financial statements as of and for the
six months ended September 30, 2000 have been translated into United
States dollars at the noon buying rate in New York City on September 30,
2000 for cable transfers in Indian rupees, as certified for customs
purposes by the Federal Reserve Bank of New York of $1 = Rs.46.06. No
representation is made that the Indian rupee amounts have been, could
have been or could be converted into United States dollars at such a
rate or at any other certain rate on September 30, 2000 or at any other
date.
(b) Interim Information (unaudited)
Interim information presented in the consolidated financial
statements has been prepared by the management without audit and, in the
opinion of management, includes all adjustments of a normal recurring
nature that are necessary for the fair presentation of the financial
position, results of operations, and cash flows for the periods shown,
is in accordance with the generally accepted accounting principles.
2. STOCK-BASED COMPENSATION PLAN
During the three months ended September 30, 2000 Satyam Infoway
Limited (the "Company," "Satyam" or "SIFY") granted 37,560 warrants to
eligible employees at 90% of the market price of the shares on Nasdaq as
on the grant date. The Company recognized deferred stock compensation of
Rs.9,675,456 of which Rs.443,369 was amortized and charged to earnings
for the quarter ended September 30, 2000.
3. ACQUISITION OF BUSINESS
(a) IndiaWorld Communications Private Limited ("IndiaWorld")
During the three months ended September 30, 2000, the Company
completed the acquisition of IndiaWorld by issuing 268,500 fresh equity
shares aggregating to Rs.1,100,000,000 for the balance of the purchase
consideration.
(b) CricInfo Limited ("CricInfo")
On July 29, 2000, the Company issued 2,204,720 ADSs (represented
by 551,180 equity shares) to acquire a 25% stake in CricInfo, a private
company incorporated in England and Wales. The number of ADSs issued was
based on the price of the ADSs on Nasdaq on the day prior to the
acquisition of CricInfo shares.
The investment has been accounted for under the equity method,
where the difference between the cost of investment and amount of
underlying equity in net assets of the investee has been accounted for
as if the investee were a consolidated subsidiary. The difference is
being amortized over a period of five years based on management's
estimate.
6
<PAGE> 8
4. OTHER EVENTS
IndiaPlaza
On July 13, 2000, Satyam entered into an agreement (the "Merger
Agreement") to acquire IndiaPlaza.com, Inc. ("IndiaPlaza"). In
connection with the merger, Satyam will issue an aggregate of 480,000
ADSs to the shareholders of IndiaPlaza. Of the 480,000 ADSs to be
issued, 230,000 ADSs will be placed into escrow account to compensate
Satyam for potential damages relating to a breach of any representation,
covenant or agreement of IndiaPlaza set forth in the Merger Agreement.
Half of the escrow would be released on January 1, 2001 and the balance
will be released on January 1, 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion of the financial condition and results of
operations of our company should be read in conjunction with the unaudited
financial statements and the related notes included elsewhere in this report and
the audited financial statements and the related notes contained in our Annual
Report on Form 20-F for the fiscal year ended March 31, 2000. This discussion
contains forward-looking statements that involve risks and uncertainties. For
additional information regarding these risks and uncertainties, please see "Risk
Factors."
OVERVIEW
We were incorporated in December 1995 as an independent business unit of
Satyam Computer Services to develop and offer connectivity-based corporate
services allowing businesses in India to exchange information, communicate and
transact business electronically. Satyam Computer Services, our parent company,
is a leading Indian information technology services company traded on the
principal Indian stock exchanges.
From December 1995 through 1997, we focused on the development and
testing of our private data network. In 1997, we began forming strategic
partnerships with a number of leading technology and electronic commerce
companies, including UUNet Technologies, Open Market and Sterling Commerce, in
order to broaden our product and service offerings to our corporate customers.
In March 1998, we obtained network certification for conformity with Indian and
international network operating standards from the Technical Evaluation
Committee of India. In April 1998, we began offering private network services to
businesses in India. Our initial products and services included electronic data
interchange, e-mail and other messaging services, virtual private networks, and
related customer support.
In October 1998, we initiated our online content offerings with two
websites: carnaticmusic.com and indiaupdate.com. We also started development of
sify.com, our online portal, and other related content sites for personal
finance, movies and automobiles with the goal of offering a comprehensive suite
of websites offering content specifically tailored to Indian interests
worldwide.
On November 6, 1998, the Indian government opened the Internet service
provider marketplace to private competition. Capitalizing on our existing
private data network, we launched our Internet service provider business, 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 online registration and
immediate usage.
In October 1999, we completed our initial public offering and issued
19,205,000 ADSs (representing 4,801,250 equity shares) at a price of $4.50 per
ADS. We received approximately $79.2 million, net of underwriting discounts,
commissions and other offering costs.
On November 29, 1999, we purchased 24.5% of the outstanding shares of
IndiaWorld Communications for a cash purchase price of Rs.1,222 million. In
connection with this purchase, we acquired an option to purchase the remaining
75.5% of the outstanding shares in IndiaWorld Communications for a cash purchase
price of Rs.3,765 million. We completed the acquisition by exercising the option
on June 30, 2000. For United States GAAP reporting purposes, the financial
statements of IndiaWorld Communications have been consolidated with our
financial statements from and after December 1, 1999. The acquisition has been
accounted for as a purchase. We
7
<PAGE> 9
are amortizing the goodwill on a straight line basis over a period of five
years. Most of the purchase price represented goodwill.
IndiaWorld Communications recognized Rs.14.0 million and Rs.37.6 million
of revenue in fiscal 1999 and 2000, 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 and Rs.14.4 million, respectively, during these periods.
IndiaWorld Communications had net income of Rs.11,256 and Rs.568,152,
respectively, during these periods.
In February 2000, we completed a secondary offering and issued 1,868,700
ADSs (representing 467,175 equity shares) at a price at $80.00 per ADS. We
received approximately $141.7 million, net of underwriting discounts, commission
and other costs.
In July 2000, we acquired a 25% stake in CricInfo Limited, a private
company incorporated in England and Wales, through the issuance of 2,204,720
ADSs (representing 551,180 equity shares). On July 13, 2000, we entered into an
agreement to acquire all of the outstanding capital stock of Indiaplaza.com a
private company incorporated in California. The agreement contemplates that we
will acquire 100% of Indiaplaza.com by issuing an aggregate of 480,000 ADSs.
In the ordinary course of our business, we regularly engage in
discussions and negotiations relating to potential investments, strategic
partnerships and acquisitions for cash, securities or a combination thereof.
Some of these discussions may also contemplate the other party making an
investment in our company.
We currently operate India's largest private data network utilizing
Internet protocol with points of presence in 46 of the largest metropolitan
areas in India as of September 30, 2000. As of September 30, 2000, we had more
than 550 corporate customers for our private network services and more than
320,000 subscribers for our Satyam Online services. During September 2000, our
websites generated approximately 105 million page views.
We conduct our business in India and most of our revenues and expenses
are denominated in Indian rupees. Our foreign exchange loss was Rs.5,613,
Rs.615,189 and a gain of Rs.5,415,274 for fiscal 1998, 1999 and 2000,
respectively.
