<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-11984
U.S. PROSPECTUS
[LOGO OF SILVERLINE TECHNOLOGIES LIMITED]
4,350,000 American Depositary Shares
Silverline Technologies Limited
Representing 8,700,000 Equity Shares
$25.00 per ADS
------------
We are selling 8,700,000 of our equity shares in the form of American
Depositary Shares. Each ADS represents the right to receive two of our equity
shares.
Of the 4,350,000 ADSs that we are selling, 3,045,000 ADSs are being offered
in the United States and Canada by the U.S. underwriters named in this
prospectus and 1,305,000 ADSs are being offered at the same time outside the
United States and Canada by a syndicate of international underwriters. The
underwriters named in this prospectus may purchase up to 650,000 additional
ADSs under certain circumstances.
This is our initial public offering of our ADSs. The ADSs have been approved
for listing on the New York Stock Exchange under the symbol "SLT", subject to
official notice of issuance. Our equity shares are listed in India on The Stock
Exchange, Mumbai, formerly the Bombay Stock Exchange, the Madras Stock Exchange
Ltd., Chennai and The Stock Exchange, Ahmedabad. On June 19, 2000, the last
reported sale price per equity share on The Stock Exchange, Mumbai, was Rs.627,
equivalent to a price of $27.97 per ADS, assuming an exchange rate of Rs.44.85
per U.S. dollar.
------------
Investing in our ADSs involves certain risks. See "Risk Factors" beginning
on page 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------
<TABLE>
<CAPTION>
Per ADS Total
--------- ------------
<S> <C> <C>
Public Offering Price $25.00 $108,750,000
Underwriting Discount $ 1.75 $ 7,612,500
Proceeds to Silverline (before expenses) $23.25 $101,137,500
</TABLE>
The underwriters are offering the ADSs subject to various conditions. The
underwriters expect to deliver the ADSs to purchasers on or about June 23,
2000.
------------
Salomon Smith Barney
ABN AMRO Rothschild
a division of ABN AMRO Incorporated
Jefferies & Company, Inc.
June 20, 2000
<PAGE>
INTERNATIONAL PROSPECTUS
[LOGO OF SILVERLINE TECHNOLOGIES LIMITED]
4,350,000 American Depositary Shares
Silverline Technologies Limited
Representing 8,700,000 Equity Shares
$25.00 per ADS
------------
We are selling 8,700,000 of our equity shares in the form of American
Depositary Shares. Each ADS represents the right to receive two of our equity
shares.
Of the 4,350,000 ADSs that we are selling, 1,305,000 ADSs are being offered
outside the United States and Canada by a syndicate of international
underwriters named in this prospectus and 3,045,000 ADSs are being offered at
the same time inside the United States and Canada by a syndicate of U.S.
underwriters. The underwriters named in this prospectus may purchase up to
650,000 additional ADSs under certain circumstances.
This is our initial public offering of our ADSs. The ADSs have been approved
for listing on the New York Stock Exchange under the symbol "SLT", subject to
official notice of issuance. Our equity shares are listed in India on The Stock
Exchange, Mumbai, formerly the Bombay Stock Exchange, the Madras Stock Exchange
Ltd., Chennai and The Stock Exchange, Ahmedabad. On June 19, 2000, the last
reported sale price per equity share on The Stock Exchange, Mumbai, was Rs.627,
equivalent to a price of $27.97 per ADS, assuming an exchange rate of Rs.44.85
per U.S. dollar.
------------
Investing in our ADSs involves certain risks. See "Risk Factors" beginning
on page 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------
<TABLE>
<CAPTION>
Per ADS Total
--------- ------------
<S> <C> <C>
Public Offering Price $25.00 $108,750,000
Underwriting Discount $ 1.75 $ 7,612,500
Proceeds to Silverline (before expenses) $23.25 $101,137,500
</TABLE>
The underwriters are offering the ADSs subject to various conditions. The
underwriters expect to deliver the ADSs to purchasers on or about June 23,
2000.
------------
Salomon Smith Barney
ABN AMRO Rothschild
CLSA Emerging Markets
June 20, 2000
<PAGE>
[Silverline Offices Map]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Special Note Regarding Forward-Looking Statements........................ 25
Enforcement of Civil Liabilities......................................... 26
Use of Proceeds.......................................................... 27
Dividend Policy.......................................................... 28
Industry Information..................................................... 28
Price Range of Our Equity Shares......................................... 29
Dilution................................................................. 31
Exchange Rates........................................................... 32
Capitalization........................................................... 33
Selected Consolidated Financial Data..................................... 34
Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 36
Business................................................................. 49
Management............................................................... 63
Related Party Transactions............................................... 69
Principal Shareholders................................................... 71
Description of Our Equity Shares......................................... 72
Description of American Depositary Shares................................ 78
Restrictions on Foreign Ownership of Indian Securities................... 86
Exchange Controls........................................................ 88
Government of India Approvals............................................ 89
Taxation................................................................. 91
Shares Eligible For Future Sale.......................................... 96
Underwriting............................................................. 97
Legal Matters............................................................ 99
Experts.................................................................. 99
Where You Can Find More Information...................................... 100
Reports to Security Holders.............................................. 101
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------
Until July 15, 2000, the 25th day after the date of this prospectus, all
dealers that buy, sell or trade these securities, whether or not participating
in this offering, may be required to deliver a prospectus. This is in addition
to the dealers' obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus
and may not contain all the information that may be important to you. Before
making an investment decision, you should read the entire prospectus, including
the consolidated financial statements and the notes to those statements
appearing elsewhere in this prospectus. In particular, you should carefully
consider the risks discussed under the heading "Risk Factors". See also
"Special Note Regarding Forward-Looking Statements".
Our Company
We are an Indian provider of information technology services. We offer our
clients a broad range of these services, including application development,
migration and maintenance, and e-business solutions. We have also begun to
focus on customer relationship management or CRM services, which enable our
clients more effectively to manage their customers as key assets.
Our flexible off-shore/off-site delivery capabilities, which we use on many
of our projects, allow us to access highly skilled, relatively low cost
information technology professionals in India and to integrate our work on a
client project at one of our software development centers with our efforts at
the project site. We undertake engagements both on a project management basis,
where we have complete responsibility for managing the project, and, to a
lesser extent, on a more integrated basis where our employees work in-house for
our clients' information technology departments. Some of our project management
assignments are also done exclusively on-site at the project's location. We
believe that our services are distinguished by our proven processes and
methodologies.
We have approximately 1,350 employees, with about 920 in India and 430 in
the United States. From 1995 through 1999, we achieved compound annual revenue
growth and net income growth of 22% and 29%, respectively. During that same
period, our net income increased from $5.7 million to $15.8 million. We focus
on marketing our information technology solutions primarily to companies in
industries that have historically devoted relatively large percentages of their
overall budgets to information technology, such as business information
services, financial services and telecommunications.
Our Opportunity
Worldwide demand for information technology services is growing rapidly and
certain segments within the broad information technology services market are
experiencing particularly rapid growth. According to International Data
Corporation, an information technology market research firm, the market for
Internet professional services will grow from $7.8 billion in 1998 to
approximately $78.5 billion in 2003. Factors contributing to the growth in the
information technology services industry as it transitions from a traditional
back-office role to a key driver in competitively positioning enterprises
include:
. Impact of the Internet. We believe that the development of the Internet
has accelerated business competition and raised consumer expectations
leading companies to offer more sophisticated Internet services.
. Competitive necessity. Strategic use of information technology enables
enterprises to reduce cycle times and production costs, improve the rate
of introduction of new products and services and price products and
services more competitively.
. Increasing complexity of information technology. As information
technology solutions have become increasingly complex, enterprises are
increasingly turning to outside firms to provide information technology
solutions that meet their business objectives.
. Growth in packaged software applications. Companies are replacing legacy
or existing applications with packaged software applications.
Implementing these packages requires highly specialized skills and
functional experience.
<PAGE>
As a result of these trends, together with recent advances in
telecommunications, we believe that companies are increasing their reliance on
the outsourcing of information technology services. We believe that our off-
shore infrastructure offers a number of benefits over more traditional
outsourcing methods, including faster delivery of new information technology
solutions, more flexible scheduling and significant cost savings.
Our Solution
We believe that we offer a number of benefits to our clients which enables
us to capitalize on the rapid growth in the information technology services
industry:
. A broad range of information technology services. We provide a broad
range of information technology services, including application
development, migration and maintenance, and e-business solutions. We have
also begun focusing on CRM services.
. Proven scaleable processes with SEI-CMM Level 4 rating. Our proven
processes and methodologies, which we use at our three software
development centers in India, have been assessed as Level 4 under the
Software Engineering Institute's Capability Maturity Model, or SEI-CMM, a
rating system for information technology companies. The Software
Engineering Institute is a research development center operated by
Carnegie Mellon University.
. Highly skilled, relatively low cost information technology
professionals. By having software development centers in both India and
the U.S. we are able to provide near 24-hour service. Our Indian software
development centers are staffed with relatively low-cost professionals,
whose average annual wages, we believe, are historically approximately
10% that of their U.S. counterparts.
. Our in-house training institute. We believe our in-house training
facility, the Silverline Institute of Software Technology, addresses our
training needs and provides us with a competitive advantage in recruiting
and retaining information technology professionals.
. Our industry-specific knowledge and experience. Our extensive knowledge
and experience in the business information services, financial services
and telecommunications industries reduces our learning curve on new
engagements in these industries, and allows us to accurately define and
deliver tailored solutions that effectively address the challenges that
our clients face.
Our Strategy
Our goal is to be the leading Indian provider of information technology
services. We intend to achieve this goal through our business strategy which
emphasizes the following elements:
. Expanding our services offerings;
. Increasing the services we perform off-shore;
. Developing and enhancing long-term client relationships;
. Attracting and retaining skilled personnel;
. Pursuing strategic acquisitions and relationships; and
. Capitalizing on our investments in infrastructure.
Risk Factors
You should consider the risks of investing in our ADSs and the impact of
various events which could adversely affect our business, results of operations
and financial condition. Please see "Risk Factors" beginning on page 5 for a
more detailed description of these risks.
2
<PAGE>
Corporate Information
Our principal executive offices are located at Unit 121, SDF IV, SEEPZ,
Andheri (East), Mumbai (Bombay) 400096, India and our telephone number is 91-
22-829-1950. Our principal offices in the United States are located at 53
Knightsbridge Road, Piscataway, New Jersey 08854 and our telephone number is
(732) 457-0200.
The Offering
American Depositary Shares
offered.................... 4,350,000 ADSs representing 8,700,000 equity
shares.
Equity shares outstanding
after this offering........ 73,200,000 equity shares.
Use of proceeds............. For capital expenditures consisting primarily of
the build-out of our existing facilities, working
capital requirements, expansion of our sales and
marketing efforts, potential acquisitions and
other strategic transactions, and other general
corporate purposes.
------------
Unless otherwise indicated, all information contained in this prospectus:
. excludes, for the purpose of determining the number of our equity shares
outstanding, 2,000,000 equity shares issuable upon the exercise of
warrants issued to the "Silverline Group of Companies Employee Welfare
Trust" at an average exercise price of Rs. 365 per equity share in
connection with our Indian employee welfare trust program granted on
November 5, 1999;
. excludes, for the purpose of determining the number of our equity shares
outstanding, 1,000,000 equity shares issuable upon the exercise of stock
options granted on November 12, 1999 at an average exercise price of Rs.
425 per equity share in connection with the Indian employee stock option
plan adopted on November 12, 1999;
. excludes, for the purpose of determining the number of our equity shares
outstanding, up to 1,000,000 ADSs reserved for issuance upon the exercise
of stock options which may be issued by us in connection with our
proposed U.S. employee stock option plan to be adopted prior to this
offering;
. assumes no exercise of the underwriters' option to purchase up to 650,000
additional ADSs to cover over-allotments; and
. reflects the initial public offering price of $25.00 per ADS.
3
<PAGE>
Summary Consolidated Financial Data
You should read the following summary consolidated financial data in
conjunction with the information under "Selected Consolidated Financial Data",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes
appearing elsewhere in this prospectus. Our financial statements are prepared
in Indian rupees and for U.S. GAAP purposes are translated into U.S. dollars
using the average monthly exchange rate for revenues and expenses and the
exchange rate at the end of the reporting period for assets and liabilities.
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
Year Ended December 31, March 31,
------------------------------------------- -----------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- -------- -------------
(in thousands, except per equity share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $39,449 $45,252 $46,769 $60,219 $87,577 $ 16,997 $ 30,998
Cost of revenues sold... 24,743 27,801 25,053 31,273 49,446 9,093 16,112
------- ------- ------- ------- ------- -------- --------
Gross profit............ 14,706 17,451 21,716 28,946 38,131 7,904 14,886
------- ------- ------- ------- ------- -------- --------
Operating expenses:
Selling, general and
administrative
expenses............... 6,407 7,599 10,342 11,316 13,141 2,564 5,688
Stock-based
compensation........... -- -- -- -- 532 -- 862
Depreciation and
amortization........... 1,592 3,234 4,945 4,415 4,095 1,024 939
------- ------- ------- ------- ------- -------- --------
Total operating
expenses............... 7,999 10,833 15,287 15,731 17,768 3,588 7,489
------- ------- ------- ------- ------- -------- --------
Operating income........ 6,707 6,618 6,429 13,215 20,363 4,316 7,397
Other income/(expense),
net.................... (608) (437) (878) (895) (1,380) (544) (284)
------- ------- ------- ------- ------- -------- --------
Income before income
taxes and extraordinary
item................... 6,099 6,181 5,551 12,320 18,983 3,772 7,113
Provision for income
taxes.................. 413 847 1,216 1,482 2,808 598 1,230
------- ------- ------- ------- ------- -------- --------
Income before
extraordinary item..... 5,686 5,334 4,335 10,838 16,175 3,174 5,883
Extraordinary item (net
of taxes).............. -- 59 10 -- 375 375 --
------- ------- ------- ------- ------- -------- --------
Net income.............. $ 5,686 $ 5,275 $ 4,325 $10,838 $15,800 $ 2,799 $ 5,883
======= ======= ======= ======= ======= ======== ========
Earnings per equity
share
Basic:
Income before
extraordinary item... $ 0.13 $ 0.12 $ 0.10 $ 0.26 $ 0.28 $ 0.07 $ 0.09
Extraordinary item.... -- -- -- -- $ (0.01) $ (0.01) --
Net Income............ $ 0.13 $ 0.12 $ 0.10 $ 0.26 $ 0.27 $ 0.06 $ 0.09
Diluted:
Income before
extraordinary item... $ 0.13 $ 0.12 $ 0.10 $ 0.19 $ 0.25 $ 0.05 $ 0.09
Extraordinary item.... -- -- -- -- $ (0.01) $ (0.01) --
Net Income............ $ 0.13 $ 0.12 $ 0.10 $ 0.19 $ 0.24 $ 0.04 $ 0.09
Earnings per ADS
Basic:
Income before
extraordinary item... $ 0.26 $ 0.24 $ 0.20 $ 0.52 $ 0.56 $ 0.14 $ 0.18
Extraordinary item.... -- -- -- -- $ (0.02) $ (0.02) --
Net Income............ $ 0.26 $ 0.24 $ 0.20 $ 0.52 $ 0.54 $ 0.12 $ 0.18
Diluted:
Income before
extraordinary item... $ 0.26 $ 0.24 $ 0.20 $ 0.38 $ 0.50 $ 0.10 $ 0.18
Extraordinary item.... -- -- -- -- $ (0.02) $ (0.02) --
Net Income............ $ 0.26 $ 0.24 $ 0.20 $ 0.38 $ 0.48 $ 0.08 $ 0.18
Weighted average equity
shares used in
computing earnings per
equity share
Basic.................. 42,450 42,450 42,450 42,450 57,150 42,450 64,500
Diluted................ 42,450 42,450 42,450 56,314 65,596 62,289 66,297
ADSs used in computing
earnings per ADS
Basic.................. 21,225 21,225 21,225 21,225 28,575 21,225 32,250
Diluted................ 21,225 21,225 21,225 28,157 32,798 31,145 33,149
See accompanying notes to consolidated financial statements
<CAPTION>
(Unaudited)
At December 31, At March 31, 2000
------------------------------------------- -----------------------
1995 1996 1997 1998 1999 Actual Adjusted(/1/)
------- ------- ------- ------- ------- -------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 834 $ 1,705 $ 7,943 $12,528 $20,662 $ 20,609 $120,082
Working capital......... 13,907 10,843 15,424 21,783 29,075 37,875 137,348
Total assets............ 35,882 49,386 57,224 69,275 87,646 101,125 200,598
Long-term debt (net of
current portion)....... 5,823 7,787 4,399 5,510 317 329 329
Total stockholders'
equity................. 20,448 24,169 34,455 43,280 68,640 76,775 176,248
</TABLE>
--------
(1) Adjusted to give effect to our sale of 4,350,000 ADSs (representing
8,700,000 equity shares) offered hereby at an initial public offering
price per ADS of $25.00.
4
<PAGE>
RISK FACTORS
Investing in this offering involves a high degree of risk. You should
carefully consider the risks described below and the other information in this
prospectus before buying ADSs in this offering. If any of the risks described
below actually occur, our business, results of operations and financial
condition could be materially adversely affected, the trading price of our
shares could decline, and you could lose all or part of your investment. See
also "Special Note Regarding Forward-Looking Statements".
Risks Related To Our Business
Our inability to hire new qualified information technology professionals or
retain our information technology professionals would hinder our ability to
grow and serve our clients.
There is intense global competition, particularly in the United States and
India, for information technology professionals with the skills necessary to
perform the services offered by us. This intense competition has resulted in
rising labor costs. There is also significant emigration of information
technology professionals from India, depleting the pool of available engineers
in India. Currently, we believe we will need to significantly expand our
information technology professional workforce, including our number of project
managers for our e-business and other services. We may not be able to hire and
retain an adequate number of qualified personnel, or be able to do so in a
cost-effective manner. Any inability to hire and retain additional qualified
personnel will impair our ability to bid for or obtain new projects and to
continue to expand our business. In addition, we cannot assure you that we will
be able to integrate and manage new information technology professionals
effectively.
Moreover, any increase in our attrition rates, particularly with respect to
experienced project managers and software engineers, would adversely affect our
business, results of operations and financial condition. The intense level of
competition among information technology companies means that skilled personnel
are frequently being recruited by other companies offering attractive
compensation packages. In addition, approximately 15% of our client contracts
permit our clients to hire our information technology professionals as full
time employees without penalty. We may not be successful in recruiting and
retaining a sufficient number of information technology professionals with the
requisite skills to replace those professionals who leave, and our former
employees may compete with us in the future. Further, we may not be able to
redeploy and retrain our professionals to keep pace with continuing changes in
information technology, evolving standards and changing client preferences. Our
failure to attract and retain skilled personnel to the extent required would
have a material adverse effect on our business, results of operation and
financial condition.
If we lose either of our two large clients or if they significantly reduce the
amount of work they give us, our revenue and operating income would be
materially adversely affected.
In the past two years, we have generated approximately 45% of our revenue
from two corporate clients. In the first three months of 2000 and in the full
year 1999 and 1998, various business units of our largest client, First Data
Corp., in the aggregate accounted for approximately 18%, 30% and 29%,
respectively, of our revenue. In addition, in the first three months of 2000
and in the full year 1999 and 1998, our second largest client, Sky Capital
International (Hong Kong), accounted for approximately 19%, 15% and 16%,
respectively, of our revenue. We expect that a small number of clients will
continue to account for a substantial portion of our revenue for the
foreseeable future.
As a result, if we were to lose either of our two major clients or have
either of our two major clients significantly reduce its volume of business
with us or cancel or defer a significant project with us, either because a
project ends or because work is moved by the client either in-house or to one
of our competitors, our business, results of operations and financial condition
would be materially adversely affected. From time to time, individuals in
information technology departments of some of our clients express an interest
in moving the services we provide for them in-house. In addition, industries in
which we have focused our sales and
5
<PAGE>
marketing efforts, including the business information services, financial
services and telecommunications industries, have begun consolidating and we
believe that this trend will continue for a number of years. Industry
consolidation or the formation of joint ventures or alliances could reduce our
client base, reduce the number of potential clients we can target or decrease
the demand for our services. A merger or acquisition of one of our clients may
result in the elimination, postponement or reduction of outsourced information
technology services utilized by the newly combined company.
If we are unable to manage our growth, our business would be disrupted.
We have experienced significant growth in recent periods. Our revenue
increased approximately 82% in the first three months of 2000 as compared to
the first three months of 1999, 45% in 1999 as compared to 1998, and 29% in
1998 as compared to 1997. As of March 31, 2000, we employed approximately 1,350
employees worldwide with four software development facilities (three of which
are in India), as compared to approximately 800 employees with three facilities
as of January 1, 1999. We intend to continue to grow in the foreseeable future
and to pursue existing and potential market opportunities, including
acquisitions. Our growth has placed, and will continue to place, significant
demands on our management and operational resources, particularly with respect
to:
. recruiting and retaining skilled technical, marketing and management
personnel in an environment where there is intense competition for
skilled personnel;
. managing a larger, more complex international organization;
. expanding our facilities and other infrastructure in a timely manner to
accommodate a significantly larger global workforce;
. maintaining high employee utilization rates, which is important to cover
our relatively high fixed costs;
. expanding our sales and marketing efforts;
. providing adequate training and supervision to maintain our high quality
standards;
. strengthening our financial and management controls in a manner
appropriate for a larger enterprise; and
. preserving our culture, values and entrepreneurial environment.
In order to manage our growth effectively, we must concurrently develop more
sophisticated operational systems, procedures and controls, both in India and
elsewhere. If we fail to develop these systems, procedures and controls on a
timely basis our business, results of operations and financial condition would
be materially adversely affected.
Our quarterly operating results are subject to fluctuations and if we fail to
meet the expectations of securities analysts or investors in any quarter, our
share price could decline significantly.
Our quarterly operating results have historically fluctuated and may
fluctuate significantly in the future. Accordingly, our operating results in a
particular period are difficult to predict and may not meet the expectations of
securities analysts or investors. If this were to occur the share price of our
equity shares and our ADSs would likely decline significantly. Factors that may
cause our operating results to fluctuate include many of the risk factors
discussed elsewhere in this propsectus, and also include:
. the number, size, scope, timing, duration and profitability of our
projects due to the long and unpredictable sales cycle of our services;
. the fixed nature of a significant proportion of our operating expenses,
particularly personnel and facilities;
. the effect of seasonal expenditures on information technology solutions
by our clients;
. the effect of seasonal hiring and training patterns, employee utilization
rates and the time required to train and productively engage new
employees;
6
<PAGE>
. the proportion of services performed at client sites rather than at our
off-shore facilities, because our profit margins for services performed
at our off-shore facilities are higher;
. changes in our pricing policies or those of our competitors; and
. unanticipated project terminations, delays or deferrals.
Accordingly, we believe that quarter-to-quarter comparisons of our results
of operations are not necessarily meaningful. You should not rely on the
results of one quarter as an indication of our future performance. For example,
our gross profit margins were 43.5% in 1999 compared to 48.0% in 1998 primarily
as a result of increases in labor costs, increases in our operating costs due
to expanded infrastructure and capacities, increasing percentages of our
revenue coming from in-house assignments which we performed as a result of our
acquisition of the Lorin Group, as well as client concerns relating to Year
2000 conversion issues which led to less off-shore work in favor of on-shore
work, and increased training costs relating to retraining our employees who had
been working on Year 2000 projects. For further information, please see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
We generate significant accounts receivable which could adversely affect our
business, operating results and financial condition.
We generate significant accounts receivable in connection with providing
information technology services to our customers. Our accounts receivable
increased from approximately $22.8 million at December 31, 1999 to
approximately $33.6 million at March 31, 2000. Our accounts receivable as a
percentage of revenue were approximately 26%, 41% and 37% as of December 31,
1999, 1998 and 1997, respectively. As of March 31, 2000, our accounts
receivable as a percentage of revenue for the immediately preceeding four
quarters, was 33%. In recent years the average number of days that our accounts
receivable were outstanding have increased in each of the 31-60, 61-90 and 90+
day aging periods. In the quarter ended March 31, 2000, several of our major
customers have delayed payment until 90 days or more after billing. If one or
more of our major customers refused to or were to become insolvent or otherwise
unable to pay for the services provided by us, our business, operating results
and financial condition would be adversely affected.
We face intense competition which could cause our revenue and margins to
suffer.
The market for our information technology services is rapidly evolving and
highly competitive. We expect that competition will continue to intensify. We
face competition in India and elsewhere from a number of companies, including:
. Indian information technology services companies, such as HCL
Technologies, Infosys Technologies Ltd., Satyam Computer Services
Limited, Tata Consultancy Services and Wipro Limited;
. U.S. information technology services companies with off-shore
capabilities, such as Cognizant Technology Solutions Corp., Complete
Business Solutions Inc. and iGate Capital Corporation;
. Internet professional services firms, such as AGENCY.COM Ltd., Proxicom
Inc., Razorfish Inc., Sapient Corp.;
. systems consulting and integration firms, such American Management
Systems Inc., Cambridge Technology Partners Inc., Computer Horizons Corp.
and marchFIRST;
. large international accounting firms and their consulting affiliates,
such as Andersen Consulting LLP, Ernst & Young LLP and
PricewaterhouseCoopers LLP;
. outsourcing firms, such as Computer Sciences Corp., Electronic Data
Systems Corp., International Business Machines Corp. and Perot Systems
Corp.; and
. in-house information technology departments.
Many of our competitors have longer operating histories and client
relationships, greater financial, technical, marketing and public relations
resources, larger client bases and greater name recognition than we have. Some
of these competitors currently provide a broader range of services than we
provide.
Moreover, major U.S. and international companies are increasingly moving a
portion of their operations to India and other overseas locations. Part of our
competitive advantage has historically been a labor cost advantage relative to
service providers in the United States, Japan and Western Europe. Labor costs
in India are
7
<PAGE>
presently increasing at a significantly faster rate than those in the United
States, Japan and Western Europe. These factors will reduce the advantages that
we have in terms of a cost effective, highly skilled pool of information
technology professionals in India and will mean we may become less competitive
over time. As a result, we may not be able to compete successfully against our
present or future competitors. For additional information, please see
"Business--Competition".
The barriers to enter our business are low and new competitors could cause our
revenue and margins to decline.
There are relatively low barriers to entry into our business. We do not own
any technologies that preclude or inhibit competitors from entering our
markets. Further, many U.S. companies have already established off-shore
locations in India, either independently or through joint ventures with our
domestic competitors. There are no significant barriers to preclude or inhibit
these companies from expanding their Indian information technology service
operations or other U.S. or other foreign companies from establishing similar
operations in India or elsewhere. Our competitors may independently develop and
patent or copyright technologies that are superior or substantially similar to
our technologies. The costs to develop and provide information technology
professional services are low. Therefore, we expect to continue to face
additional competition from new entrants into our markets, which could
materially adversely affect our business.
If we cannot keep pace with rapidly changing technology, industry standards and
client preferences, we will lose business.
Our market and the enabling technologies used by our clients are
characterized by rapid technological change. Failure to respond successfully to
these technological developments, or to respond in a timely or cost-effective
way, will result in serious harm to our business and operating results. Our
success will depend, in part, on our ability to offer services that keep pace
with continuing changes in technology, evolving industry standards and changing
client preferences. In addition, we must hire, train and retain technologically
knowledgeable professionals so they can fulfill the increasingly sophisticated
and changing needs of our clients.
Approximately 35% of our revenue in 1999 was derived from services we
provided for mainframe computer systems, excluding Year 2000 conversion work.
The computing environment is increasingly based less on mainframe systems and
more on distributed platforms such as client/server and Internet-based
networks. Although demand for mainframe access and management solutions has
grown in recent years, it may not continue to grow. There has been debate in
the marketplace regarding the future role of mainframe computers. If we do not
replace our mainframe service work with other work, our business, results of
operation and financial condition would be materially adversely affected.
The demand for our Year 2000 services has disappeared entirely, and if we
cannot replace that business with other business our revenue and profits would
decrease.
Year 2000 conversion projects represented 13% and 18% of our revenue for the
full year 1999 and 1998, respectively, of which approximately two-thirds was
undertaken for First Data Corp., our largest client. Year 2000 conversion
projects will not generate any revenue in 2000 or beyond. We cannot assure you
that:
. we will be successful in replacing Year 2000 conversion projects with
other projects or generating additional business from our Year 2000
clients; or
. margins from any such other projects will be comparable to those obtained
from our Year 2000 conversion projects.
In addition, we may not be able to redeploy and retrain information
technology professionals who were assigned to Year 2000 conversion projects.
Furthermore, there is a likelihood of increased competition for other types of
projects from firms formerly dependent on Year 2000 business. We intend to
replace our Year 2000 business, at least in part, with e-business and CRM
projects. As noted below, we may not be successful in making this transition.
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Our e-business and CRM services require skills and strategies different from
our traditional lines of business, and if our e-business and CRM services are
not successful, we would lose opportunites to grow our business.
Many e-business projects, particularly Internet projects as opposed to
intranet projects, require skills ranging from understanding and building
software architecture to making a client's website user-friendly and
attractive. Many of these skills are different from the skills we have
developed to date. Also, our e-business projects require us to interact with a
broader set of decision makers, including marketing and consulting departments,
within our clients. Historically, we have mostly dealt only with information
technology departments. Our lack of relationships with these new decision
makers may adversely affect our ability to develop e-business projects. If we
are unable to develop or acquire these skills on a timely basis, our e-business
services may not be successful and our business, results of operations and
financial condition would be adversely affected.
Additionally, e-business technology is developing rapidly and the
competition for e-business projects is intense. The rapid change in e-business
technology may not allow us sufficient time to retrain our existing personnel.
We may also need to hire project managers with e-business experience, which
will be difficult given the intense competition for information technology
personnel.
Our e-business service is in the early stage of development. At March 31,
2000, we had completed four e-business projects, all of which were intranet-
based, and we were working on another six e-business projects.
We have also recently begun to offer CRM services. Our efforts to develop a
CRM service business is subject to the same risks described above for our e-
business efforts. We completed one CRM project during 1999, and as of March 31,
2000 we were working on two other CRM projects.
If the Internet does not continue to develop, our business would be adversely
affected because we intend to expand our e-business and CRM services.
Our future success is substantially dependent upon continued growth in the
use of the Internet. The adoption of the Internet for commerce and
communications, particularly by those individuals and companies that have
historically relied upon alternative means of commerce and communication,
generally requires the understanding and acceptance of a new way of conducting
business and exchanging information. In particular, companies that have already
invested substantial resources in other means of conducting commerce and
exchanging information may be particularly reluctant or slow to adopt a new,
Internet-based strategy that may make their existing personnel and
infrastructure obsolete. To the extent that businesses do not consider the
Internet a viable commercial medium, our client base for Internet related work
may not grow.
In addition, our business may be indirectly impacted if the number of users
on the Internet does not increase or if commerce over the Internet does not
become more accepted and widespread. The use and acceptance of the Internet may
not increase for a number of reasons, including:
. actual or perceived lack of security of information;
. high cost or lack of availability of access;
. congestion of traffic or other usage delays on the Internet;
. inconsistent quality of service or the lack of availability of cost-
effective, high-speed service;
. governmental regulation;
. uncertainty regarding intellectual property ownership; and
. possible outages or other damage to the Internet.
Published reports have also indicated that capacity constraints caused by
growth in the use of the Internet may impede further development of the
Internet to the extent that users experience delays, transmission errors
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and other difficulties. If the necessary infrastructure, products, services or
facilities are not developed, or if the Internet does not become a viable and
widespread commercial medium, our business, results of operations and financial
condition would be materially adversely affected.
Our revenues are difficult to predict and can vary significantly from quarter
to quarter, which adversely affects our ability to manage our business in
accordance with our operating budgets.
We derive our revenue from fees for services generated on a project-by-
project basis. These projects may vary in size, scope and duration. A single
person may work for a few weeks on a project or over 100 employees may work
together on a project for six months. A client that accounts for a significant
portion of our revenue in a particular period may not account for a similar
portion of our revenue in future periods. A client may or may not engage us for
further services once a project is completed. In addition, as discussed below,
clients may cancel contracts or defer projects at any time for a number of
different reasons. As a result, our revenues are not recurring from period to
period, which makes them more difficult to predict.
Because the work we perform off-shore in India yields higher gross margins
than the work we perform elsewhere, to the extent the proportion of our work
that we perform off-shore decreases in any period, our results of operations
and financial condition would be adversely affected.
Our clients may terminate projects before completion or choose not to renew
contracts, many of which are verbal agreements, which could adversely affect
our results of operations.
Any failure to meet a client's expectations could result in a cancellation
or non-renewal of a contract. Our contracts with clients may be terminated by
our clients with or without cause, with little or no advance notice and without
penalty. Additionally, our contracts with clients typically are limited to a
specific project and not any future work. There are also a number of factors
other than our performance and not within our control that could cause the loss
of a client. Our clients may demand price reductions, change their outsourcing
strategy by moving more work in-house, or replace their existing software with
packaged software supported by licensors, any of which would adversely affect
our business, results of operation and financial condition.
Also, approximately 20% of our work in the first three months of 2000 and
22% of our work in 1999 was performed for clients on the basis of a limited
written or verbal work order. Without written contracts in place, our ability
to enforce termination provisions as well as collect fees, protect our
intellectual property and protect ourselves from liability to others may be
impaired.
An increasing portion of our business is subject to fixed-price, fixed time-
frame contracts, any of which could prove to be unprofitable for us.
We sometimes agree to provide our information technology services on a
fixed-price, fixed time-frame basis, rather than on a time-and-materials basis.
Approximately 26% and 24% of our revenue in the first three months of 2000 and
the full year 1999, respectively, was derived from fixed-price projects. We
expect the percentage of our revenue from fixed-price projects will increase in
the future. All of our e-business and CRM work is currently done on a fixed-
price basis. In addition, increasing competition for information technology
services may result in our clients being able to demand that more of our
services be provided on a fixed-price basis. Although we use specified software
engineering processes and our past project experience to reduce the risks
associated with estimating, planning and performing fixed-price projects, we
bear the risk of cost overruns, completion delays and wage inflation in
connection with these projects. Our business, results of operations and
financial condition would suffer if, with respect to a fixed-price project, we
fail to either:
. estimate accurately the resources and time required or the future rates
of wage inflation and currency exchange rates; or
. complete our contractual obligations within the time frame committed.
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We anticipate increased operating expenses, which could cause our results of
operations to suffer if we do not correspondingly increase our revenue.
We expect to increase our operating expenses significantly as we:
. expand our sales and marketing operations and develop new distribution
channels;
. enhance existing and possibly build additional software development
centers;
. enhance our operational and financial systems; and
. broaden our customer support capabilities.
We expect many of these increased operating expenses will be incurred
beginning with the first three quarters of 2000. In particular, our selling,
general and administrative expenses increased approximately 119% in the first
three months of 2000 as compared to the same period in 1999. If we do not
significantly increase our revenue to meet these increased operating expenses,
our business, results of operations and financial condition would suffer.
We have committed to make substantial investments in new facilities which could
harm our financial condition if our business does not grow significantly.
We have committed aggregate capital expenditures of $6.3 million for 2000
and 2001 for the build-out of our existing facilities and we have budgeted an
additional $8.2 million for the further build-out of existing facilities. We
may use some of these funds to build new facilities over the same period. We
may spend additional amounts of money on new facilities as our business grows
and our client demands dictate. Because these investments will significantly
increase our fixed costs, our results of operations would be materially
adversely affected if we are unable to grow our revenue proportionately. We
cannot assure you that we will not encounter cost overruns or project delays in
connection with any or all of the new facilities. Furthermore, we cannot assure
you that future financing for additional facilities, whether within India or
elsewhere, would be available on attractive terms.
Future acquisitions, strategic investments and joint ventures are important
parts of our business plan, and even if we are able to complete them, they may
adversely affect your investment in our company.