REVENUES
For reporting purposes, we classify our revenues into three divisions:
- consumer Internet access services;
- online 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 online 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 52.5% of our revenues in fiscal 1999 and 2000, 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 online portal and content offerings division derives revenues from
third-party advertising and commissions from electronic commerce transactions on
our websites. Advertising fees are recognized over the period in which the
advertisements are hosted on our websites. This division does not currently
constitute a material portion of our total revenues.
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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 portion of our revenues
through the sale of third-party hardware. Our corporate network and technology
services division accounted for approximately 87.1% and 42.5% revenues in fiscal
1999 and 2000, 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 assuming
that subscription rates stabilize. 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 online portal and content offerings
division includes the labor cost of developing and maintaining our websites, the
cost of third-party software and the cost of obtaining content from third-party
vendors.
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 September 30, 2000, we had granted an
aggregate of 573,540 options (net of 21,840 options forfeited by employees)
under our ASOP with a weighted average exercise price equal to approximately
Rs.2,807 per equity share. We recorded non-cash compensation charges related to
these grants in the aggregate amount of approximately Rs.233.5 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.
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We 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.
For fiscal 1998, 1999, 2000 and the six months ended September 30, 2000,
we incurred negative cash flow from operations of approximately Rs.74.0 million,
Rs.171.4 million, Rs.373.9 million and Rs.513.6 million ($11.1 million),
respectively. For fiscal 1998, 1999, 2000 and the six months ended September 30,
2000, we incurred net losses of approximately Rs.100.6 million, Rs.187.4
million, Rs.381.9 million and Rs.793.2 million ($17.2 million), respectively.
Giving pro forma effect to our current investment in IndiaWorld Communications
as if it had occurred at the beginning of each period, we would have incurred
net losses of approximately Rs.535 million and Rs.612 million for fiscal 1999
and 2000, respectively. We intend to substantially increase our operating
expenses and capital expenditures to expand and enhance our network
infrastructure and online 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 online 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 online content offerings or achieve positive cash
flow or profitability in the future. As of September 30, 2000, we had an
accumulated deficit of approximately Rs.1,490.1 million ($32.4 million).
RESULTS OF OPERATIONS
Quarter ended September 30, 2000 compared to quarter ended September 30, 1999
Revenues. We recognized Rs.435.2 million ($9.4 million) in revenues for
the quarter ended September 30, 2000, as compared to Rs.127.4 million for the
quarter ended September 30, 1999, representing an increase of Rs.307.7 million,
or 242%. Current quarter revenues exclude Rs.59.6 million ($1.3 million) of
deferred income primarily representing consumer access subscriptions which had
been purchased but not yet used by the consumer subscribers. This increase was
primarily attributable to increase in number of customers and introduction of
new service offerings. From September 30, 1999 to September 30, 2000, our number
of corporate customers grew from more than 300 to more than 550, and our number
of Internet access subscribers grew from more than 87,000 to more than 320,000.
During recent quarters, however, average selling prices for consumer access have
decreased on response to market factors, including competition.
Cost of Revenues. Cost of revenues were Rs.273.5 million ($5.9 million)
or 63% of revenues for the quarter ended September 30, 2000, compared to Rs.68.2
million or 54% of revenues for the quarter ended September 30, 1999,
representing an increase of Rs.205.3 million, or 301%. This increase was
primarily attributable to a Rs.32 million increase in software and hardware
purchased for resale, a Rs.123.7 million increase in leased line charges due to
the increased capacity of our network backbone, Rs.3.7 million towards web
development charges and a Rs.0.8 million increase in domain registration
charges.
Selling, general and administrative expenses. Selling, general and
administrative expenses were Rs.544.4 million ($11.8 million) for the quarter
ended September 30, 2000, compared to Rs.125.1 million for the quarter ended
September 30, 1999, representing an increase of Rs.419.3 million, or 335%. This
increase was primarily attributable to a growth in staff from 493 as of
September 30, 1999 to 1,084 as of September 30, 2000 resulting in an increase in
employee expenses of Rs.90.5 million, a Rs.161.2 million increase in marketing
expenses relating to the launch of our consumer Internet access services
division and portals division, and increases in travel expenses of Rs.22.6
million, office rental expenses of Rs.12.5 million and increase in telephone
charges of Rs.6.5 million.
Depreciation and amortization. Depreciation and amortization was
Rs.451.6 million ($9.8 million) for the quarter ended September 30, 2000,
compared to Rs.27.1 million for the quarter ended September 30, 1999,
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representing an increase of Rs.424.5 million. This increase was primarily
attributable to capital expenditures of Rs.636.3 million during the period from
September 1999 to September 2000, including the purchase of routers, modems,
ports, servers and other capital equipment in connection with the addition of
points of presence to our network, amortization of deferred compensation charge
amounting to Rs.28.4 million ($0.6 million) and amortization of goodwill arising
out of the IndiaWorld Communications acquisition and investment in CricInfo
Limited amounting to Rs.328.6 million ($7.1 million).
Interest expense. Interest income was Rs.68.8 million ($1.5 million) for
the quarter ended September 30, 2000, compared to an interest expense of Rs.11.0
million for the quarter ended September 30, 1999, representing a decrease of
Rs.79.8 million. This was attributable to interest earned on deposits placed
with banks amounting to Rs.68.8 million ($1.5 million). The investment funds
were provided by our public offerings.
Other income. Other income was Rs.68.9 million ($1.5 million) for the
quarter ended September 30, 2000, representing foreign exchange gain of Rs 68.1
million compared to Rs.0.02 million for the quarter ended September 30, 1999,
representing an increase of Rs.68.88 million.
Net Income. Our net loss was Rs.614.9 million ($13.4 million) for the
quarter ended September 30, 2000, compared to a net loss of Rs.76.9 million for
the quarter ended September 30, 1999.
Six months ended September 30, 2000 compared to six months ended September 30,
1999
Revenues. We recognized Rs.756.8 million ($16.4 million) in revenues for
the six months ended September 30, 2000, as compared to Rs.208.2 million for the
six months ended September 30, 1999, representing an increase of Rs.548.6
million, or 263%. Revenues for the six months ended September 30, 2000 exclude
Rs.63.6 million ($1.4 million) of deferred income representing consumer access
subscriptions which had been purchased but not yet used by the consumer
subscribers. This increase was primarily attributable to increase in number of
customers and introduction of new service offerings.
Cost of Revenues. Cost of revenues were Rs.470.3 million ($10.2 million)
or 62% of revenues for the six months ended September 30, 2000, compared to
Rs.107.1 million or 51% of revenues for the six months ended September 30, 1999,
representing an increase of Rs.363.2 million, or 339%. This increase was
primarily attributable to a Rs.60.5 million increase in software and hardware
purchased for resale, a Rs.193.7 million increase in leased line charges due to
the increased capacity of our network backbone, Rs.3.9 million towards web
development charges.
Selling, general and administrative expenses. Selling, general and
administrative expenses were Rs.914.3 million ($19.9 million) for the six months
ended September 30, 2000, compared to Rs.209.2 million for the six months ended
September 30, 1999, representing an increase of Rs.705.1 million, or 337%. This
increase was primarily attributable to a growth in staff from 493 as of
September 30, 1999 to 1,084 as of September 30, 2000 resulting in an increase in
employee expenses of Rs.173.5 million, a Rs.268.4 million increase in marketing
expenses relating to the launch of our consumer Internet access services
division and portals division, and increases in travel expenses of Rs.40.4
million, office rental expenses of Rs.23.0 million and increase in telephone
charges of Rs.44.4 million.
Depreciation and amortization. Depreciation and amortization was
Rs.622.3 million ($13.5 million) for the six months ended September 30, 2000,
compared to Rs.48.6 million for the six months ended September 30, 1999,
representing an increase of Rs.573.7 million. This increase was primarily
attributable to capital expenditures of Rs.1,517.1 million during the period
from September 1999 to September 2000, including the purchase of routers,
modems, ports, servers and other capital equipment in connection with the
addition of points of presence to our network, amortization of deferred
compensation charge amounting to Rs.47.3 million ($1.1 million) and amortization
of goodwill arising out of the IndiaWorld Communications acquisition and the
CricInfo Limited investment amounting to Rs.415.6 million ($9.0 million).
Interest expense. Interest income was Rs.185.5 million ($4.0 million)
for the six months ended September 30, 2000, compared to an interest expense of
Rs.20.6 million for the six months ended September 30, 1999, representing a
decrease of Rs.205.6 million. This was attributable to interest earned on
deposits placed with
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banks amounting to Rs.198.0 million ($4.3 million) offset by an interest expense
of Rs.12.4 million ($0.3 million). The investment funds were provided by our
public offerings.
Other income. Other income was Rs.128.9 million ($2.8 million) for the
six months ended September 30, 2000, compared to Rs.0.5 million for the six
months ended September 30, 1999, representing foreign exchange gain of Rs.125.0
million ($2.7 million).
Net Income. Our net loss was Rs.793.2 million ($17.2 million) for the
six months ended September 30, 2000, compared to a net loss of Rs.128.7 million
for the six months ended September 30, 1999.
SEASONALITY
Given the early stage of the development of the Internet in India, the
rapidly evolving nature of our business and our limited operating history, we
cannot predict to what extent, if at all, our operations will prove to be
seasonal.
LIQUIDITY AND CAPITAL EXPENDITURES
Since inception, we have financed our operations primarily through a
combination of equity sales and borrowings from institutions and banks. During
fiscal 1998, 1999 and 2000, we received Rs.38.5 million, Rs.307.5 million, and
Rs.10,220.0 million, respectively, in net proceeds from the sale of equity
shares.
In July 1999, we agreed to sell 481,000 equity shares to Sterling
Commerce for $5.0 million. We completed this transaction in September 1999 and
used the funds for general corporate purposes, primarily the repayment of debt.
In October 1999, we completed our initial public offering and issued
19,205,000 ADSs (representing 4,801,250 equity shares) at a price of $4.50 per
share. We received approximately $79.2 million in cash, net of underwriting
discounts, commissions and other offering costs. We used approximately $28.0
million of these proceeds to purchase 24.5% of the outstanding shares of
IndiaWorld Communications and an additional $12.0 million as a non-refundable
deposit towards the exercise of our option to complete the acquisition by
purchasing the remaining 75.5% of the outstanding shares of IndiaWorld
Communications. We also used approximately $24.7 million of these proceeds to
fund network expansion and enhancements and to advertise and promote our brand.
We used the balance of the proceeds from our initial public offering for general
corporate purposes. Pending this use we invested these proceeds in high quality,
interest bearing instruments.
In February 2000, we completed a secondary offering and issued 1,868,700
ADSs (representing 467,175 equity shares) at a price at $80.00 per ADS. We
received approximately $141.7 million, net of underwriting discounts, commission
and other costs. We used approximately $48 million of the proceeds from our
public offering to complete our acquisition of IndiaWorld Communications. We
intend to use the balance of the proceeds for general corporate purposes.
Pending this use we invested these proceeds in high quality, interest bearing
instruments.
The following table summarizes our statements of cash flows for the
periods presented:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, SIX MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------------
1998 1999 2000 2000 2000
----------- ------------ --------------- ---------------- ------------
INDIAN RUPEES U.S. DOLLARS
--------------------------------------------------------------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net loss ......................... (100,590,364) (187,375,665) (381,896,719) (793,236,530) (17,221,809)
Net decrease (increase) in
working capital ................ 7,256,536 (33,212,328) (254,557,813) (362,606,175) (7,872,474)
Other adjustments for non-cash
items .......................... 19,383,346 49,200,230 262,516,281 642,268,056 13,944,161
Net cash provided by (used in)
operating activities ........... (73,950,482) (171,387,763) (373,938,251) (513,574,649) (11,150,122)
Net cash provided by (used in)
investing activities ........... (77,069,635) (145,999,547) (2,611,693,743) (3,460,582,364) (75,132,054)
Net cash provided by (used in)
financing activities ........... 159,449,294 443,023,096 10,167,709,373 (203,340,629) (4,414,690)
Net increase (decrease) in cash
and cash equivalents ........... 8,429,177 115,635,786 7,182,077,379 (4,177,497,642) (90,696,866)
</TABLE>
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Our principal capital and liquidity needs historically have related to
developing our network infrastructure and our corporate network and electronic
commerce products, establishing our customer service and support operations,
developing our sales and marketing activities and for general working capital
needs. Prior to 1998, our capital needs were primarily met by funding from our
parent company, Satyam Computer Services, and borrowings from institutions and
banks. As we placed greater emphasis on expanding our network infrastructure and
developing our consumer Internet access and online portal and content services,
we sought additional capital from other sources, including vendor capital leases
and other vendor financing arrangements and through private placements of our
securities.
Cash used in operating activities for the six months ended September 30,
2000 was Rs.513.6 million ($11.1 million) primarily attributable to a net loss
of Rs.793.2 million ($17.2 million), increases in accounts receivable of
Rs.309.1 million ($6.7 million), prepaid expenses of Rs.109.7 million ($2.4
million) and other assets of Rs.231.6 million ($5.0 million), inventories of
Rs.25.6 million ($0.5 million) partially offset by depreciation of plant and
equipment and amortization of Rs.622.2 million ($13.5 million), an increase in
trade accounts payable by Rs.66.8 million ($1.5 million) and an increase in
deferred revenue of Rs.63.6 million ($1.4 million). Cash used in investing
activities during the six months ended September 30, 2000 was Rs.3,461 million
($75.1 million), principally as a result of the purchase consideration paid for
acquisition of IndiaWorld Communications amounting to Rs.2,173 million ($47.1
million) including the stamp duty paid in connection with the acquisition of
the shares, expenditure on license fees of Rs.23.3 million ($0.5 million) and an
amount of Rs.1,156.6 million ($25.1 million) towards the purchase of routers,
modems, ports, servers and other capital equipment in connection with the
expansion of our servers and other capital equipment in connection with the
expansion of our network. Cash provided by financing activities was Rs.203.3
million ($4.4 million) for the six months ended September 30, 2000, which
consisted primarily of repayment of Rs.107.6 million ($2.4 million) of
debentures to IDBI Bank and repayment of Rs.100.6 million ($2.3 million) of term
loan to Exim Bank.