We intend to pursue acquisitions of other businesses or technologies. Our
continued growth will depend in part on our ability to identify and acquire
companies that would complement or enhance our business strategy. In April
2000, we purchased a small software development firm in Toronto, Canada for
approximately $4.0 million in cash. The firm had approximately $3.1 million in
revenues in 1999 and 70 employees as of December 31, 1999. We evaluate
acquisitions based on numerous quantitative and qualitative factors. We cannot
assure you that we will be able to identify suitable acquisition candidates
available at reasonable terms, obtain any necessary financing on acceptable
terms for these transactions, consummate any acquisition or successfully
integrate any acquired business with our current operations.
The intense level of competition among information technology companies has
also increased the purchase price for acquisitions. This makes completing
successful acquisitions more difficult and increases the possibility that we
could do an acquisition that adversely affects our results of operations.
Further, our acquisitions may result in our having to amortize significant
amounts of goodwill and other intangible assets, particularly in light of the
high valuations of many companies in the information technology industry.
In the event of any future purchases, we could issue equity shares or
additional ADSs, which would dilute our existing shareholders' equity
interests, or we may incur debt or assume liabilities. We cannot assure you
that we will be able to obtain any additional financing on satisfactory terms,
or at all, and this failure would have a material adverse effect on our
business, financial condition and results of operations. Additional
indebtedness would make us more vulnerable to economic downturns and may limit
our ability to withstand competitive pressures. The terms of any additional
indebtedness may include restrictive financial and operating covenants which
would limit our ability to compete and expand.
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Any future acquisitions by us for consideration consisting of our shares
increase the possibility that we may lose our tax holidays. See "Risk Factor--
Our results of operations may be materially adversely affected if tax benefits
and other incentives provided to us by the government of India are reduced or
withheld. Recently, the government of India has introduced laws that could
reduce our tax incentives".
Our business strategy also includes strategic investments and joint ventures
with other companies. These transactions are subject to many of the same risks
identified above for acquisitions.
We may not be able to successfully integrate companies which we acquire, which
may adversely affect our business and results of operations.
Our acquisition strategy may create financial and other challenges which, if
not addressed or resolved, would have an adverse affect on our business and
results of operations.
We may not be able to maintain the levels of operating efficiency that any
acquired companies had achieved or might achieve separately. Successful
integration of each of their operations would depend upon our ability to manage
those operations and to eliminate redundant and excess costs. Because of
difficulties in combining operations, we may not be able to achieve the cost
savings and other size-related benefits that we would hope to achieve with
these acquisitions.
In addition, because management will have to devote time and attention to
integrate the technology, operations and personnel of the businesses we
acquire, we may not be able to serve our current clients properly or attract
new clients. Also, our senior management faces the difficult and potentially
time consuming challenge of implementing uniform standards, controls,
procedures and policies throughout our Indian, United States and other foreign
offices. Any difficulties in this process could disrupt our ongoing business,
distract our management, result in the loss of key personnel or clients,
increase our expenses and otherwise adversely affect our business.
Also, an acquisition may result in a decrease in our gross margins during
the period it takes for us to develop the acquired business into one which
provides greater value added services. For example, our acquisition of the
Lorin Group has resulted in decreases in our gross margins because the Lorin
Group primarily provides in-house assignment services, which generally have
lower gross margins. For more information, please see "Management's Discussion
and Analysis of Financial Condition and Results of Operation".
Deferred stock-based compensation expenses could adversely affect our financial
condition and results of operations.
Our reported income has been and may continue to be affected by stock option
grants under our various employee benefit plans. Under the terms of these
plans, employees may be granted rights to purchase equity shares at a discount
to the current market value. Such grants require us to record non-cash
compensation expenses amortized over the vesting period of the stock option
rights. For the first three months of 2000 we incurred approximately $862,000
in deferred stock-based compensation expense and we expect to incur an
additional charge of approximately $870,000 in the second quarter of 2000, as
well as additional charges through the period ending April 1, 2003. In 1999, we
incurred approximately $532,000 in deferred stock-based compensation expense as
a result of options being granted in November 1999 under our Indian Employee
Welfare Trust Program. If the market price of our equity shares increases
materially, we would be required to record significantly higher compensation
expense in connection with the grant of future stock option rights to purchase
equity shares under our employee benefit plans, which would adversely affect
our reported operating results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview" and "Management--
Employee Benefit Plans".
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Our management will have broad discretion with respect to the expenditure of
the net proceeds from this offering, and may use the proceeds in ways that you
disagree with.
Our management will have broad discretion in using the proceeds from this
offering and therefore investors will be relying on the judgment of our
management to invest those funds effectively. We intend to use the net proceeds
for capital expenditures consisting primarily of the build-out of our existing
facilities, working capital requirements, expansion of our sales and marketing
efforts, potential acquisitions and other strategic transactions and other
general corporate purposes. We have specifically enumerated uses for only
approximately 33% of the net proceeds we will receive from this offering. As a
result, investors will be relying on the judgment of our management regarding
the application of the balance of the proceeds. For additional information
regarding the expenditure of the net proceeds from this offering, please see
"Use of Proceeds".
We depend on senior management and other key personnel for our future success
and we have no protection if they leave us.
Our success depends significantly upon the continued contributions of
members of our board of directors, senior management and other key personnel,
including Ravi Subramanian, our founder and Chairman, Krishna K. Subramanian,
our Vice Chairman and Executive for International Initiatives, and Shankar
Iyer, our President and Chief Executive Officer and Director. The only
employment agreement we have with our senior management and other key personnel
is with our wholetime director, Mr. K. Mohan Subramanian, and we do not
restrict any of our senior management and other key personnel from leaving our
company and competing against us. The loss of any such persons could have a
material adverse effect on our business, results of operations and financial
condition. Except with respect to Ravi Subramanian, we do not have any life,
disability or key man insurance policies covering these persons.
The global nature of our operations could strain our management resources.
All our software development facilities are currently located in India and
the United States. Our directors, executive officers and other key employees
are similarly dispersed. In addition, we maintain offices in the United States
and India, as well as in Toronto, London and Tokyo, to market and sell our
services in those countries and surrounding regions. This geographic dispersion
requires significant management resources that our more locally-based
competitors do not need to devote to their operations.
In addition, we may develop new software development facilities or sales
offices in other regions. We have not yet made any substantial contractual
commitments to develop this new infrastructure and cannot assure you that we
will not significantly alter or reduce our proposed expansion plans. The
development of new infrastructure could have a material adverse effect on our
business, results of operations and financial condition.
In addition, our lack of experience with facilities outside of India and the
United States subjects us to further risk with regard to:
. foreign regulation, including restrictions against the repatriation of
earnings, acquisitions, export requirements and restrictions, and
multiple and possibly overlapping tax structures; and
. overseas facilities management, including difficulties relating to
administering our business globally and managing foreign operations and
currency exchange rate fluctuations.
If we fail to manage our geographically dispersed organization, our
business, results of operations and financial condition may be materially
adversely affected.
Our technology may be subject to infringement claims by third parties or
clients, which could adversely affect our business and results of operations.
Substantial litigation regarding intellectual property rights exists in the
software industry. In connection with our operations, we license software from,
and develop software applications for, various third parties. Although we
believe that our services do not infringe upon the intellectual property rights
of third parties, we
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cannot assure you that such a claim will not be asserted against us in the
future by third parties from whom we have licensed software or by other third
parties who allege misappropriation of their proprietary products and
processes. We expect that the risk of infringement claims against us and our
clients will increase if more of our competitors are able to obtain patents for
software products and processes.
Further, a portion of our business involves the development of software for
client engagements. Ownership of client-specific software is generally retained
by the client. Also, in 1997 we sold to International Technology Ventures, LLC
rights to software products, computer equipment and the intellectual property
rights, if any, which we may have developed, and may in the future develop, in
connection with specific projects. We cannot assure you that our clients or
assignees will not assert intellectual property claims against us and that
disputes will not arise that will affect our ability to resell or reuse these
applications.
We typically indemnify our clients against intellectual property claims.
Assertion of claims against us or our clients could result in litigation, and
we may not prevail in the litigation or be able to obtain a license for the use
of any infringed intellectual property from a third party on commercially
reasonable terms. Any of these claims, regardless of their outcome, could harm
our reputation, damage our relationships with clients, result in substantial
costs to us, divert management's attention from our operations and could
adversely affect our business, results of operation and financial condition.
We do not insure against all potential losses and we could be seriously harmed
and our reputation damaged by unexpected liabilities.
Many of our contracts, including our Year 2000 conversion projects, involve
projects that provide benefits to our clients' businesses that may be difficult
to quantify. Any failure in a client's system could adversely affect our
reputation and result in a claim for substantial damages against us, regardless
of our responsibility for such failure. Although we generally attempt to limit
our contractual liability for damages arising from negligent acts, errors,
mistakes or omissions in rendering our services, we cannot assure you that we
will be able to do so in all cases or that any limitations of liability set
forth in our service contracts will be enforceable in all instances, or will
otherwise protect us from liability for damages. In addition, our failure to
meet client expectations or to deliver error free services may result in
adverse publicity for us and damage to our reputation.
We maintain general liability insurance coverage, including coverage for
errors or omissions. However, we cannot assure you that:
. our insurance coverage will be available in sufficient amounts to cover
one or more significant claims that are successfully asserted against us;
. our insurance coverage will continue to be available to us in the future
on reasonable terms, including reasonable premium, deductible and co-
insurance requirements; or
. our insurer will not disclaim coverage as to any future claim.
Our business, results of operations and financial condition would be
materially adversely affected if any of these developments were to occur.
Risks Related To Investment In Indian Companies
Our results of operations may be materially adversely affected if tax benefits
and other incentives provided to us by the government of India are reduced or
withheld. Recently, the government of India has introduced laws that could
impair our tax incentives.
We benefit from certain significant tax incentives under Indian tax laws. As
a result of these incentives, our operations have been subject to relatively
insignificant Indian tax liabilities. These tax incentives currently include:
. a 10-year tax holiday from payment of Indian corporate income taxes for
operation of our Indian facilities, all of which are "Export Oriented
Undertakings" or located in "Software Technology Parks" or "Export
Processing Zones"; and
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. an income tax deduction of 100% for profits derived from exporting
information technology services.
We may use either of the two tax incentives. Further, we are currently
eligible for exemptions from other taxes, including customs duties.
The recently enacted Finance Act, 2000 phases out the 10-year tax holiday
over a ten year period from the financial year 1999 - 2000 to the financial
year 2008 - 2009. Accordingly, facilities set up on or before March 31, 2000
have a 10-year tax holiday, new facilities set up on or before March 31, 2001
would have a 9-year tax holiday and so forth until the tax holiday would not be
available to new facilities set up after March 31, 2009. Our tax holiday
extends until 2002, 2003, 2008 and 2009, respectively, for our Mumbai (Bombay),
Chennai (Madras) and for our new Thane and new Chennai facilities.
Under the Finance Act, 2000, Indian software companies will lose their tax
holidays with respect to a particular software development center if there is a
change of 49% or more in their ownership between the last date of the financial
year in which that center was set up and the last date of any subsequent
financial year. As a result, companies are more likely to lose their tax
holidays if large shareholders sell their shares or if new shares are issued in
order to raise capital, for acquisitions or otherwise. In addition, companies
are more likely to lose their tax holidays with respect to their older
facilities, because more time will have elapsed in which to accumulate the 49%
ownership change.
A number of aspects of the Finance Act, 2000 are as of yet unclear,
including whether the Act would be interpreted to deprive a company of its tax
holidays if, as has occurred in our case with respect to our two oldest
centers, its record ownership changed 49% or more without an accompanying
change in beneficial ownership. Based on consultations with some of our Indian
tax advisors, we believe that this change in record ownership only should not
cause the loss of these tax holidays. However, our interpretation could be
wrong. In addition, the understanding of the definition of beneficial ownership
as of yet is unclear. If we are deemed to have lost our tax holidays in 2000
with respect to our two oldest centers, we estimate that our provision for
income taxes for this year would increase by approximately $1 million.
Moreover, if in the future we were to lose our tax holidays with respect to our
two newest software development centers, our provision for income taxes would
increase by substantially more than that and would have a material adverse
effect on our net income and the trading prices of our equity shares and the
ADSs.
In addition, the recently enacted law restricts the scope of the tax
exemption to export income earned by the software development centers which are
"Export Oriented Undertakings" or located in "Software Technology Parks" or
"Export Processing Zones" as compared to the earlier exemption which was
available to the business profits earned by them.
The Finance Act, 2000 also phases out the income tax deduction over the next
five years by decreasing the tax deduction by 20% each year beginning April 1,
2000. When our tax holiday and income tax deduction exemptions expire or
terminate or if we choose to build new software development centers beyond our
new facilities in Thane and Chennai, our business, results of operations and
financial condition could be materially adversely affected. Further, the
government of India could enact similar laws in the future which could further
impair our other tax incentives.
Any adverse developments in political or economic conditions in India could
cause our business or stock price to suffer.
We are a public limited company incorporated under the laws of India. Many
of our directors and executive officers and a majority of our employees, assets
and facilities are located in India. Consequently, our financial performance
and the market price of our ADSs will be affected by political, social and
economic developments in India, including changes in exchange rates and
controls, interest rates and government of India policies, including taxation
and foreign investment policies.
The role of the Indian central and state governments in the Indian economy
as producers, consumers and regulators is substantially larger than the role of
U.S. and Western European governments. The government of India has changed six
times since 1996. India's current government, formed in October 1999, has
announced
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policies and taken initiatives that continue to support the economic
liberalization policies that were pursued by previous governments. However, the
economy and businesses, including ours, remain heavily regulated. We cannot
assure you that these liberalization policies will continue or that the rate of
economic liberalization in India will not decline. Nor can we assure you that
Indian laws, government policies, foreign investment restrictions, currency
exchange rates and other matters generally affecting information technology
companies will not change. Any significant change in Indian economic
liberalization and deregulation that may occur with respect to these matters
could materially adversely affect business and economic conditions in India
generally and our business, results of operations and financial condition in
particular.
In addition, financial turmoil in certain Asian countries, Russia and
elsewhere in the world in 1998 significantly affected the world's securities
markets, including in the United States and India. Financial downturns in these
countries could cause decreases in securities prices on the United States and
Indian exchanges, including the market prices of our equity shares and the
ADSs.
Regional conflicts between India and its neighbors could adversely affect the
Indian economy and cause our business to suffer.
India's relations with neighboring Pakistan, each a nuclear power, are
extremely tense. In April 1999, India and Pakistan each conducted long-range
missile tests. Since May 1999, military confrontations between India and
Pakistan have occurred in the disputed Himalayan region of Kashmir. Among other
military incidents, Indian jets shot down a Pakistani reconnaissance plane in
August 1999. Further, in October 1999, the leadership of Pakistan changed as a
result of a coup led by the military. In December 1999, an Indian Airlines
plane with 185 passengers was hijacked by alleged Kashmir militants. The
hijackers demanded and several days later obtained the release of three
Pakistani militants arrested in Kashmir. India has publicly stated that it
believes that Pakistan aided or supported the hijackers. In March 2000,
terrorists massacred 35 Sikhs in Kashmir. The government of India has publicly
attributed the slayings to Pakistani-backed militants.
India's relations with neighboring China are also tense. On December 28,
1999, the seventeenth Karmapa, the master of the Karma Kagyu sect of Tibetan
Buddhism, fled from neighboring Tibet to seek refuge in India. Due to China's
annexation of Tibet, this incident strained diplomatic relations between India
and China.
Events of this nature in the future could influence the Indian economy and
have a material adverse effect on the market for securities of Indian companies
and on our business.
Trade sanctions against India could significantly harm our business.
In May 1998, the United States imposed economic sanctions against India in
response to India's testing of nuclear devices. The United States later waived
some of these sanctions in response to the government of India's indication
that it would sign the Comprehensive Test Ban Treaty. In April 1999, India and
Pakistan conducted long range missile tests which were met with an expression
of regret from the United States and other countries subjecting India to
additional sanctions. These sanctions, or additional sanctions, could restrict
our access to technology that is available only in the United States and that
is required to operate our business. We cannot assure you that any of these
sanctions will continue to be waived, that additional economic sanctions of
this or a similar nature will not be imposed, or that sanctions will not have a
material adverse effect on our business or on the markets for our equity shares
in India and ADSs in the United States.
The government of India may not grant us approvals for acquisitions or
investments in non-Indian companies that we may need to grow our business.
Under Indian law we cannot make any acquisition of, or investment in, a non-
Indian company without governmental approval. We cannot assure you that the
government of India will grant the required approvals and, even if it does, the
approvals may have conditions attached to them which may make the acquisitions
or investments not feasible. As an information technology services company, we
are eligible to make an application for a blanket approval from the government
of India to utilize up to $100 million of the net proceeds from this offering
for acquisitions of, or investments in, non-Indian companies.
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For all other acquisitions or investments in non-Indian companies, we will
need to file an application with the government of India for approval. This
application process may require us to submit project and feasibility reports
and may take a significant amount of time. We may not receive governmental
approval on a timely basis, if at all. Since acquisitions and investments are
an important part or our growth strategy, our business may be adversely
affected by these approval requirements.
Even if we are able to successfully acquire or invest in a non-Indian
company, dividends or profits realized from the acquired company may have to be
remitted to us in India within a period of 60 days from the date on which they
are declared. Further, we would be required to remit to India any entitlements
due to us by way of royalty, technical fees and other entitlements within a
period of 60 days from the date they become due from the acquired non-Indian
company. This may limit our ability to use Silverline Technologies, Inc. as a
vehicle to carry out acquisitions of, or investments in, non-Indian companies
without approval from the government of India and will also subject us to a
risk of the depreciation of the Indian rupee for repatriated funds.
Indian income tax surcharges and dividend taxes may adversely affect us.
The statutory corporate income tax rate in India is currently 35% plus a 10%
surcharge, resulting in an effective statutory tax rate of 38.5%. Because our
Indian tax incentives do not apply to dividends we receive from our non-Indian
subsidiaries, these dividends will be subject to this 38.5% tax rate, depending
on the availability of foreign tax credits. Currently, our U.S. subsidiary is
required by the government of India to remit dividends to us which will be
subject to corporate income tax plus the surcharge in India and U.S.
withholding taxes, subject to the benefits available under the U.S.-India tax
treaty and available foreign tax credits. The government of India may increase
the corporate tax rate and the surcharge in the future which may increase our
tax liabilities to the extent we receive significant dividends from our U.S.
subsidiary.
In addition, dividends declared, distributed or paid by us are currently
subject to a tax of 11%, including the 10% surcharge. The recently enacted
Finance Act, 2000 increases this tax to 22%, including the 10% surcharge,
commencing June 1, 2000. This tax is neither paid by shareholders nor is it a
withholding requirement, but rather it is a direct tax payable by the
corporation. We have declared and paid in cash dividends of 1.25 Indian rupees
per equity share in 1998 and 1.75 rupees per equity share in 1999
(approximately $0.03 per share and $0.04 per share, respectively). Although we
intend to continue dividend payments, we cannot assure you that any future
dividends will be declared or paid or as to the amount of those dividends. To
the extent we do pay dividends these dividends will be taxed as described
above, in addition to any other tax payable on dividends by holders of our
ADSs.
We cannot assure you that surcharges and dividend taxes imposed by the
government of India will not be further increased in the future.
Labor costs in India are increasing at rapid rates, which could adversely
affect our competitive position and reported results.
Our labor costs in India have historically been significantly lower than
labor costs in the United States for comparably skilled information technology
professionals. According to an October 1999 report by Software Productivity
Research, a research firm, the average annual wage rate for software
professionals in India is approximately 10% of the average annual U.S. rate for
equivalent professionals. However, our labor costs in India for information
technology professionals increased by approximately 27% and 42% during the
periods from 1998 to 1999 and from 1997 to 1998, respectively, while during the
same period our labor costs in the United States increased only 10% in total
for comparably skilled professionals. We expect this trend to continue in the
future, especially given the intense global competition for, and shortage of,
information technology professionals. These labor cost increases continue to
have an adverse effect on our profit margins and may erode our competitive
advantage.
Restrictions on U.S. immigration may adversely affect our business.
Our professionals employed on temporary and extended assignments at our
offices or clients' facilities in the United States are typically required to
obtain work visas from the United States Immigration and Naturalization
Service. As of May 1, 2000, approximately 75% of our personnel in the United
States were
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working pursuant to H-1B visas (293 persons) or L-1 visas (19 persons). An H-1B
visa or an L-1 visa is granted for an initial period of 3 years. The maximum
length of time employees may remain in the United States on H-1B and L-1 visas,
including renewals, is 6 years and 7 years, respectively. This turnover can be
disruptive to our business and clients. In addition, we may not be able to
staff a project or in-house assignment quickly enough, because of the
significant lead time the visa procurement requires.
There is a limit to the number of new H-1B petitions that the United States
Immigration and Naturalization Service may approve in any U.S. government
fiscal year. In years in which this limit is reached, we may be unable to
obtain H-1B visas necessary to bring critical professionals to the United
States on an extended basis. This limit on H-1B visas was reached in April 1999
for the U.S. fiscal year ended September 30, 1999 and was reached in March 2000
for the U.S. fiscal year that will end September 30, 2000. We cannot assure you
that we will be able to obtain a sufficient number of H-1B visas. There is no
limit to new L-1 petitions granted in a particular year. Changes in existing
U.S. immigration laws that make it more difficult for us to obtain H-1B and L-1
visas could impair our ability to compete for and provide services to clients,
and could have a material and adverse effect on our business, results of
operations and financial condition. For additional information, please see
"Business--Employees".
Indian courts might not enforce judgments rendered outside of India and you may
not be able to bring an original action in India, which may adversely affect
your ability to sue us.
We are a public limited company incorporated under the laws of India. Many
of our directors and executive officers, a majority of our employees and the
Indian experts named in this prospectus, reside outside the United States, and
their assets and a majority of our assets are located outside the United
States. It may be difficult for investors to effect service of process on these
directors, executive officers and Indian experts. In addition, it will be
extremely difficult for investors to enforce judgments obtained in the United
States in India including judgments based on the civil liability provisions of
the federal securities laws of the United States.
Since there is no reciprocal treaty between the United States and India for
enforcement of judgments rendered in the United States, a judgment of a court
in the United States may be enforced in India only by a suit upon the judgment,
not by proceedings in execution. A suit upon the judgment must be brought in
India within three years from the date of the judgment. In this type of suit, a
defendant can raise defenses that the judgment:
. has not been pronounced by a court of competent jurisdiction;
. has not been given on the merits of the case;
. appears on its face to be founded on an incorrect view of international
law or a refusal to recognize the law of India where applicable;
. has been obtained in proceedings opposed to natural justice;
. has been obtained by fraud; or
. is founded on a breach of law or public policy in India.
A party seeking to repatriate any amount recovered on a foreign judgment is
required to obtain approval from the government of India. Also, there are
significant delays in obtaining resolutions of lawsuits in India. In addition,
it is highly unlikely that an Indian court would enforce a U.S. judgment if it
believed the amount of damages awarded to be excessive, inconsistent with
Indian practice or in the nature of punitive damages.
Importantly, Indian courts also will not enforce U.S. default judgments
obtained outside of India. As a result, an Indian defendant could elect simply
not to appear in any U.S. proceeding against it, which would leave the U.S.
plaintiff with a default judgment that is unenforceable in India.
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We have also been advised by our Indian legal counsel that it is
theoretically possible that a party may file an original suit in India against
us, our directors or our executive officers that is predicated upon the
provisions of the civil liability provisions of the federal securities laws of
the United States. To our knowledge, no suit predicated on the federal
securities laws of the United States has ever been brought in India. It is
highly unlikely that a court in India would award damages on the same basis as
a foreign court if an action is brought in India. For additional information,
please see "Enforcement of Civil Liabilities".
The trading price of the ADSs may be materially adversely affected by exchange
rate fluctuations between the U.S. dollar and the Indian rupee.
Fluctuations in the exchange rate between the U.S. dollar and the Indian
rupee may affect the value of your investment in the ADSs. Specifically, as the
relative value of the Indian rupee to the U.S. dollar declines, as it has
generally over the past several years, each of the following values will also
decline:
. the U.S. dollar equivalent of the Indian rupee trading price of equity
shares in India and indirectly the U.S. dollar trading price of the ADSs
in the United States may also decline;
. the U.S. dollar equivalent of the proceeds that you would receive upon
the sale in India of any equity shares that you withdraw from the
depositary; and
. the U.S. dollar equivalent of cash dividends, if any, paid in Indian
rupees on the equity shares represented by the ADSs.
Our results of operations may be materially adversely affected if the Indian
rupee appreciates against the U.S. dollar.
Although a majority of our revenue is denominated in U.S. dollars, a portion
of our expenses, including labor costs as well as capital and operating
expenditures, are incurred in Indian rupees. For the first three months of 2000
and the full year 1999 and 1998, our U.S. dollar-denominated revenue
represented 99%, 99% and 98%, respectively, of our total revenue; and rupee-
denominated expenses represented 20%, 21% and 19%, respectively, of our total
expenses. We expect that, for the foreseeable future, a majority of our revenue
will continue to be generated in U.S. dollars and a portion of our expenses
will continue to be denominated in rupees. As a result, our results of
operations will be adversely affected to the extent that the rupee appreciates
against the U.S. dollar. During the four year period from 1996 through 1999 the
value of the rupee against the U.S. dollar declined by approximately 24%. We
cannot assure you that the value of the rupee will continue to decline against
the U.S. dollar.
Your ability to sell in India any of our equity shares received upon conversion
of any ADSs may be subject to delays if approvals required from the government
of India and listing on stock exchanges is delayed.
Investors seeking to sell in India any equity shares received upon
conversion of any ADSs, will require approval from the government of India for
each transaction, unless the sale of the equity shares is made on a stock
exchange or in connection with an offer made under Indian regulations regarding
takeovers. We cannot guarantee that any approval will be obtained in a timely
manner or at all. Because of possible delays in obtaining requisite approvals,
investors who hold equity shares may be prevented from realizing gains during
periods of price increases or limiting losses during periods of price declines.
For additional information, please see "Exchange Controls".
Our service delivery model is subject to potential disruption in
telecommunications and power, which would adversely affect our business.
Our service delivery model requires us to maintain active voice, data and
video communications among our clients' offices, our software development
facilities and our other offices in India and the United States. Indian
telecommunications infrastructure and power delivery is generally less reliable
than telecommunications infrastructure and power delivery in the United States.
Any significant loss of, or disruption in, local utility and telecommunications
services would have a material adverse effect on our business, results of
operations and financial condition.
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Trading stoppages and closures at The Stock Exchange, Mumbai, The National
Stock Exchange, The Madras Stock Exchange Ltd., Chennai and The Stock Exchange,
Ahmedabad may adversely affect the trading price of ADSs.
Our shares are listed in India on The Stock Exchange, Mumbai, the Madras
Stock Exchange Ltd., Chennai and The Stock Exchange, Ahmedabad. Our shares are
also traded on The National Stock Exchange and most major exchanges in India.
Over 90% of recent trading in our securities has been carried out on The Stock
Exchange, Mumbai and The National Stock Exchange.
The regulation and monitoring of Indian securities markets and the
activities of investors, brokers and other participants differs, in some cases
significantly, from those in the United States and Western European countries.
Indian stock exchanges have in the past experienced problems, including
temporary exchange closures, broker defaults, settlement delays and strikes by
brokerage firm employees, which, if these or similar problems were to continue
or recur, could affect the market price and liquidity of the securities of
Indian companies, including our equity shares and ADSs, in both domestic and
international markets.
The Stock Exchange, Mumbai was closed from January 11 through January 13,
1993 due to a riot in Mumbai (Bombay). It was also closed on March 12, 1993 due
to a bomb explosion within the premises of The Stock Exchange, Mumbai. From
December 14 through December 23, 1993, The Stock Exchange, Mumbai was closed
due to a broker's strike, and from March 20 through March 22, 1995, the
Governing Board of The Stock Exchange, Mumbai closed the market due to a
default of one of the broker members. Also, on December 8, 1999, trading on The
National Stock Exchange was disrupted for over an hour due to an error
occurring in computer software. The National Stock Exchange closed for one week
during October, 1994 due to failure of the communications satellite. On June 5,
1993, a bomb scare delayed commencement of trading in the Madras Stock Exchange
Ltd., Chennai by over an hour following receipt of an anonymous call to the
Exchange. There have been several occasions when trading was disrupted for up
to five hours on The Stock Exchange, Mumbai due to power outages.
There have been no closures of The Stock Exchange, Mumbai and The National
Stock Exchange in response to "panic" trading or large fluctuations. The Stock
Exchange, Mumbai and the National Stock Exchange do, however, have a specific
price band for each security listed. When a price fluctuation exceeds the
specified limits of the price band, trading of the security is stopped for that
trading session. Such price volatility controls and the specific price bands
are decided by each individual exchange and may differ from exchange to
exchange. A closure of or trading stoppage on The Stock Exchange, Mumbai and
The National Stock Exchange could adversely affect the price of the equity
shares represented by the ADSs and would consequently affect the trading price
of the ADSs. In addition, the liquidity and trading patterns of securities
quoted on The Stock Exchange, Mumbai may be substantially different from those
of securities quoted on the New York Stock Exchange. Historical trading prices,
therefore, may not be indicative of the prices at which the ADSs will trade in
the future. For additional information, please see "Price Range of Our Equity
Shares" and "Trading Practices and Procedures on the Indian Stock Exchanges".
The inadequacy of public records in India means that you may not be able to
obtain reliable information about us.
Information relating to litigation and bankruptcy are not on public record
in India and as a result it is difficult to obtain conclusive information on us
regarding these matters from searching public records. Even documents which are
filed by us may not be available for public inspection if the Registrar of
Companies believes that they have not been completely filled in. Consequently,
the information publicly available about us may be inadequate and may not
contain material documents. In addition, the filing systems in the Registrar of
Companies office are manual, not electronic, and otherwise imperfect and
documents filed by us may not be available or complete.
The government of India may require us to convert the proceeds of this offering
into rupees and repatriate the proceeds to India, which could reduce the dollar
value of the proceeds due to depreciation of the Indian rupee.
We will be required to submit to the government of India quarterly
statements regarding the periodic repatriation of the net proceeds of this
offering. Pending the use of funds as discussed in "Use of Proceeds" we
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intend to invest the net proceeds of this offering in U.S. dollar denominated
short-term, investment grade, interest-bearing instruments. However, the
government of India has the right to require us to repatriate the proceeds of
this offering. This would require us to convert the net proceeds of this
offering into Indian rupees and hold them in India, which would subject these
funds to the depreciation of the Indian rupee.
Risks Related To Your Investment In The ADSs
Pre-emptive rights in respect of the equity shares underlying the ADSs may be
unavailable to United States holders, which would reduce their proportional
ownership interests in the company.
Under Indian law, we must offer holders of our equity shares pre-emptive
rights to purchase a proportionate number of shares to maintain their existing
ownership prior to the issuance of any new equity shares, unless the pre-
emptive rights have been waived by three-fourths of our shareholders present
and voting at a general meeting. Our existing shareholders have waived their
pre-emptive rights for the ADS offering contemplated by this prospectus.
Although the government of India has begun to allow non-resident holders to
exercise pre-emptive rights the government of India could reverse its position
in the future. In addition, before U.S. holders may exercise pre-emptive
rights, a registration statement under the Securities Act of 1933 must be
effective with respect to the securities relating to such rights, unless an
exemption from the registration requirements of the Securities Act is
available.
At the time of any rights offering we will evaluate the costs and potential
liabilities associated with filing a registration statement, as well as the
perceived benefits of enabling holders of the ADSs to exercise their pre-
emptive rights. We cannot assure you that we will file a registration statement
or otherwise seek the approval of the government of India.
If in the future our ADS holders are allowed to exercise pre-emptive rights,
the equity shares may be issued to the depositary, which may sell them for the
benefit of the holders of the ADSs. We cannot assure you of the value, if any,
that the depositary would receive upon the sale of those equity shares.
To the extent that holders of the ADSs are unable to exercise pre-emptive
rights, the proportional interests of such holders in our company would be
reduced. For additional information regarding the pre-emptive rights of holders
of ADSs, please see "Description of our Equity Shares" and "Description of
American Depositary Shares".
Holders of ADSs may be restricted in their ability to exercise voting rights.
As a holder of ADSs, you generally will have the right under the deposit
agreement to instruct the depositary to exercise voting rights for the equity
shares represented by your ADSs.
At our request, the depositary will mail you any notice of any shareholders'
meeting received from us together with information explaining how to instruct
the depositary to exercise the voting rights of the securities represented by
ADSs. If the depositary receives voting instructions for a holder of ADSs on a
timely basis, it will endeavor to vote the securities representing the holder's
ADSs in accordance with those voting instructions. The ability of the
depositary to carry out voting instructions, however, may be limited by
practical and legal limitations, such as time zone differences and logistical
problems, and the terms of the securities on deposit.
We cannot assure that you will receive voting materials in time to enable
you to return voting instructions to the depositary in a timely manner. If no
voting instructions have been received by the depositary, the depositary will
appoint a person designated by us as proxy to vote the securities. For
additional information regarding the voting rights of holders of equity shares,
please see "Description of Our Equity Shares--Voting Rights".
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Requirements under Indian law relating to the payment of dividends may reduce
the value of equity shares underlying the ADSs.
Under current Indian laws, we may pay cash dividends out of our profits in
the year in which the dividend is declared or out of our undistributed profits
from previous fiscal years.
With respect to equity shares issued during a particular fiscal year of our
company, including equity shares underlying the ADSs issued in this offering,
cash dividends declared and paid for that fiscal year will be prorated from the
date of issuance to the end of the fiscal year of our company in which those
shares are issued. This disparity in dividend treatment increases the
probability that the price of the ADSs may not trade on par with the price of
the equity shares as quoted on the stock exchanges in India on which our equity
shares are traded, and may reduce the liquidity of the ADSs.
In addition, to the extent that we distribute cash dividends, if exchange
rates fluctuate during a time when the depositary cannot convert Indian rupees
into U.S. dollars you may lose some or all of the value of the distribution.
Although we have typically paid cash dividends and have no current intention
to discontinue these dividend payments, we cannot assure you that any future
dividends will be declared or paid or as to the amount of those dividends. For
additional information regarding dividends, please see "Dividend Policy",
"Description of Our Equity Shares--Dividends" and "Description of American
Depositary Shares--Dividends and Distributions".
There has been no prior market for our ADSs and the initial public offering
price may not be indicative of future trading prices and the trading price of
the ADSs may bear no relationship with the trading price of the underlying
equity shares.
Our equity shares are listed on The Stock Exchange, Mumbai, the Madras Stock
Exchange Ltd., Chennai and The Stock Exchange, Ahmedabad and are also traded on
The National Stock Exchange and most other large stock exchanges in India. Over
90% of recent trading in our securities has been carried out on The Stock
Exchange, Mumbai and The National Stock Exchange. Prior to this offering, there
has been no public market for the ADSs offered by this prospectus or for the
underlying equity shares in the United States. Consequently, the public
offering price for the ADSs was determined by negotiation among us and the
representatives of the underwriters, and may bear no relationship to the price
at which the ADSs will trade upon the completion of this offering. The primary
factor considered in determining the public offering price was the price of our
equity shares on The Stock Exchange, Mumbai and The National Stock Exchange.
Other factors considered include:
. our record of operation;
. our current financial condition;
. our future prospects;
. our markets;
. the economic conditions in and future prospects for the information
technology industry;
. our management;
. the economic and political climate in India; and
. prevailing general conditions in the equity securities markets, including
current market valuations of publicly traded companies considered
comparable to us.
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The prices at which our shares will sell in the public market after this
offering may, however, be lower than the price at which they are sold by the
underwriters. Additionally, an active trading market in the ADSs may not
develop and continue after this offering. You may not be able to resell your
shares at or above the initial public offering price due to a number of
factors, including, but not limited to, the following:
. announcements concerning our company or our competitors;
. announcements relating to technological innovations;
. announcements relating to strategic relationships or acquisitions;
. changes in earnings estimates by analysts;
. conditions affecting the technology and emerging growth company sectors;
. currency fluctuations;
. general economic, political and market conditions in any or all of India,
the United States and other world markets; and
. trends related to the fluctuations of stock prices of Indian companies.
We may experience volatility in our share price after this offering, which
could negatively affect your investment.
The trading price of the ADSs and our equity shares may be volatile. Indian
securities markets are substantially smaller than the securities markets in the
United States and Western Europe and have been extremely volatile from time to
time. The market for technology and Internet-related companies also has been
extremely volatile and fluctuations often have been unrelated to the operating
performance of particular companies. These fluctuations may adversely affect
the trading price of our shares, regardless of our actual operating
performance.
The market for the ADSs may be illiquid and could increase the volatility in
our ADS price and reduce the price at which you can sell our ADSs.
Prior to this offering, there has been no public market for the ADSs or our
equity shares in the United States. After this offering, there will be no
public market for our equity shares in the United States. Although holders of
the ADSs are entitled to withdraw the equity shares underlying their ADSs from
the depositary at any time, under current Indian law, equity shares may not be
re-deposited with the depositary. Therefore, the number of outstanding ADSs
will decrease to the extent that any equity shares are withdrawn from the
depositary, which may adversely affect the market price and the liquidity of
the market for the ADSs.
Although we have been approved to have our ADSs listed on the New York Stock
Exchange, subject to official notice of issuance, we cannot assure you that any
active trading market for the ADSs or our equity shares will develop or be
sustained after this offering, or that the initial public offering price will
correspond to the price at which the ADSs will trade in the public market
subsequent to this offering.
Risks Related To Our Corporate Charter And Share Ownership
Our officers, directors and affiliated entities, including Silverline Holdings,
Corp., own a large percentage of our company and could significantly influence
us in ways that might not be in the best interest of our other shareholders,
including the holders of our ADSs.
We anticipate that Messrs. Ravi Subramanian and Krishna K. Subramanian,
together with entities affiliated with them, including Silverline Holdings,
Corp., will, in the aggregate, effectively own approximately 41.6% of our
outstanding equity shares following the completion of this offering. These
shareholders may have interests
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that conflict with those of our other shareholders and, if acting together,
these shareholders would likely be able to control most matters requiring
approval by our shareholders, including the election of directors and the
approval of significant corporate transactions. For example, these shareholders
could delay or prevent a change in control of our company or discourage a
potential acquiror from making a tender offer for or otherwise attempting to
obtain control of us, even if such a transaction would be beneficial to our
other shareholders.
In addition, 3.5 million shares of Silverline Holdings, Corp. and 6.5
million shares of Silverline Technologies Limited that are held by our Chairman
are pledged to lenders who could foreclose on those shares in the event of
default under the respective loan agreements. If an event of default were to
occur under the loan agreements then the control by Silverline Holdings, Corp.
and our Chairman and our existing shareholders would be diminished and a
significant block of shares could be held or transferred by the respective
lenders who might not act in the best interests of our other shareholders.
Virtually all our shares will be eligible for sale shortly after the offering
and substantial sales of our shares could cause our share price to fall.
If our shareholders sell a large number of our ADSs or equity shares,
including shares issued upon the exercise of outstanding options and warrants,
in the public market following this offering, the trading price of our ADSs or
equity shares would decrease dramatically. Any perception that these sales
could occur would also result in a dramatic decline in the trading price of our
shares. These sales also might make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate.
Upon completion of this offering, 73,200,000 equity shares will be
outstanding, including 8,700,000 equity shares represented by 4,350,000 ADSs
issued in connection with this offering which excludes approximately 3 million
options and warrants each exercisable for one equity share under our Indian
employee stock option plans. We have also reserved up to 2 million equity
shares which may be issued in connection with the proposed U.S. employee stock
option plan to be adopted before this offering.
Of the 64,500,000 equity shares outstanding prior to the issuance of the
ADSs, holders of approximately 30,420,221 equity shares have agreed not to
dispose of or hedge any of these equity shares for a period of 180 days
following the date of this prospectus. Of these 30,420,221 equity shares, our
Chairman has pledged 6,500,000 under a loan and pledge agreement. The lender
will not be subject to the 180-day lockup and the pledged shares may be sold by
the lender in the event of a default under the loan and pledge agreement.
Salomon Smith Barney Inc. may permit the sale of these shares in its sole
discretion at any time and without prior public announcement.
Substantially all our equity shares that are not subject to these sale
restrictions will be freely tradable in India immediately following this
offering. Upon expiration of the 180-day period, or earlier with the consent of
Salomon Smith Barney Inc., substantially all our outstanding equity shares will
be available for sale on all the major stock exchanges in India. Sales of
substantial amounts of our equity shares, or the availability of such shares
for sale, could materially adversely affect the market price of the ADSs.
Compliance with provisions under Indian law could delay or prevent an
acquisition of our company, even if an acquisition would be beneficial to our
shareholders.
Certain provisions under Indian law may have the effect of delaying,
preventing or making more difficult an acquisition or merger of our company,
even if the acquisition or merger is beneficial to our shareholders. Indian law
requires any person who acquires 5% or more of our equity shares to disclose
the same to each stock exchange on which our shares are listed in India.
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In addition, if any person or its associates acquires more than 15% of our
equity shares, that person must publicly offer to acquire another 20% of our
equity shares. However, no public offer is required if a person who holds
between 15% and 75% of our equity shares does not acquire more than an
additional 5% of our equity shares in any 12-month period. These requirements
do not apply to the acquisition of ADSs, but will apply upon conversion of ADSs
into equity shares.
Our charter documents provide for a staggered board of directors, which
means that someone could wait two years before being able to elect enough
directors to take over control of our board. We currently have seven directors,
and our charter documents allow our board to, without shareholder approval,
appoint additional directors, up to a maximum of twelve total directors.
These provisions could delay or prevent a change in control of our company,
impede a business combination or discourage a potential acquiror from making a
tender offer or otherwise attempting to obtain control of our company which
could have a material adverse effect on the market price of the ADS.
Our lenders may be entitled to appoint directors to our board of directors.
Our articles of association give our lenders, as well as certain Indian
public financial institutions, the right to appoint their own nominees to our
board of directors. A lender may only exercise this right to the extent
permitted under its loan or other agreement with us. We have been advised by
our Indian counsel that this provision is common in the articles of association
of other Indian companies.
Our articles of association provide that any directors nominated to our
board by lenders will not be subject to re-election. Indian law limits the
number of directors not subject to re-election to be one-third of the total
number of directors on our board.
Directors not subject to re-election include directors nominated by lenders,
as well as wholetime directors and managing directors. Wholetime directors work
full time for us and are appointed for a fixed term which may be determined by
our board of directors. Our existing board includes one wholetime director who
has been appointed for a fixed term of 5 years expiring in November, 2003 and
no managing directors. Accordingly, the most directors our lenders could
currently nominate to our board is one-third of the total size of our board.
Our articles of association provide that our maximum board size is 12
directors, however, this number does not include the nominee directors, the
wholetime directors and the managing directors.
We do not currently have any lender nominated directors on our board, and
our existing loan agreements do not currently grant our lenders the right to
nominate directors. However, we may in the future grant our lenders this right,
especially since it is common practice in India for Indian public financial
institutions and other lenders to have nominee rights.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this prospectus that relate to
future results of operations, plans, objectives, expectations and intentions.
These statements are based on a number of assumptions and estimates which are
subject to significant uncertainties, many of which are beyond our control. In
some cases, you can identify forward-looking statements by terminology such as
"believe", "may", "would", "could", "will", "expect", "intend", "continue",
"anticipate", "predict", "estimate" or similar expressions. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including the risks described in
"Risk Factors" and elsewhere in this prospectus.
Readers are cautioned not to place undue reliance on these forward-looking
statements which reflect our views only as of the date of this prospectus. We
undertake no obligation to update such statements or publicly release the
result of any revisions to these forward-looking statements which we may make
to reflect events or circumstances after the date of this prospectus or to
reflect the occurrence of unanticipated events.
25
<PAGE>
ENFORCEMENT OF CIVIL LIABILITIES
We are a public limited company incorporated under the laws of India. Many
of our directors and executive officers, a majority of our employees and the
Indian experts named in this prospectus, reside outside the United States, and
their assets and a majority of our assets are located outside the United
States. It may be difficult for investors to effect service of process upon
these directors, executive officers and Indian experts. In addition, it will be
extremely difficult for investors to enforce judgments obtained in the United
States in India, including judgments based on the civil liability provisions of
the federal securities laws of the United States. Importantly, Indian courts
also will not enforce U.S. default judgments obtained outside of India. As a
result, an Indian defendant could elect simply not to appear in any U.S.
proceeding against it, which would leave the U.S. plaintiff with a default
judgment that is unenforceable in India. In addition, while it is theoretically
possible that you could file an original suit in India against us, our
directors or our executive officers based on the civil liability provisions of
the federal securities laws of the United States, to our knowledge, no suit
predicated on the federal securities laws of the United States has ever been
brought in India.
For more information, please see "Risk Factors--Indian courts might not
enforce judgments rendered outside of India and you may not be able to bring an
original action in India, which may adversely affect your ability to sue us".
26
<PAGE>
USE OF PROCEEDS
We expect that our net proceeds from this offering will be approximately
$99.5 million after deducting the underwriting discount and estimated offering
expenses and reflecting the initial offering price of $25.00 per ADS. If the
underwriters fully exercise their over-allotment option, our net proceeds will
be approximately $114.6 million.
We expect to use approximately $32.0 million of the net proceeds of this
offering as follows:
. approximately $14.0 million for capital expenditures, consisting
primarily of the build-out of our existing facilities;
. approximately $10.0 million for working capital requirements; and
. approximately $8.0 million for expansion of our sales and marketing
efforts;
We expect to use the remaining approximately $67.5 million of net proceeds for:
. potential acquisitions and other strategic transactions; and
. other general corporate purposes.
As noted above, we may use a portion of the net proceeds of this offering
for the acquisition of businesses that complement our existing business
strategy. However, we have no commitments or agreements with respect to any
specific future acquisition, except that we recently signed a non-binding
letter of intent to purchase a small software development firm in Toronto that
provides intranet and Internet application development and systems integration
services, subject to satisfactory due diligence and other contingencies.
Management will have significant flexibility in applying the net proceeds of
this offering. Pending the use of the net proceeds as described above, we
intend to invest the net proceeds of this offering in U.S. dollar denominated
short-term, investment grade, interest-bearing instruments. Please see "Risk
Factors--Our management will have broad discretion with respect to the
expenditure of the net proceeds from this offering, and may use the proceeds in
ways that you disagree with". We may be required by the government of India to
repatriate the net proceeds from this offering as described in "Risk Factors--
The government of India may require us to convert the proceeds of this offering
into rupees and repatriate the proceeds to India, which could reduce the dollar
value of the proceeds due to depreciation of the Indian rupee". Subject to
repatriation of the net proceeds to India, the Reserve Bank of India has
granted general permission for us to:
. invest the funds as an interim arrangement on a short term basis as
deposits with foreign banks which are rated A1+ by Standard & Poor's or
P1 by Moody's or with the branches of Indian banks located outside of
India;
. invest in U.S. treasury bills and other monetary instruments with
maturities not exceeding a period of one year;
. keep the funds as foreign currency deposits with authorized dealers
and/or public financial institutions in India; and
. invest in certificate of deposits or other commercial paper issued
outside India by banks incorporated in India.
27
<PAGE>
DIVIDEND POLICY
Although the amount varies, public companies in India typically pay cash
dividends. Under current Indian laws and regulations, we may pay cash dividends
out of our profits in the year in which the dividend is declared or out of our
undistributed profits of the previous fiscal years of our company, upon the
recommendation of our board of directors and approval by a majority of our
shareholders. Our shareholders may, as part of this approval, decrease, but not
increase the amount of the dividend recommended by our board of directors.
Before declaring a dividend greater than 10% of the par value of our shares we
are required under Indian law to transfer to our reserves a minimum percentage
of our profits in that year, ranging from 2.5% to 10% depending upon the
dividend percentage to be declared in that year. In addition, our board of
directors has the discretion to declare and pay interim dividends without prior
shareholder approval.
We have declared and paid cash dividends of 1.25 Indian rupees per equity
share in 1998 and 1.75 rupees per equity share in 1999 (approximately $0.03 per
share and $0.04 per share, respectively). Although we intend to continue
dividend payments, we cannot assure you that any future dividends will be
declared or paid or as to the amount of those dividends.
Dividends declared, distributed or paid by an Indian corporation are
currently subject to a tax of 11%. The recently enacted Finance Act, 2000
increases this tax to 22%, including the 10% surcharge, commencing June 1,
2000. This tax is neither paid by shareholders nor is it a withholding
requirement, but rather it is a direct tax payable by the corporation.
As an ADS holder, you will generally be entitled to receive dividends
payable in respect of the equity shares represented by your ADSs. Cash
dividends in respect of the equity shares represented by your ADSs will be paid
to the depositary in Indian rupees and, except as otherwise described under
"Description of American Depositary Shares--Dividends and Distributions", will
be converted by the depositary into U.S. dollars. The depositary will
distribute these proceeds to you. The equity shares represented by your ADSs
will rank equally with our existing equity shares in respect of dividends.
With respect to equity shares issued during a particular fiscal year of our
company, including equity shares underlying the ADSs issued in this offering,
cash dividends declared and paid for that fiscal year of our company will be
prorated from the date of issuance to the end of the fiscal year of our company
in which those shares are issued. Once a cash dividend is declared, equity
shares entitled to prorated dividends are quoted on Indian stock exchanges at
the same price as equity shares entitled to full dividends. Upon sale and
payment for equity shares entitled to a prorated dividend, the selling broker
will deduct the difference between the full dividend and the prorated dividend
from the sale price.
As an ADS holder, you will receive only dividends prorated from the date of
issuance of the equity shares underlying your ADSs to the end of the fiscal
year of our company for which the dividends are declared and paid. This
disparity in dividend treatment increases the probability that the price of the
ADSs may not trade at the same price as our equity shares quoted on the stock
exchanges in India. ADSs withdrawn from the depositary in exchange for the
underlying equity shares prior to payment of any dividend will receive proceeds
reduced by the difference between the full dividend and the prorated dividend,
upon sale of and payment for the underlying equity shares. For additional
information, please see "Risk Factors--Requirements under Indian law relating
to the payment of dividends may reduce the value of equity shares underlying
the ADSs" and "--Indian income tax surcharges and dividend taxes may adversely
affect us", "Description of Equity Shares--Dividends" and "Description of
American Depositary Shares--Dividends and Distributions".
INDUSTRY INFORMATION
This prospectus includes data concerning information technology professional
services industry that we obtained from material published by International
Data Corporation and Software Productivity Research. These sources generally
indicate that they have obtained information from sources that they believe are
reliable, but that they do not guarantee the accuracy and completeness of the
information. Although we believe that these industry sources are reliable, we
have not independently verified their data. We also have not sought the consent
of any of these sources to refer to their data in this prospectus.
28
<PAGE>
PRICE RANGE OF OUR EQUITY SHARES
Our equity shares outstanding prior to this offering are listed on The Stock
Exchange, Mumbai under the code "389" and the Madras Stock Exchange Ltd.,
Chennai and The Stock Exchange, Ahmedabad under the symbol "SILVERLINE". In
addition, our equity shares are traded on The National Stock Exchange and most
other large exchanges in India under the symbol "SILVERLINE". We expect that
the equity shares underlying the ADSs will be listed on The Stock Exchange,
Mumbai, the Madras Stock Exchange Ltd., Chennai and The Stock Exchange,
Ahmedabad shortly after the completion of this offering. Over 90% of recent
trading in our securities has been carried out on The Stock Exchange, Mumbai
and The National Stock Exchange. The ADSs have been approved for listing on the
New York Stock Exchange under the symbol "SLT", subject to official notice of
issuance.
Trading Prices of Our Equity Shares on the Indian Stock Exchanges
The trading prices for our equity shares are quoted in the official list of
each of The Stock Exchange, Mumbai, the Madras Stock Exchange Ltd., Chennai and
The Stock Exchange, Ahmedabad in Indian rupees. Presented in the table below
for the periods indicated are:
. the reported high and low closing sales prices for our equity shares on
The Stock Exchange, Mumbai;
. the imputed high and low closing sales prices for our equity shares
translated into U.S. dollars based on the noon buying rate on the last
date of each period presented; and
. the average daily trading volume for our equity shares on The Stock
Exchange, Mumbai.
The noon buying rate is the U.S. dollar buying rate in the City of New York
for cable transfers in Indian rupees at noon on a particular day as certified
for customs purposes by the Federal Reserve Bank of New York.
<TABLE>
<CAPTION>
Price per Price per
equity share equity share
(Indian rupees) (U.S. dollars) Average daily
--------------------- --------------- equity share
Year High Low High Low trading volume
---- ----------- --------- ------- ------- --------------
(in thousands)
<S> <C> <C> <C> <C> <C>
1998
First Quarter........... Rs. 44.80 Rs. 25.50 $1.08 $0.61 22.52
Second Quarter.......... 121.40 8.55 2.93 1.17 174.23
Third Quarter........... 109.70 60.65 2.93 1.46 356.47
Fourth Quarter.......... 112.40 74.95 2.72 1.81 364.21
1999
First Quarter........... Rs. 380.25 Rs.106.80 $8.80 $2.47 1,294.62
Second Quarter.......... 351.75 180.80 8.14 4.18 760.88
Third Quarter........... 373.55 191.95 8.67 4.44 1,031.93
Fourth Quarter.......... 844.00 350.00 19.54 8.10 2,943.12
2000
First Quarter........... Rs.1,360.00 Rs.657.00 $ 31.18 $ 15.05 1,908.18
Second Quarter (through
June 19)............... 751.50 338.90 17.06 7.69 3,002.46
</TABLE>
On June 19, 2000, the closing price of our equity shares on The Stock
Exchange, Mumbai was Rs.627 per equity share, equivalent to $13.98 per equity
share and $27.97 per ADS, translated at the noon buying rate of Rs.44.85 per
U.S. dollar on June 19, 2000. The liquidity and trading patterns of securities
quoted on The Stock Exchange, Mumbai may be substantially different from those
of securities quoted on the New York Stock Exchange. Historical trading prices,
therefore, may not be indicative of the prices at which the ADSs will trade in
the future.
As of March 31, 2000, there were approximately 75,000 holders of record of
our equity shares, of which 976 had registered addresses in the United States
and held an aggregate of approximately 416,079 of our equity shares.
29
<PAGE>
Trading Practices and Procedures on the Indian Stock Exchanges
Our shares are listed in India on The Stock Exchange, Mumbai, the Madras
Stock Exchange Ltd., Chennai and The Stock Exchange, Ahmedabad. Our shares are
also traded on The National Stock Exchange and most major exchanges in India.
Over 90% of recent trading in our securities has been carried out on The Stock
Exchange, Mumbai and The National Stock Exchange.
Trading on The Stock Exchange, Mumbai and The National Stock Exchange is
accomplished through on-line execution. These two stock exchanges handle an
aggregate of over 100,000 trades per day with daily volumes in excess of Rs. 10
billion. Trading on these exchanges is done on a five-day fixed settlement
basis, and any outstanding amount at the end of the settlement period is
settled by delivery and payment. Institutional investors are not permitted to
"net out" their transactions and must trade on a delivery basis only.
The Stock Exchange, Mumbai permits carry-forwards of trades in certain
securities by non-institutional investors with an associated charge. In
addition, orders can be entered with a specified term of validity that may last
until the end of the session, day or settlement period. Dealers must specify
whether orders are for a proprietary account or a client. The Stock Exchange,
Mumbai specifies certain margin requirements for trades executed on the
exchange, including margins based on the volume or quantity of exposure that
the broker has on the market, as well as mark-to-market margins payable on a
daily basis for all outstanding trades. Trading on The Stock Exchange, Mumbai
takes place from 10:00 a.m. to 3:30 p.m. (India time) on weekdays, except
holidays.
The National Stock Exchange was established in April 1993 in Mumbai
(Bombay), by financial institutions and banks along with the Industrial
Development Bank of India as the coordinating agency. The National Stock
Exchange provides nationwide online satellite-linked screen-based trading
facilities with market makers as well as electronic clearing and settlement.
The National Stock Exchange trades from 9:30 a.m. until 3:30 p.m. (India time)
on weekdays, except holidays. The National Stock Exchange does not permit carry
forwards of trades. It has separate margin requirements based on the net
exposure of the broker on the Exchange.
On the National Stock Exchange, deliveries for trade executed "on-market"
are exchanged through the National Securities Clearing Corporation Limited.
Negotiated or "off-market" trades are reported to The National Stock Exchange
on-line. As a result, The National Stock Exchange allows screen-based paperless
trading and settlement from any of more than 236 cities in India. The daily
volume of trading on The National Stock Exchange generally exceeds that of The
Stock Exchange, Mumbai.
The Stock Exchange, Mumbai and The National Stock Exchange also have
separate online trading systems and separate clearing houses. For additional
information, please see "Risk Factors--Trading stoppages and closures at The
Stock Exchange, Mumbai, The National Stock Exchange, The Madras Stock Exchange
Ltd., Chennai and The Stock Exchange, Ahmedabad may adversely affect the
trading price of ADSs".
30
<PAGE>
DILUTION
Our net tangible book value as of March 31, 2000 was approximately $72.6
million, or $1.13 per equity share, the equivalent of $2.26 per ADS. Our net
tangible book value is the difference between our tangible assets and our
liabilities, divided by the number of equity shares outstanding (including the
equity shares represented by the ADSs). For investors in the ADSs, dilution is
the per ADS difference between the initial public offering price of $25.00 per
ADS in this offering and our adjusted net tangible book value immediately after
the completion of this offering. Dilution in this case results from the fact
that the per ADS offering price of the ADSs is substantially in excess of the
per share price paid by some of our current shareholders for our presently
outstanding equity shares.
After giving effect to the net proceeds from our sale of 4,350,000 ADSs
(representing 8,700,000 equity shares) offered by this prospectus at the public
offering price of $25.00 per ADS ($12.50 per equity share), and after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us, our adjusted net tangible book value as of March 31, 2000, would have
been approximately $172.1 million, or $4.71 per ADS ($2.36 per equity share).
This represents an immediate increase in our net tangible book value of $2.45
per ADS ($1.23 per equity share) to existing shareholders and an immediate
dilution of $20.29 per ADS ($10.14 per equity share) to new investors
purchasing the ADSs. The following table illustrates this ADS dilution:
<TABLE>
<CAPTION>
Per Equity Per
Share ADS
---------- ------
<S> <C> <C> <C> <C>
Initial public offering price per equity
share and ADS............................... $12.50 $25.00
Net tangible book value per equity share
and ADS before this offering.............. $1.13 $2.26
Increase in net tangible book value per
equity share and ADS attributable to new
investors in this offering................ 1.23 2.45
----- -----
Net tangible book value per equity share
and ADS after this offering............... 2.35 4.71
------ ------
Dilution per equity share and ADS to new in-
vestors..................................... $10.14 $20.29
====== ======
</TABLE>
The following table describes, on a pro forma basis as of March 31, 2000,
the difference between existing shareholders and new investors with respect to
the number of equity shares purchased, the total consideration paid and the
average price per equity share, paid.
<TABLE>
<CAPTION>
Equity Shares Total
Purchased Consideration Average
-------------- ---------------- Price Per
Number Percent Amount Percent Equity Share
------ ------- -------- ------- ------------
(In thousands, except per
share data)
<S> <C> <C> <C> <C> <C>
Existing shareholders......... 64,500 88.1% $ 56,495 34.2% $ 0.88
New investors................. 8,700 11.9 108,750 65.8 12.50
------ ----- -------- -----
Total....................... 73,200 100.0% $165,245 100.0%
====== ===== ======== =====
</TABLE>
The tables and calculations described above assume no exercise by the
underwriters of their overallotment option and no exercise of the warrants
exercisable for two million equity shares under our Indian employee welfare
trust program, options exercisable for one million equity shares under our
Indian employee stock option plan and the exercise of options exercisable for
up to one million ADSs under our proposed U.S. employee stock option plan. To
the extent that the overallotment option or outstanding options or warrants are
exercised, there will be further dilution to new investors in the ADSs.
31
<PAGE>
EXCHANGE RATES
The presentation of our net income in Indian rupees or U.S. dollars can be
significantly affected by movements in currency exchange rates, in particular
the movement of the Indian rupee against the U.S. dollar. See "Risk Factors--
Our results of operations may be materially adversely affected if the Indian
rupee appreciates against the U.S. dollar", "--The trading price of the ADSs
may be materially adversely affected by exchange rate fluctuations between the
U.S. dollar and the Indian rupee", and "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
The table below provides the following information for the periods indicated
concerning the number of Indian rupees for which one U.S. dollar could be
exchanged:
.the noon buying rate at each period end;
.the average of the noon-buying rates on the last day of each month during
the period;
.the 52-week high noon buying rate during the period; and
.the 52-week low noon buying rate during the period.
<TABLE>
<CAPTION>
Year Period End Average High Low
---- ---------- --------- --------- ---------
<S> <C> <C> <C> <C>
1995.................................. Rs. 35.18 Rs. 32.51 Rs. 35.18 Rs. 31.38
1996.................................. 35.95 35.53 36.46 34.35
1997.................................. 39.30 36.53 39.30 35.72
1998.................................. 42.52 41.43 42.65 38.80
1999.................................. 43.51 43.20 43.59 42.50
2000
First Quarter......................... 43.65 43.63 43.75 43.55
Second Quarter (through June 19)...... 44.85 44.01 44.85 43.61
</TABLE>
These rates are provided solely for your convenience and are not necessarily
the exchange rates, if any, used by us in the preparation of the financial
statements or other information included elsewhere in this prospectus. The noon
buying rate is the U.S. dollar buying rate in the City of New York for cable
transfers in Indian rupees at noon on a particular day as certified for customs
purposes by the Federal Reserve Bank of New York.
32
<PAGE>
CAPITALIZATION
The following table shows our total capitalization at March 31, 2000:
.on an actual basis; and
.on an as adjusted basis to give effect to this offering.
You should read this capitalization table together with "Selected
Consolidated Financial Data", "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
At March 31, 2000
--------------------
Actual As Adjusted
------- -----------
(in thousands,
except share
amounts)
<S> <C> <C>
Cash and cash equivalents................................. $20,609 $120,082
======= ========
Current portion of long-term debt and capital lease
obligations.............................................. $ 2,052 $ 2,052
Long-term debt and capital lease obligations, excluding
current installments..................................... 329 329
Stockholders' equity:
Equity shares, Rs. 10 ($0.23) per share par value:
authorized 85,000,000 shares; issued and outstanding
64,500,000 shares (actual); issued and outstanding
73,200,000 shares (as adjusted)......................... 18,306 20,307
Additional paid-in capital............................... 24,666 122,138
Retained earnings........................................ 39,168 39,168
Deferred, stock-based compensation....................... (1,303) (1,303)
Accumulated other comprehensive income (expense)......... (4,061) (4,061)
------- --------
Total stockholders' equity.............................. 76,776 176,249
------- --------
Total capitalization...................................... $77,105 $176,578
======= ========
</TABLE>
33
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and
related notes appearing elsewhere in this prospectus. The consolidated
statements of operations data for the fiscal years ended December 31, 1997,
1998 and 1999 and the consolidated balance sheet data as of December 31, 1998
and 1999 have been derived from the consolidated financial statements of the
Company included elsewhere in this prospectus which have been audited by
Deloitte Haskins & Sells (a member firm of Deloitte Touche Tohmatsu),
independent auditors. The consolidated statements of operations data for the
years ended December 31, 1995 and 1996 and the consolidated balance sheet data
as of December 31, 1995, 1996 and 1997 were derived from the unaudited
consolidated financial statements, which are not included in this prospectus,
which were prepared in accordance with Indian GAAP and have been recast in
accordance with U.S. GAAP. The unaudited consolidated financial statements have
been prepared on substantially the same basis as the audited consolidated
financial statements and, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of operations for these periods. Historical
results are not necessarily indicative of the results to be expected in the
future. Our financial statements are prepared in Indian rupees and for U.S.
GAAP purposes are translated into U.S. dollars using the average monthly
exchange rate for revenue and expense and the exchange rate at the end of the
reporting period for assets and liabilities. The following selected
consolidated financial data reflects the financial position, results of
operations and cash flows of our company, including Silverline Technologies,
Inc., a Delaware corporation which we acquired on December 28, 1999. Because
Silverline Technologies, Inc. had been under common control with us, the
acquisition was accounted for in a manner similar to a pooling of interests.
See "Related Party Transactions" and note 1 to our consolidated financial
statements.
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
Year Ended December 31, March 31,
------------------------------------------- --------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- --------- ---------
(in thousands, except per equity share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $39,449 $45,252 $46,769 $60,219 $87,577 $ 16,997 $ 30,998
Cost of revenues sold... 24,743 27,801 25,053 31,273 49,446 9,093 16,112
------- ------- ------- ------- ------- --------- ---------
Gross profit............ 14,706 17,451 21,716 28,946 38,131 7,904 14,886
------- ------- ------- ------- ------- --------- ---------
Operating expenses:
Selling, general and
administrative
expenses............... 6,407 7,599 10,342 11,316 13,141 2,564 5,688
Stock-based
compensation........... -- -- -- -- 532 -- 862
Depreciation and
amortization........... 1,592 3,234 4,945 4,415 4,095 1,024 939
------- ------- ------- ------- ------- --------- ---------
Total operating
expenses............... 7,999 10,833 15,287 15,731 17,768 3,588 7,489
------- ------- ------- ------- ------- --------- ---------
Operating income........ 6,707 6,619 6,429 13,215 20,363 4,316 7,397
Other income/(expense),
net.................... (608) (437) (878) (895) (1,380) (544) (284)
------- ------- ------- ------- ------- --------- ---------
Income before income
taxes and extraordinary
item................... 6,099 6,181 5,551 12,320 18,983 3,772 7,113
Provision for income
taxes.................. 413 847 1,216 1,482 2,808 598 1,230
------- ------- ------- ------- ------- --------- ---------
Income before
extraordinary item..... 5,686 5,334 4,335 10,838 16,175 3,174 5,883
Extraordinary item (net
of taxes).............. -- 59 10 -- 375 375 --
------- ------- ------- ------- ------- --------- ---------
Net income.............. $ 5,686 $ 5,275 $ 4,325 $10,838 $15,800 $ 2,799 $ 5,883
======= ======= ======= ======= ======= ========= =========
Earnings per equity
share
Basic:
Income before
extraordinary item... $ 0.13 $ 0.12 $ 0.10 $ 0.26 $ 0.28 $ 0.07 $ 0.09
Extraordinary item.... -- -- -- -- (0.01) (0.01) --
Net Income............ $ 0.13 $ 0.12 $ 0.10 $ 0.26 $ 0.27 $ 0.06 $ 0.09
Diluted:
Income before
extraordinary item... $ 0.13 $ 0.12 $ 0.10 $ 0.19 $ 0.25 $ 0.05 $ 0.09
Extraordinary item.... -- -- -- -- (0.01) (0.01) --
Net Income............ $ 0.13 $ 0.12 $ 0.10 $ 0.19 $ 0.24 $ 0.04 $ 0.09
Earnings per ADS
Basic:
Income before
extraordinary item... $ 0.26 $ 0.24 $ 0.20 $ 0.52 $ 0.56 $ 0.14 $ 0.18
Extraordinary item.... -- -- -- -- $ (0.02) $ (0.02) --
Net income............ $ 0.26 $ 0.24 $ 0.20 $ 0.52 $ 0.54 $ 0.12 $ 0.18
Diluted:
Income before
extraordinary item... $ 0.26 $ 0.24 $ 0.20 $ 0.38 $ 0.50 $ 0.10 0.18
Extraordinary item.... -- -- -- -- $ (0.02) $ (0.02) --
Net income............ $ 0.26 $ 0.24 $ 0.20 $ 0.38 $ 0.48 $ 0.08 $ 0.18
Weighted average equity
shares used in
computing earnings per
equity share
Basic.................. 42,450 42,450 42,450 42,450 57,150 42,450 64,500
Diluted................ 42,450 42,450 42,450 56,314 65,596 62,289 66,297
ADSs used in computing
earnings per ADS
Basic.................. 21,225 21,225 21,225 21,225 28,575 21,225 32,250
Diluted................ 21,225 21,225 21,225 28,157 32,798 31,145 33,149
</TABLE>
See accompanying notes to consolidated financial statements
34
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
At December 31, At March 31, (Unaudited)
------------------------------------- 2000 At March 31, 2000
1995 1996 1997 1998 1999 (Actual) (As Adjusted)(/1/)
------- ------ ------ ------- ------- ------------ ------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 834 $1,705 $7,943 $12,528 $20,662 $ 20,609 $120,082
Working capital......... 13,907 10,843 15,424 21,783 29,075 37,875 137,348
Total assets............ 35,882 49,386 57,224 69,275 87,646 101,125 200,598
Long-term debt (net of
current portion)....... 5,823 7,787 4,399 5,510 317 329 329
Total stockholders'
equity................. 20,448 24,169 34,455 43,875 68,640 76,775 176,248
</TABLE>
--------
(1) Adjusted to give effect to our sale of 4,350,000 ADSs (representing
8,700,000 equity shares) offered hereby at the initial public offering
price per ADS of $25.00
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
our consolidated financial statements and related notes appearing elsewhere in
this prospectus. The results shown in this prospectus are not necessarily
indicative of the results we will achieve in any future periods.
Overview
Silverline was founded in 1992. We are an Indian provider of information
technology services. We derive our revenue from fees for software consulting
services. We undertake engagements both on a project management basis, where we
have complete responsibility for managing the project, and, to a lesser extent,
on a more integrated basis where our employees work in-house for our clients'
information technology departments. Our managed project work is performed
either entirely at our clients' sites or through a combination of work
performed off-shore in our Indian facilities, at our clients' sites, and off-
site in our Piscataway, New Jersey facility. In the first three months of 2000
and in the full year 1999, revenue from our U.S. clients represented
approximately 80% and 84% of our revenue, respectively, while services
performed for our Indian clients for both periods was approximately 1%, of our
revenue and the remainder of our revenue during the related periods was derived
from our clients in other countries. In the first three months of 2000 and in
the full year 1999, managed projects represented approximately 78% and 76% of
our revenue, respectively. In-house assignments represented the remaining 22%
and 24% of our revenue. Our margins are substantially higher on project work we
undertake than the in-house work we perform.
Our Indian operations represented approximately 26% and 29% and 44% of our
revenue in the first three months of 2000 and in the full year 1999 and 1998,
respectively. The amount of work performed at our facilities and at clients'
sites varies from project to project. We charge higher rates and incur higher
compensation expenses for work performed at a client's site or our U.S.
facility. The services we perform at a client's site or our U.S. facility
typically generate higher revenue per employee but at a lower gross margin than
similar services performed at our Indian facilities. Accordingly, although 65%
of our information technology professionals were located in India, only 26% and
29% of our revenue in the first three months of 2000 and in the full year 1999
was generated by services performed in India, but our margins were higher for
the services that we performed in India. We currently have approximately 1,350
employees with approximately 920 in India and 430 in the United States.
We generally provide our services pursuant to written agreements on either a
time and materials basis or a fixed-price basis. Although terminations have
historically been rare, our service agreements typically can be terminated by a
client without penalty with little or no advance notice and without cause.
Also, while significantly all our work is performed for clients under master or
other detailed contracts, approximately 30% of our time and materials work is
performed on the basis of limited written or verbal work orders. Without
detailed written work orders in place, our ability to enforce termination
provisions as well as collect fees, protect our intellectual property and
protect ourselves from liability to others may be impaired.