Our aggregate billings for quarter ended September 30, 2000 were
approximately Rs.494.6 million ($10.7 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.435.2 million ($9.4 million) and deferred Rs.59.4 million ($1.3
million) of billings in the quarter ended September 30, 2000. Our deferred
revenues balance was Rs.214.1 million ($4.6 million) as of September 30, 2000.
INCOME TAX MATTERS
As of September 30, 2000, we had a net operating loss carryforward of
approximately Rs.1,490 million ($32.4 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%. We cannot assure you that the 10.0% surcharge will
be in effect for a limited period of time or that additional surcharges will not
be implemented by the Government of India. Dividends declared, distributed or
paid by an Indian corporation are subject to a dividend tax of 22.0%, 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 1997, 1998 and 1999 were 7.2%, 13.2%, and 5.0%,
respectively. Under our Internet service provider license, we are given the
right to establish the prices we charge to our subscribers, as determined by
market forces. However, under the conditions of our license, the Telecom
Regulatory Authority of India may review and fix the prices we charge our
subscribers at any time. If the Telecom Regulatory Authority were to fix prices
for the Internet service provider services we provide, we might not be able to
increase the prices we charge our subscribers to mitigate the impact of
inflation, which could have a material adverse effect on our business, results
of operations and financial condition.
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DEBT FINANCING
In March 2000, we privately placed 1,075,000 secured redeemable,
non-convertible debentures of Rs.100 each with IDBI Bank Ltd. resulting in net
proceeds of Rs.107.5 million. These debentures are secured by our buildings and
are redeemable at par in March 2002. These debentures were repaid in June 2000.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. We
currently do not engage or plan to engage in derivative instruments or hedging
activities.
RISKS RELATED TO OUR BUSINESS
Any investment in our ADSs involves a high degree of risk. You should
consider carefully the following information about these risks, together with
the other information contained in this report, before you decide to buy our
ADSs. If any of the following risks actually occur, our company could be
seriously harmed. In any such case, the market price of our ADSs could decline,
and you may lose all or part of the money you paid to buy our ADSs.
RISKS RELATED TO INVESTMENTS IN INDIAN COMPANIES
We are incorporated in India, and 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 could halt or delay the liberalization of the
Indian economy and adversely affect business and economic conditions in
India generally and our business in particular.
During the past decade, the Government of India has pursued policies of
economic liberalization, including significantly relaxing restrictions on the
private sector. Nevertheless, the role of the Indian central and state
governments in the Indian economy as producers, consumers and regulators has
remained significant. The Government of India recently changed for the fifth
time since 1996. The rate of economic liberalization could change, and specific
laws and policies affecting technology companies, foreign investment, currency
exchange rates and other matters affecting investment in our securities could
change as well. A significant change in India's economic liberalization and
deregulation policies could adversely affect business and economic conditions in
India generally and our business in particular.
Regional conflicts in South Asia could adversely affect the Indian
economy and cause our business to suffer.
South Asia has from time to time experienced instances of civil unrest
and hostilities among neighboring countries, including between India and
Pakistan. In April 1999, India and Pakistan conducted long-range missile tests.
Since May 1999, military confrontations between India and Pakistan have occurred
in the disputed Himalayan region of Kargil and other border areas. Further, in
October 1999 the leadership of Pakistan changed as a result of a coup led by the
military. Events of this nature in the 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.
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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 stockholders.
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 44% of our equity interests are presently held by foreign
investors. As a result of the 49% limit on foreign equity ownership, we will not
be permitted to sell more than an additional 5% of our equity shares to foreign
investors in the future. We cannot assure you that other forms of financing will
be available on terms favorable to us, or at all. If adequate funds are not
available or are not available on acceptable terms, our ability to fund our
operations, take advantage of unanticipated opportunities, develop or enhance
our infrastructure or services, or otherwise respond to competitive pressures
would be significantly limited. Our business, results of operations and
financial condition could be materially adversely affected by any such
limitation. The 49% limit on foreign equity ownership also restricts our ability
to be acquired by a non-Indian company because a foreign company is prohibited
from acquiring a majority of our equity shares. Likewise, the terms of our
Internet service provider license prevents us from transferring the license to a
third person. This may prevent us from entering into a transaction which would
otherwise be beneficial for our company and the holders of our equity shares.
We are subject to foreign investment restrictions under Indian law that
limit our ability to attract foreign investors which, together with the
lack of a public market for our equity shares, may adversely impact the
value of our ADSs.
Currently there is no public trading market for our equity shares in
India nor can we assure you that we will take steps to develop one. Our equity
securities are not traded publicly in India, but are only traded on Nasdaq
through the ADSs as described in this report. 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. To our knowledge, as of the date of this
report, such an approval has never been granted by the Government of India in
respect of ADSs traded in the United States. 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 resolutions, you will be
prohibited from re-depositing those outstanding equity shares with our
depositary without 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.
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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 November 1, 1997 through October 31, 2000, the
value of the rupee against the U.S. dollar declined by approximately 29%.
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.
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.
The Government of India may change its regulation of our business or the
terms of our license to provide Internet access services without our
consent, and any such change could decrease our revenues and/or increase
our costs which would adversely affect our operating results.
Our business is subject to government regulation under Indian law and to
significant restrictions under our Internet service provider license issued by
the Government of India. These regulations and restrictions include the
following:
- Our Internet service provider license has a term of 15 years and we
have no assurance that the license will be renewed. If we are unable
to renew our Internet service provider license in 2013 for any
reason, we will be unable to operate as an Internet service provider
in India and will lose one of our primary sources of revenue.
- The Government of India and the Telecom Regulatory Authority of
India, or TRAI, maintain the right to regulate the prices we charge
our subscribers. The success of our business model depends on our
ability to price our services at levels we believe are appropriate.
If the government or the TRAI sets a price floor, we may not be able
to attract and retain subscribers. Likewise, if the government or
the TRAI sets a price ceiling, we may not be able to generate
sufficient revenues to fund our operations.
- The Government of India maintains the right to take over our entire
operations or revoke, terminate or suspend our license for national
security and similar reasons without compensation to us. If the
Government of India were to take any of these actions, we would be
prevented from conducting all or part of our business.
We had outstanding performance guarantees for various statutory purposes
totaling Rs.24.5 million ($0.5 million) as of September 30, 2000. 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.
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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%. However, we cannot assure you that the 10.0%
surcharge will be repealed in the future 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 22.0%, 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 stockholders
nor is it a withholding requirement, but rather it is a direct tax payable by
the corporation.
RISKS RELATED TO THE INTERNET MARKET IN INDIA
Our success will depend in large part on the increased use of the
Internet by consumers and businesses in India. However, our ability to exploit
the Internet service provider and other data service markets in India is
inhibited by a number of factors. If India's limited Internet usage does not
grow substantially, our business may not succeed.
The success of our business depends on the acceptance of the Internet in
India which may be slowed or halted by high bandwidth costs and other
technical obstacles in India.