In the first three months of 2000 and in the full year 1999, time and
materials fees represented 74% and 76% of our revenue, respectively, with the
remaining 26% and 24% of our revenue, respectively, were generated from fixed-
price contracts. Under time and materials contracts, we recognize revenue as we
perform services. Under fixed-price contracts, we recognize revenue upon the
achievement of specified milestones identified in the related service
agreements, which approximates the percentage of completion method.
Historically, we typically have earned higher margins under fixed-price
arrangements, but we bear the risks associated with cost overruns and
inflation. We anticipate that an increasing percentage of our client
engagements will be subject to fixed-price arrangements, and our operating
results could be adversely affected if we fail to accurately estimate the costs
we will incur or our anticipated completion dates in connection with those
arrangements.
We generated approximately 36% of our revenue in the first three months of
2000 and 45% of our revenue in the full year 1999 and 1998 from two clients and
we expect this to continue in the foreseeable future.
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Various businesses of our largest client, First Data Corp., accounted for
approximately 18%, 30% and 29% of our revenue in the first three months of 2000
and in the full year 1999 and 1998, respectively. In addition, in the first
three months of 2000 and in the full year 1999 and 1998, our second largest
client, Sky Capital International (Hong Kong), accounted for approximately 19%,
15% and 16%, respectively, of our revenue. If we were to lose either of our two
major clients, or have either major client significantly reduce its volume of
business with us, or cancel or defer a significant project with us, our
business, results of operations and financial condition would be materially
adversely affected.
Year 2000 conversion projects represented 0%, 13% and 18% of our revenue for
the first three months of 2000 and the full year 1999 and 1998, respectively,
of which approximately two-thirds was undertaken for various businesses of
First Data Corp in 1999 and 1998. Year 2000 conversion projects will not
generate any revenue in 2000 or beyond. We intend to replace our Year 2000
business, at least in part, with e-business and customer relationship
management or CRM services, which enable our clients to more effectively manage
their customers as key assets. Both e-business and CRM services generally yield
higher margins than our Year 2000 projects and our other services. E-business
and CRM represented 32%, 24% and 6% of our revenue for the first three months
of 2000 and the full year 1999 and 1998, respectively. At March 31, 2000, we
had completed four e-business projects and were working on another six e-
business projects each of which we expect to generate over $1 million in
revenues. We completed one CRM project during 1999, and as of March 31, 2000 we
were working on another two CRM projects. Projects relating to mainframes
represented 36% and 35% of our first three months of 2000 revenues and full
year 1999 revenues, respectively, client server 32% and 28%, e-business 28% and
21%, Year 2000 0% and 13% and CRM 4% and 3%, respectively.
Our strategy is to develop long term client relationships and to secure
additional engagements with existing clients by providing quality services and
being responsive to our clients' needs. In the first three months of 2000,
approximately 90% of our revenue was generated from companies that were our
clients in 1999. In 1999, approximately 65% of our revenue was generated from
companies that were our clients in 1998 and 1997.
In October 1998, we acquired the Lorin Group, a New York based company that
performs consulting services and provides information technology professionals
to work on in-house assignments with its client's information technology
departments. We made this acquisition with the intention of cross-selling our
off-shore facilities and our other higher value-added project management
services to the Lorin Group's clients. Our acquisition of the Lorin Group was
for cash and was accounted for using the purchase method of accounting. In
April 2000, we purchased a small software development firm in Toronto, Canada
for approximately $4.0 million in cash. The firm had approximately $3.1 million
in revenues in 1999 and 70 employees as of December 31, 1999. We evaluate
acquisitions based on numerous quantitative and qualitative factors.
Quantitative factors include historical and projected revenue, growth and
profitability and contract backlog. Qualitative factors include strategic and
cultural fit, geographic and industry coverage, management skills, client base,
technology, off-shore leveragability and technical proficiency.
We believe our acquisition of the Lorin Group has contributed to our growth
by expanding our employee base, client base, geographic coverage, industry
expertise and technical skills. We will continue to seek additional
acquisitions in the future that complement our business strategy. We cannot
guarantee that we will be able to identify suitable acquisition candidates
available at reasonable terms, obtain any necessary financing on acceptable
terms for these transactions, consummate any acquisitions or successfully
integrate any acquired business. We may also finance future acquisitions by
issuing our equity shares or additional ADSs, which would dilute your
percentage ownership in our company.
Costs of revenue represent our most significant expense and consist
primarily of salaries, bonuses and employee benefits for our personnel
dedicated to client assignments. Non-billable time incurred by our information
technology professionals resulting from start-up time for new hires, time off
between projects and training time incurred to upgrade skills of existing staff
are charged to our cost of revenue. We plan to increase the number of our
information technology professionals in order to support our planned business
growth. However, global competition for information technology professionals is
intense and we may not be able to
37
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hire or retain sufficient additional personnel to support our business plan.
Further, there is significant immigration of information technology
professionals from India, depleting the pool of available engineers from India.
The higher relative profitability of our Indian operations principally
results from lower overhead and personnel costs. We intend to continue to take
advantage of the benefits of delivering our services in India by completing the
expansion of our existing software development centers. We have committed
aggregate capital expenditures of $6.3 million for 2000 and 2001 for the build-
out of our existing facilities and we have budgeted an additional $8.2 million
for the further build-out of these existing facilities. In the first three
months of 2000, approximately 68% of our information technology professionals
were located in India, yet they accounted for only approximately 21% of our
labor costs in the first three months of 2000 for all our information
technology professionals. Historically, these costs have been significantly
lower relative to labor costs in the United States, Western Europe and Japan
for comparably skilled professionals. In particular, we believe that the
average annual wage rate for software professionals in India is currently
approximately 10% of the average U.S. rate. However, our labor costs in India
are currently increasing at a faster rate than the general rate of inflation in
India, as well as compared to labor costs in the United States, Western Europe
and Japan for comparably skilled professionals. Between 1997 and 1998, our
labor costs in India increased approximately 42% and between 1998 and 1999, our
labor costs in India increased approximately 27%, while our labor costs in the
United States increased only 10% in total for comparably skilled professionals
over the period 1997 and 1999. Our total labor costs also rose by 66% in the
first three months of 2000 as compared to the same period in 1999. We believe
these trends will continue for the foreseeable future given the shortage of,
and significant demand for, information technology professionals. Although we
believe that the significant labor cost differential between India and the U.S.
will continue, the increases in our labor costs will have an adverse effect on
our profit margins, unless we are able to recover these cost increases through
increases in our billing rates or improvements in the efficiency and
productivity of our information technology professionals.
We typically bill our clients on a monthly basis to monitor client
satisfaction and manage our outstanding accounts receivable balances. We
continuously monitor our engagements in order to manage billing and utilization
rates effectively. Actual billing rates are established on an engagement-by-
engagement basis. Over the last three years, our average hourly billing rates
have increased primarily due to a higher percentage of billable hours related
to e-business and CRM solutions, which command higher billing rates.
Selling, general and administrative expenses consist primarily of salaries,
bonuses and employee benefits for our support staff and non-project personnel,
as well as occupancy costs, staff recruiting costs, travel expenses,
telecommunication expenses and promotional costs. These expenses increased
approximately 119% in the first three months of 2000 as compared to the same
period in 1999. This increase could have an adverse effect on our profit
margins, unless we are able to recover these cost increases through increases
in our billing rates or time billed and are successful in managing our growth.
Our sales and marketing costs are expected to increase as a percentage of our
revenue as we enhance our selling efforts.
In anticipation of business growth, we expect to incur significantly higher
operating costs and capital expenditures. We may not continue to grow at a pace
that will support these costs and expenditures. To the extent that our revenue
does not increase at a rate commensurate with these additional costs and
expenditures, our results of operations and liquidity could be materially
adversely affected.
In connection with stock options granted in November 1999 to our employees
the Company recorded, deferred stock-based compensation of approximately $2.7
million. This amount represents the difference between the exercise price and
the deemed fair market value of our common stock for accounting purposes on the
date we granted these stock options. This amount is included as a component of
stockholders' equity and is being amortized on a straight-line basis by charges
to operations over the vesting period of the options. For fiscal 1999 and the
first three months of 2000, we recorded approximately $532,000 and $862,000 of
stock-based compensation amortization expense, respectively. The amortization
of the remaining deferred stock-based compensation will result in an additional
charge of $870,000 to operations in the second quarter of 2000. The
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<PAGE>
remaining balance will be amortized over the period ending April 1, 2003. In
addition, our deferred stock-based compensation may be even higher for fiscal
2000 because of additional grants.
Depreciation and amortization consists of depreciation and amortization
expenses related to hardware, desktop software and upgrades, goodwill from
prior acquisitions, and property, plant and equipment. We expect depreciation
and amortization expenses to increase going forward due to our recent
acquisition of a Toronto software development firm and the build-out of our new
facilities.
Interest and finance costs includes income realized from the investment of
liquid assets in fixed income securities and interest expense associated with
our credit facilities.
We pay taxes in accordance with United States federal, state and municipal
tax regulations. We are currently not subject to corporate income tax in India
on approximately 98% of our income. The majority of our profits are derived
from Indian operations and accordingly, our tax expenses are relatively low.
Our effective tax rate as of March 31, 2000, was approximately 17%. However,
the government of India has recently introduced laws to phase out the tax
incentives given to information technology services exporters. Specifically,
the government of India has introduced legislation to reduce tax deductions
available to those companies over the next five years at the rate of 20% each
year. See "Risk Factors--Our results of operations may be materially adversely
affected if tax benefits and other incentives provided to us by the government
of India are reduced or withheld. Recently, the government of India has
introduced laws that could impair our tax incentives". As a result, after our
existing tax exemptions which extend until 2002, 2003, 2008 and 2009,
respectively, for our Mumbai (Bombay), Chennai (Madras), new Thane and new
Chennai facilities expire, our income from these facilities could be subject to
Indian taxation. Further, to the extent we construct any new software
development centers in India beyond our current facilities, income derived from
these new facilities could be subject to Indian taxation after 2009. At the
present moment we have significant unbuilt capacity in our Thane and new
Chennai facilities. As we build out these facilities, tax exemptions for work
done in this additional space shall extend up to 2008 and 2009 for the new
Thane and new Chennai facilities.
Under the Finance Act, 2000, Indian software companies will lose their tax
holidays with respect to a particular software development center if there is a
change of 49% or more in their ownership between the last date of the financial
year in which that center was set up and the last date of any subsequent
financial year. As a result, companies are more likely to lose their tax
holidays if large shareholders sell their shares or if new shares are issued in
order to raise capital, for acquisitions or otherwise. In addition, companies
are more likely to lose their tax holidays with respect to their older
facilities, because more time will have elapsed in which to accumulate the 49%
ownership change.
A number of aspects of the Finance Act, 2000 are as of yet unclear,
including whether the Act would be interpreted to deprive a company of its tax
holidays if, as has occurred in our case with respect to our two oldest
centers, its record ownership changed 49% or more without an accompanying
change in beneficial ownership. Based on consultations with some of our Indian
tax advisors, we believe that this change in record ownership only should not
cause the loss of these tax holidays. However, our interpretation could be
wrong. In addition, the understanding of the definition of beneficial ownership
as of yet is unclear. If we are deemed to have lost our tax holidays in 2000
with respect to our two oldest centers, we estimate that our provision for
income taxes for this year would increase by approximately $1 million.
Moreover, if in the future we were to lose our tax holidays with respect to our
two newest software development centers, our provision for income taxes would
increase by substantially more than that and would have a material adverse
effect on our net income and the trading prices of our equity shares and the
ADSs.
In addition, the recently enacted law restricts the scope of the tax
exemption to export income earned by the software development centers which are
"Export Oriented Undertakings" or located in "Software Technology Parks" or
"Export Processing Zones" as compared to the earlier exemption which was
available to the business profits earned by them. In view of these changes our
tax expenses could increase significantly after our exemptions expire.
39
<PAGE>
Principles of Currency Translation
In 1999, over 99% of our revenue was generated in U.S. dollars.
Approximately 21% of our expenses were incurred in Indian rupees, and the
balance was incurred in U.S. dollars and other currencies. Silverline
Technologies Limited, as an Indian company, uses the Indian rupee as its
functional currency, while our U.S. subsidiary, Silverline Technologies, Inc.,
uses the U.S. dollar as its functional currency. Revenue generated in foreign
currencies are translated using the exchange rate prevailing on the date that
revenue is recognized. Expenses of overseas operations incurred in foreign
currencies are translated using either the monthly average exchange rate or
the exchange rate on the date the expense is incurred, depending on the source
of payment. Assets and liabilities held in foreign currency are translated
using the exchange rate at the end of the applicable reporting period. For
1997, 1998, 1999 and the first three months of 2000, the net gains from
foreign currency fluctuations comprised 6.8%, 0.23%, 1.0% and 0.1% of
operating income, respectively.
For U.S. GAAP reporting, our financial statements are translated into U.S.
dollars using the average monthly exchange rate for revenue and expenses and
the period end rate for assets and liabilities. The gains or losses from
translation are reported as other comprehensive income, a separate component
of shareholders' equity.
We expect that a majority of our revenue will continue to be generated in
U.S. dollars for the foreseeable future and that a portion of our expenses,
including labor costs as well as capital and operating expenditures, will
continue to be denominated in Indian rupees. Consequently, our results of
operations will be adversely affected to the extent the Indian rupee
appreciates against the U.S. dollar, which has historically occurred
infrequently. The Indian rupee has depreciated against the U.S. dollar at an
average annual rate of 7% over the last three years which has positively
affected our financial condition. As a result, we have chosen not to enter
into currency hedging arrangements. If the Indian rupee does not continue to
depreciate against the U.S. dollar, our results of operations would be
materially adversely affected.
Basis of Presentation
The consolidated financial statements reflect the financial position,
results of operations and cash flows of our company, including our subsidiary
Silverline Technologies, Inc., a Delaware corporation, which we acquired on
December 28, 1999. Silverline Technologies, Inc. had been under common control
with us and accordingly, the acquisition was accounted as a pooling of
interests. See note 1 to our consolidated financial statements and "Related
Party Transactions".
Results of Operations
The following table presents for the periods indicated certain financial
data as a percentage of revenue:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
------------------- --------------------
1997 1998 1999 1999 2000
----- ----- ----- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue................................. 53.6 51.9 56.5 53.5 52.0
----- ----- ----- --------- ---------
Gross profit.................................... 46.4 48.1 43.5 46.5 48.0
Selling, general and administrative expenses.... 22.1 18.8 15.0 15.1 18.3
Stock-based compensation........................ -- -- 0.6 -- 2.8
Depreciation and amortization................... 10.5 7.3 4.6 6.0 3.0
----- ----- ----- --------- ---------
Operating income................................ 13.8 22.0 23.3 25.4 23.9
Other income (expenses), net.................... (1.9) (1.5) (1.6) (3.2) (0.9)
----- ----- ----- --------- ---------
Income before income taxes and extraordinary
item........................................... 11.9 20.5 21.7 22.2 23.0
Provisions for income taxes..................... 2.6 2.5 3.3 3.4 4.0
----- ----- ----- --------- ---------
Income before extraordinary item................ 9.3 18.0 18.4 18.8 19.0
Extraordinary item (net of taxes)............... -- -- 0.4 2.2 --
----- ----- ----- --------- ---------
Net income...................................... 9.3% 18.0% 18.0% 16.6% 19.0%
===== ===== ===== ========= =========
</TABLE>
40
<PAGE>
First Three Months of 2000 Compared to First Three Months of 1999
Revenue. Revenue increased $14.0 million or 82.4% to $30.9 million in the
first three months of 2000 from $16.9 million in the first three months of
1999. The increase was primarily attributable to increases in our service
offerings combined with the expanded infrastructure in our software development
centers established during 1999 and 2000. E-business and CRM revenue segments
together constituted 32% of our revenues for first three months of 2000
compared to 10% for the first three months of 1999. Revenue increases in e-
business and CRM were partially offset by declining revenues from Year-2000 and
mainframe services. We did not generate any revenue from Year-2000 work for the
first three months of 2000 compared with approximately $1.7 million or 10% of
our revenue for the comparable period in 1999. Revenue from project services
grew to contribute 78% of revenues in the first three months of 2000 compared
to 73% in the first three months of 1999. The continued expansion of our
infrastructure and capabilities primarily resulted from a 54% increase in the
number of our information technology professionals to approximately 1,350 at
March 31, 2000, from approximately 875 at March 31, 1999. Revenue from existing
clients contributed 90% of total revenue for the first three months of 2000.
Cost of Revenue. Cost of revenue increased $7.0 million or 77.2% to $16.1
million in the first three months of 2000 from $9.1 million for the first three
months of 1999. The increase was primarily attributable to higher employee
deployments on projects and services in the first three months of 2000 over the
first three months of 1999. Total labor costs rose by 66% in the first three
months of 2000 over the first three months of 1999 primarily due to the
increased number of professionals referred to above and also due to increased
wage rates. As a percentage of revenue, cost of revenue decreased to 52.0% in
the first three months of 2000 from 53.5% in the first three months of 1999.
Selling, General and Administration Expenses. Selling, general and
administrative expenses increased $3.1 million or 119.2% to $5.7 million in the
first three months of 2000 from $2.6 million in the first three months of 1999.
This increase was attributable to the opening of three new sales offices,
higher recruiting costs for sales, marketing and management staff, and higher
labor costs for our administrative and support staff. Our sales force expanded
from 19 in the first three months of 1999 to 25 sales professionals in the
first three months of 2000 and a wider scope of marketing and selling
activities during the first three months of 2000 have caused marketing
expenditures to rise significantly. As a percentage of revenue, selling,
general and administrative expenses increased to 18.3% in the first three
months of 2000 from 15.1% in the first three months of 1999. This increase is
attributable to our establishment of new sales offices and the compensation of
additional sales, marketing and management staff of our Company.
Stock-based compensation. Amortization of deferred stock compensation
expense in the first three months of 2000 was $0.9 million arising from the
grant of stock options and warrants to employees in November 1999. There was no
deferred stock option compensation expense in the same period in 1999.
Depreciation and Amortization. Depreciation and amortization was $0.9
million in the first three months of 2000 representing a decrease of 0.1% over
the first three months of 1999. Depreciation expense decreased by 14% due to
our inability to depreciate some of our assets because their useful lives
expired in 1999, while amortization arising from goodwill on acquisitions
increased by 13.1% from the same period in 1999.
Provision for Income Taxes. Taxes were $1.2 million in the first three
months of 2000 as against $0.6 million in the first three months of 1999. Our
effective tax rate increased to 17.3% due to higher operating incomes in the
first three months of 2000 as against 16% in the first three months of 1999.
Extraordinary Items. There were no extraordinary items in the first three
months of 2000. In the same period in 1999, we used internally generated funds
to prepay outstanding foreign currency loans of $3.8 million. For this purpose,
we incurred a prepayment penalty of $0.4 million.
1999 Compared to 1998
Revenue. Revenue increased $27.4 million or 45.5% to $87.6 million in 1999
from $60.2 million in 1998. This increase was primarily attributable to
increases in both the size and number of client projects
41
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resulting from the Lorin Group acquisition and the expansion of our
infrastructure and capabilities. The expansion of our infrastructure and
capabilities primarily resulted from a 50% increase in the number of our
information technology professionals to approximately 1,200 at December 31,
1999, from approximately 800 at December 31, 1998. Revenue from existing
clients contributed 71% of total 1999 revenues, new client business represented
18% and business revenues from the Lorin Group acquisition accounted for the
balance.
Cost of Revenue. Cost of revenue increased $18.1 million or 57.8% to $49.4
million in 1999 from $31.3 million in 1998. As a percentage of revenue, cost of
revenue increased to 56.5% in 1999 from 51.9% in 1998. This increase, both in
terms of dollar amount and as a percentage of revenue, was primarily
attributable to 55% higher labor costs for our skilled information technology
professionals in 1999. These labor costs consist predominantly of a 50%
increase in the number of information technology professionals to 1,200 at
December 31, 1999, from 800 at December 31, 1998, and a 27% increase in our
labor costs in 1999 from 1998 for our information technology professionals in
India given the shortage of, and significant demand for, information technology
professionals.
Cost of revenues both in terms of dollar amount and as a percentage of
revenue were also higher in 1999 compared to 1998 due to an increased
percentage of our revenue coming from on-site assignments resulting from the
Lorin Group acquisition. In addition, client concerns relating to Year 2000
conversion issues led to less off-shore work in favor of on-site work because a
significant portion of the Year 2000 work was performed on-site at the
respective client. Increased training costs relating to retraining our
employees who had been working on Year 2000 projects also contributed to higher
cost of revenues in 1999.
Selling, General and Administration Expenses. Selling, general and
administrative expenses increased $1.8 million or 15.9% to $13.1 million in
1999 from $11.3 million in 1998. This increase in selling, general and
administrative expenses was attributable to an increased number of sales
offices and higher labor costs for our administrative and support staff. As a
percentage of revenue, selling, general and administrative expenses decreased
to 15.0% in 1999 from 18.8% in 1998. This decrease is attributable to our 45.4%
revenue growth without proportional increases in these expenses. Salaries for
administrative and support staff represented 3.5% of revenues, rent and office
maintenance represented 1.9% of revenues and selling expenses accounted for
4.1% of revenues in 1999 as compared to 3.8%, 2.0% and 4.5%, respectively, in
1998.
Stock-based Compensation. Stock-based compensation increased from $0 in 1998
to approximately $532,000 in 1999. This increase was due to the grant of stock
options in November 1999 to employees in connection with the Company's new
employee stock option plans.
Depreciation and Amortization. Depreciation and amortization decreased $0.3
million or 6.8% to $4.1 million in 1999 from $4.4 million in 1998. This
decrease was primarily attributable to fewer assets being subject to
depreciation during a substantial part of the year.
Provision for Income Taxes. Taxes increased $1.3 million or 86.7% to $2.8
million in 1999 from $1.5 million in 1998. Our effective tax rate was 14.8% for
1999.
Extraordinary Items. In 1999, we used internally generated funds to prepay
outstanding foreign currency loans of $3.8 million. For this purpose, we
incurred a prepayment penalty of $0.4 million. The loss per share due to this
prepayment was $0.01.
1998 Compared to 1997
Revenue. Revenue increased $13.4 million or 28.6% to $60.2 in 1998 from
$46.8 million in 1997. This revenue increase was primarily attributable to both
the size and number of client projects resulting from the expansion of our
infrastructure and capabilities, and to a lesser extent, the acquisition of the
Lorin Group in October 1998. The expansion of our infrastructure and
capabilities primarily resulted from a 33% increase in the number of our
information technology professionals to approximately 800 at December 31, 1998
from approximately 600 at December 31, 1997. Revenue from existing clients
contributed 77% of total 1998 revenues, new client business represented 19% and
business revenues from the Lorin Group acquisition accounted for the balance.
42
<PAGE>
Cost of Revenue. Cost of revenue increased $6.2 million or 24.7% to $31.3
million in 1998 from $25.1 million in 1997. This increase was primarily
attributable to 51.0% higher labor costs for our skilled information technology
professionals in 1998. These labor costs consist primarily of a 33% increase in
the number of information technology professionals to 800 at December 31, 1998,
from 600 at December 31, 1997 and a 42% increase in our labor costs in 1998
from 1997 for our information technology professionals in India given the
shortage of, and significant demand for, information technology professionals.
Cost of revenue decreased as a percentage of revenue to 51.9% in 1998 from 53.6
in 1997. This decrease was due to a higher percentage of off-shore services
performed in 1998 as compared to 1997, partially offset by a significant
portion of Year 2000 work which was performed on-site at the respective client.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.0 million or 9.7% to $11.3 million in 1998
from $10.3 million in 1997. This increase was attributable to an increased
number of sales offices and higher labor costs for our administrative and
support staff. As a percentage of revenue, selling general and administrative
expenses decreased to 18.8% in 1998 from 22.1% in 1997. The decrease was a
result of series of cost control measures and our 28.8% revenue growth without
proportional increases in these expenses. Salaries for support staff amounted
to 3.8% of revenues, rent and office maintenance represented 2.0% of revenues
and selling expenses accounted for 4.5% of revenues in 1998 as compared to
3.4%, 2.4% and 2.8% respectively in 1997.
Depreciation and Amortization. Depreciation and amortization decreased $0.5
million or 10.2% to $4.4 million in 1998 from $4.9 million in 1997. This
decrease was primarily attributable to lower amortization costs on software and
decreased expenditures on new facility build-outs.
Provision for Income Taxes. Taxes increased $0.3 million or 23.3% to $1.5
million in 1998 from $1.2 million in 1997. Our effective tax rate was 12.0% for
1998.
Extraordinary Items. Silverline Technologies, Inc. retired two outstanding
term loans of $8.0 million from Columbia Savings Bank. In connection with the
retirement of the loans, it had to pay prepayment penalties of $10,105. These
payments have been classified under "extraordinary item".
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Quarterly Results of Operations
The following table presents certain condensed unaudited quarterly financial
information for each of the eight quarters from April 1, 1998 through March 31,
2000. This information is derived from our unaudited financial statements that
include, in our opinion, all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of results of operations, when
read in conjunction with our financial statements and the notes to our
financial statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Three-Month Period Ended
------------------------------------------------------------------------
June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31
1998 1998 1998 1999 1999 1999 1999 2000
------- -------- ------- ------- ------- -------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $14,492 $13,783 $18,058 $16,997 $18,321 $24,714 $27,545 $30,998
Cost of revenue......... 7,540 7,046 9,299 9,093 10,189 13,912 16,251 16,112
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 6,952 6,737 8,759 7,904 8,132 10,802 11,294 14,886
Selling, general and
administrative
expenses............... 2,669 2,831 3,606 2,564 2,992 3,625 3,959 5,688
Stock-based
compensation........... -- -- -- -- -- -- 532 862
Depreciation and
amortization........... 1,052 1,132 1,191 1,024 1,080 1,066 925 939
------- ------- ------- ------- ------- ------- ------- -------
Operating income........ 3,231 2,774 3,962 4,316 4,060 6,111 5,878 7,397
------- ------- ------- ------- ------- ------- ------- -------
Other income (expenses),
net
taxes................... (192) (181) (248) (544) (217) (285) (334) (284)
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes and extraordinary
item................... 3,039 2,593 3,714 3,772 3,843 5,826 5,544 7,113
Provisions for income
taxes.................. 560 364 327 598 526 910 776 1,230
------- ------- ------- ------- ------- ------- ------- -------
Income before
extraordinary item .... 2,479 2,229 3,387 3,174 3,317 4,916 4,768 5,883
Extraordinary item (net
of taxes).............. -- -- -- 375 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income.............. $ 2,479 $ 2,229 $ 3,387 $ 2,799 $ 3,317 $ 4,916 $ 4,768 $ 5,883
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Our quarterly operating results have historically fluctuated and may
continue to fluctuate significantly as a result of numerous external factors.
For a description of some of these factors, please see "Risk Factors--Our
quarterly operating results are subject to fluctuations and if we fail to meet
the expectations of securities analysts or investors in any quarter, our share
price could decline significantly". We believe, therefore, that past operating
results and period-to-period comparisons should not be relied upon as an
indication of future performance.
Liquidity and Capital Resources
We have generally financed our working capital needs through cash flow from
operations, supplemented by borrowings under a line of credit and various
credit facilities, as well as an initial public offering in India and a private
placement to Silverline Holdings Corporation, our controlling shareholder. Net
cash provided (used) by our operating activities was $(5.9) million, $24.6
million, $12.3 million and $11.1 million in the first three months of 2000, and
in the full years 1999, 1998 and 1997, respectively.
We typically bill our clients on a monthly basis to monitor client
satisfaction and manage our outstanding accounts receivable balances. Our
accounts receivable increased from approximately $22.8 million at December 31,
1999 to approximately $33.6 million at March 31, 2000. Our accounts receivable
as a percentage of revenue was approximately 26%, 41% and 37%, as of December
31, 1999, 1998 and 1997, respectively. As of March 31, 2000, our accounts
receivable as a percentage of revenue for the immediately preceding four
quarters, was 33%. In recent years, the average number of days that our
accounts receivables are outstanding have increased in each of the 31-60, 61-90
and 90+ day aging periods and decreased in the 0-30 day aging period. This is
due to an increasing portion of our revenue being represented by large accounts
with companies, that tend to delay payment until at least 90 days after
billing. In the quarter ended March 31, 2000, several of
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our major customers have delayed payment until 90 days or more after billing.
If one or more of our major customers refused to or were to become insolvent or
otherwise unable to pay for the services provided by us, our business,
operating results and financial condition would be adversely affected.
We periodically review all our outstanding accounts receivable and examine,
among other things:
. the age, amount and quality of the account receivable;
. the relationship with, size of and history of the client; and
. the quality of service performed for a client to determine the
classification of an account receivable.
Based on this review, we determine doubtful accounts receivable and make
provisions for all accounts that are doubtful for recovery. We have made
allowances for doubtful debts of approximately $469,707 and $425,368 as of
March 31, 2000 and as of December 31, 1999, respectively.
In September 1992, we raised approximately $10.3 million in gross aggregate
proceeds from the sale of our equity shares in our initial public offering on
the Bombay Stock Exchange (now known as The Stock Exchange, Mumbai). In
December 1997, we received from Subra Holdings, Inc., which is now known as
Silverline Holdings, Corp., a significant shareholder, a commitment to acquire
shares of STL for approximately $12 million (or approximately Rs. 22 per
share). In March 1998, Silverline Holdings, Corp. paid $1.2 million of the
total committed amount and in May 1999, Silverline Holdings, Corp. paid an
additional $10.8 million upon which 22 million STL shares were issued. The
proceeds from these transactions were predominantly used for capital
expenditures.
At March 31, 2000, we had an aggregate of $20.6 million of cash and cash
equivalents, $11.7 million of working capital and $2.1 million in outstanding
bank borrowings, and an aggregate of $18.3 million in available working capital
lines of credit from a total of four commercial banks.
Silverline Technologies, Inc. is a party to a loan agreement with The Chase
Manhattan Bank and the Bank of Baroda providing for an aggregate revolving line
of credit in the amount of $12.0 million. Interest is calculated at a variable
rate. At March 31, 2000, the annual rate of interest for funds advanced under
this revolving line of credit was at the U.S. prime rate. Silverline
Technologies, Inc. also has a term loan facility with The Chase Manhattan Bank
in the amount of $2.3 million which is payable over four years at the U.S.
prime rate. The loan agreement also allows for $2.0 million of letters of
credit split equally between The Chase Manhattan Bank and the Bank of Baroda
under which two standby letters of credit have been issued for an aggregate
amount of $575,000 and one commercial letter of credit in the amount of
approximately $525,000.
Provisions in Silverline Technologies, Inc.'s loan agreement restrict
Silverline Technologies, Inc. from, among other things, incurring additional
debt, issuing guarantees and creating liens on our property, without the prior
consent of The Chase Manhattan Bank and the Bank of Baroda. The loan agreement
also contains provisions requiring Silverline Technologies, Inc. to maintain
specified tangible net worth levels and leverage ratios. Borrowings under the
loan agreement are short-term and are secured by certain of Silverline
Technologies, Inc's. assets, including equipment and receivables. As of March
31, 2000, we had $6.5 million of indebtedness outstanding under the line of
credit and $1.8 million under the term loan. This loan is currently guaranteed
by Silverline Holdings, Corp. and Mr. Ravi Subramanian, our chairman, and
secured by a pledge of 3.5 million shares which Mr. Ravi Subramanian holds in
Silverline Holdings, Corp. Subject to the approval of the government of India
and our board of directors, this guaranty will be assumed by us with a pledge
of our shares in Silverline Technologies Inc. We are currently preparing this
proposal for filing with the government of India for approval.
In addition to the loan agreement with The Chase Manhattan Bank and the Bank
of Baroda, Silverline Technologies, Inc. has a term loan outstanding with
Columbia Savings Bank in the aggregate principal amount of $275,000. This loan
is payable in equal monthly installments of $12,500 with interest calculated at
the bank's prime rate plus 0.75%. Our final payment on this loan is due
December 31, 2001.
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Silverline Technologies Limited has working capital credit facilities in
India from the Corporation Bank and the IDBI Bank Ltd for approximately $3.5
million and $2.8 million, respectively. These facilities have been drawn to the
extent of $385,000 and $0, respectively, at March 31, 2000. The working capital
credit facilities are secured by a lien on all our assets in India. The
interest rates range between 11% and 16% per annum. IDBI has reserved the right
to withdraw the facilities in the event of any change in circumstances,
including a material change in ownership, shareholding pattern or management of
the Company. However, the Corporation Bank credit facility can be cancelled or
withdrawn at any time without prior notice.
A bank has issued a performance guarantee of $500,000 on our behalf in favor
of Bell Atlantic Corp., relating to their software development contract with
us. We, in turn, issued a counter guarantee to the bank.
In October, 1998 we purchased substantially all the assets of Lorin
Management Services Inc., Lorimar Services Inc. and Nova Technical Services
Inc. or collectively the Lorin Group, for approximately $2.3 million. The
purchase agreement provides for contingent payments to the sellers upon the
achievement of certain financial performance measures. During the period ended
December 31, 1999, we paid approximately $690,000 pursuant to this contingent
obligation. The payment for fiscal year 2000 under this contingent earn-out
obligation will be made in 2001 and will be our last contingent payment. In
April 2000, we purchased a small software development firm in Toronto, Canada
that provides intranet and Internet application development and systems
integration services. The firm had approximately $3.1 million in revenues in
1999 and 70 employees on December 31, 1999. The maximum contingent amount
payable pursuant to this obligation is $2.0 million.
During 1999, our capital expenditures totaled approximately $16.8 million,
including $2.7 million related to the construction and build-out of our new
facility at Thane, $12.0 million for the construction and build-out of our new
facility at Chennai, and $2.1 million for the construction of a residential
complex for employees constructed at Mumbai (Bombay). In the first three months
of 2000, our capital expenditures equaled approximately $5.6 million relating
to the construction of our new Chennai facility. As of December 31, 1999, we
budgeted aggregate capital expenditures of $14.5 million for 2000 and 2001, in
addition to the $16.8 million we spent in 1999, to further build-out and equip
our two new facilities at Thane and Chennai and had contractual commitments for
capital expenditures of $6.3 million of the $14.5 million budgeted amount
through that same period.
During 1998, capital expenditures of $4.6 million were incurred mainly on
the build-out of our new facilities in Thane and Chennai and the purchase of
office equipment and computers. During 1997, our capital expenditures were
approximately $9.3 million primarily for the build-out of our new facilities in
Thane and Chennai.
Our net cash used in investing activities was $0.2 million, $16.8 million,
$6.8 million and $3.4 million in the first three months of 2000, and in the
full year 1999, 1998, and 1997 respectively. The increase from 1998 to 1999 was
due to the build-out of our Thane and Chennai facility. Since the planned
facilities expansion will significantly increase our fixed costs, our results
of operations would be materially adversely affected if we are unable to grow
our business proportionately.
We may require additional capital to develop the infrastructure needed to
support our future growth. Our management believes that our level of working
capital will continue to grow at a rate generally consistent with the growth of
our operations. Although we cannot assure you that future financing will be
available on terms acceptable to us, we may seek additional funds through
public or private debt or equity offerings or through bank borrowings, to the
extent permitted by our existing debt agreements. Our management believes that
our existing cash balances, proceeds from this offering, funds generated from
operations, and borrowings under our credit facilities will be sufficient to
permit us to meet our liquidity requirements for at least the next twelve
months.
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<PAGE>
Tax Matters
We benefit from certain significant tax incentives under Indian tax laws. As
a result of these incentives, our operations have been subject to relatively
insignificant Indian tax liabilities. These tax incentives currently include:
. a 10-year tax holiday from payment of Indian corporate income taxes for
operation of our software development centers which are "Export Oriented
Undertakings" or located in "Software Technology Parks" or "Export
Processing Zones"; and
. an income tax deduction of 100% for profits derived from exporting
information technology services.