Bandwidth, the measurement of the volume of data capable of being
transported in a communications system in a given amount of time, remains very
expensive in India, especially when compared to bandwidth costs in the United
States. Bandwidth rates are commonly expressed in terms of Kbps (kilobits per
second, or thousands of bits of data per second) or Mbps (megabits per second,
or millions of bits of data per second). Prices for bandwidth capacity are set
by the Indian government and the Telecom Regulatory Authority of India and have
remained high due to, among other things, capacity constraints. Further,
limitations in network architecture in India limit Internet connection speeds to
28 Kbps and below, less than the 33 to 56 Kbps connection speeds on conventional
dial-up telephone lines, and significantly less than the up to 1.5 Mbps
connection speed on cable modems, in the United States. These speed and cost
constraints may severely limit the quality and desirability of using the
Internet in India.
The limited installed personal computer base in India limits our pool of
potential customers and restricts the amount of revenues that our
consumer Internet access services division may generate.
The market penetration rates of personal computers and online 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
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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 online 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;
- inadequate legal infrastructure relating to electronic commerce in
India;
- lack of security of commercial data such as credit card numbers; and
- low number of Indian companies accepting credit card numbers over
the Internet.
If usage of the Internet in India does not substantially increase and
the legal infrastructure and network infrastructure in India are not further
developed, we are not likely to realize any benefits from our investment in the
development of electronic commerce products and services.
RISKS RELATED TO SATYAM INFOWAY
Our limited operating history makes it difficult to evaluate our
business.
We commenced operation of our private data network business in April
1998 and launched our Internet service provider operations and Internet portal
website in November 1998. Accordingly, we have a limited operating history to
evaluate our business. You must consider the risks and difficulties frequently
encountered by companies in the early stages of development, particularly
companies in the new and rapidly evolving Internet service markets. These risks
and difficulties include our ability to:
- continue to develop and upgrade our technology, including our
network infrastructure;
- maintain and develop strategic relationships with business partners;
- offer compelling online services and content; and
- promptly address the challenges faced by early stage, rapidly
growing companies which do not have an experience or performance
base to draw on.
Not only is our operating history short, but we have determined to
compete in three businesses that we believe are complementary. These three
businesses are business network and connectivity services, Internet service
provider and consumer portal. Our three businesses were started at different
times and have only been functioning together since late in 1998. We do not yet
know whether these businesses will prove complementary. We cannot assure you
that we will successfully address the risks or difficulties described above.
Failure to do so could lead to an inability to attract and retain subscribers
for our Internet services and corporate customers for our network services as
well as the loss of advertising revenues.
We have a history of losses and negative cash flows and anticipate this
to continue because our business plan, which is unproven, calls for
additional subscribers and other customers to attain profitability.
Since our founding, we have incurred significant losses and negative
cash flows. As of September 30, 2000, we had an accumulated deficit of
approximately $32.4 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.
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Our ability to compete in the Internet service provider market is
hindered by the fact that our largest 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 approximately
500,000 subscribers as of September 30, 2000. 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:
- 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 further lower the rates we charge for our products
and services in response to new pricing models introduced by new and
existing competition in the Internet services market which would
significantly decrease our revenues.
A significant number of new competitors have recently entered India's
recently liberalized Internet service provider market, and we expect additional
competitors to emerge in the near future. As of May 2000, approximately 315
companies had obtained Internet service provider licenses in India, including 54
companies which have obtained licenses to offer Internet service provider
services throughout India. New entrants into the national Internet service
provider market in India may enjoy significant competitive advantages over our
company, including greater financial resources, which could allow them to charge
Internet access fees that are lower than ours in order to attract subscribers.
Since May 2000, we have offered unlimited Internet access to consumers for a
fixed price. A number of our competitors, including Dishnet, Zee Telefilms and
VSNL, also offer unlimited Internet access for a fixed price. In addition, some
competitors offers free Internet service. These factors have resulted in
significant reduction in actual average selling prices for consumer ISP services
over the past several quarters. We expect the market for consumer Internet
access to continue to be highly price competitive as late market entrants
attempt to acquire customers.
Our online portal, www.sify.com, faces significant competition from
well-established Indian content providers, including RediffontheNet, which
recently completed an offering in the United States. Some of these sites
currently have greater traffic than our site and offer some features that we do
not. Further, the dominant Internet portals continue to be the online services
and search engine companies based in the United States, such as America Online,
Microsoft Network, Yahoo!, Excite@Home, Infoseek and Lycos. These companies have
been developing specially branded or co-branded products designed for audiences
in specific markets. We expect that these companies will deploy services that
are targeted at the Indian market. For example, Yahoo! launched an Indian
service in June 2000.
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 or
operating losses, loss of market share and diminished value in our services, as
well as different pricing, service or marketing decisions. We cannot assure you
that we will be able to successfully compete against current and future
competitors.
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Our marketing campaign to establish brand recognition and loyalty for
the Satyam Online and SIFY brands could be unsuccessful or, if
successful, may not benefit our company if in the future we are no
longer permitted to use the "Satyam" trademark that we license from
Satyam Computer Services.
In order to expand our customer base and increase traffic on our
websites, we must establish, maintain and strengthen the Satyam Online and SIFY
brands. We plan to increase substantially our marketing expenditures to
establish brand recognition and brand loyalty. If our marketing efforts do not
produce a significant increase in consumer traffic to offset our marketing
expenditures, our losses will be increased or, to the extent that we are
generating profits, our profits will be decreased. Furthermore, our Internet
portal will be more attractive to advertisers if we have a large audience of
consumers with demographic characteristics that advertisers perceive as
favorable. Therefore, we intend to introduce additional and enhanced content,
interactive tools and other services and features in the future in an effort to
retain our current subscribers and users and attract new ones. Our reputation
and brand name could be adversely affected if we are unable to do so
successfully.
"Satyam" is a trademark owned by Satyam Computer Services Limited, or
Satyam Computer Services, our parent company. We have a license to use the
"Satyam" trademark for so long as Satyam Computer Services continues to own at
least 51% of our company. If there is a change of control in our company,
however, Satyam Computer Services may terminate our license to use the "Satyam"
trademark upon two years' prior written notice. Termination of our license to
use the "Satyam" trademark would require us to invest significant funds in
building a new brand name and could have a material adverse effect on our
business, results of operations and financial condition.
If our efforts to retain our subscribers through investment in network
infrastructure and customer and technical support are unsuccessful, our
revenues will decrease without a corresponding reduction in costs.
Our sales, marketing and other costs of acquiring new subscribers are
substantial relative to the fees actually derived from these subscribers.
Accordingly, our long-term success depends to a great extent on our ability to
retain our existing subscribers, while continuing to attract new subscribers. We
invest significant resources in our network infrastructure and in our customer
and technical support capabilities to provide high levels of customer service.
We cannot be certain, however, that these investments will maintain or improve
subscriber retention. We believe that intense competition from our competitors,
some of whom may offer free hours of service or other enticements for new
subscribers, has caused, and may continue to cause, some of our 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 prevailing prices charged determine the amount of revenues
generated by our consumer Internet services division;
- advertising and electronic commerce activity on www.sify.com
determines the amount of revenues generated by our online portal and
content offerings division; and
- the products developed by our strategic partners and the usage
thereof by our customers determines the amount of revenues generated
by our corporate network and technology services division.