We may use either of these two tax incentives mentioned above. Further, we
are currently eligible for exemptions from other taxes, including customs
duties.
As a result of these tax incentives, historically our operations in India
have been subject to a relatively insignificant tax liability. We pay corporate
income tax in foreign countries on income derived from operations in those
countries. Our effective tax rate as of March 31, 2000 was approximately 17%.
The recently enacted Finance Act, 2000 phases out the 10-year tax holiday over
a ten year period from the financial year 1999 - 2000 to the financial year
2008 - 2009. Accordingly, facilities set up on or before March 31, 2000 have a
10-year tax holiday, new facilities set up on or before March 31, 2001 would
have a 9-year tax holiday and so forth until the tax holiday would not be
available to new facilities set up after March 31, 2009. Our tax holiday
extends until 2002, 2003, 2008 and 2009, respectively, for our Mumbai (Bombay),
Chennai (Madras) and for our new Thane and new Chennai facilities.
Under the Finance Act, 2000, Indian software companies will lose their tax
holidays with respect to a particular software development center if there is a
change of 49% or more in their ownership between the last date of the financial
year in which that center was set up and the last date of any subsequent
financial year. As a result, companies are more likely to lose their tax
holidays if large shareholders sell their shares or if new shares are issued in
order to raise capital, for acquisitions or otherwise. In addition, companies
are more likely to lose their tax holidays with respect to their older
facilities, because more time will have elapsed in which to accumulate the 49%
ownership change.
A number of aspects of the Finance Act, 2000 are as of yet unclear,
including whether the Act would be interpreted to deprive a company of its tax
holidays if, as has occurred in our case with respect to our two oldest
centers, its record ownership changed 49% or more without an accompanying
change in beneficial ownership. Based on consultations with some of our Indian
tax advisors, we believe that this change in record ownership only should not
cause the loss of these tax holidays. However, our interpretation could be
wrong. In addition, the understanding of the definition of beneficial ownership
as of yet is unclear. If we are deemed to have lost our tax holidays in 2000
with respect to our two oldest centers, we estimate that our provision for
income taxes for this year would increase by approximately $1 million.
Moreover, if in the future we were to lose our tax holidays with respect to our
two newest software development centers, our provision for income taxes would
increase by substantially more than that and would have a material adverse
effect on our net income and the trading prices of our equity shares and the
ADSs.
In addition, the recently enacted law restricts the scope of the tax
exemption to export income earned by the software development centers which are
"Export Oriented Undertakings" or located in "Software Technology Parks" or
"Export Processing Zones" as compared to the earlier exemption which was
available to the business profits earned by them.
The Finance Act, 2000, also phases out the income tax deduction over the
next five years by decreasing the tax deduction by 20% each year beginning
April 1, 2000. Therefore, after our existing tax holiday and income tax
deduction expire or if we lose our tax holiday for the reasons mentioned above,
we could be subject to taxation by the Indian government for income derived
from these facilities. In addition, we could lose our tax holidays if certain
changes in our share ownership occur or are deemed to have occurred. For
additional information, please see "Risk Factors--Our results of operations may
be materially adversely affected if tax benefits and other incentives provided
to us by the government of India are reduced or withheld. Recently, the
government of India has introduce laws that could impair our tax incentives".
47
<PAGE>
Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") recently issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activity". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. We are currently evaluating the
impact of SFAS No. 133 on our consolidated financial statements.
Year 2000
Year 2000 conversion projects represented 0%, 13% and 18% of our revenue for
the first three months of 2000 and the full year 1999 and 1998, respectively.
Many of our Year 2000 conversions projects involve projects that provide
benefits to our clients' businesses that may be difficult to quantify. We have
not had and do not expect, any claim asserted against us, and we maintain
liability insurance for claims that may arise under our indemnification of our
clients for Year 2000 compliance. However, we cannot assure you that this
insurance will sufficiently protect us from any Year 2000 claims that may be
asserted against us.
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<PAGE>
BUSINESS
Overview
We are an Indian provider of information technology services. We offer our
clients a broad range of these services, including application development,
migration and maintenance, and e-business solutions. We have also begun to
focus on customer relationship management or CRM services.
Our flexible off-shore/off-site delivery capabilities, which we use on many
of our projects, allow us to access highly skilled, relatively low cost
information technology professionals in India and to integrate our work on a
client project at one of our software development centers with our efforts at
the project site. We undertake engagements both on a project management basis,
where we have complete responsibility for managing the project, and, to a
lesser extent, on a more integrated basis where our employees work in-house for
our clients' information technology departments. Some of our project management
assignments are also done exclusively on-site at the project's location. We
believe that our services are distinguished by our proven processes and
methodologies.
We currently have approximately 1,350 employees, with about 920 in India and
430 in the United States. From 1995 through 1999, we achieved compound annual
revenue growth and net income growth of approximately 22% and 29%,
respectively. During that same period, our net income increased from $5.7
million to $15.8 million. We focus on marketing our information technology
solutions primarily to companies in industries that have historically devoted
relatively large percentages of their overall budgets to information
technology, including:
. business information services, with clients such as First Data Corp.;
. financial services, with clients such as J.P. Morgan & Co.; and
. telecommunications, with clients such as Bell Atlantic Corp.
Industry Background
The Information Technology Professional Services Industry
Worldwide demand for information technology services is growing rapidly and
certain segments within the information technology services market are
experiencing particularly rapid growth. According to International Data
Corporation, an information technology market research firm, the market for
Internet professional services will grow from $7.8 billion in 1998 to
approximately $78.5 billion in 2003. In addition, that firm predicts that the
total information technology services market related to CRM solutions will
increase from $33.2 billion in 1998 to approximately $90.0 billion by 2003.
Factors contributing to the growth in the information technology services
industry as it transitions from a traditional back-office role to a key driver
in competitively positioning enterprises include:
. Impact of the Internet. International Data Corporation estimates that
there were approximately 56 million Internet users in the U.S. at year-
end 1998 and that by 2002 there will be approximately 137 million
Internet users in the U.S. We believe that the development of the
Internet has resulted in increased customer expectations, reduced
barriers to market entry, reduced costs and increased competition. As a
result, companies are seeking to build, implement or enhance their
existing CRM or other alternative solutions, as well as offer more
sophisticated Internet services, in order to meet customers'
expectations, remain competitive and effectively benefit from new
customer information. We believe that companies that are able to
successfully develop and maintain an Internet presence will be able to
more efficiently conduct business with their partners and suppliers,
communicate with customers and employees, and address the rapidly
growing, global base of business-to-customer and business-to-business
online transactions.
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. Competitive necessity. Deregulation, globalization and technological
innovation are accelerating the pace of business competition. Companies
face constant pressures to improve the quality of their products and
services, reduce the costs and time to market them, improve operating
efficiencies and strengthen customer relationships. In order to achieve
these objectives, companies are re-engineering their business processes
and improving their information systems to enable and support their re-
engineered processes. Using information technology as a strategic tool
for addressing critical business issues enables enterprises to reduce
cycle times and production costs, improve the rate of introduction of
new products and services and price products and services more
competitively.
. Increasing complexity of information technology. Designing, developing,
and implementing information technology solutions has become
increasingly complex. Information technology departments must integrate
and manage computing environments often consisting of multiple operating
systems, databases, programming languages and networking protocols, and
must implement both custom and packaged software applications. Many
businesses do not have the time, resources, or experience to keep pace
with rapid industry and technological changes or to build appropriate
and cost-effective information technology solutions. Globally,
enterprises are increasingly focusing on their core business
competencies and turning to outside firms to provide information
technology solutions and assist them in changing business processes to
meet specific business objectives.
. Growth in packaged software applications. Businesses are increasingly
turning to e-commerce, CRM and enterprise resource planning packaged
software applications such as those made by BroadVision, Inc., Commerce
One, Inc., Oracle Corporation, SAP AG and Siebel Systems Inc.
International Data Corporation estimates that the worldwide packaged
software market was equal to $154 billion in 1999. Businesses use these
integrated applications packages to replace, on an enterprise-wide
basis, existing or legacy applications which have limited functionality
and integration capability. Customizing and implementing these packages
is often a major undertaking that requires highly specialized skill sets
and functional experience, all of which is in short supply.
International Data Corporation forecasts application development and
integration services in the U.S. to grow from $2 billion in 1998 to
$16.9 billion in 2003.
As a result of these trends, together with recent advances in
telecommunications, we believe companies are increasing their reliance on the
outsourcing of information technology services. Businesses seek experienced
information technology services providers that not only have the knowledge and
experience to address the complexities of rapidly changing technologies but
also possess the capability to understand and automate their business processes
and organizational knowledge base. The number of available, qualified technical
professionals has not kept pace with the development of the Internet and the
increasing demand for information technology services, particularly in regions
such as North America, Western Europe and Japan. The Information Technology
Association of America estimated that in 1998 there was a shortage of 346,000
information technology professionals in the United States alone.
Historically, information technology service companies used off-shore
professionals primarily to supplement internal project management staffing
requirements of their customers. More recently, information technology services
companies have increasingly used off-shore resources to provide higher value-
added project management services, such as application development, migration,
e-business and CRM solutions. We believe that our off-shore infrastructure
offers a number of benefits over more traditional outsourcing methods,
including faster delivery of new information technology solutions, more
flexible scheduling and significant cost savings.
The Indian Information Technology Industry
Since the late 1980's, a significant amount of information technology work
has moved off-shore. Many large international software firms, such as Microsoft
Corporation, Oracle Corporation, SAP AG and Sun Microsystems Inc. have set up
operations in India. Large multinationals also use Indian companies to
outsource
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software services. According to a study released in December 1999 by McKinsey &
Company, Inc. on behalf of India's National Association of Software and Service
Companies or NASSCOM, approximately 40% of Fortune 500 companies use the
services of Indian information technology companies. In addition, the McKinsey
study states that information technology services exports from India have grown
at a rate of approximately 50% a year since 1994-95.
According to the McKinsey study, overall revenue from the Indian information
technology software and service industry have grown from $50 million in 1988-89
to $3.9 billion in 1998-99. Further, the McKinsey study states that NASSCOM
should target $87 billion in annual revenue from the industry by 2008.
We believe that India's rapid growth in the information technology services
industry can be attributed to the following factors:
Large base of highly skilled information technology professionals. According
to NASSCOM, India, with 4.1 million technical workers, currently has the second
largest English-speaking pool of scientific professionals, second only to the
United States. There are over 1,900 educational institutions including
engineering colleges, technical institutes and polytechnics, that train over
67,000 computer professionals annually. In addition, we believe that the
quality of technical training in India is among the best in the world.
High quality information technology services companies. Indian information
technology service companies have developed the capability to deliver a high
quality product. Many of India's leading information technology service
companies have been measured against international quality standards and have
received certification and recognition for their processes and quality
controls. A NASSCOM analysis of international quality standards conducted in
December 1999 showed that 140 of the top 300 Indian information technology
service companies had already been assessed by the International Standards
Organization, a standards assessment organization, at ISO 9001. ISO 9001 is a
model for quality assurance in design, development, production, installation
and services. As of November 1999, 10 of the 21 organizations worldwide that
had achieved Level 5 certification under the Software Engineering Institute's
Capability Maturity Model, or SEI-CMM, a rating system for information
technology companies, were Indian companies. Further, as of November 1999,
14 of the 40 organizations worldwide that had achieved SEI-CMM Level 4
certification were Indian companies.
Significantly lower wages for information technology professionals. India's
sizable pool of information technology talent is available to companies
worldwide at relatively low labor costs. According to an October 1999 report by
Software Productivity Research, a research firm, the average annual wage rate
for software professionals in India is approximately 10% of the average U.S.
rate. Although wages in India are rising significantly faster than in the
United States, the wage rate differential is anticipated to remain a
substantial competitive advantage for Indian companies in the foreseeable
future.
Government infrastructure investments and income tax advantages. The
government of India has supported the rapid growth of the Indian information
technology industry by investing in infrastructure serving information
technology companies. In addition, the government of India has created
specialized export facilities in several parts of India which benefit from
waivers of duties on certain imported goods, exemptions from local sales taxes
and certain excise duties, certain corporate tax holidays, subsidized rents and
thereafter a tax deduction of 100% of profits derived from exporting computer
software and information technology services.
Near 24-hour service using time zone differences. Indian information
technology companies use the 9-1/2 to 10-1/2 hour time difference between India
and the eastern United States to create, when combined with U.S. operations, a
near 24-hour software development office.
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The Silverline Solution
We believe that the combination of the following capabilities and
characteristics enables us to capitalize on the rapid growth in the information
technology services industry and to provide a faster time to market,
comprehensive, flexible solutions to our clients:
A broad range of information technology services. We provide a broad range
of information technology services, including application development,
migration and maintenance, and e-business solutions. We have also begun
focusing on CRM services. We have significant software project knowledge and
experience across multiple systems and technologies that we believe allow us to
function as a virtual extension of our clients' information technology
departments. Instead of using multiple vendors to design and implement complex
information technology projects, our clients are able to rely solely on us to
provide strategy, coding and implementation of their information technology
solutions. By using us as their single source provider of information
technology services for a project, our clients are able to reduce their time to
market.
Proven, scaleable processes with SEI-CMM Level 4 rating. We have developed
our own proven processes and methodologies in order to facilitate timely, cost-
effective management and the seamless delivery of well documented, high quality
software projects in multiple locations using on-site, off-site and off-shore
personnel. The processes and methodologies we use at our four software
development facilities in India conform to ISO 9001 standards and were assessed
in December 1999 as SEI-CMM Level 4. We are continually improving our processes
and methodologies so that they can be used in conjunction with the latest
technologies.
Highly skilled, relatively low cost information technology professionals in
India. As of March 31, 2000, 65% of our approximately 1,200 information
technology professionals were employed at one of our three software development
centers in India. We have approximately 120 project managers and senior
technical personnel on our staff who provide in-depth project management
experience to our clients. Our information technology professionals have
experience over a broad range of competencies, averaging more than 5 years of
industry and technical experience per person. Our four software development
centers in India and our operations in the U.S. permit us to provide near 24-
hour service. Our Indian software development centers are staffed with
relatively low cost professionals, whose average annual wages are, according to
an October 1999 report by Software Productivity Research, a research firm,
approximately 10% that of their U.S. counterparts. For large projects with
short time frames, our multiple off-shore facilities allow for simultaneous
processing of various development phases to accelerate delivery time. In
addition, we are able to use the excess capacity of our clients' existing
computing facilities during off-peak hours through our software development
centers. This allows us to undertake additional projects without substantial
client investment in new hardware and software.
Our in-house training institute. In 1993, we established an in-house
training facility, the Silverline Institute, to address our training needs on
an on-going basis. Our institute is located in Mumbai (Bombay) and Chennai,
India, offering technical training, along with non-technical leadership skills
development and trains approximately 800 professionals annually. We make offers
of employment to some of the graduates of our institute. We are currently
training our own information technology professionals through the Silverline
Institute on many of the latest e-business technologies. The facility also
offers training to equip new employees for meeting specific client project
needs. We also offer training programs to selected clients as a distinct value-
added service. We believe that the Silverline Institute provides us with a
competitive advantage in recruiting and retaining information technology
professionals. In addition, we believe that our educational collaborative
relationships with two governmental organizations, namely India's Centre for
Development of Advanced Computing and the National Center for Software
Technology, helps us to attract quality information technology professionals.
Our industry-specific knowledge and experience. We have extensive knowledge
and experience in three industries: business information services, financial
services and telecommunications. We disseminate this knowledge and experience
throughout Silverline using our intranet. We intend to continue to expand our
capabilities through acquisitions and hiring. We believe our knowledge and
experience helps us reduce our
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learning curve on new engagements in these industries, and accurately deliver
solutions that effectively address the challenges that our clients face.
Our Business Strategy
Our business strategy emphasizes the following elements:
Expand our services offerings. The Internet is a major catalyst for change
in the business world and is generating substantial opportunities for
information technology services firms. We intend to capitalize on this
opportunity by expanding our e-business and CRM services. We are currently
training, through the Silverline Institute, and recruiting information
technology professionals in these technologies. The percentage of our revenue
derived from our e-business and CRM services has grown from 10% in the first
three months of 1999 to 32% in the first three months of 2000 and 6% in 1998 to
24% in 1999. We also intend to continue to enhance our processes and
methodologies as new information technologies and challenges emerge. We believe
that continued expansion of our service offerings will enhance long-term
relationships with our clients.
Increase the services we performed off-shore. We are continually seeking to
provide a greater proportion of our services at our off-shore facilities rather
than at our client sites or at our New Jersey facility. The services we perform
at a client's site typically generate higher revenue per information technology
professional because we charge higher rates for work performed on-site and on-
shore. However, on-site or on-shore services result in lower profit margins
than equivalent services performed off-shore at our facilities in India
primarily because the compensation expenses associated with providing our
services at these locations are disproportionately higher. By moving services
off-shore, we are able to significantly reduce our costs, allowing us both to
charge our client lower rates and to earn higher profit margins. We have been
successful in performing a significant proportion of our e-business services at
our off-shore software development centers.
Develop and enhance long-term client relationships. In the first three
months of 2000, approximately 90% of our revenue was generated from companies
that were also our clients in 1999. In 1999, approximately 65% of our revenue
was generated from companies that were also our clients in 1998. We believe
that our long-term client relationships provide substantial cross-selling
opportunities, especially for newer technologies, such ase-business and CRM
solutions. We will continue to emphasize our strategy of building long-term,
broad relationships with our clients in an effort to obtain higher margin, more
complex projects.
Attract and retain skilled personnel. Our success depends on our ability to
attract, train, motivate and retain highly skilled information technology
professionals. We focus our recruiting efforts on the top students from the
engineering departments of Indian universities as well as lateral candidates.
We seek to attract, motivate and retain our information technology
professionals by offering:
. multiple professional challenges and the opportunity to work in one or
more of our consulting and training divisions;
. the ability to work with leading-edge technologies;
. attractive compensation plans that align employees' interests and goals
with our own;
. a stimulating, flexible and entrepreneurial work environment; and
. the opportunity to receive ongoing technical training at our in-house
training institute, the Silverline Institute.
Pursue additional strategic acquisitions and relationships. We believe that
acquisitions will be an important part of our expansion strategy. We completed
the acquisition of the Lorin Group, a New York-based in-house consulting
company in October 1998. For more information on this acquisition, please see
"Management's Discussion and Analysis of Financial Condition and Result of
Operations". This acquisition
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not only strengthened our presence in the United States but also provided us
with access to additional clients such as Deutsche Banc Alex. Brown, Merrill
Lynch & Co. and Depository Trust Company, providing us with deeper penetration
into the financial services market and additional information technology
professionals in the northeastern United States. This acquisition has generated
cross-selling opportunities for us. In April 2000, we purchased a small
software development firm in Toronto, Canada that provides intranet and
Internet application development and systems integration services for
approximately $4.0 million in cash. The firm had approximately $3.1 million in
revenues in 1999 and 70 employees as of December 31, 1999. We are also pursuing
other acquisitions or other strategic transactions in order to enhance our
geographic and industry presence and broaden our service offerings and skills.
We seek acquisition candidates that complement our existing business strategy
and have a good client base and strong employee retention levels.
In addition, a critical element of our expansion strategy is to use
industry-leading software to deliver high quality information technology
solutions. We have established relationships with a number of companies,
including Active Software Inc., Digital Island, Inc., Microsoft Corporation,
Relativity Technologies, Inc., SEEC, Inc., Siebel Systems Inc., Versata Inc.
and Videsh Sanchar Nigam Ltd. We believe that these relationships have resulted
in direct referrals and enhanced industry recognition. We also believe that
these relationships enable us to broaden our client base, maintain
technological leadership and increase overall competitiveness. We intend to
expand and develop our relationships with software companies serving the
information technology market to benefit from joint marketing opportunities and
shared technical and industry knowledge.
Capitalize on our investments in infrastructure. Since 1993, we have made
significant investments in infrastructure that allow us to perform engagements
off-site with full integration of our systems and our client's systems, while
sensitive databases, programs, development and support activities remain at the
client's site. We currently maintain sales offices in the United States, India,
the United Kingdom, Canada and Japan. We intend to expand our global sales and
marketing infrastructure by hiring new sales and marketing personnel, opening
additional sales offices in the United States and Western Europe, and
increasing our marketing expenditures. We believe that increasing our
geographic presence will enhance our ability to establish and support new
client relationships. We have dedicated satellite connectivity enabling voice,
data, Internet and video conferencing among our offices and between us and our
clients. This enables our employees and clients to work productively with less
regard for location, technical platform or time zone. In addition, we have
substantial unused space at our new software development centers in Thane and
Chennai, which, as they are built-out, will give us the capacity to house
approximately 2,000 additional information technology professionals. As
capacity, client and geographic demands require, we intend to continue to
expand our current facilities and may construct new facilities.
Our Service Offerings
We offer a broad range of information technology services, including
application development, migration and maintenance, and e-business solutions.
We have also begun to focus on customer relationship management or CRM
services.
Application Development. We design, develop and implement our clients'
applications in a wide variety of programming languages, architectures and
platforms. A typical application development project includes:
. assessment, strategy and definition;
. application design and customization;
. database design;
. user interface design;
. implementation; and
. testing.
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We have developed process and methodologies that we believe enable us to
efficiently implement solutions. In addition, we have a library of our own
reusable software that allows our project managers and consultants to
accelerate development.
Application Migration and Maintenance. Our application migration services
assist clients in converting to new technologies while extending the life cycle
of their existing, functional systems. Migration projects include re-
engineering software to transfer applications from mainframe to client/server
architectures, which links large computers, or servers, with smaller computers
and other system components, or clients, or from existing operating systems to
UNIX or Windows NT or to update from a non-relational or non-integrated to a
relational or integrated database technology. Our application maintenance
services include on-going management, systems maintenance, support, testing and
enhancement of software applications. As with our other services, we have
developed proven processes and methodologies that govern the planning,
execution and testing of the software migration and maintenance.
e-business: We enable our clients to engage in e-commerce and otherwise use
the Internet and corporate intranets by providing the following services:
. Internet integration;
. Internet, intranet and extranet strategy;
. intranet and extranet development; and
. website design.
Our e-business solutions have focused on integrating clients' legacy
applications, which have limited functionality and integration capability, with
the Internet and developing corporate intranet applications to transmit
clients' data through the Internet or a corporate intranet in a more effective
manner. We have also developed custom Internet software solutions and adapted
Internet-based components to function with our clients' existing software
applications. At March 31, 2000, we had completed four e-business projects and
were working on another six e-business projects, each of which we expect to
generate $1 million for us.
Customer Relationship Management. We have recently begun to offer CRM
services. At March 31, 2000, we had completed one CRM project and were working
on another two CRM projects. In addition, we have assigned a number of our
professionals to work in-house on CRM solutions with a few of our clients. Our
CRM services enable our clients to more effectively manage their customers as
key assets and focus on improving customer relationships, maximizing revenue
per customer, enabling better assessment of prospective customer opportunities
and preferences, and identifying new customers. We are a Certified Siebel
Consulting Partner in the United States and Canada. We are capable of
delivering integrated CRM solutions encompassing sales force field service and
marketing automation and customer service support.
Quality Standards
Our project management, risk management and quality control processes and
methodologies undertaken at our software development centers in India are
certified both under SEI-CMM Level 4 and ISO 9001.
SEI-CMM Level 4 Certification: In December 1999, our three software
development centers in India were certified at SEI-CMM Level 4. As of November
1999, of the 21 organizations worldwide that had achieved SEI-CMM Level 5
certification, 10 of them were Indian. Further, as of November 1999, 14 of the
40 organizations worldwide that had achieved SEI-CMM Level 4 certification were
Indian companies. TheSEI-CMM is recognized within the information technology
industry as one of the leading standards for measuring the effectiveness, or
maturity, of information technology development and management processes. This
maturity model describes the key elements of an effective software process,
outlining an evolutionary improvement path through five maturity levels, from
an ad hoc, immature process (Level 1), to a mature, disciplined and repeatable
process (Level 5). The SEI-CMM covers practices for planning, engineering and
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<PAGE>
managing software development and maintenance, which improve the ability of
organizations to meet goals for cost, schedule, functionality and product
quality. According to the Software Engineering Institute, the key process areas
at Level 4, which is described as the managed level, focus on establishing a
quantitative understanding of both the software process and the software work
products being built. This level of process capability allows an organization
to predict trends in process and product quality because the process is
measured and operates within measurable limits, and results in software
products of a predictably high quality.
ISO 9001 Certification: Our software development centers in India have been
certified as being in compliance with ISO 9001. ISO 9001 is a series of
standards that provide specifications and guidelines for establishing,
documenting and maintaining an effective quality management system. The purpose
of ISO 9001 is to demonstrate an organization's commitment to quality, their
capability to satisfy customer requirements and ultimately achieve total
customer satisfaction through the prevention of error. ISO 9001 conformance
gives an organization the capabilities and tools to implement continuous
improvement programs that will ultimately translate into good product and
service quality. Over 100 countries are members of the International Standards
Organization and participate in writing and revising the organization's
standards. The principles and disciplines of ISO 9001 are accepted and
recognized worldwide as a sound basis for quality management systems.
Clients
We provide our services primarily to companies in industries that have
historically devoted relatively large percentages of their budgets on
information technology, including business information services, financial
services and telecommunications.
During the first three months of 2000 and the full year 1999, approximately
1% of our revenue was generated from Indian clients, 80% and 84% of our revenue
was generated from United States clients, respectively, 18% and 16% was from
international clients, respectively. Our two largest clients together accounted
for approximately 36% of our revenue in the first three months of 2000 and 45%
of our revenue in the full year 1999 and 1998.
The following is a partial list of some of our clients for whom we provided
services during 1999. We believe the list is representative of our overall
client base.
Because of the nature of our business, some of the listed companies may not
be significant current clients as a result of the completion of recent
assignments.
Bell & Howell Publishing InterRide, Inc.
Services J.P. Morgan & Co.
Bell Atlantic Corp. NRJ Enterprises Inc.
Carboline Company Object XPERTS Inc.
Compuware Technologies Inc. Philip Morris Management Corp.
Cybernetics, Inc. Realsoft, Inc.
Delta Global Inc. Sky Capital International (Hong
Ecomparts, Inc. Kong)
Evergreen Funds Style Asia Inc.
First Data Corp.
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<PAGE>
Client Solutions
A few examples of the solutions we have recently provided to our clients are
set forth below:
<TABLE>
<S> <C>
Challenge: Allow Philip Morris Management Solution: We designed and developed a
Corp. to monitor, achieve, modify and global intranet, the Mark Management
retrieve information about its worldwide System, which integrated a wide variety of
trademarks. back-end relational or integrated databases
and multiple file systems. This system will
allow employees more effectively to search
for trademark information. Security
features were built in to protect sensitive
information from unauthorized users,
including a conditional access system which
offers employees multiple read-and-write
access levels. The resulting database
solution will position Philip Morris
Management Corp. more effectively to track
and monitor its worldwide trademark
licensing arrangements.
</TABLE>
<TABLE>
<S> <C>
Challenge: Re-engineer from mainframe to Solution: We redesigned an IBM mainframe
client server technology a mission critical base Bell Atlantic access ordering system
access system used by Bell Atlantic to into a client/ server based architecture to
process access service requests concurrently provide greater automation, control and
to 300-350 users. convenience to 300-350 concurrent users of
Bell Atlantic. Deployed in 1997, this
system called CAFE is currently in the
third of five years of maintenance contract
work with us. In the current year, plans
are underway to migrate CAFE's client
server architecture to the web environment.
Challenge: Enable InterRide, Inc., a Solution: We developed an online integrated
transportation portal company, to system for InterRide, Inc. This system
electronically pool its consortium of member allows a customer of InterRide, Inc. to
transportation companies in order to identify availability among various ground
facilitate the efficient processing of transportation companies and create their
reservations and the economical own personal travel itinerary.
administration of vehicle dispatching over Consequently, the ground transportation
the Internet. companies monitor and dispatch the
appropriate vehicles and then bill these
customers. In addition to pricing and
booking a reservation via the Internet,
customers of InterRide, Inc. have the
ability to access InterRide's system
through an interactive voice response
system. InterRide, Inc. released the beta
version of the system in January 2000 and
the system is scheduled to go live in May
2000.
Challenge: Assist three business units of Solution: We have provided valuable
First Data Corp. with various information information technology services to First
technology services: First Data Merchant Data Corp. for the past three years,
Services, First Data Resources and Western executing over 30 projects including
Union. mainframe, client/server, application
migration and maintenance, Year 2000
remediation and a feasibility study. On a
recent project, we developed an Internet
based application, which integrates with
various mainframe systems and enables the
company to respond in a significantly
shorter timeframe.
</TABLE>
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Sales and Marketing
We sell and market our services from sales offices located in the United
States, India, the United Kingdom, Canada and Japan. In North America, we
presently have sales offices located in Piscataway, New Jersey; Oakbrook,
Illinois; Bedford, New Hampshire; and Toronto, Canada. We also have sales
offices in London, England; and Tokyo, Japan. As of March 31, 2000, we had 25
sales professionals; 18 in North America, three in India, two in the United
Kingdom and two in Japan.
We have been informed by our clients generally that our quality of work,
information technology competency, competitive prices, industry knowledge and
experience, and management team are the primary reasons why we were awarded
competitive contracts. In addition, our client references and endorsements as
well as our willingness to participate in trade shows and speaking engagements,
have helped us to generate greater awareness for our services. We expect this
offering and our profile as a public company in the United States will further
enhance our corporate marketing efforts.
We have traditionally used two methods to market our services:
. direct sales; and
. leads from our established clients and strategic relationships.
Our direct sales force employs a variety of business development and
marketing techniques, including participation at industry events and direct
mail campaigns to prospective clients. Existing clients have contributed to new
business by providing referrals which have developed into new clients. The
sales and marketing group works with members of our technical personnel during
the sales process. The duration of the sales process varies depending on the
type of service, ranging from approximately two months to over one year. The
account manager or sales executive works with the technical team to define the
scope, deliverables, assumptions and execution strategies for a proposed
project, develop project estimates, prepare pricing and margin analyses and
formalize sales proposals. Management reviews and approves the proposal, which
is then presented to the prospective customer. Sales and account management
personnel remain actively involved in the project through the execution phase.
We have focused our sales and marketing efforts on expanding the scope and
depth of our relationships with existing clients. Although initially we may
provide only one service to a client, we seek to convince our clients to expand
and diversify the type of services they outsource to us. As a part of our
customer service philosophy, we assign a relationship manager who is
responsible for the success of individual projects and for ensuring that our
client needs are met. We also aim to strengthen our relationships with our
clients by closely integrating our services with our clients' information
technology operations. In the first three months of 2000, approximately 90% of
our revenue was generated from companies that were also our clients in 1999. In
1999, approximately 65% of our revenue was generated from companies that were
our clients in 1998 and 1997. Furthermore, our business model of moving up the
"value chain" has allowed us to convert some in-house assignments into project
management engagements.
Software Development Centers
Our software development centers are off-site facilities that design,
engineer, construct, test and support our managed information technology
solutions. Each software development center has a number of project teams
dedicated to clients and separate quality assurance groups to ensure the
delivery of well documented, high-quality, and cost-effective solutions in
accordance with our software development methodologies and processes. Our
software development centers have common infrastructure, organizational units
and human resource practices that allow projects and personnel to be shifted
among our software development centers to maximize utilization rates and meet
client requirements. Our software development centers enable us to divide our
information technology project deliverables between our off-shore/off-site
software development facilities and our client's on-site location.
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We have opened four software development centers in India and one in the
United States. In a typical off-shore software development project, we assign a
small team of information technology professionals, including a project
manager, to visit a client's site and determine the scope and requirements of
the project. Once the specifications of the engagement have been established,
the team returns to India to supervise the development of the required software
or system by a much larger group of professionals. Some of our professionals
remain at the client's site to track changes in scope and address new
requirements as the project progresses. The client's systems are then linked
via dedicated telecommunications links to our software development facilities
enabling simultaneous processing of data. Once development is completed, a team
returns to the client's site to install the software or system and ensure its
functionality. Our professionals often maintain a continued presence at the
client site to perform comprehensive maintenance services through one of our
off-shore/off-site software development facilities. In contrast to development
projects, a typical maintenance assignment requires a larger team of
professionals to visit client's site to gain a thorough understanding of all
aspects of the client's system. A majority of the maintenance team will return
to one of our software development centers, where it assumes responsibility for
day-to-day maintenance of the client's system, while coordinating with a few
maintenance professionals who remain stationed at the client's site.
In addition to our project management services, we conduct in-house
assignments for certain of our clients. This involves providing a small team of
our information technology professionals, who work at a client's site on a
project which is usually managed by our client. Our information technology
professionals provide the necessary experience which our client may require.
Our on-site information technology professionals have the full support of our
processes and methodologies while working on such an assignment. We believe
that these in-house assignments provide us with the opportunity to cross-sell
our higher margin project management services.
Properties
Our global headquarters are located in Mumbai (Bombay), India. Our
registered office is located at 1405 Maker Chamber V, Nariman Point, Mumbai
(Bombay) 400021. Our U.S. headquarters are located in Piscataway, New Jersey
and are the primary location for our domestic off-site outsourcing marketing
and sales. We also have sales offices in Oakbrook, Illinois; Bedford, New
Hampshire; London, United Kingdom; Tokyo, Japan; and Toronto, Canada. Our
training facilities and off-shore software development centers are located in
the Indian cities of Mumbai (Bombay), Thane and Chennai and in Piscataway, New
Jersey.
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The following table sets forth certain information as of February 1, 2000
relating to our principal facilities developments:
<TABLE>
<CAPTION>
Approximate
Location Square Feet Status/Term Type of Facility
-------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
Thane, In- 120,000, of which Owned Software Development
dia 40,000 is built-out & Training Center
and operational
Mumbai 58,000 Leased/varies from Global Headquarters,
(Bombay), August 2002 to August Software Development
India 2006 & Training Center
Mumbai 1,500 Owned Corporate Office
(Bombay),
India
Mumbai, 30,000 Owned Residential Complex
(Bombay),
India
Chennai 25,000 Leased/varies from Software Development
(Madras), January 2002 to May & Training Center
India 2003
Chennai 160,000, of which Owned Software Development
(Madras), 40,000 is built-out & Training Center
India and operational
Piscataway, 65,000 Leased/January 2013 U.S. Headquarters,
New Jersey Sales Office and
Software Development
& Training Center
Oakbrook, 3,600 Leased/April 2004 Sales Office (Midwest)
Illinois
Bedford, 250 Leased/December 2000 Sales Office (New
New Hamp- England)
shire
Toronto, 2,500 Leased/September 2004 Sales Office (Canada)
Canada
London, 1,000 Leased/month to month Sales Office (U.K.)
United
Kingdom
Tokyo, Ja- 300 Leased/January 2009 Sales Office (Japan)
pan
</TABLE>
We have committed aggregate capital expenditures of $6.3 million for 2000
and 2001 for the build-out of our existing facilities and we have budgeted an
additional $8.2 million for the further build-out of existing facilities. We
may use some of these funds to build new facilities over the same period.
Employees
As of March 31, 2000, we employed approximately 1,350 employees worldwide
with about 920 in India and 430 in the United States. We also have sales
offices in the United Kingdom, Canada and Japan. Our workforce is comprised of
approximately 92% technical staff and approximately 8% administrative staff.
Recruiting. There is intense global competition, particularly in the United
States and India, for information technology professionals with the skills
necessary to perform the services offered by us. We invest heavily in our
programs to recruit, train and retain qualified employees. We seek to attract,
motivate, and retain our professionals by offering:
. multiple professional challenges and the opportunity to work in one or
more of our consulting and training divisions;
. the ability to work with leading-edge technologies;
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. attractive compensation plans that align employees' interests and goals
with our own;
. a stimulating, flexible and entrepreneurial work environment; and
. the opportunity to receive continuous, ongoing technical training at our
in-house training institute, the Silverline Institute.