Our future revenues are difficult to forecast and, in addition to the
foregoing, will depend on the following:
- new Internet sites, services, products or pricing policies
introduced by our competitors may require us to introduce new
offerings or reduce the prices we charge our customers for Internet
access;
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- our capital expenditures and other costs relating to the expansion
of our operations could affect the completion of our network or
could require us to generate additional revenue in order to be
profitable;
- the timing and nature of any agreements we enter into with strategic
partners will determine the amount of revenues generated by our
corporate network and technology services division;
- the timing and nature of our marketing efforts could affect the
number of our subscribers and the level of electronic commerce
activity on our websites;
- our ability to successfully integrate operations and technologies
from any acquisitions, joint ventures or other business combinations
or investments, including our joint ventures with ICICI Bank,
Citibank, Bank of Madura and RPG Netcom and our acquisition of
IndiaWorld Communications and investment in CricInfo;
- 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 yearly comparisons of our results of operations
as indicators of future performance. It is possible that in some future periods
our operating results may be below the expectations of public market analysts
and investors. In this event, the price of our ADSs may underperform or fall.
Because we lack full redundancy for our computer systems, a systems
failure could prevent us from operating our business.
We rely on the Internet and, accordingly, depend upon the continuous,
reliable and secure operation of Internet servers, related hardware and software
and network infrastructure such as lines leased from service providers operated
by the Government of India. We have a back-up data facility but we do not have
full redundancy for all of our computer and telecommunications facilities. As a
result, failure of key primary or back-up systems to operate properly could lead
to a loss of customers, damage to our reputation and violations of our Internet
service provider license and contracts with corporate customers. These failures
could also lead to a decrease in value of our ADSs, significant negative
publicity and litigation. Recently, several large Internet companies have
suffered highly publicized system failures which resulted in adverse reactions
to their stock prices, significant negative publicity and, in some instances,
litigation.
We have suffered service outages from time to time. We guarantee to our
corporate customers that our network will be operational 99% of the time, and
our Internet service provider license requires that we provide an acceptable
level of service quality and that we remedy customer complaints within a
specified time period. Our computer and communications hardware are protected
through physical and software safeguards. However, they are still vulnerable to
fire, storm, flood, power loss, telecommunications failures, physical or
software break-ins and similar events. We do not carry business interruption
insurance to protect us in the event of a catastrophe even though such an event
could lead to a significant negative impact on our business. Any sustained
disruption in Internet access provided by third parties could also have a
material adverse effect on our business.
Security breaches could damage our reputation or result in liability to
us.
Our facilities and infrastructure must remain secure and be perceived by
consumers to be secure, because we retain confidential customer information in
our database. Despite the implementation of security measures, our
infrastructure may be vulnerable to physical break-ins, computer viruses,
programming errors or similar disruptive problems. If a person circumvents our
security measures, he or she could jeopardize the security of confidential
information stored on our systems, misappropriate proprietary information or
cause interruptions in our operations.
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We may be required to make significant additional investments and efforts to
protect against or remedy security breaches. A material security breach could
damage our reputation or result in liability to us, and we do not carry
insurance that protects us from this kind of loss.
The security services that we offer in connection with our business
customers' networks cannot assure complete protection from computer viruses,
break-ins and other disruptive problems. Although we attempt to limit
contractually our liability in such instances, the occurrence of these problems
could result in claims against us or liability on our part. These claims,
regardless of their ultimate outcome, could result in costly litigation and
could damage our reputation and hinder ability to attract and retain customers
for our service offerings.
If we are unable to manage the rapid growth required by our business
strategy, our results of operations will be adversely affected.
We have experienced and are currently experiencing a period of
significant growth. As of September 30, 2000, we had 1,084 employees, an
increase of 120% from the 493 employees we had as of September 30, 1999. 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, Mr. Zacharias, our
President and Chief Operating Officer, Mr. Santhanakrishnan, our Chief Financial
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 Sterling Commerce are
exclusive to us within the Indian market with regard to specific products, so
long as we maintain stated minimum performance 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 also provide
access to a co-branded version of the AOL Instant Messenger service to our
portal customers and this proprietary service is an important feature of our
Website.
IndiaWorld Communications is engaged in disputes which, 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 are involved in litigation with a party
located in the United States which has alleged that the activities of IndiaWorld
Communications infringe with a United States trademark for the
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term "IndiaWorld," and associated logos and trade dress purportedly owned by
this third party. We have been advised by the prior owners of IndiaWorld
Communications that no such infringement has taken place and they have commenced
legal action in federal court to cancel the United States trademark which they
believe was improperly granted and to assert other claims. Our contract with the
prior owners of IndiaWorld Communications includes an indemnity for past
infringement. Further, we presently do not believe that the disputed marks are
material to our business strategy 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. We and IndiaWorld
Communications have also been contacted by a party who alleges, among other
things, that he is entitled to an equity ownership in IndiaWorld Communications.
We believe that this claim is also covered by the contractual indemnity provided
by the prior owners of IndiaWorld Communications. Nonetheless, any dispute such
as those described above creates uncertainty as to the possible outcome,
including whether or not our indemnity will be effective in protecting us, and
also could divert management time and attention away from our business.
We face risks associated with our joint ventures with ICICI Bank,
Citibank, Bank of Madura and RPG Netcom, our acquisition of IndiaWorld
Communications, our investment in CricInfo Limited and with other
potential acquisitions, investments, strategic partnerships or other
ventures, including whether any such transactions can be 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 which we exercised in June 2000. In
November and December 1999, we also formed alliances with ICICI Bank, Citibank,
Bank of Madura and RPG Netcom. In May 2000, we entered into a partnership with
VeriSign to provide managed digital certificate-based authentication services in
India. In June 2000, we entered into an agreement with America Online to
distribute a co-branded version of the AOL Instant Messenger. In July 2000, we
completed our investment in CricInfo Limited and agreed to acquire
Indiaplaza.com. In September 2000, we made an investment in Eduempire.com. These
transactions were only recently entered into and most of them are not yet
operational. We may acquire or make investments in other complementary
businesses, technologies, services or products, or enter into additional
strategic partnerships with parties who can provide access to those assets, if
appropriate opportunities arise in the future. From time to time we have had
discussions and negotiations with a number of companies regarding our acquiring,
investing in or partnering with their businesses, products, services or
technologies, and we regularly engage in such discussions and negotiations in
the ordinary course of our business. Some of those discussions also contemplate
the other party making an investment in our company. We may not identify
suitable acquisition, investment or strategic partnership candidates in the
future, or if we do identify suitable candidates, we may not complete those
transactions on commercially acceptable terms or at all. We may experience
difficulty in integrating the services of ICICI Bank, Citibank, Bank of Madura,
RPG Netcom, VeriSign, CricInfo and AOL Instant Messenger with our services, and
these alliances may not provide all or a portion of the anticipated benefits. We
could have difficulty in assimilating IndiaWorld Communications' or Indiaplaza's
personnel, operations, technology and software, or that of another company we
acquire, with our company. In addition, the key personnel of an acquired company
may decide not to work for us. If we make other types of acquisitions, we could
have difficulty in integrating the acquired products, services or technologies
into our operations. These difficulties could disrupt our ongoing business,
distract our management and employees and increase our expenses which could
adversely affect our operating results and cause the price of our ADSs to
decline. Furthermore, we may incur indebtedness or issue additional equity
securities to pay for any future acquisitions. The issuance of additional equity
securities would dilute the ownership interests of the holders of our ADSs.
Satyam Computer Services controls our company and may have interests
which conflict with those of our other stockholders or holders of our
ADSs.
As of the date of this report, Satyam Computer Services beneficially
owned approximately 53% of our equity shares. As a result, it is able to
exercise control over many matters requiring approval by our stockholders,
including the election of directors and approval of significant corporate
transactions. Under Indian law, a simple majority is sufficient to control all
stockholder action except for those items which require approval by a special
resolution. If a special resolution is required, the number of votes cast in
favor of the resolution must not be less than three times the number of votes
cast against it. Examples of actions that require a special resolution include:
- altering our Articles of Association;
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- issuing additional shares of capital stock, except for pro rata
issuances to existing stockholders;
- commencing any new line of business; and
- commencing a liquidation.
Circumstances may arise in which the interests of Satyam Computer
Services could conflict with the interests of our other stockholders or holders
of our ADSs. Satyam Computer Services could delay or prevent a change of control
of our company even if a transaction of that sort would be beneficial to our
other stockholders, including the holders of our ADSs. In addition, we have an
agreement with South Asia Regional Fund, an investor in our company, which
assures them a board seat and provides specified additional rights to them.
We must make substantial capital expenditures in new network
infrastructure which, if not offset by additional revenue, will
adversely affect our operating results.
We must continue to expand and adapt our network infrastructure as the
number of users and the amount of information they wish to transfer increases
and as the requirements of our customers change. The expansion of our Internet
network infrastructure will require substantial financial, operational and
management resources. The development of private Internet access and other data
networks in India is a new business for private markets entrants such as our
company and we may encounter cost overruns, technical difficulties or other
project delays in connection with any or all of the new facilities. We can give
no assurance that we will be able to expand or adapt our network infrastructure
to meet the additional demand or our customers' changing requirements on a
timely basis, or at a commercially reasonable cost, or at all. A portion of our
capital expenditures for network development are fixed, and the success of our
business depends on our ability to grow our business to utilize this capacity.
In addition, if demand for usage of our network were to increase faster than
projected, our network could experience capacity constraints, which would
adversely affect the performance of the system.
The laws of India do not protect intellectual property rights to the
same extent as those of the United States, and we may be unsuccessful in
protecting our intellectual property rights.
Our intellectual property rights are important to our business. We rely
on a combination of copyright and trademark laws, trade secrets, confidentiality
procedures and contractual provisions to protect our intellectual property.
Our efforts to protect our intellectual property may not be adequate.
Our competitors may independently develop similar technology or duplicate our
products or services. Unauthorized parties may infringe upon or misappropriate
our products, services or proprietary information. In addition, the laws of
India do not protect proprietary rights to the same extent as laws in the United
States, and the global nature of the Internet makes it difficult to control the
ultimate destination of our products and services. For example, Indian statutory
law does not protect service marks. The misappropriation or duplication of our
intellectual property could disrupt our ongoing business, distract our
management and employees, reduce our revenues and increase our expenses. In the
future, litigation may be necessary to enforce our intellectual property rights
or to determine the validity and scope of the proprietary rights of others. Any
such litigation could be time-consuming and costly.
We could be subject to intellectual property infringement claims as the
number of our competitors grows and the content and functionality of our
websites or other product or service offerings overlap with competitive
offerings. Defending against these claims, even if not meritorious, could be
expensive and divert our attention from operating our company. If we become
liable to third parties for infringing their intellectual property rights, we
could be required to pay a substantial damage award and forced to develop
non-infringing technology, obtain a license or cease selling the applications
that contain the infringing technology. We may be unable to develop
non-infringing technology or obtain a license on commercially reasonable terms,
or at all.
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
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rate or timing of increases, if any, in the use of our websites or expand and
upgrade our systems and infrastructure to accommodate such increases. Our
systems may not accommodate increased use while maintaining acceptable overall
performance. Service lapses could cause our users to use the online services of
our competitors.
We do not plan to pay dividends in the foreseeable future.
We do not anticipate paying cash dividends to the holders of our ADSs in
the foreseeable future. Accordingly, investors must rely on sales of their ADSs
after price appreciation, which may never occur, as the only way to realize on
their investment. Investors seeking cash dividends should not purchase our ADSs.
RISKS RELATED TO THE INTERNET
We may be liable to third parties for information retrieved from the
Internet.
Because users of our Internet service provider service and visitors to
our websites may distribute our content to others, third parties may sue us for
defamation, negligence, copyright or trademark infringement, personal injury or
other matters. We could also become liable if confidential information is
disclosed inappropriately. These types of claims have been brought, sometimes
successfully, against online services in the United States and Europe. Others
could also sue us for the content and services that are accessible from our
websites through links to other websites or through content and materials that
may be posted by our users in chat rooms or bulletin boards. We do not carry
insurance to protect us against these types of claims, and there is no precedent
on Internet service provider liability under Indian law. Further, our business
is based on establishing the satyamonline.com network as a trustworthy and
dependable provider of information and services. Allegations of impropriety,
even if unfounded, could damage our reputation, disrupt our ongoing business,
distract our management and employees, reduce our revenues and increase our
expenses.
The success of our strategy depends on our ability to keep pace with
technological changes.
Our future success depends, in part, upon our ability to use leading
technologies effectively, to continue to develop our technical expertise, to
enhance our existing services and to develop new services that meet changing
customer requirements. The market for our service is characterized by rapidly
changing technology, evolving industry standards, emerging competition and
frequent new service introductions. We may not successfully identify new
opportunities and develop and bring new services to market in a timely manner.
Our business may not be compatible with delivery methods of Internet
access services developed in the future.
We face the risk that fundamental changes may occur in the delivery of
Internet access services. Currently Internet services are accessed primarily by
computers and are delivered by modems using telephone lines. As the Internet
becomes accessible by cellular telephones, personal data assistants, television
set-top boxes and other consumer electronic devices, and becomes deliverable
through other means involving digital subscriber lines, coaxial cable or
wireless transmission mediums, we will have to develop new technology or modify
our existing technology to accommodate these developments. Our pursuit of these
technological advances, whether directly through internal development or by
third party license, may require substantial time and expense. We may be unable
to adapt our Internet service business to alternate delivery means and new
technologies may not be available to us at all.
Our product and service offerings may not be compatible with industry
standards developed in the future.
Our ability to compete successfully depends upon the continued
compatibility and interoperability of our services with products and
architectures offered by various vendors. Although we intend to support emerging
standards in the market for Internet access, industry standards may not be
established and, if they become established, we may not be able to conform to
these new standards in a timely fashion or maintain a competitive position in
the market. The announcement or introduction of new products or services by us
or our competitors and any change in industry standards could cause customers to
deter or cancel purchases of existing products or services.