We focus our recruiting efforts on the top students from engineering
departments of Indian schools as well as lateral candidates, and use a series
of reviews and tests to identify the best applicants. Because we emphasize
flexibility and innovation, applicants are selected on the basis of their
ability to learn as well as their academic achievement, conceptual knowledge
and their temperament for, and fit with, our corporate culture.
Training. We currently provide programs at the Silverline Institute on many
of the latest e-business technologies, as well as our software development and
quality processes. We provide three months of combined classroom and on-the-job
training to new hires and two weeks additional training each year, including
both technical training along with non-technical leadership skills development.
We also offer advanced courses affiliated with Center for Development of
Advanced Computing and India's National Center for Software Technology,
including courses to satisfy the requirements for a Post-Graduate Diploma in
Software Technology. We believe that the Silverline Institute provides us with
a competitive advantage in recruiting and retaining information technology
professionals.
Immigration Matters. Our professionals that work in the United States either
on-site at client facilities or at our facilities in the United States are
typically required to obtain visas, as described in "Risk Factors --
Restrictions on U.S. immigration may adversely affect our business".
Competition
The market for information technology services is rapidly evolving and
highly competitive. We expect that competition will continue to intensify. We
face competition in India and elsewhere from numerous companies, many of which
are larger and have substantially more resources than us. For examples of our
competitors, please see "Risk Factors--We face intense competition which could
cause our revenue and margins to suffer".
We anticipate that future competition will increasingly include firms with
operations in countries with lower labor costs than those prevailing in India.
Major U.S. companies are increasingly moving a portion of their operations to
India and other overseas locations. Part of our competitive advantage has
historically been a cost advantage relative to service providers in the United
States, Japan and Western Europe. Labor costs in India are presently increasing
at a significantly faster rate than those in the United States, Japan and
Western Europe. These factors will reduce the advantages that we have in terms
of a cost effective, highly skilled pool of information technology
professionals in India and will mean we may become less competitive over time.
We believe that our ability to compete also depends in part on a number of
factors outside of our control, including:
. our competitors' abilities to attract and retain skilled information
technology professionals;
. prices at which our competitors offer comparable services;
. our competitors' responsiveness to client needs; and
. loss of information technology professionals to foreign markets
including the U.S.
Intellectual Property
We have applied for registration of "SILVERLINE" as a trademark in India and
we have obtained the registration in the United States. We do not have any
patents or registered copyrights in the United States. Ownership of the
software and associated deliverables created by us for a client is generally
retained by or
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assigned to the client. As a result, we generally do not retain any
intellectual property interest in our work product. We currently require our
information technology professionals to enter into non-disclosure and
assignment of rights agreements to limit use of, access to and distribution of
our confidential information. For additional information, please see "Risk
Factors--Our technology may be subject to infringement claims by third parties
or clients, which could adversely affect our business and results of
operations".
Legal Proceedings
CIT Canada Inc., our recently acquired software development subsidiary in
Toronto, has commenced litigation against the Gaming Lottery Corporation for
Cdn. $21 million for breach of contract. The Gaming Lottery Corporation has
counterclaimed for Cdn. $10 million. We believe that the counterclaim has no
merit and will defend it vigorously. There are no other material legal
proceedings pending or, to our knowledge, threatened against us.
------------
On December 28, 1999, Silverline Technologies Limited acquired all the
outstanding capital stock of Silverline Technologies, Inc., a Delaware
corporation that had been under common control with us. See "Related Party
Transactions" and note 1 to our consolidated financial statements. All
references to "Silverline", "company", "us", "we" and "our" in this prospectus
mean Silverline Technologies Limited and its subsidiaries, including Silverline
Technologies, Inc. and its subsidiaries, as a combined entity, except where we
make it clear that we are referring only to Silverline Technologies Limited.
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<PAGE>
MANAGEMENT
Our executive officers, directors and key employees and their respective
ages and positions with Silverline are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Executive Officers and
Directors:
Ravi Subramanian.............. 43 Chairman of the Board of Directors
Krishna K. Subramanian(/1/)... 38 Vice Chairman of the Board of Directors and
Executive for International Initiatives
Shankar Iyer(/1/)............. 35 President and Chief Executive Officer
(Principal Executive Officer) and Director
Venkatachalam K. Murthy....... 42 Senior Vice President and Chief Financial
Officer (Principal Accounting Officer)
Shiva Vohra................... 49 Senior Vice President, Corporate Finance
Srinivasan Viswanathan........ 50 Chief Technology Officer
Brett Proud................... 41 Executive Vice President, Business
Development
Larry L. Cox.................. 59 Vice President, Human Resources
K. Mohan Subramanian.......... 43 Wholetime Director
Arjan R. Daswani.............. 54 Director
S. V. Mony(/1/)............... 62 Director
P. Murari..................... 66 Director
Vaidyanathan 64 Director
Panchapakesan(/1/)...........
George R. Zoffinger........... 52 Director
</TABLE>
<TABLE>
<S> <C> <C>
Other Key Employees:
Dilip Londhe......................... 50 Head of Operations--Mumbai
P.S. Karthikeyan..................... 44 Head of Operations--Chennai
Charles F. Carlino................... 52 Head of Lorin Business Unit--New York
Venkatarajan Subramanian............. 32 Head of e-Commerce Business Unit
</TABLE>
--------
(/1/)Member of the Compensation Committee
Our charter documents provide that one third of our longest serving
directors subject to reelection must stand for reelection at each annual
general meeting as described below. Except as described below, there are no
family relationships between any of our directors and our executive officers.
Ravi Subramanian is our founder and has served as the Chairman of our board
of directors and the Chairman of Silverline Technologies, Inc. since 1992 and
the Chairman of Silverline Holdings, Corp., our largest shareholder, since
1996. Prior to that, Mr. Ravi Subramanian was the founder and Managing Director
of Silverline Electronics Private Limited., a personal computer service and
reselling firm. Mr. Ravi Subramanian is the brother of Mr. Krishna K.
Subramanian and Mr. Mohan Subramanian. Mr. Subramanian's term as a director
expires at the annual general meeting in 2001.
Krishna K. Subramanian has served as the Vice-Chairman of our board of
directors and Executive for International Initiatives since January 12, 2000.
Mr. Krishna K. Subramanian served as a wholetime director of our company from
1992 through January 12, 2000. From 1987 to 1992, Mr. Krishna K. Subramanian
was a director of Silverline Electronics Private Ltd. Mr. Krishna K.
Subramanian is the founder and sole shareholder of Subra Mauritius Ltd., KS
Software Technologies Ltd. and Shreyas Holdings Ltd. Mr. Krishna K. Subramanian
is the brother of Mr. Ravi Subramanian and Mr. Mohan Subramanian.
Mr. Subramanian's term as a director expires at the annual general meeting in
2002.
Shankar Iyer has served as the President and Chief Executive Officer of our
Company since 1999. From 1996 to September 1999, Mr. Shankar Iyer was the Chief
Operating Officer of Silverline Technologies Inc.
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From April 1993 to September 1996, Mr. Iyer was a Vice President of Silverline
Technologies, Inc. From March 1992 to March 1993, Mr. Iyer was the Operations
Manager for Human Resources, Sales and Marketing for Infocom Inc. From January
1990 to February 1992, Mr. Iyer was the Operations Manager in the Export
Division for Data Consultancy Services in India. Mr. Iyer is the brother-in-law
of Mr. Mohan Subramanian. Mr. Iyer's term as a director expires at the annual
general meeting in 2002.
Venkatachalam K. Murthy has served as the Senior Vice President and the
Chief Financial Officer of our Company since 1996. From 1992 to 1996, Mr.
Murthy served as a Vice President of our Company. From 1981 to 1992, Mr. Murthy
was the Financial Controller and the Regional Controller of Singapore Airlines
Limited. Mr. Murthy holds a Bachelor's degree in Commerce, a Professional
degree in Finance Management and Accountancy and a Master's degree in
Management from Bombay University.
Shiva Vohra has served as the Senior Vice President of Corporate Finance of
our Company since November 1999. Prior to that, Mr. Vohra served within the
Capital Markets Section of the Bank Supervision and Regulation Division of the
Board of Governors of the Federal Reserve System of the United States. Mr.
Vohra has previously served as Managing Director, Board Member, and Chief
Financial and Administrative Officer of an investment management subsidiary of
Credit Agricole Indosuez; Senior Portfolio Manager of ABN AMRO Securities Inc.;
chief executive officer of the International Financial Management unit of ABN
AMRO Bank; and other executive positions with Chemical Bank (World Banking
Group) and W.R. Grace & Co. (Corporate Finance). Mr. Vohra holds a Master's
degree in Business Administration from Columbia Business School in New York and
a Bachelor of Science (Honors) degree in Physics from St. Xavier's College in
India. He is also a Chartered Financial Analyst and a Certified Public
Accountant.
Srinivasan Viswanathan has served as the Chief Technology Officer of our
Company since November 1999. From October 1995 to October 1999, Mr. Viswanathan
was the President of PRT (Barbados) Ltd. and headed PRT Group Inc.'s Solutions
Business. Prior to that, Mr. Viswanathan was the Chief Executive Officer of
Citicorp Overseas Software Limited and a Director of Citicorp Information
Technology Industries Ltd. in India. Before joining Citicorp in January 1986,
Mr. Viswanathan worked with the Tata group of companies, including Tata
Consultancy Services. Mr. Viswanathan holds a Bachelor's degree in Engineering
from the Indian Institute of Technology in Chennai, India and a Master's degree
in Business from the Indian Institute of Management in Ahmedabad, India.
Brett Proud has served as the Executive Vice President, Business Development
of our Company since November 1999. Mr. Proud also served as Vice President and
General Manager of Silverline Technologies, Inc., Canada from July 1999 to
November 1999. Prior to that, Mr. Proud's served as President of Mastech
Systems Corporation, Keane, Canada and he held a senior position at Andersen
Consulting. Mr. Proud holds a Bachelor's degree in Mathematics from the
University of Waterloo in Canada.
Larry Cox has served as the Vice President, Human Resources of our Company
since 1997. Prior to that, he was the Director of Human Resources. His previous
work experience includes various positions with Moore Business Forms & Systems,
AT Kearney, and Peat Marwick Mitchell. Mr. Cox holds a Bachelor's degree in
Accounting from the University of Denver.
K. Mohan Subramanian has served as a wholetime director since 1994. He has
been a Director of Silverline Industrial Fabrics Private Ltd. since 1980 and a
Director of Silverline Electronics Private Limited since 1987. Mr. Mohan
Subramanian has been responsible for the development of the new facilities in
Thane and Chennai. Mr. Mohan Subramanian is the brother of Mr. Ravi Subramanian
and Mr. Krishnakumar Subramanian and the brother-in-law of Mr. Iyer. Mr.
Subramanian's term as a director expires on November 25, 2003.
Arjan R. Daswani has served as a Director of our Company since 1992. Mr.
Daswani is the Chief Executive Officer of Myquest Hong Kong Ltd., an
information technology company. In addition, Mr. Daswani is the Managing
Director of Myquest Internet Private Limited. Mr. Daswani's term as a director
expires at the annual general meeting in 2001.
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S. V. Mony has served as a Director of our Company since 1996. From 1991
until 1995, Mr. Mony served as the Chairman of the General Insurance
Corporation of India. In addition, Mr. Mony presently serves as the Director of
GIO Australia Holdings Ltd., India, and Director of GIO Sanmar Gilts Limited
and Sanmar Securities Trading Limited. Mr. Mony's term as a director expires at
the next annual general meeting.
P. Murari has served as a Director of our Company since April 2000. He is
the Advisor to the President of the Federation of Indian Chambers of Commerce
and Industry. He is also an Advisor to a number of government and industrial
groups and holds directorships on the boards of several Indian public
companies. Mr. Murari has also been Chairman of Committees on Deep Sea Fishing
Industry, Ministry of Food Processing Industries; the Indian Institute of Mass
Communications, Ministry of Information & Broadcasting and the Steering
Committee of the World Marketing Congress, Institute of Marketing Management.
Mr. Murari held several senior positions with the government of India, the last
being the Secretary to the President of India. He earned his M.A. degree in
economics from Madras University. Mr. Murari's term expires at the next annual
general meeting.
Vaidyanathan Panchapakesan has served as a Director of our Company since
1999. From 1979 to 1996, Mr. Panchapakesan worked for Banque Nationale De
Paris, Hong Kong. Since 1996, he has been a consultant for Banque National De
Paris. Since December 1999, Mr. Panchapakesan has been engaged as an advisor to
Rabobank, Singapore. Mr. Panchapakesan's term as a director expires at the next
annual general meeting.
George R. Zoffinger has served as a Director of our Company since April
2000. He currently serves as the President and CEO of Constellation Capital
Corporation. Previously, he served as President and Chief Executive Officer of
Value Property Trust, a publicly owned Real Estate Investment Trust trading on
the New York Stock Exchange. He has held senior executive positions with
CoreStates New Jersey National Bank, Constellation Bancorp and Constellation
Bank, N.A. Prior to assuming the leadership of Constellation Bancorp, Mr.
Zoffinger was appointed Commissioner of Commerce and Economic Development for
the State of New Jersey, serving as Chairman of the New Jersey Economic
Development Authority, Chairman of the New Jersey Council on Job Opportunities
and was a member of the New Jersey Department of Banking Credit Crunch Task
Force. Mr. Zoffinger was appointed by President Clinton to serve as a delegate
to the White House Conference on Small Business. He was awarded a Master's
degree in Finance from New York University and a Bachelor's degree in business
from Pennsylvania State University. Mr. Zoffinger's term expires at the next
annual general meeting.
Dilip Londhe has served as the Head of Operations-Mumbai of our Company
since 1993. From 1976 until 1993, Mr. Londhe worked with Tata Consulting
Services. Mr. Londhe has a Bachelor's degree in Engineering from Nagpur
University and a Master's degree in Industrial and Management Engineering from
the Indian Institute of Technology, Kanpur, India.
P.S. Karthikeyan has served as the Head of Operations-Chennai of our Company
since 1996. From 1991 to 1993, Mr. Karthikeyan worked as Deputy General Manager
at ESSAR Information Technology Limited. Mr. Karthikeyan holds a Master's
degree in Computer Sciences from the Indian Institute of Technology, Chennai.
He is also a Certified Project Management Professional from Project Management
Inc., USA.
Charles F. Carlino has served as the Head of Lorin Business Unit-New York of
our Company since 1998. From 1984 to 1998, Mr. Carlino served as the President
of Lorin Technology Group. Mr. Carlino holds an Associate's degree in Marketing
from Queensborough Community College of New York.
Venkatarajan Subramanian has served as the Head of the e-Commerce Business
Unit of our Company since December 1999. From 1995 to 1999, Mr. Venkatarajan
Subramanian was a Director at Silverline Technologies, Inc. overseeing various
projects in emerging technologies. Mr. Venkatarajan Subramanian has a
Bachelor's degree in Electronics Engineering from Bombay University.
Board Committees
Compensation Committee: We have a Compensation Committee of our board of
directors to administer the Indian employee stock option plan, the Indian
Employee Welfare Trust Program and the U.S. employee stock
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option plan. The Committee is comprised of Mr. Mony, Mr. Panchapakesan, Mr.
Iyer and Mr. Krishna K. Subramanian.
Audit Committee: We are currently in the process of assembling an Audit
Committee of our board of directors.
Board Composition
Our articles of association provide for a minimum of three directors and a
maximum of twelve directors excluding managing directors, wholetime directors
and nominee directors, if any, appointed by Indian public financial
institutions and other lenders as discussed below. We currently have seven
directors and our charter documents allow our board, without shareholder
approval, to appoint additional directors, up to the maximum board size of
twelve. Both Indian law and our articles of association provide that at least
two thirds of our directors must be subject to reelection by shareholders and
at least one third of these directors will be subject to reelection at each
annual meeting of shareholders.
Our articles also provide for the appointment by our board of directors of a
managing director and that the appointment is for a fixed term up to five years
and during this period the managing director will not be subject to reelection.
Our articles also provide for appointment of wholetime directors who manage
and administer our company's affairs. Wholetime directors are appointed by our
board of directors and are not subject to reelection. On October 23, 1997, and
November 26, 1998, Messrs. Krishna K. Subramanian and Mohan Subramanian,
respectively, were appointed wholetime directors of our company, each for a
five year term. These appointments were confirmed by our shareholders at our
annual general meeting held on December 28, 1998. Mr. Krishna K. Subramanian
resigned as a wholetime director effective January 12, 2000. He continues to be
the Vice Chairman of our board of directors.
Our articles of association give our lenders, as well as certain Indian
public financial institutions, the right to appoint their own nominees to our
board of directors. A lender may only exercise this right to the extent
permitted under its loan or other agreement with us. We have been advised by
our Indian counsel that this provision is common in the articles of association
of other Indian companies.
Our articles of association provide that any directors nominated to our
board by lenders will not be subject to re-election. Indian law limits the
number of directors not subject to re-election to one-third of the total number
of directors on our board.
We do not currently have any lender nominated directors on our board, and
our existing loan agreements do not currently grant our lenders the right to
nominate directors. See "Risk Factors--Our lenders may be entitled to appoint
directors to our board of directors".
Board Compensation
In 1999, Mr. Krishna K. Subramanian and Mr. K. Mohan Subramanian were paid
an aggregate of approximately $67,000 in their capacity as wholetime directors.
In addition, they were entitled to perquisites, allowances and reimbursement of
certain expenses totaling to an aggregate of approximately $23,000. Mr. Mohan
Subramanian, our only current wholetime director, receives aggregate
compensation and perquisites of approximately $45,000 per annum. Our directors,
including Mr. Krishna K. Subramanian and Mr. K. Mohan Subramanian, were paid an
aggregate of $306,000 in 1999. Indian law provides that we may pay our
directors any remuneration by way of salary, inflation adjustment allowance,
perquisites, commission and other allowances which shall not exceed 10% of our
net profits.
Our directors are reimbursed for certain expenses in connection with their
attendance at board and committee meetings.
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Executive Compensation
Our executive officers received aggregate compensation of $928,000 for 1999
and our other key employees, described above, received aggregate compensation
of $216,000.
Employment Agreements
Under Indian law, our shareholders must approve the remuneration and
benefits of all directors on our board at an annual general meeting of
Shareholders. As discussed above, we have a formal written contract with our
one wholetime director.
Employee Benefit Plans
Silverline Group of Companies, Indian Employee Welfare Trust Program. Our
Indian employee welfare trust program was approved by our shareholders and
adopted by our board of directors on November 5, 1999. The program provides for
the grant to eligible employees on November 5, 1999 of warrants exercisable for
equity shares. All 2,000,000 options have been granted. Each warrant provides
the right to subscribe for one equity share of the Company at an exercise price
equal to Rs. 365 per share. The trust has paid approximately $1.7 million
towards the 10% amount required to be paid under Indian law on the warrants we
have issued to the trust. The trust can exercise the warrants upon payment of
the balance due of $15.3 million at any time prior to July 11, 2001.
Under this program we have reserved 2 million equity shares for issuance
upon the exercise of warrants under the program. The program will be
administered by our board of directors.
Indian Employee Stock Option Plan. Our Indian employee stock option plan
provides for the grant to eligible employees of options to purchase equity
shares based on meeting certain performance criteria.
A total of 1 million equity shares were reserved for issuance upon the
exercise of options issued under this plan. On November 12, 1999, we granted
all the 1 million options under the plan at an exercise price equal to Rs. 425
per share. The options are exercisable for one full year beginning April 1 of
2001, 2002 or 2003.
This plan is administered by the Compensation Committee of our board of
directors. The Compensation Committee made recommendations for the issuance of
options based on the loyalty and performance of each employee.
U.S. Employee Stock Option Plan. We will establish an employee stock option
for employees, directors and officers of our U.S. subsidiary of up to 1 million
of ADSs. The establishment of the plan was approved by our shareholders on
March 21, 2000 and will be approved by our board of directors prior to this
offering of the ADSs. All options under the plan will be exercisable for ADSs
represented by ADRs.
The plan will be administered by the Compensation Committee of our board of
directors. The Compensation Committee will have the power to determine the
terms of the options granted, including the exercise price, the number of ADSs
subject to each option, the exercisability thereof, and the form of
consideration payable upon such exercise. In addition, the committee will have
the authority to amend, suspend or terminate the plan, provided that no such
action may affect any ADS previously issued and sold or any option previously
granted under the plan.
Options granted under the plan will generally not be transferable by the
optionee. Options granted under the plan must generally be exercised within
three months of the end of optionee's status as an employee director or officer
of Silverline, but in no event later than the expiration of the option's term.
In the event of termination for cause, the options will expire immediately upon
the date Silverline gives notice of the
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termination. In the event of the optionee's termination as a result of
retirement or disability, the vesting and exercisability of the optionee's
option will accelerate in full and the option must be exercised within three
years after such optionee's termination by retirement or disability, but in no
event later than the expiration of the option's term. The options will vest in
stages on December 31, 2000, 2001 and 2002.
The plan will provide that in the event of a merger of us with or into
another corporation, a sale of substantially all our assets or a similar
transaction, each option will become immediately exercisable.
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RELATED PARTY TRANSACTIONS
Other than compensation agreements and other arrangements, which are
described as required in "Management" and the transactions described below,
since December 31, 1996, there has not been, nor is there currently proposed,
any transaction or series of transactions to which we were or will be a party:
. in which the amount involved was material; and
. in which any of our directors or officers, or any member of their
immediate family, or any company or government entity which holds a
controlling interest in our equity shares, had or will have a direct or
indirect material interest.
Silverline Technologies, Inc. and Silverline Holdings, Corp.
In January 1997, Subra Holdings, Inc., a Delaware corporation controlled by
Ravi Subramanian, the Chairman of our company, and the predecessor company to
Silverline Holdings, Corp., purchased all the outstanding shares of Silverline
Industries, Inc., the predecessor to Silverline Technologies, Inc., from
Silverline Industries Limited, the predecessor to our Company. Subsequently,
Silverline Industries Limited and Silverline Industries, Inc. signed an
intercompany agreement under which Silverline Industries Limited agreed to
perform software consulting, design and programming services for projects
designated by Silverline Industries, Inc.
In August 1997, Subra Holdings, Inc. acquired 51% of our company through a
public tender offer.
In December 1997, we received a commitment from Subra Holdings, Inc., to
acquire shares of STL for approximately $12.0 million (or approximately Rs. 22
per share). In March 1998, Silverline Holdings, Corp. paid $1.2 million of the
total committed amount and in May 1999, paid an additional $10.8 million upon
which 22 million STL shares were issued. The proceeds were predominantly used
for capital expenditures.
On December 28, 1999, Silverline Holdings, Corp. sold 50,000 common shares
of Silverline Technologies, Inc., representing 100% of its outstanding shares
of capital stock for 4.5 million equity shares of our company with a value of
approximately $46.25 million, which was within the valuation range determined
by a big five accounting firm. Before the share exchange, Silverline Holdings,
Corp. sold 8.2 million of our equity shares to Subra Mauritius Ltd. at the
equivalent price per share. Accordingly, Silverline Holdings, Corp. and Subra
Mauritius Ltd. own approximately 30.0% and 13.4% of our equity shares as of the
date of this prospectus.
In 1997, 1998 and 1999, Silverline Technologies, Inc. made advances of
$947,165, $1.6 million and $3.6 million, respectively, in the form of payments
made on behalf of Silverline Holdings, Corp. in connection with its corporate
restructuring. The entire amounts advanced have been repaid as of December 31,
1999.
International Real Estate Ventures, LLC or IREV
IREV is a limited liability company owned by Himanshu P. Shukla, a former
employee and former consultant of Silverline Technologies, Inc. On December 31,
1997, Silverline Technologies, Inc. sold a building to IREV for $4 million. The
purchase was financed through a mortgage from The Chase Manhattan Bank, which
was guaranteed by Silverline Technologies, Inc. and Ravi Subramanian, our
Chairman. The net book value of the property on December 31, 1997 was $2.2
million. On August 14, 1998, Chase, in consideration of the payment by IREV of
the sum of $1.5 million to Chase as cash collateral, released Silverline
Technologies, Inc. as guarantor.
During 1998, Silverline Technologies, Inc. loaned $165,307 to IREV, to be
used in connection with special attentions and renovations to be made by IREV
at Silverline Technologies, Inc.'s request.
During 1999, Silverline Technologies, Inc. loaned $505,437 to IREV for the
purpose of carrying out further renovations. These amounts have been repaid as
of December 31, 1999.
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On February 2, 2000, IREV sold the building referred to above to Silverline
Holdings, Corp. Sovereign Bank financed 80% of the fair market value of the
building which was $5.5 million. In addition, the bank agreed to a construction
loan of $1.6 million. These loans were guaranteed by Mr. Ravi Subramanian, our
Chairman and Mr. Ravi Subramanian was released from the guarantee of IREV's
mortgage with the Chase Manhattan Bank.
International Technology Ventures, LLC or ITV
ITV is a limited liability company owned by Himanshu P. Shukla, a former
employee and former consultant of Silverline Technologies, Inc. On December 31,
1997, Silverline Technologies, Inc. sold to International Technology Ventures,
LLC rights to certain software products, computer equipment and certain
intellectual property rights, if any, which we have developed, and may in the
future develop, in connection with specific projects. ITV signed a note for the
purchase price of $1.5 million, payable in three annual equal installments
commencing December 31, 1999. The note bears interest at a rate of 8.5%. The
software products are to be further developed, customized and marketed by ITV.
ITV's ability to repay the principal and interest on the note depends on
whether or not it will be able to develop and market these products. ITV paid
$500,000 on the note on December 31, 1999.
At December 31, 1997, Silverline Technologies, Inc. had a receivable from
ITV of $207,811 that was subsequently paid in the following year.
Infocom International, Inc.
On April 14, 1993, Silverline Technologies, Inc. acquired all the assets of
Infocom, a Delaware corporation, consisting largely of accounts receivable, and
work-in-progress and office and computer equipment, for a total purchase price
of approximately $1.6 million in cash. For approximately six months prior to,
and at the time of, the acquisition, Ravi Subramanian was both the President of
Infocom and the Chairman of our board of directors.
InterRide, Inc.
InterRide is a Delaware corporation, of which Himanshu P. Shukla is the
Chairman and a stockholder. Himanshu P. Shukla is a former employee and a
former consultant of Silverline Technologies, Inc. In April 1999, InterRide
contracted with us to provide one of our first e-business solutions. For more
information, please see "Business--Client Solutions".
Payments to Executive Officers and Directors
During 1997, Silverline Technologies, Inc. made payments on behalf of Mr.
Ravi Subramanian, our Chairman, totaling $27,251. The amount was repaid to
Silverline Technologies, Inc. by Mr. Ravi Subramanian during 1998. At December
31, 1998, Silverline Technologies, Inc. had receivables from Mr. Ravi
Subramanian and from Lorimar Services Inc., which is part of the Lorin Group,
of $27,867 and $5,775, respectively. The amount due from Mr. Ravi Subramanian
was repaid during 1999. During 1999, Silverline Technologies, Inc. made
advances, in the form of payments made on behalf of Mr. Ravi Subramanian,
totaling $787,640. The amount has been repaid as of December 31, 1999.
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PRINCIPAL SHAREHOLDERS
The following table provides information regarding the beneficial ownership
of our equity shares as of June 20, 2000 (after giving effect to the
restructuring), and as adjusted to reflect this offering, by:
. each person or group of affiliated persons known by us to beneficially
own 10% or more of our equity securities;
. each director and our Chief Executive Officer; and
. all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power
with respect to equity shares. Unless otherwise indicated, the persons named in
the table have sole voting and sole investment control with respect to all
equity shares beneficially owned. The percentage of equity shares beneficially
owned described in the table is calculated on a fully diluted basis.
<TABLE>
<CAPTION>
Percentage of Equity Shares
Beneficially Owned
---------------------------
Number of Equity Shares Before After
Name and Address Beneficially Owned(/1/) this offering this offering
---------------- ----------------------- ------------- -------------
<S> <C> <C> <C>
Silverline Holdings,
Corp.(/2/)............... 19,354,954 30% 26%
Ravi Subramanian(/2/)..... 19,354,954 30% 26%
KS Software Technologies
Ltd.(/2/) (/3/).......... 19,354,954 30% 26%
Subra Mauritius Ltd. (/2/)
(/4/).................... 8,628,000 13% 12%
Shreyas Holdings Ltd.
(/5/).................... 2,437,267 4% 3%
Krishna K. Subramanian
(/3/) (/4/) (/5/)........ 30,420,221 47% 42%
All directors and
executive officers as a
group (12 persons)....... 30,464,731 47% 42%
</TABLE>
--------
(/1/)Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission that deem shares to be beneficially
owned by any person who has or shares voting or investment power with
respect to the shares. All information with respect to the beneficial
ownership of any principal shareholder has been furnished by the
shareholder and, unless otherwise indicated below, the Company believes
that persons named in the table have sole voting and sole investment power
with respect to all shares shown as beneficially owned, subject to
community property laws where applicable.
(/2/)Ravi Subramanian, our Chairman and Silverline Holdings, Corp.'s Chairman,
KS Software Technologies Ltd. and Subra Mauritius Ltd. beneficially own
approximately 46.30%, 45.04% and 8.66%, respectively, of the outstanding
voting securities of Silverline Holdings, Corp. The equity shares held by
Silverline Holdings, Corp. are included in the equity shares shown as
beneficially owned by Ravi Subramanian and KS Software Technologies Ltd.
KS Software Technologies Ltd. disclaims beneficial ownership of the shares
owned by Silverline Holdings, Corp. In addition, 3.5 million shares of
Silverline Holdings, Corp. and 6.5 million shares of Silverline
Technologies Limited that are held by Ravi Subramanian are pledged to
lenders who could foreclose on those shares in the event of default under
the respective loan agreements.
(/3/)Krishna K. Subramanian beneficially owns 100% of the outstanding voting
securities of KS Software Technologies Ltd. Accordingly, all the equity
shares shown as beneficially owned by KS Software Technologies Ltd. are
included in the equity shares shown as beneficially owned by Krishna K.
Subramanian.
(/4/)Krishna K. Subramanian beneficially owns 100% of the outstanding voting
securities of Subra Mauritius Ltd. Accordingly, all the equity shares held
by Subra Mauritius Ltd. are included in the equity shares shown as
beneficially owned by Krishna K. Subramanian.
(/5/)Krishna K. Subramanian beneficially owns 100% of the outstanding voting
securities of Shreyas Holdings Ltd.
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DESCRIPTION OF OUR EQUITY SHARES
Our company was incorporated in 1992 as a public limited company under the
name Silverline Industries Limited. In November 1999 we changed the name of our
company to Silverline Technologies Limited. We first offered our equity shares
to the public in India in September 1992. Our equity shares are listed for
trading in India on The Stock Exchange, Mumbai, the Madras Stock Exchange Ltd.,
Chennai and The Stock Exchange, Ahmedabad. Our shares are also traded on The
National Stock Exchange and most major exchanges in India.
Described below is the material information concerning our share capital and
a brief summary of the material provisions of the Indian Companies Act, 1956
and our charter documents. The following description is not complete and should
be read in conjunction with our articles of association and memorandum of
association and the relevant provisions of the Indian Companies Act, 1956. Our
articles of association provide that the regulations contained in Table "A' of
the Indian Companies Act, 1956 apply to us to the extent they are not
inconsistent with any of the provisions of our articles of association. We have
filed our memorandum of association, articles of association and Table "A' of
the Indian Companies Act, 1956 with the Securities and Exchange Commission as
exhibits to our registration statement on Form F-1, of which this prospectus
forms a part. In this prospectus, all references to our articles of association
or our charter documents include the regulations of Table "A' of the Indian
Companies Act, 1956 incorporated into our articles of association.
General
Our authorized share capital is Rs. 850 million divided into 85 million
equity shares with a par value of Rs. 10 per share. As of January 31, 2000,
64.5 million of our equity shares were issued and outstanding. Equity shares
are the only class of our share capital. However, our charter documents and the
Indian Companies Act, 1956 permit us to issue other classes of securities in
addition to the equity shares.
We have issued options and warrants exercisable for 3 million equity shares
under our Indian employee stock option plans. In addition, we have reserved up
to 2 million ADSs which may be issued in connection with the proposed U.S.
employee stock option plan to be adopted prior to this offering.
Dividends
Under Indian law, unless our board of directors recommends the payment of a
dividend, our company has no power to declare a dividend. Similarly, under our
charter documents and Indian law, although the shareholders may, at the annual
general meeting, approve a dividend in an amount less than that recommended by
our board of directors, they cannot increase the amount of the dividend. In
India, dividends are generally declared as a percentage of the par value of a
company's equity shares. The dividend recommended by our board of directors, if
any, is distributed and paid to our shareholders in proportion to the paid-in
value of their equity shares within 42 days of the approval by our shareholders
at our annual general meeting. In addition, our board of directors has the
discretion to declare and pay interim dividends to our shareholders without
prior shareholder approval. Indian law provides that shares of a company of the
same class must receive equal dividend treatment. Under Indian law, dividends
can only be paid in cash to registered shareholders on a date fixed on or
before the Annual General Meeting or at the direction of the shareholder.
The Indian Companies Act, 1956 states that any dividends that remain unpaid
or unclaimed after the42-day period are to be transferred to a special bank
account. Any money that remains unclaimed for seven years from the date of the
transfer is to be transferred by us to a fund created by the government of
India. No claims for the payment of dividends unpaid or unclaimed for a period
of seven years will lie against the fund of the government of India or against
us.
However, with respect to equity shares issued during a particular fiscal
year of our company, including equity shares underlying the ADSs to be issued
in this offering, cash dividends declared and paid for that fiscal year of our
company generally will be prorated from the date of issuance to the end of the
fiscal year of our
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company in which those shares are issued. This disparity in dividend treatment
increases the probability that the price of the ADSs may not trade on par with
the price of our equity shares as quoted on the stock exchanges in India on
which our equity shares are traded, and may reduce the liquidity of the ADSs.
Under Indian law, dividends may be paid out of our profits in the year in
which the dividend is declared, or out of our undistributed profits from
previous years. Before declaring a dividend greater than 10% of the par value
of our shares, we are required under Indian law, to transfer to our reserves a
minimum percentage of our profits for that year, ranging from 2.5% to 10%
depending upon the dividend percentage to be declared in that year.
Indian law further provides that, in the event of an inadequacy or absence
of profits in any year, we may declare a dividend for that year out of our
accumulated profits earned in previous years and transferred to our reserves,
subject to the following conditions:
. the rate of dividend to be declared may not exceed 10% of our paid-in
capital or the average of the rate at which dividends were declared by
us in the prior five years, whichever is less;
. the balance of reserves after withdrawals shall not fall below 15% of
our paid-in capital; and
. the total amount to be drawn from the accumulated profits earned in the
previous years and transferred to our reserves may not exceed an amount
equivalent to 10% of our paid-in capital and free reserves, and the
amount so drawn is to be used first to set off our losses incurred in
the fiscal year before any dividends are declared.
In addition, dividends declared, distributed or paid by us are currently
subject to a tax of 11%. The government of India, however, has recently
proposed legislation that would increase the dividend distribution tax to 22%.
This tax is neither paid by shareholders nor is it a withholding requirement,
but rather it is a direct tax payable by the corporation. We have declared and
paid cash dividends totaling 1.25 Indian rupees per equity share in 1998 and
1.75 Indian rupees per equity share in 1999 (approximately $0.03 per share and
$0.04 per share, respectively). Although we intend to continue dividend
payments, we cannot assure you that any future dividends, will be declared or
paid or what the amount of those dividends may be. To the extent we do pay
dividends these dividends will be taxed as described above, in addition to any
other tax payable on dividends by holders of our ADSs. For additional
information, please see "Risk Factors--Requirements under Indian law relating
to the payment of dividends may reduce the value of equity shares underlying
the ADSs" and "Dividend Policy".