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RISK RELATED TO THE ADSS AND OUR TRADING MARKET
Holders of ADSs are restricted in their ability to exercise preemptive
rights under Indian law and thereby may suffer future dilution of their
ownership position.
Under the Companies Act, 1956 of India, or Companies Act, a company
incorporated in India must offer its holders of equity shares preemptive rights
to subscribe and pay for a proportionate number of shares to maintain their
existing ownership percentages prior to the issuance of any new equity shares,
unless the preemptive rights have been waived by adopting a special resolution
by holders of three-fourths of the company's shares which are voted on the
resolution. At our 2000 Annual General Meeting, our stockholders approved a
special resolution pursuant to which we may issue up to one million equity
shares in connection with acquisitions, 268,500 of which we issued in connection
with our acquisition of IndiaWorld Communications, 551,180 of which we issued in
connection with our acquisition of a 25% stake in CricInfo Limited, 57,692 of
which we have agreed to issue in connection with our investment in Navin.com and
120,000 of which we have agreed to issue in connection with our acquisition of
Indiaplaza. As a result, ADS holders are deemed to have waived their preemptive
rights with respect to their shares. In addition, U.S. holders of ADSs may be
unable to exercise preemptive rights for equity shares underlying ADSs unless
approval of the Ministry of Finance of the Government of India is obtained and a
registration statement under the Securities Act of 1933, as amended, is
effective with respect to the rights or an exemption from the registration
requirements of the Securities Act is available. Our decision to file a
registration statement will depend on the costs and potential liabilities
associated with any given registration statement as well as the perceived
benefits of enabling the holders of our ADSs to exercise their preemptive rights
and any other factors that we deem appropriate to consider at the time the
decision must be made. We may elect not to file a registration statement related
to preemptive rights otherwise available by law to our stockholders. In the case
of future issuances, the new securities may be issued to our depositary, which
may sell the securities for the benefit of the holders of the ADSs. The value,
if any, our depositary would receive upon the sale of such securities cannot be
predicted. To the extent that holders of ADSs are unable to exercise preemptive
rights granted in respect of the equity shares represented by their ADSs, their
proportional interests in our company would be reduced.
Holders of ADSs may be restricted in their ability to exercise voting
rights.
As a holder of ADSs, you generally have the right under the deposit
agreement to instruct the depositary bank to exercise the voting rights for the
equity shares represented by your ADSs.
At our request, the depositary bank will mail to you any notice of
stockholders' meeting received from us together with information explaining how
to instruct the depositary bank to exercise the voting rights of the securities
represented by ADSs. If the depositary bank timely receives voting instructions
from a holder of ADSs, it will endeavor to vote the securities represented by
the holder's ADSs in accordance with such voting instructions. However, the
ability of the depositary bank to carry out voting instructions may be limited
by practical and legal limitations and the terms of the securities on deposit.
We cannot assure you that you will receive voting materials in time to enable
you to return voting instructions to the depositary bank in a timely manner.
Securities for which no voting instructions have been received will not be voted
on a poll.
The market price of our ADSs has been and may continue to be highly
volatile.
The market price of our ADSs has fluctuated widely and may continue to
do so. For example, since our initial public offering in October 1999 through
October 31, 2000 and, after giving effect to the 4-for-1 split of our ADSs in
January 2000, the trading price of our ADSs has ranged from a high of $113 per
ADS to a low of $6.75 per ADS. Many factors could cause the market price of our
ADSs to rise and fall. Some of these factors include:
- our failure to integrate successfully our operations with those of
IndiaWorld Communications or Indiaplaza;
- actual or anticipated variations in our quarterly operating results;
- announcement of technological innovations;
- conditions or trends in the Internet and electronic commerce
industries;
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- the successful implementation by competitors of the free Internet
access model, or the introduction of alternative pricing models, in
India;
- the perceived attractiveness of investment in Indian companies;
- acquisitions and alliances by us or others in the industry;
- changes in estimates of our performance or recommendations by
financial analysts;
- market conditions in the industry and the economy as a whole;
- introduction of new services by us or our competitors;
- changes in the market valuations of other Internet service
companies;
- announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
- additions or departures of key personnel; and
- other events or factors, many of which are beyond our control.
The financial markets in the United States and other countries have
experienced significant price and volume fluctuations, and the market prices of
technology companies, particularly Internet-related companies, have been and
continue to be extremely volatile. Volatility in the price of our ADSs may be
caused by factors outside of our control and may be unrelated or
disproportionate to our operating results. In the past, following periods of
volatility in the market price of a public company's securities, securities
class action litigation has often been instituted against that company. Such
litigation could result in substantial costs and a diversion of our management's
attention and resources.
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 includes 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 stockholders
may hurt the price of our ADSs.
The market price of our ADSs could decline as a result of sales of a
large number of equity shares or ADSs or the perception that such sales could
occur. Such sales also might make it more difficult for us to sell equity
securities in the future at a time and at a price that we deem appropriate. We
intend to issue additional equity shares and ADSs to fund acquisitions and
investments, and the parties to any such future transactions could also decide
to sell them.
Forward-looking statements contained in this report may not be realized.
This report contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of the risks faced by us
described above and elsewhere in this report. We do not intend to update any of
the forward-looking statements after the date of this report to conform such
statements to actual results.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We and IndiaWorld Communications are involved in litigation with 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 prior owners of IndiaWorld
Communications that no such infringement has taken place and they have commenced
legal action in federal court to cancel the United States trademark which they
believe was improperly granted and to assert other claims. Our contract with the
prior owners of IndiaWorld Communications includes an indemnity for past
infringement. Further, we presently do not believe that the disputed marks are
material to our business strategy 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. We and IndiaWorld
Communications have also been contacted by a party who alleges, among other
things, that he is entitled to an equity ownership in IndiaWorld Communications.
We believe that this claim is also covered by the contractual indemnity provided
by the prior owners of IndiaWorld Communications. Nonetheless, any dispute such
as those described above creates uncertainty as to the possible outcome,
including whether or not our indemnity will be effective in protecting us, and
also could divert management time and attention away from our business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 31, 2000, we completed our acquisition of a 25% stake in
CricInfo Limited through the issuance of an aggregate of 2,204,720 ADSs
(representing 551,180 equity shares). The issuance was made solely in the United
Kingdom in a transaction exempt from registration under Regulation S and Section
4(2) of the Securities Act of 1933.
ITEM 6. EXHIBITS AND REPORTS
(a) Our report on Form 6-K which we filed with the SEC on July 12,
2000;
(b) Our report on Form 6-K which we filed with the SEC on July 27,
2000; and
(c) Our report on Form 6-K which we filed with the SEC on August 14,
2000.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
-------------- -----------------------
27.1 Financial Data Schedule.
---------------
(b) Financial Statement Schedules
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunder duly organized.
Date: November 14, 2000
SATYAM INFOWAY LIMITED
By: /s/ T.R. SANTHANAKRISHNAN
-------------------------------------
Name: T.R. Santhanakrishnan
Title: Chief Financial Officer
/s/ K. THIAGARAJAN
-------------------------------------
Name: K. Thiagarajan
Title: General Manager, Finance
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
-------------- -----------------------
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