Bonus Shares
In addition to permitting dividends to be paid out of current or retained
earnings as described above, Indian law permits our board of directors to
distribute an amount transferred from our general reserve or surplus in our
profit and loss account to our shareholders in the form of bonus shares
(similar to a stock dividend). Indian law also permits the issuance of bonus
shares from a share premium account (additional paid-in capital). Bonus shares
are distributed to shareholders based on the recommendation of our board of
directors and in proportion to the number of equity shares each shareholder
owns. The distribution of bonus shares is subject to the approval of our
shareholders at a general meeting. Shareholders of record on a fixed record
date are entitled to receive the bonus shares.
Pre-emptive Rights and Issuance of Additional Shares
Under current Indian law, we must offer holders of our equity shares pre-
emptive rights to purchase a proportionate number of shares to maintain their
existing ownership percentages prior to the issuance of any new equity shares,
unless the pre-emptive rights have been waived by a special resolution passed
by three-fourths of our shareholders present and voting at a general meeting.
If the special resolution is not approved,
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we must first offer the new equity shares to our existing shareholders as of a
specified record date. Our offer must include:
. a right, exercisable by our shareholders of record, to renounce the
shares offered in favor of any other person acceptable to our board of
directors; and
. the number of shares offered and the deadline for accepting our offer,
which can not be less than 15 days from the date of the offer.
If the offer is not accepted by the shareholder before the deadline then it
is deemed to have been declined. Indian law and our charter authorize our board
to distribute any new shares not purchased by the holders of pre-emptive rights
in any manner that it considers to be most beneficial to our company.
To the extent that pre-emptive rights are granted, U.S. holders of the ADSs
may be unable to exercise pre-emptive rights for equity shares underlying the
ADSs unless approval of the Ministry of Finance of the government of India is
obtained and a registration statement under the United States Securities Act of
1933 is effective with respect to such rights or an exemption from the
registration requirements of the Securities Act is available.
We intend to evaluate at the time of any rights offering the costs and
potential liabilities associated with filing a registration statement, as well
as the benefits of enabling holders of the ADSs to exercise their pre-emptive
rights. We cannot assure you that we will file any such registration statement
or otherwise seek the approval of the government of India.
Whenever we intend to offer pre-emptive rights, we will notify the
depositary in advance and will indicate whether we wish such offer to be made
to you. If so, we will assist the depositary in determining whether such
distribution to holders is lawful and reasonably practicable.
The distribution will be made net of fees, expenses, taxes and governmental
charges payable by holders under the terms of the deposit agreement. In order
to pay such taxes and governmental charges, the depositary may sell all or a
portion of the property received. Holders of the ADSs may be unable to exercise
pre-emptive rights, in which case the proportional interests of such holders in
our company would be reduced. For additional information, please see "Risk
Factors--Pre-emptive rights in respect of the equity shares underlying the ADSs
may be unavailable to United States holders, which would reduce their
proportional ownership interests in the company" and "Description of American
Depositary Shares--Dividends and Distributions".
For the ADS offering contemplated by this prospectus and the issuance of the
underlying equity shares, our existing shareholders have waived their pre-
emptive rights.
General Meetings of Shareholders
We must convene an annual general meeting of our shareholders within six
months after the end of each fiscal year. We may convene an extraordinary
general meeting of our shareholders when necessary, or at the request of any
shareholder or shareholders holding voting securities with an aggregate value
of at least 10% of our paid-in capital. Our annual general meeting is generally
convened by our secretary in accordance with a resolution of our board of
directors. Written notice describing the agenda of our shareholders' meetings
must be given to our shareholders of record at least 21 days (excluding the
days of mailing and receipt) before the applicable meeting. You will be
entitled to attend or vote at our general meetings provided that you are
registered as a shareholder on the date of the applicable meeting.
Our annual general meetings must be held at our registered office, or at
such other place within the same city. Our registered office is located in
Mumbai (Bombay), in the State of Maharashtra, India. Meetings other than our
annual general meetings may be held at any other place designated by our board
of directors.
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The quorum requirements in our charter documents require that at least five
shareholders attend our general meetings in person.
Voting Rights
At any general meeting, voting is by show of hands unless a poll is demanded
by a shareholder or shareholders present in person or by proxy holding:
. at least 10% of the total shares entitled to vote at the general
meeting; or
. shares with an aggregate paid-in capital of at least Rs. 50,000.
Upon a show of hands, every shareholder entitled to vote and present in
person has one vote. On a poll, every shareholder entitled to vote and present
in person or by proxy has voting rights in proportion to the paid-in capital
held by that shareholder. The chairman of our board of directors has a deciding
vote in the case of any tied vote. For a description of voting of ADSs, please
see "Description of American Depositary Shares--Voting Rights".
Any of our shareholders may appoint a proxy. The instrument appointing a
proxy must be delivered to us at least 48 hours prior to the applicable
meeting. A proxy may not vote except on a poll. A corporate shareholder may
appoint an authorized representative who can vote on behalf of the shareholder,
both upon a show of hands and upon a poll.
Ordinary resolutions may be passed by a simple majority of the shareholders
present and voting at any properly called general meeting. Certain actions must
be approved by resolutions which have been passed by the affirmative vote,
whether by show of hands or poll, of not less than three times the number of
votes, if any, cast against the resolution. The relevant actions, among others,
include:
. amendments to our charter documents;
. commencement of a new line of business;
. waiver of pre-emptive rights for the issuance of any new equity shares;
and
. reduction of our share capital.
Register of Shareholders and Record Dates
We maintain a register of our shareholders in Mumbai (Bombay). For the
purpose of determining the shares that are entitled to annual dividends, the
register is closed for a specified period prior to the annual general meeting.
The date on which this period begins is the record date.
To determine which shareholders are entitled to certain shareholder rights,
we may close the register of shareholders in accordance with the applicable
resolution of our board of directors. Under Indian law, we are required to give
at least 42 days prior notice to the exchanges and at least seven days prior
notice to the public before we may close the register of our shareholders. We
may not close the register of our shareholders for more than 30 consecutive
days or more than 45 days in a year. Trading of our equity shares may, however,
continue while the register of our shareholders is closed.
Transfer of Shares
Our company has its equity shares publicly listed in India and our shares
are freely transferable in India, subject only to the provisions of Section
111A of the Indian Companies Act, 1956. Recently, the Securities and Exchange
Board of India has mandated that all our equity shares be traded only in
electronic form. As a result, all the trading and settlement in our equity
shares will be done only through a dematerialized mode. However,
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this procedure is not applicable to off-market transactions which are not
required to be reported to the stock exchange.
Equity shares transferred electronically require that both the transferor
and transferee have an account with the depository participants. Charges for
opening and maintaining an account vary with each depository participant. The
depository transfers shares by entering the name of the purchaser in its books
as the beneficial owner of the shares. In turn we enter the name of the
depository in our records as the registered owner of the securities. The
beneficial owner is entitled to all the rights and benefits as well as the
liabilities with respect to the securities that are held by the depository.
Transfer of beneficial ownership through a depository is exempt from any stamp
duty.
Our charter documents currently contain provisions which give our directors
discretion to refuse to register a transfer of equity shares if they have
sufficient cause. If we refuse to register a transfer of equity shares without
sufficient cause, within two months from the date on which the application for
such transfer is made, the transferee may appeal to the Company Law Board, a
statutory body, to direct us to register the transfer.
Where any transfer of shares is alleged to have been made in contravention
of any of the provisions of the Securities and Exchange Board of India Act,
1992, the Sick Industrial Companies (Special Provisions) Act, 1985 or any other
Indian law, we, the depository, investors or the Securities and Exchange Board
of India may file an application with the Company Law Board for the
rectification of our register of shareholders or the depository's records. The
Company Law Board, after making the necessary inquiry, may direct us or the
depository to rectify our register of shareholders or the depository's records.
The Company Law Board may, in its discretion, issue an interim order
suspending the voting rights attached to the relevant shares before making or
completing its investigation into the alleged contravention. Despite this
investigation, the rights of a shareholder to transfer the shares will not be
restricted.
Under Indian law, unless the shares of a company are held in dematerialized
form, a transfer of shares is effected by executing a transfer instrument in
the form prescribed by the Indian Companies Act, 1956 and the rules thereunder
together with the delivery of the share certificates representing the
transferred shares. Our transfer agent in India is Intime Spectrum Registry
Private Limited, Mumbai (Bombay), Maharashtra, India.
We have entered into listing agreements with The Stock Exchange, Mumbai, the
Madras Stock Exchange Ltd., Chennai and The Stock Exchange, Ahmedabad. Clause
40A of the listing agreement for The Stock Exchange, Mumbai provides that if an
acquisition of our shares results in the acquiring person and its associates
holding 5% or more of our outstanding equity shares or voting rights, the
acquiring person must report its holding to us and the exchange.
Certain provisions under Indian law may have the effect of delaying,
preventing or making more difficult an acquisition or merger of our company
even if the acquisition or merger is beneficial to our shareholders. Indian law
requires any person who acquires 5% or more of our equity shares to disclose
the same to each stock exchange on which our shares are listed. In addition, if
any person and its associates acquires more than 15% of our equity shares, that
person must publicly offer to acquire another 20% of our equity shares.
However, no public offer is required if a person who holds between 15% and 75%
of our equity shares does not acquire more than an additional 5% of our equity
shares in any 12-month period. These requirements do not apply to the
acquisition of ADSs, but will apply upon the conversion of ADSs into equity
shares. For additional information, please see "Description of American
Depositary Shares".
Disclosure of Ownership Interest
Section 187C of the Indian Companies Act, 1956 requires beneficial owners of
our shares who are not holders of record to declare to us details regarding the
holder of record and the holder of record to declare details regarding the
beneficial owner. Any lien, promissory note or other collateral agreement
created, executed or entered into with respect to any equity share by its
registered owner, or any hypothecation by the
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registered owner of any equity share will not be enforceable by the beneficial
owner or any person claiming through the beneficial owner if the required
declaration is not made.
Failure to comply with Section 187C will not affect our obligation to
register a transfer of shares or to pay any dividends to the registered holder
of any equity shares pursuant to which the declaration has not been made, but
any person who fails to make the required declaration within 30 days may be
liable for a fine of up to Rs. 1,000 for each day the declaration is not made.
In the absence of any specific exemption granted by the Department of Company
Affairs with respect to the application of this provision to the holders of
ADSs, the reporting requirements under this section would apply to the holders
of the ADSs and investors who exchange ADSs for the underlying equity shares.
Any person who fails to comply with the provisions of the section, is liable to
punishment with a fine which may extend to a sum of Rs. 1000 for every day
during which the failure continues. In addition, if the Company fails to comply
with the provisions of this section, then the Company and every officer of the
Company who is in default, is liable to pay a fine which may extend to Rs. 100
for every day during which the default continues. Additionally, holders of ADSs
may be required to comply with the notification and disclosure obligations
pursuant to the provisions of the deposit agreement to be entered into by the
holders, our company and the depositary. See "Description of American
Depositary Shares".
Audit and Annual Report
At least 21 days (excluding the days of mailing and receipt) before the
annual general meeting of our shareholders, we must distribute an abridged
version of our audited balance sheet and profit and loss account and the
related reports of our board of directors and the auditors to our shareholders
together with a notice convening the annual general meeting. We are also
required under Indian law to make available upon the request of any shareholder
a complete balance sheet and profit and loss account.
Under Indian law, we must file with the Registrar of Companies in Mumbai
(Bombay), India, our balance sheet and annual profit and loss account within 30
days of the conclusion of our annual general meeting. We must also file an
annual return containing a list of our registered shareholders or changes
thereto and other information within 60 days of the conclusion of that meeting.
The depositary will be named on this annual return as the registered
shareholder of the equity shares deposited with it which are represented by
ADSs.
Company Acquisition of its own Equity Shares
Under Indian law, approval of at least 75% of a company's shareholders
voting on the matter and approval of the High Court of the State in which the
registered office of the company is situated is required to reduce a company's
share capital. Pursuant to a recent amendment to the Indian Companies Act, 1956
a company may, under some circumstances, acquire its own equity shares without
seeking the approval of the High Court. However, a company would have to
extinguish the shares it acquired within seven days of the completion of the
buy-back. A company is not permitted to acquire its own shares for treasury
operations. An acquisition by a company of its own shares (without having to
obtain the approval of the High Court) must comply with prescribed rules,
regulations and conditions in the Indian Companies Act, 1956, and the
Securities and Exchange Board of India (Buy-back of Shares) Regulations, 1998
as amended in 1999, or Buy-back Regulations. The Buy-back Regulations apply
only to public companies listed on a recognized Indian stock exchange and will
therefore apply to us. However, our articles of association currently prohibit
us from buying back our own securities because they were adopted prior to the
insertion of Section 77A into the Indian Companies Act, 1956, which permits us
to buy-back our own shares. We may amend our articles of association to reflect
the new change of law in the Indian Companies Act, 1956, by a resolution passed
by three-fourths of our shareholders at a general meeting of our shareholders.
If we amend our articles of association, you may be eligible to participate
in a buy-back of equity shares in certain cases. You may acquire equity shares
by withdrawing your equity shares from the depositary and then selling those
equity shares back to us. You should note, however, that you are prohibited
from re-depositing those outstanding equity shares with the depositary and
receiving ADSs. For additional information, please see "Description of American
Depositary Shares--Withdrawal of Shares Upon Cancellation of ADSs" and "--
Issuance of ADSs Upon Deposit of Equity Shares".
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There can be no assurance that the equity shares offered by an ADS investor
in any buy-back of shares by us will be accepted by us. ADS investors are
advised to consult their Indian legal counsel prior to participating in any
buy-back by us.
Liquidation Rights
Subject to the rights of creditors, employees and holders of any equity
shares entitled to preferential liquidation rights, if any, in the event of the
winding-up of our company, holders of the equity shares are entitled to be
repaid the amounts of paid-in capital or credited as paid-in on such equity
shares. All surplus assets remaining after payments are made to the holders of
any preference shares at the commencement of the winding-up shall be paid to
holders of equity shares in proportion to their shareholdings.
DESCRIPTION OF AMERICAN DEPOSITARY SHARES
Morgan Guaranty Trust Company of New York will act as the depositary for the
ADSs pursuant to a deposit agreement. A copy of the deposit agreement is on
file with the Securities and Exchange Commission as an exhibit to a
registration statement on Form F-6. You may obtain a copy of the deposit
agreement from the Securities and Exchange Commission's Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549. The depositary's offices are
located at 60 Wall Street, New York, New York 10060. The deposit agreement is
governed by New York law. However, our obligations to the holders of our equity
shares will continue to be governed by the laws of India, which are different
from the laws of the United States. See "Enforcement of Civil Liabilities".
American Depositary Shares are frequently referred to as "ADSs" and represent
ownership interests in securities that are on deposit with the depositary. ADSs
are normally represented by certificates that are commonly known as American
Depositary Receipts or "ADRs". The depositary typically appoints a custodian to
safekeep the securities on deposit. In this case, however, the depositary is
initially acting as custodian.
We are providing you a summary description of the ADSs and your rights as an
owner of ADSs. Please remember that summaries by their nature lack the
precision of the information summarized and that a holder's rights and
obligations as an owner of ADSs will be determined by the deposit agreement and
not by this summary. We urge you to review the deposit agreement in its
entirety as well as the form of ADR attached to the deposit agreement.
Each ADS represents two of our equity shares on deposit with the custodian
bank. An ADS will also represent any other property received by the depositary
or the custodian on behalf of the owner of the ADS which has not been
distributed to the owners of ADSs because of legal restrictions or practical
considerations.
If you become an owner of ADSs, you will become a party to the deposit
agreement and therefore will be bound to its terms and to the terms of the ADR
that represents your ADSs. An ADS may be issued in either book-entry or
certificated form by the depositary. If an ADS is issued in book-entry form you
will receive periodic statements from the depositary showing your ownership
interest in the ADSs. The deposit agreement and the ADR specify our rights and
obligations as well as your rights and obligations as owner of ADSs and those
of the depositary. As a holder of ADSs you appoint the depositary to act on
your behalf in certain circumstances.
As an owner of ADSs, you may hold your ADSs either by means of an ADR
registered in your name on the books of the depositary or through a brokerage
or safekeeping account. If you decide to hold your ADSs through your brokerage
or safekeeping account, you must rely on the procedures of your broker or bank
to assert your rights as an ADS owner. Please consult with your broker or bank
to determine what those procedures are. This summary description assumes you
have opted to own the ADSs directly by means of an ADR registered in your name
and, as such, we will refer to you as the "holder". When we refer to "you", we
assume the reader owns new ADSs and will own ADSs at the relevant time.
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Dividends and Distributions
As an ADS holder, you will generally be entitled to receive dividends
payable in respect of the equity shares represented by your ADSs. The
depositary has agreed to pay cash dividends or other distributions it or the
custodian receives on the deposited equity shares, after it deducts expenses.
Your receipt of these distributions may be limited, however, by practical
considerations and legal limitations, as described below. Holders will receive
the distributions under the terms of the deposit agreement in proportion to the
number of ADSs held as of a specified record date.
As an ADS holder, you will receive only dividends prorated from the date of
issuance of the equity shares underlying your ADSs to the end of the fiscal
year of our company for which the dividends are declared and paid. As a result,
you will receive only a portion of dividends. This disparity in dividend
treatment increases the probability that the price of the ADSs may not trade on
par with the price of the equity shares as quoted on the stock exchanges in
India on which our equity shares are traded, and may reduce the liquidity of
the ADSs. ADSs withdrawn from the depositary in exchange for the underlying
equity shares prior to payment of the annual dividend will receive proceeds
reduced by the difference between the full dividend and the prorated dividend,
upon the sale of and payment for the underlying equity shares. See "Risk
Factors--Requirements under Indian law relating to the payment of dividends may
reduce the value of the equity shares underlying the ADSs" and "Description of
Our Equity Shares--Dividends".
Distributions of Cash
Whenever we make a cash distribution for the securities on deposit with the
custodian, we will notify the depositary. Cash dividends in respect of the
equity shares represented by your ADSs will be paid to the depositary in Indian
rupees. Upon receipt of the notice the depositary will arrange for the funds to
be converted into U.S. dollars and for the distribution of the U.S. dollars to
the holders. The conversion into U.S. dollars will take place only if
practicable and if the Indian rupees are transferable to the United States. The
amounts distributed to holders will be net of the fees, expenses, taxes and
governmental charges payable by holders under the terms of the deposit
agreement. In addition, before making a distribution the depositary will deduct
any taxes that are due. The depositary will apply the same method for
distributing the proceeds of the sale of any property held by the custodian in
respect of securities on deposit. If exchange rates fluctuate during a time
when the depositary cannot convert a foreign currency you may lose some or all
of the value of the distribution.
Distributions of Shares
Whenever we make a free distribution of equity shares for the securities on
deposit with the custodian, we will notify the depositary. Upon receipt of the
notice, the depositary will either distribute to holders new ADSs representing
the equity shares deposited, in which case each of the ADSs you hold will
represent rights and interests in the additional equity shares deposited. Only
whole new ADSs will be distributed. Fractional entitlements will be sold and
the proceeds will be distributed as in the case of a cash distribution.
The distribution of new ADSs will be made net of the fees, expenses, taxes
and governmental charges payable by holders under the terms of the deposit
agreement. In order to pay taxes or governmental charges, the depositary may
sell all or a portion of the new equity shares so distributed. No distribution
of new ADSs will be made if it would violate applicable law (e.g., the U.S.
securities laws) or if it is not practicable. If the depositary does not
distribute new ADSs as described above, it will sell the equity shares received
and will distribute the proceeds of the sale as in the case of a distribution
of cash.
Distributions of Rights
Whenever we intend to distribute rights to subscribe for additional equity
shares or other rights, we will give prior notice to the depositary and we will
assist the depositary in determining whether it is lawful and reasonably
practicable to distribute these rights.
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The depositary will establish procedures, subject to our providing all the
documentation contemplated in the deposit agreement to distribute rights to
subscribe for additional ADSs and to enable such holders to exercise such
rights if it is lawful and reasonably practicable to make the rights available
to holders of ADSs. You may have to pay fees, expenses, taxes and other
governmental charges to subscribe for the new ADSs upon the exercise of your
rights. The depositary is not obligated to establish procedures to facilitate
the distribution and exercise by holders of rights to purchase new equity
shares directly rather than new ADSs.
The depositary will not distribute the rights to you if:
. we fail to deliver satisfactory documents to the depositary; or
. it is not reasonably practicable to distribute the rights.
The depositary will sell the rights that are not exercised or not
distributed if such sale is lawful and reasonably practicable. The proceeds of
such sale will then be distributed to holders as in the case of a cash
distribution. If the depositary is unable to sell the rights, it will allow the
rights to lapse.
For specific information regarding pre-emptive rights, please see
"Description of our Equity Shares--Pre-emptive Rights and Issuance of
Additional Shares".
Other Distributions
Whenever we intend to distribute property other than cash, equity shares or
rights to purchase additional equity shares, we will notify the depositary in
advance. If so, we may assist the depositary in determining whether such
distribution to holders is lawful and reasonably practicable.
If it is reasonably practicable to distribute such property to you and if we
provide all of the documentation contemplated in the deposit agreement, the
depositary will distribute the property to the holders in a manner it deems
practicable.
Any U.S. dollars will be distributed by checks drawn on a bank in the United
States for whole dollars and cents (fractional cents will be withheld without
liability for interest and added to future cash distributions).
The depositary may not be able to convert any currency at a specified
exchange rate or sell any property, rights, shares or other securities at a
specified price and any of these transactions may not be completed within a
specified time period.
Changes Affecting Equity Shares
The equity shares held on deposit for your ADSs may change from time to
time. For example, there may be a change in nominal or par value, a split-up,
cancellation, consolidation or other reclassification of our equity shares or a
recapitalization, reorganization, merger, consolidation, liquidation,
receivership, bankruptcy or sale of all or substantially all the assets of the
Company.
If any such change were to occur, your ADSs would, to the extent permitted
by law, represent the right to receive the property received or exchanged in
respect of the equity shares held on deposit. The depositary may in these
circumstances deliver new ADSs to you or call for the exchange of your existing
ADSs for new ADSs. If the depositary may not lawfully distribute this property
to you, the depositary may sell this property and distribute the net proceeds
to you as in the case of a cash distribution. If the depositary does not choose
any of the above options, any of the cash, securities or other property it
receives will constitute part of the deposited securities and each ADSs will
then represent a proportionate interest in this property.
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Issuance of ADSs Upon Deposit of Equity Shares
The depositary will issue ADSs upon the deposit of equity shares or evidence
of rights to receive equity shares with the custodian. In the case of the ADSs
to be issued under this prospectus, we will arrange with the underwriters named
herein to deposit such equity shares. Except for equity shares deposited by us,
no equity shares may be deposited by persons located in India, residents of
India or for, or on the account of, such persons.
Equity shares deposited in the future with the custodian must be accompanied
by certain documents, including instruments showing that such equity shares
have been properly transferred or endorsed to the person on whose behalf the
deposit is being made. After the closing of the offering to which this
prospectus relates, unless otherwise agreed by the depositary and ourselves and
permitted by applicable law, only the following may be deposited with the
depositary or custodian: (1) equity shares issued as a dividend or free
distribution in respect of deposited securities; (2) equity shares subscribed
for or acquired by holders from us through the exercise of rights distributed
by us to such persons in respect of equity shares; and (3) securities issued by
us as a result of any change in par values, subdivision, consolidation and
other reclassification of deposited securities or otherwise. We will inform the
depositary if any of the equity shares permitted to be deposited do not rank
equally with the equity shares issued in this offering and the depositary will
arrange for the ADSs issuable with respect to such equity shares to be
differentiated from those issued in this offering until such time as they rank
equally with the equity shares issued in this offering.
The custodian will hold all deposited equity shares (including those being
deposited by or on our behalf in connection with the offering to which this
prospectus relates) for the account of the depositary. ADS holders thus have no
direct ownership interest in the equity shares and only have such rights as are
contained in the deposit agreement. The custodian will also hold any additional
securities, property and cash received on or in substitution for the deposited
equity shares. The deposited equity shares and any such additional items are
referred to as "deposited securities".
Upon each deposit of equity shares, receipt of related delivery
documentation and compliance with the other provisions of the deposit
agreement, including the payment of the fees and charges of the depositary and
any taxes or other fees or charges owing, the depositary will issue an ADR or
ADRs in the name of the person entitled thereto evidencing the number of ADSs
to which such person is entitled. Certificated ADRs will be delivered at the
depositary's principal New York office or any other location that it may
designate as its transfer office.
Withdrawal of Shares Upon Cancellation of ADSs
As a holder, you will be entitled to present your ADSs to the depositary for
cancellation and then receive the underlying equity shares at the custodian's
offices. At your risk, expense and request, the depositary may deliver the
underlying equity shares to a different place. In order to withdraw the equity
shares represented by your ADSs, you will be required to pay to the depositary
the fees for the cancellation of your ADSs and any charges and taxes payable
upon the transfer of the equity shares being withdrawn. You assume the risk for
delivery of all funds and securities upon withdrawal. Once canceled, the ADSs
will not have any rights under the deposit agreement.
If you hold an ADR registered in your name, the depositary may ask you to
provide proof of identity and genuineness of any signature and certain other
documents as the depositary may deem appropriate before it will cancel your
ADSs. The withdrawal of the equity shares represented by your ADSs may be
delayed until the depositary receives satisfactory evidence of compliance with
all applicable laws and regulations. Please keep in mind that the depositary
will only accept ADSs for cancellation that represent a whole number of
securities on deposit.
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You will have the right to withdraw the securities represented by your ADSs
at any time except for:
. temporary delays that may arise because (1) the transfer books for the
equity shares or ADSs are closed, or (2) equity shares are immobilized
on account of a shareholders' meeting or a payment of dividends;
. obligations to pay fees, taxes and similar charges; and
. restrictions imposed because of laws or regulations applicable to ADSs
or the withdrawal of securities on deposit.
Unless the applicable law changes, once withdrawn, shares may not be
redeposited under the deposit agreement. If you withdraw the shares evidenced
by your ADSs, a stamp duty of 0.5 percent of the market value of the shares
will be charged to you in respect of these withdrawn shares; provided however,
you will not be required to pay such stamp duty for the transfer of shares held
in dematerialized form. Any subsequent transfer of shares by you after your
withdrawal of your equity shares will require the approval of the government of
India, which approval must be obtained by your purchaser under the provisions,
of the Foreign Exchange Management Act, 1999, with effect from June 1, 2000
unless the transfer is on a stock exchange or in connection with an offer under
the Indian takeover regulations.
The deposit agreement may not be modified to impair your right to withdraw
the securities represented by your ADSs except to comply with mandatory
provisions of law.
You are currently prohibited from re-depositing your withdrawn equity shares
with the depositary and receiving ADSs.
Voting Rights
As a holder, you generally have the right under the deposit agreement to
instruct the depositary to exercise voting rights for the equity shares
represented by your ADSs. The voting rights of holders of equity shares are
described in "Description of our Equity Shares--Voting Rights".
At our request, the depositary will mail to you any notice of a
shareholders' meeting received from us together with information explaining how
to instruct the depositary to exercise the voting rights of the securities
represented by ADSs. If the depositary receives on a timely basis voting
instructions for a holder of ADSs, it will endeavor to vote the securities
representing the holder's ADSs in accordance with those voting instructions.
The ability of the depositary to carry out voting instructions, however, may
be limited by practical and legal limitations, such as time zone differences
and logistical problems, 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 in a timely manner. The depositary
will not itself exercise any voting discretion in respect of any deposited
securities. Neither the depositary nor its agents are responsible for any
failure to carry out any voting instructions, for the manner in which any vote
is cast or for the effect of any one vote. If no voting instructions have been
received by the depositary, the depositary will appoint a person designated by
us as proxy to vote the securities.
The depositary may, after consultation with us, if practicable, fix record
dates (which shall be as near as practicable to any corresponding record date
set by us) for the determination of the ADS holders who will be entitled:
. to receive a dividend, distribution or rights; or
. to give instructions for the exercise of voting rights at a meeting of
holders of equity shares or other deposited securities,
all subject to the provisions of the deposit agreement.
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For additional information, please see "Risk Factors--Holders of ADSs may be
restricted in their ability to exercise voting rights".
Reports and Other Communications
The depositary will make available for inspection by ADS holders any written
communications from us which are both received by the custodian or its nominee
as a holder of deposited securities and made generally available to the holders
of deposited securities. These communications will be furnished in English.
Fees and Charges
As an ADS holder, you will be charged a fee for each issuance of ADSs,
including issuances resulting from distributions of shares, rights and other
property, and for each surrender of ADSs in exchange for deposited securities.
The fee in each case is $5.00 for each 100 ADSs (or any portion less than 100)
issued or surrendered.
As an ADS holder you will also be responsible to pay certain fees and
expenses incurred by the depositary and certain taxes and governmental charges
such as:
. fees for the transfer and registration of equity shares (e.g. upon
deposit and withdrawal of equity shares);
. expenses incurred for converting foreign currency into U.S. dollars;
. expenses for cable, telex and fax transmissions and for delivery of
newly issued securities; and
. taxes and duties upon the transfer of securities (e.g. when equity
shares are deposited or withdrawn from deposit).
We have agreed to pay certain other charges and expenses of the depositary.
Note that the fees and charges you may be required to pay may vary over time
and may be changed by us and by the depositary. You will receive prior notice
of such changes.
Amendment and Termination
We may agree with the depositary to modify the deposit agreement at any
time, without your consent. We undertake to give holders 30 days prior notice
of any modifications that impose or increase any fees or charges (except for
taxes, transfer and registration fees, cable, telex or facsimile transmission
costs, delivery costs or other such expenses) or that would prejudice any of
their substantial rights under the deposit agreement (except in very limited
circumstances enumerated in the deposit agreement).
You will be bound by the modifications to the deposit agreement if you
continue to hold your ADSs after the modifications to the deposit agreement
become effective. Except as permitted by law, the deposit agreement cannot be
amended to prevent you from withdrawing the equity shares represented by your
ADSs. If a governmental body adopts new laws or rules which require the deposit
agreement or the ADSs to be amended, we and the depositary may make necessary
amendments, which could take effect before you receive notice thereof.
We have the right to direct the depositary to terminate the deposit
agreement at our request. The depositary must give notice to the holders at
least 30 days before termination.
Upon termination, the following will occur under the deposit agreement:
. for a period of six months after termination, you will be able to
request the cancellation of your ADSs and the withdrawal of the equity
shares represented by your ADSs and the delivery of all other property
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held by the depositary in respect of those equity shares. During this six
month period the depositary will continue to collect all distributions
received on the equity shares on deposit (i.e., dividends) but will not
distribute any property to you until you request the cancellation of your
ADSs; and
. after the expiration of this six month period, the depositary may sell
the securities held on deposit. The depositary will hold the proceeds
from this sale and any other funds then held for the holders of ADSs in
a non-interest bearing account. At that point, the depositary will have
no further obligations to holders other than to account for the funds
then held for the holders of ADSs still outstanding.
Books of Depositary
The depositary will maintain ADS holder records at its depositary office.
You may inspect such records at such office during regular business hours but
solely for the purpose of communicating with other holders in the interest of
business matters relating to the ADSs and the deposit agreement.
The depositary will maintain in New York facilities to record and process
the issuance, cancellation, combination, split-up and transfer of ADSs. These
facilities may be closed from time to time, to the extent not prohibited by
law.
Limitations on Obligations and Liabilities to ADS holders
The deposit agreement limits our obligations and the depositary's
obligations to you. Please note the following:
. we and the depositary are obligated only to take the actions
specifically stated in the depositary agreement without gross negligence
or bad faith;
. the depositary disclaims any liability for any failure to carry out
voting instructions, for any manner in which a vote is cast or for the
effect of any one vote, provided it acts in good faith and in accordance
with the terms of the deposit agreement;
. we and the depositary will not be obligated to perform any act that is
inconsistent with the terms of the deposit agreement;
. we and the depositary disclaim any liability if we are prevented or
forbidden from acting on account of any law or regulation, any provision
of any securities on deposit or by reason of any act of God or war or
other circumstances beyond our control;
. we and the depositary disclaim any liability by reason of any exercise
of, or failure to exercise, any discretion provided for by the deposit
agreement or in any provisions of the securities on deposit;
. we and the depositary further disclaim any liability for any action or
inaction in reliance on the advice or information received from legal
counsel, accountants, any person presenting equity shares for deposit,
any holder of ADSs or authorized representative thereof, or any other
person believed by either of us in good faith to be competent to give
such advice or information;
. we and the depositary may rely without any liability upon any written
notice, request or other document believed to be genuine and to have
been signed or presented by the proper parties;
. neither the depositary nor its agents have any obligation to appear in,
prosecute or defend any action, suit or other proceeding in respect of
any deposited securities or ADSs. We and our agents shall be obligated
to appear in, prosecute or defend any action, suit or other proceeding
in respect of any deposited securities or ADSs, which in our opinion may
involve us in expense or liability, only if indemnity satisfactory to us
against all expense (including fees and disbursements of counsel) and
liability is furnished, as often as we may require; and
. the depositary may own and deal in deposited securities and in ADSs.
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Disclosure of Interest in ADSs
We may, from time to time, request you and other holders and beneficial
owners of ADSs to provide information as to:
. the capacity in which you and other holders and beneficial owners own or
owned ADSs;
. the identity of any other persons then or previously interested in such
ADSs; and
. the nature of such interest and various other matters.
You agree to provide any information requested by us or the depositary
pursuant to the deposit agreement. The depositary has agreed to use reasonable
efforts to comply with written instructions received from us requesting that it
forward any such requests to you and other holders and beneficial owners and to
forward to us any responses to such requests to the extent permitted by
applicable law.
We may restrict the transfer of shares where any transfer might result in
contravention of applicable law or our organizational documents. We reserve the
right to instruct you to deliver your ADSs for cancellation and withdrawal of
the shares underlying your ADSs.
Pre-Release Transactions
The depositary may, in certain circumstances, issue ADSs before receiving a
deposit of equity shares or release equity shares before receiving ADSs. These
transactions are commonly referred to as "pre-release transactions". The
depositary may pre-release ADSs only if:
. the depositary has received collateral for the full market value of the
pre-released ADSs; and
. each recipient of pre-released ADSs agrees in writing that he or she
owns the underlying equity shares, assigns all rights in such shares to
the depositary, holds such shares for the account of the depositary and
will deliver such shares to the custodian as soon as practicable, and
promptly if the depositary so demands.
In general, the number of pre-released ADSs will not be more than 30% of all
ADSs outstanding at any given time. However, the depositary may change or
disregard such limit from time to time as it deems appropriate. The deposit
agreement limits the aggregate size of pre-release transactions and imposes a
number of conditions on such transactions (i.e., the need to receive
collateral, the type of collateral required, the representations required from
brokers). The depositary may retain the compensation received from the pre-
release transactions.
Taxes
You will be responsible for the taxes and other governmental charges payable
on the ADSs and the securities represented by the ADSs. We, the depositary and
the custodian may deduct from any distribution the taxes and governmental
charges payable by holders and may sell any and all property, including your
ADSs, on deposit to pay the taxes and governmental charges payable by holders.
You will be liable for any deficiency if the sale proceeds do not cover the
taxes and government charges that are due.
The depositary may refuse to issue ADSs, to deliver, transfer, split and
combine ADSs or to release securities on deposit until all taxes and charges
are paid by the applicable holder. The depositary and the custodian may take
reasonable administrative actions to obtain tax refunds and reduced tax
withholding for any distributions on your behalf. However, you may be required
to provide to the depositary and to the custodian proof of taxpayer status and
residence and such other information as the depositary and the custodian may
require to fulfill legal obligations. You are required to indemnify us, the
depositary and the custodian for any claims with respect to taxes based on any
tax benefit obtained for you.
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RESTRICTIONS ON FOREIGN OWNERSHIP OF INDIAN SECURITIES
General
Prior to June 1, 2000 foreign investment in Indian securities, including the
acquisition, sale and transfer of securities in Indian companies, was regulated
by the Foreign Exchange Regulation Act, 1973. With effect from June 1, 2000,
foreign investment in Indian securities is regulated by the provisions of the
Indian Foreign Exchange Management Act, 2000 and the accompanying rules and
regulations issued by the Reserve Bank of India and the notifications issued by
the Ministry of Finance. A summary of the foreign investment regime in India is
provided below.
ADR Guidelines
As a result of recent changes in Indian policy, Indian companies issuing
ADRs are no longer required to obtain the approval of the Ministry of Finance
or the Reserve Bank of India under the Issue of Foreign Currency Convertible
Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993,
as amended from time to time. However since this change was effected only
recently, and since we had applied for the "in-principle" approval of the
Ministry of Finance prior to the change being effected, we currently have
obtained the "in-principle" approval of the Ministry of Finance for the ADR
issue. As a result of these recent changes, we will not be required to obtain
either the final approval of the Ministry of Finance or the approval of the
Reserve Bank of India. However, we will be required to furnish full particulars
of the issue, including the underlying equity shares representing the ADRs to
the Ministry of Finance and the Reserve Bank of India within 30 days following
the completion of this offering. In addition, we will be required to furnish a
quarterly return in the prescribed form to the Reserve Bank of India within 15
days from the close of the calendar quarter.
We have applied to the Ministry of Finance for their approval for the issue
of ADR-linked stock options to our employees, directors, and officers of our
subsidiaries and associate companies.
The Issue of Foreign Currency Convertible Bonds and Ordinary Shares Scheme
is distinct from other policies described below relating to investments in
Indian companies by foreign investors.
Foreign Direct Investment
Previously, there were limits on foreign equity holdings in all Indian
companies. The Government of India formed the Foreign Investment Promotion
Board, or FIPB, to negotiate with large foreign companies wishing to make long-
term investments in India. Over time, the Government of India has relaxed the
restrictions on foreign investment.
Currently, subject to certain exceptions, and as a result of recent changes
in Indian policy, foreign direct investment and investment by individuals of
Indian nationality or origin residing outside India, or non-resident Indians,
and overseas corporate bodies at least 60% owned by such persons, or overseas
corporate bodies, in Indian companies would not require the prior approval of
either the FIPB or the Reserve Bank of India. Currently, any foreign direct
investment in our company would not require the prior approval of the FIPB,
unless the proposed foreign direct investment is in excess of Rs. 6.0 billion.
However, since the changes to Indian policy have been effected only recently,
and since we had already applied to the FIPB prior to these changes being
effected and since the foreign direct investment in Silverline pursuant to the
ADR issue is in excess of Rs. 6.0 billion, we have received the approval of the
FIPB for the proposed foreign investment in Silverline pursuant to the ADR
issue.
In cases where FIPB approval is obtained, no prior approval of the Reserve
Bank of India is required although a declaration in the prescribed form giving
details of the foreign investment, is required to be filed
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with the Reserve Bank of India once the foreign investment is made in the
Indian company. We have obtained the approval of the FIPB, a copy of which will
be made available for public inspection at our corporate office or provided
upon written request to our chief financial officer. As discussed above, we
will also be required to file a post-investment declaration with the Reserve
Bank of India.
In cases where approval of neither the FIPB or the RBI is required, a
declaration giving details of the foreign investment is required to be filed
with the Reserve Bank of India once the foreign investment is made in the
Indian company.
This discussion on the foreign direct investment regime in India applies
only to a new issue of shares made by Indian companies and does not apply to a
transfer of shares.
Investment by Non-Resident Indians and Overseas Corporate Bodies Owned At Least
60% By Non-Resident Indians
A variety of special methods for making investments in shares of Indian
companies are available to individuals of Indian nationality or origin residing
outside India, or non-resident Indians, and to overseas corporate bodies at
least 60% owned by such persons, or overseas corporate bodies. These methods
permit non-resident Indians and overseas corporate bodies to make portfolio
investments in shares and other securities of Indian companies on a basis not
generally available to other foreign investors. Apart from portfolio
investments in Indian companies, non-resident Indians and overseas corporate
bodies may also make foreign direct investments in Indian companies pursuant to
the foreign direct investment route.
Investment by Foreign Institutional Investors
In September 1992, the government of India issued guidelines which enable
foreign institutional investors, including institutions such as pension funds,
investment trusts, asset management companies, nominee companies and
incorporated/institutional portfolio managers, to make portfolio investments in
all securities of listed and unlisted companies in India. Under the guidelines,
foreign institutional investors must obtain an initial registration from the
Securities and Exchange Board of India and a general permission from the
Reserve Bank of India. However, since the Securities and Exchange Board of
India provides a single window clearance, a single application must be made to
the Securities and Exchange Board of India.
Foreign institutional investors are also required to comply with the
provisions of the Securities and Exchange Board of India (Foreign Institutional
Investors) Regulations, 1995, or foreign institutional investor regulations. A
registered foreign institutional investor may buy, subject to the ownership
restrictions discussed below, and freely sell securities issued by any Indian
company, realize capital gains on investments made through the initial amount
invested in India, subscribe to or renounce rights offerings for shares,
appoint a domestic custodian for custody of investments made and repatriate the
capital, capital gains, dividends, income received by way of interest and any
compensation received towards the sale or renunciation of rights offerings of
shares.
Apart from making portfolio investments in Indian companies as described
above, foreign institutional investors may make direct foreign investments in
Indian companies.
There is uncertainty under Indian law as to the tax regime applicable to
foreign institutional investors that hold and trade ADSs. Foreign institutional
investors are urged to consult with their Indian legal and tax advisors.
Ownership Restrictions
Portfolio investments in Indian companies
The Securities and Exchange Board of India and the Reserve Bank of India
regulations restrict portfolio investments in Indian companies by foreign
institutional investors, non-resident Indians and overseas corporate bodies,
all of which we refer to as foreign portfolio investors.
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Under current Indian law, foreign institutional investors in the aggregate
may hold no more than 24% of the equity shares of an Indian company, and non-
resident Indians and overseas corporate bodies in aggregate may hold no more
than 10% of the shares of an Indian company through portfolio investments. The
24% limit referred to above may be increased to 40% if the shareholders of the
company pass a special resolution to that effect. The 10% limit referred to
above may be increased to 24% if the shareholders of the company pass a special
resolution to that effect. The Reserve Bank of India also requires that no
single foreign institutional investor hold more than 10% of the shares of an
Indian company and that no single non-resident Indian or overseas corporate
body hold more than 5% of the shares of an Indian company.
Takeover code
Under the Securities and Exchange Board of India (Substantial Acquisition of
Shares and Takeovers) Regulations, 1997, or takeover code, upon the acquisition
of more than 5% of the outstanding shares or voting rights of a listed company
in India, a purchaser is required to notify the company and the company and the
purchaser are required to notify all the stock exchanges on which the shares of
such company are listed. Upon the acquisition of 15% or more of such shares or
voting rights, or a change in control of the company, the purchaser is required
to make an open offer to the other shareholders offering to purchase at least
20% of all the outstanding shares of the company at a minimum offer price as
determined pursuant to the takeover code. Since our company is a listed company
in India, the provisions of the takeover code will apply to us. However, the
provisions of the takeover code will apply to an ADS holder only once the
holder converts the ADSs into the underlying equity shares.
EXCHANGE CONTROLS
Restrictions on Conversion of Indian Rupees
There are restrictions on the conversion of Indian rupees into U.S. dollars.
Since August 1994, the government of India has substantially complied with its
obligations to the International Monetary Fund or IMF, under which India is
committed to refrain from using exchange restrictions on current international
transactions as an instrument in managing the balance of payments.
Restrictions on the Sale of the Equity Shares underlying the ADSs and the
Repatriation of Sale Proceeds
ADSs issued by Indian companies to non-residents have free transferability
outside India. However, a holder of our ADSs who converts their ADSs into
equity shares will be required to seek prior approval for the sale from the
Reserve Bank of India for the sale of such shares which are not:
. sold on a recognized Indian stock exchange; or
. sold pursuant to a tender offer under Indian law.
It is unlikely that the Reserve Bank of India will allow a sale price higher
than the market price of the equity shares.
In addition, foreigners other than registered foreign institutional
investors and non-resident Indians cannot purchase stock on Indian stock
exchanges. Further, there are clear limits to the number of shares that each
registered foreign institutional investors and non-resident Indians can acquire
in our company. However, subject to certain conditions, a non-resident can
transfer the equity shares to another non-resident without the prior approval
of the Reserve Bank of India.
For further information, please see "Restrictions on Foreign Ownership of
Indian Securities", "Exchange Controls" and "Government of India Approvals".
Further, equity shares received upon conversion of ADSs may not be traded on
The Stock Exchange, Mumbai, The National Stock Exchange or any other Indian
exchange on which our equity shares are traded, until those equity shares have
been listed on the applicable stock exchange, a process which we expect will be
completed shortly after this offering. However, we cannot
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assure you that this process will be completed in a timely manner, or at all.
Investors who seek to sell in India any equity shares withdrawn from the
depositary are allowed to convert the Indian rupee proceeds from the sale into
foreign currency and repatriate the foreign currency proceeds from India
through an authorized dealer without the approval of the Reserve Bank of India
provided such a sale is made on a recognized Indian stock exchange through a
registered Indian broker at prevailing market rates or if the sale is made
under the Takeover Regulations or the prior approval of the Reserve Bank of
India has been obtained for the sale of the equity shares. In such cases, the
sale proceeds may be repatriated after payment of applicable taxes and stamp
duties. For additional information, please see "Risk Factors--Your ability to
sell in India any of our equity shares received upon conversion of any ADSs may
be subject to delays if approvals required from the government of India and
listing on stock exchange is delayed" and "Taxation--Indian Taxation".
For further information, please see "Restrictions on Foreign Ownership of
Indian Securities", "Exchange Controls" and "Government of India Approvals".
Further, equity shares received upon conversion of ADSs may not be traded on
The Stock Exchange, Mumbai, The National Stock Exchange or any other Indian
exchange on which our equity shares are traded, until those equity shares have
been listed on the applicable stock exchange, a process which we expect will be
completed shortly after this offering. However, we cannot assure you that this
process will be completed in a timely manner, or at all.
Investors who seek to sell in India any equity shares withdrawn from the
depositary are allowed to convert the Indian rupee proceeds from the sale into
foreign currency and repatriate the foreign currency proceeds from India,
through an authorized dealer without the prior approval of the Reserve Bank of
India provided such a sale is made on a recognized Indian stock exchange
through a registered Indian broker at prevailing market rates or if the sale is
made under the Takeover Regulations or the prior approval of the Reserve Bank
of India has been obtained for the sale of the equity shares. In such cases,
the sale proceeds may be repatriated after payment of applicable taxes and
stamp duties. For additional information, please see "Risk Factors--Your
ability to sell in India any of our equity shares received upon conversion of
any ADSs may be subject to delays if approvals required from the government of
India and listing on stock exchange is delayed" and "Taxation--Indian
Taxation".
GOVERNMENT OF INDIA APPROVALS
We have obtained all necessary approvals from the Ministry of Finance and
the Ministry of Industry of the government of India for this offering. However,
we are required to furnish the full particulars of the issue to the Ministry of
Finance and the Reserve Bank of India within 30 days of the completion of this
transaction. We are also required to inform the Reserve Bank of India of any
repatriation of issue proceeds held abroad immediately on such repatriation and
file quarterly returns with the Reserve Bank of India within 15 days of the
close of the calendar quarter. Copies of the approvals from the Ministry of
Finance and the Ministry of Industry will be made available for public
inspection at our corporate office or provided upon written request to our
Chief Financial Officer.
On January 20, 2000, the Reserve Bank of India issued a notification under
the provisions of the Indian Foreign Exchange Regulation Act, 1973 ("FERA")
relaxing the requirement of prior approval for an Indian company issuing ADS,
provided that the issuing company is eligible to issue ADSs in terms of the
guidelines issued by the Ministry of Finance and the issuing company has the
necessary approval, if required, of the Ministry of Commerce and Industry. We
satisfy both the criteria mentioned above and hence we will not be required to
obtain the prior approval of the Reserve Bank of India for this offering.
Through this notification the Reserve Bank of India has also granted general
permission for the following:
. foreign investors, to acquire ADSs and equity shares issued by us;
. us to issue ADSs and to transfer and register the equity shares
represented by the ADSs issued by us in the name of the depositary or
its nominee;
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. us to remit dividends on the equity shares represented by ADSs at market
rates, when payable, through an authorized dealer, as and when due
subject to the payment of any applicable Indian taxes;
. us to issue any rights or bonus equity shares represented by the ADSs
issued by us;
. us to export equity shares from India for transfer outside of India upon
withdrawal from the depositary facility; and
. you to freely transfer the ADSs outside India between non-residents of
India, which transfers are subject to applicable foreign securities law.
The notification issued by the Reserve Bank of India on January 20, 2000
referred to above was issued under the FERA which has now been repealed
pursuant to the introduction of the Indian Foreign Exchange Management Act,
1999 ("FEMA"). The FEMA has been in effect since June 1, 2000. However, there
is a provision in the FEMA which states that even though the FERA was repealed
since June 1, 2000, any notification, order, notice or exemption granted under
FERA will, in so far it is not inconsistent with the provisions of the FEMA be
deemed to have been done or taken under the FEMA. In light of this, the
provisions of the notification dated January 20, 2000 referred to above is
still in force.
Transfers of equity shares in our company made by a person resident outside
India to a person resident in India, where such sales are not made on a
recognized Indian stock exchange through a registered Indian broker at
prevailing market rates, require the non-resident Indian to apply for Reserve
Bank of India approval by submitting a Form TS1. Form TS1 requires information
as to the transferor, transferee, the shareholding structure of our company,
the proposed sale price per share and other similar information. The price at
which the Reserve Bank of India would approve the transfer or sale would
generally be the market price of the shares because the sale at a price higher
than the market price of the shares would result in an outflow of foreign
exchange from India. Once approval of the Reserve Bank of India has been
received, the proceeds from such transfers may be transferred outside India
after payment of applicable taxes and stamp duties. For additional information,
please see "Taxation--Indian Taxation".
Any person resident outside India desiring to sell equity shares received
upon surrender of ADSs or otherwise transfer such equity shares within India
should seek the advice of Indian legal counsel as to the requirements
applicable at that time.
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TAXATION
Indian Taxation
General. The following discussion is based on the opinion of Nishith Desai
Associates, Mumbai (Bombay), India. This discussion of our principal Indian tax
consequences for holders of ADSs and equity shares received upon conversion of
equity shares by holders who are not a resident of India, whether of Indian
origin or not and resident employees of our company who receive employee stock
options linked to the ADSs pursuant to an employee stock option plan, or ESOP,
is based on the provisions of the Indian Income-tax Act, and the Issue of
Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary
Receipt Mechanism) Scheme, 1993, or the Foreign Currency Convertible Bonds and
Ordinary Shares Scheme. The Income-tax Act is amended every year by the Finance
Act.
This summary is valid as of the date of this prospectus and is not intended
to constitute a complete analysis of the individual tax consequences to non-
resident holders under Indian law for the acquisition, ownership and sale of
ADSs and equity shares. Personal tax consequences of an investment may vary for
non-resident holders in various circumstances and potential investors should
therefore consult their own tax advisers on the tax consequences of such
acquisition, ownership and sale, including specifically the tax consequences
under the law of the jurisdiction of their residence and any tax treaty between
India and their country of residence.
Residence. For purposes of the Indian Income-tax Act, an individual is
considered to be a resident of India during any fiscal year if he or she is in
India in that year for:
. a period or periods amounting to 182 days or more; or
. 60 days or more and, within the four preceding years has been in India
for a period or periods amounting to 365 days or more; or
. 182 days or more, in the case of a citizen of India or a person of
Indian origin living abroad who visits India and within the four
preceding years has been in India for a period or periods amounting to
365 days or more.
A company is a resident of India in any fiscal year if it is incorporated in
India or the control and the management of its affairs is situated wholly in
India in that year. Individuals and companies that are not residents of India
would be treated as non-residents for purposes of the Income-tax Act.
Taxation of Distributions. Pursuant to the Finance Act, 1997, dividends paid
to shareholders (whether resident in India or not) are not subject to
withholding tax because such tax has been abolished. However, the company that
pays a dividend is subject to a dividend distribution tax of 11% including the
presently applicable surcharge, on the total amount it distributes, declares or
pays as a dividend, in addition to normal corporation tax. The Indian Finance
Act, 2000 increases the dividend distribution tax to 22% commencing June 1,
2000.
In addition, any distribution of additional ADSs, equity shares or rights to
subscribe for equity shares made to non-resident or resident holders with
respect to ADSs or equity shares will not be subject to Indian tax.
Taxation of Capital Gains. The following is a brief summary of the taxation
of capital gains with respect to ADSs acquired by non-residents and our
employees. Long-term capital gains are gains upon the sale of equity shares
held for more than 12 months. Short-term capital gains are gains upon the sale
of equity shares held for 12 months or less. The relevant provisions are
contained in sections 45, 47(viia), 115AC and 115ACA of the Income Tax Act.
They are:
1. Any sale of ADSs by a non-resident outside India to another non-resident
is not regarded as a transfer, and therefore any realization of capital gains
therefrom, whether long-term or short-term, will not be taxable.
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2. Long-term capital gains realized on the sale of equity shares held by
non-residents obtained upon conversion of ADSs are taxed at the rate of 10%.
The Indian Finance Act, 2000 increases the rate of tax, in the case of non-
residents, other than companies, by a surcharge of 10% on such tax where the
total income exceeds $1,358 (Rs. 60,000) but does not exceed $3,370 (Rs.
150,000) and by a surcharge of 15% where the total income exceeds $3,370 (Rs.
150,000).
3. Short-term capital gains realized on the sale of equity shares held by
foreign companies obtained upon conversion of ADSs are taxed at the rate of
48%. The rate for non-resident individuals is 30%. The Indian Finance Act, 2000
increases the rate of tax by a surcharge of 10% where the total income exceeds
$1,358 (Rs. 60,000) but does not exceed $3,370 (Rs. 150,000) and by a surcharge
of 15% where the total income exceeds $3,370 (Rs. 150,000). These rates may be
reduced by an applicable tax treaty that India may have with the country of
residence of the seller.
4. Any long-term capital gains realized by our Indian resident employees
upon the sale of ADSs received pursuant to a notified stock option plan
pertaining to ADSs would be taxed at the rate of 11% inclusive of the surcharge
imposed on residents of India provided the plan complies with the government of
India's guidelines for ADS linked stock options. The Indian Finance Act, 2000
increases this rate to 11.5% for those employees whose income exceeds Rs.
150,000. Short-term capital gains realized by these employees would be taxed at
applicable rates up to a maximum of 33%. The Indian Finance Act, 2000 increases
the rate to 34.5% for those employees whose income exceeds Rs. 150,000. Our
employees who are not residents of India and who are rendering services outside
India would not be taxable under Section 115ACA but should be eligible for
benefits of Section 45 read with 47(viia) or Section 115AC described above.
The Issue of Foreign Currency Convertible Bonds and Ordinary Share Scheme
provides that if equity shares are sold on a recognized stock exchange in India
against payment in Indian rupees, the equity shares will no longer be eligible
for concessional tax treatment. Further, it is unclear as to whether the
concessional tax treatment under Sections 115AC and 115ACA and the Issue of
Foreign Currency Convertible Bonds and Ordinary Share Scheme is available to a
non-resident who acquires equity shares outside India from a holder of equity
shares after that holder receives the equity shares upon surrender of ADSs.
Nishith Desai Associates is therefore unable to give an opinion as to the issue
of concessional tax treatment.
Also, subscription rights or other rights attached to the ADSs are not
expressly covered by Section 115AC or 115ACA. It is therefore unclear, as to
whether capital gain derived from the sale of subscription rights or other
rights by a non-resident holder not entitled to an exemption under a tax treaty
or a resident holder to any non-resident outside India may be subject to Indian
capital gains tax. If such subscription rights or other rights are deemed by
the Indian tax authorities to be situated within India, the gains realized on
the sale of such subscription rights or other rights will be subject to Indian
taxation on capital gains.
Subject to any relief provided pursuant to an applicable tax treaty, any
gain realized on the sale of equity shares to an Indian resident or inside
India generally will be subject to Indian capital gains tax. The India-U.S.
Treaty does not provide an exemption from the imposition of Indian capital
gains tax. Under the Issue of Foreign Currency Convertible Bonds and Ordinary
Share Scheme, the purchase price of equity shares received in exchange for ADSs
will be the prevailing market price of the underlying shares on the date that
the depositary gives notice to the custodian of the delivery of the equity
shares in exchange for the corresponding ADSs. A non-resident holder's holding
period for purposes of determining the applicable Indian capital gains tax rate
in respect of equity shares received in exchange for ADSs commences on the date
of the notice of the redemption by the depositary to the custodian. However,
the Issue of Foreign Currency Convertible Bonds and Ordinary Shares Scheme does
not address this issue in the case of resident employees, and it is therefore
unclear as to when the holding period for the purposes of determining capital
gains tax starts for them.
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Withholding Tax. A buyer of equity shares from a non-resident holder will be
required to withhold tax in respect of the capital gains realized by the non-
resident holder upon the sale of the equity shares before remitting the sale
proceeds. In addition, the withholding tax rate varies depending on various
conditions.
Buy-Back of Securities. Indian companies are not subject to any tax in
connection with the buy-back of their shares. However, the shareholders (both
resident and non-resident) will be taxed on any gain at long-term or short-term
capital gains tax rates, as applicable. Our company would be required to deduct
tax in India in accordance with the capital gains tax liability of the
shareholder who is a non-resident.
Stamp Duty and Transfer Tax. Upon the issuance of the equity shares
underlying our ADSs, we will be required to pay a stamp duty of Rs. 1 per share
of the issue price of the underlying equity shares. A transfer of ADSs is not
subject to Indian stamp duty. However, upon the acquisition of equity shares
from the depositary in exchange for ADSs, the non-resident holder or the
resident employee, as the case may be, will be liable for Indian stamp duty at
the rate of 0.5% of the market value of the ADSs exchanged for equity shares. A
sale of equity shares by a non-resident holder or a resident employee will also
be subject to Indian stamp duty at the rate of 0.5% of the market value of the
equity shares on the trade date, although customarily such tax is borne by the
transferee. Transfers of equity shares in dematerialized form is currently not
subject to stamp duty.
Wealth Tax. The holding of the ADSs or the underlying equity shares will be
exempt from Indian wealth tax. ADS holders are advised to consult their own tax
advisers on this issue.
Gift Tax and Estate Duty. Indian gift tax was abolished as of October 1998.
Estate duty was abolished in India as of March 1985. However, we cannot assure
you that these taxes and duties will not be revived. ADS holders are advised to
consult their own tax advisors in this context.
Service Tax. Brokerage commissions paid to stockbrokers in connection with
the sale or purchase of shares is subject to a service tax of 5%. The
stockbroker is responsible for collecting the service tax from the stockholder
and paying it to the relevant authority.
Prospective purchasers should consult their own tax advisors with respect to
Indian and local tax consequences of acquiring, converting, owning or disposing
of equity shares or ADSs.
United States Federal Taxation
The following is a summary of the material U.S. federal income tax matters
that may be relevant with respect to the acquisition, ownership and sale of
equity shares or ADSs. This summary addresses the U.S. federal income tax
considerations of holders who are "United States persons" and holders who are
not "United States persons", in each case so long as they hold equity shares or
ADSs as capital assets. We refer to these persons as U.S. holders and non-U.S.
holders, respectively.
A United States person is:
. a citizen or resident of the United States under U.S. federal income tax
laws;
. a corporation or other entity taxable as a corporation organized under
the laws of the United States or any political subdivision of the United
States;
. an estate if its income is subject to U.S. federal income taxation
regardless of its source; and
. a trust if (1) a court within the United States is able to exercise
primary supervision over its administration and (2) one or more United
States persons have authority to control all substantial decisions of
the trust.
If a partnership holds equity shares or ADSs, the tax treatment of a partner
will generally depend upon the status of the partner and upon the activities of
the partnership. If you are a partner of a partnership holding equity shares or
ADSs, we suggest that you consult your tax advisor.
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This summary does not address tax considerations applicable to holders that
may be subject to special tax rules, such as:
. banks and financial institutions;
. insurance companies;
. dealers in securities or currencies;
. tax-exempt entities;
. persons that will hold equity shares or ADSs as a position in a
"straddle" or as part of a "hedging" or "conversion" transaction for tax
purposes;
. persons whose "functional currency" is not the U.S. dollar; or
. persons who actually or constructively own 10% or more of our equity
shares.
This summary is based on the tax laws of the United States as in effect on
the date of this prospectus and on United States Treasury Regulations in effect
(or, in certain cases, proposed) as of the date of this prospectus, as well as
judicial and administrative interpretations thereof available on or before such
date. All of the foregoing are subject to change, which change could apply
retroactively and could affect the tax consequences described below.
Ownership of ADSs. For U.S. federal income tax purposes, holders of ADSs
will be treated as the owners of equity shares represented by such ADSs.
Prospective purchasers should consult their own tax advisors with respect to
the U.S. federal, state, local and foreign tax consequences of acquiring,
owning or disposing of equity shares or ADSs.
Taxation of U.S. Holders
Dividends. Except as otherwise noted in the passive foreign investment
company discussion below, distributions of cash or property (other than equity
shares, if any, distributed pro rata to all our shareholders, including holders
of ADSs) with respect to equity shares will be includible in gross income by a
U.S. holder as foreign source dividend income at the time of receipt, which in
the case of a U.S. holder of ADSs generally will be the date of receipt by the
depositary, to the extent such distributions are made from our current and
accumulated earnings and profits (as determined under U.S. federal income tax
principles). If dividends are paid in Indian rupees, the amount of the dividend
distribution includible in the gross income of a U.S. holder will be in the
U.S. dollar value of the payments made in Indian rupees, determined at a spot
exchange rate between Indian rupees and U.S. dollars applicable to the date
such dividend is includible in the gross income of the U.S. holder, regardless
of whether the payment is in fact converted into U.S. dollars on such date.
Generally, gain or loss (if any) resulting from currency exchange fluctuations
during the period from the date the dividend is received to the date such
payment is converted into U.S. dollars will be treated as ordinary income or
loss. To the extent, if any, that the amount of any distribution by us exceeds
our current and accumulated earnings and profits as determined under U.S.
federal income tax principles, it will be treated first as a tax-free return of
the U.S. holder's tax basis in the equity shares or ADSs and thereafter as
capital gain. No dividends from us will be eligible for the dividends received
deduction generally allowed to corporate U.S. holders.
A U.S. holder will not be eligible for a foreign tax credit against its U.S.
federal income tax liability for Indian taxes paid by us unless it is a U.S.
corporation owning 10% or more of our voting stock.
U.S. holders should be aware that dividends paid by us generally will
constitute "passive income" or, in the case of certain U.S. holders, "financial
services income" for purposes of the foreign tax credit. The Code applies
various limitations on the amount of foreign tax credit that may be available
to a U.S. taxpayer. U.S. holders should consult their own tax advisors with
respect to the potential consequences of those limitations.
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Sale or Exchange of Equity Shares or ADSs. A U.S. holder generally will
recognize gain or loss on the sale or exchange of equity shares or ADSs equal
to the difference between the amount realized on such sale or exchange and the
U.S. holder's tax basis in the equity shares or ADSs, as the case may be.
Subject to the PFIC discussion below, such gain or loss will be a capital gain
or loss, and will be a long-term capital gain or loss if the equity shares or
ADSs, as the case may be, were held for more than one year. Gain or loss, if
any, recognized by a U.S. holder generally will be treated as U.S. source
passive income or loss for U.S. foreign tax credit purposes.
Passive Foreign Investment Company. A non-U.S. corporation will be
classified as a passive foreign investment company for U.S. federal income tax
purposes if it satisfies either of the following two tests:
. 75% or more of its gross income for the taxable year is passive income;
or
. on average for the taxable year by value (or, if we so elect, by
adjusted basis) 50% or more of its assets produce or are held for the
production of passive income.
We do not believe that we satisfy either of the tests for passive foreign
investment company status. Nonetheless, if we were to be a passive foreign
investment company for any taxable year, U.S. holders would be required to
either:
. pay an interest charge together with tax calculated at maximum ordinary
income rates on certain "excess distributions" (defined to include
certain distributions from us as well as gain on a sale or other
disposition of equity shares or ADSs);
. if a Qualified Electing Fund election is made, to include in their
taxable income their pro rata share of certain undistributed amounts of
our income; or
. if the equity shares are "marketable" and a mark-to-market election is
made, to mark-to-market the equity shares each taxable year and
recognize ordinary gain and, to the extent of prior ordinary gain,
ordinary loss for the increase or decrease in market value for such
taxable year.
Taxation of Non-U.S. Holders
Dividends. A Non-U.S. holder of equity shares or ADSs generally will not be
subject to U.S. federal income tax or withholding tax on dividends received on
equity shares or ADSs unless such income is effectively connected with the
conduct by such Non-U.S. holder of a trade or business in the United States but
may be subject to taxation of other countries. Prospective non-U.S. holders are
advised to consult their own tax consultants on this issue.
Sale or Exchange of Equity Shares or ADSs. A Non-U.S. holder of equity
shares or ADSs generally will not be subject to U.S. federal income or
withholding tax on any gain realized on the sale or exchange of such equity
shares or ADSs unless:
. such gain is effectively connected with the conduct by the Non-U.S.
holder of a trade or business in the U.S.; or
. in the case of any gain realized by an individual Non-U.S. holder, the
holder is present in the United States for 183 days or more in the
taxable year of such sale and certain other conditions are met.
Backup Withholding Tax and Information Reporting Requirements
Under current U.S. Treasury Regulations, dividends paid on equity shares or
ADSs, if any, generally will not be subject to information reporting and
generally will not be subject to U.S. backup withholding tax. Information
reporting will apply to payments of dividends on, and to proceeds from the sale
or redemption of, equity shares or ADSs by a paying agent (including a broker)
within the United States to a U.S. holder (other than an "exempt recipient",
including a corporation, a payee that is a Non-U.S. holder that provides an
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appropriate certification and certain other persons). In addition, a paying
agent within the United States will be required to withhold 31% of any proceeds
from the sale or redemption of equity shares or ADSs within the United States
to a holder (other than an "exempt recipient") if such holder fails to furnish
its correct taxpayer identification number or otherwise fails to comply with
such backup withholding requirements.
The above summary is not intended to constitute a complete analysis of all
tax consequences relating to ownership of equity shares or ADSs. Prospective
purchasers of ADSs offered by this prospectus should consult their own tax
advisors concerning the tax consequences of their particular situation.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our ADSs, and no
prediction can be made as to the effect, if any, that market sales of ADSs or
equity shares or the availability of ADSs or equity shares for sale will have
on the market price of the ADSs prevailing from time to time. Nevertheless,
sales of a substantial number of our equity shares in the public market
following this offering, whether such sales are made on the Indian stock
exchanges on which our equity shares are traded or into the United States
market by the conversion of our outstanding equity shares into ADSs, if
permitted in the future by the government of India, or the perception that such
sales could occur, could adversely affect the market price of the ADSs and
could impair our future ability to raise capital through the sale of our equity
securities. For additional information, please see "Risk Factors--There has
been no prior market for our ADSs and the initial public offering price may not
be indicative of future trading prices".
Upon completion of this offering, 73,200,000 equity shares will be issued
and outstanding, including 8,700,000 equity shares represented by 4,350,000
ADSs issued in connection with this offering. Of the 64,500,000 equity shares
issued and outstanding prior to the issuance of the ADSs, holders of
approximately 30,420,221 equity shares have agreed not to, without the prior
written consent of Salomon Smith Barney Inc., dispose of or hedge any of our
equity shares or ADSs for a period of 180 days following the date of this
prospectus. Of these 30,420,221 equity shares, our Chairman has pledged
6,500,000 under a loan and pledge agreement. The lender will not be subject to
the 180-day lockup and the pledged shares may be sold by the lender in the
event of a default under the loan and pledge agreement. There are no payments
due under the loan and pledge agreement until after the 180-day lockup expires.
Salomon Smith Barney Inc. in its sole discretion may release any of the
securities subject to these lock-up arrangements at any time without notice.
Substantially all our equity shares that are not subject to these lock-up
arrangements will be freely tradable in India immediately following this
offering. Upon expiration of the 180-day lock-up period, or earlier with the
required consent, substantially all our equity shares will be available for
sale on the Indian stock exchanges on which our equity shares are traded. Sales
of substantial amounts of equity shares, or the availability of such shares for
sale, could materially adversely affect the market price of the ADSs and could
impair our future ability to raise capital through the sale of our equity
shares. For additional information, please see "Risk Factors--Virtually all our
shares will be eligible for sale shortly after the offering and substantial
sales of our shares could cause our share price to fall".
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UNDERWRITING
The global offering consists of (1) a U.S. offering of an aggregate of
3,045,000 shares in the form of ADSs in the United States and Canada and (2) an
international offering of an aggregate of 1,305,000 shares in the form of ADSs
outside the United States, Canada and India. Salomon Smith Barney Inc. is the
global coordinator and bookrunner of this global offering.
Subject to the terms and conditions stated in the U.S. underwriting
agreement dated the date hereof, each U.S. underwriter named below has
severally agreed to purchase, and we have agreed to sell to such underwriter,
the number of ADSs set forth opposite the name of such underwriter.
<TABLE>
<CAPTION>
Number
of ADSs
---------
<S> <C>
Salomon Smith Barney Inc........................................... 2,283,750
ABN AMRO Incorporated.............................................. 609,000
Jefferies & Company, Inc........................................... 152,250
---------
Total............................................................ 3,045,000
=========
</TABLE>
Subject to the terms and conditions stated in the international underwriting
agreement dated the date hereof, each international underwriter named below has
severally agreed to purchase, and we have agreed to sell to such underwriter
the number of ADSs set forth opposite the name of such international
underwriter:
<TABLE>
<CAPTION>
Number
of ADSs
---------
<S> <C>
Salomon Brothers International Limited............................. 913,500
ABN AMRO Rothschild................................................ 261,000
CLSA Limited....................................................... 130,500
---------
Total............................................................ 1,305,000
=========
</TABLE>
The U.S. underwriting agreement and the international underwriting agreement
provide that the obligations of the underwriters to purchase the ADSs included
in the offering are subject to approval of certain legal matters by counsel and
to certain other conditions. The U.S. underwriters and the international
underwriters are obligated to purchase all the ADSs (other than those covered
by the over-allotment option described below) if they purchase any of the ADSs.
The offering price and aggregate underwriting discounts and commissions per
share for the U.S. offering and the international offering are identical. In
addition, the U.S. and the international offerings are each conditioned upon
the closing of the other.
The U.S. underwriters and the international underwriters propose to offer
some of the ADSs directly to the public at the public offering price set forth
on the cover page of this prospectus and some of the ADSs to certain dealers at
the public offering price less a concession not in excess of $1.05 per ADS. The
underwriters may allow, and such dealers may reallow, a concession not in
excess of $0.10 per ADS on sales to certain other dealers. If all of the ADSs
are not sold at the initial offering price, the representatives may change the
public offering price and the other selling terms. The representatives have
advised us that the underwriters do not intend to confirm any sales to any
accounts over which they exercise discretionary authority.
We have granted to the U.S. underwriters and the international underwriters
an option, exercisable for 30 days from the date of this prospectus, to
purchase up to 650,000 additional ADSs at the public offering price less the
underwriting discount. The U.S. underwriters and the international underwriters
may exercise this option solely for the purpose of covering over-allotments, if
any, in connection with this offering. To the extent such option is exercised,
each U.S. underwriter and international underwriter will be obligated, subject
to certain conditions, to purchase a number of additional ADSs approximately
proportionate to such U.S. underwriter's or international underwriter's initial
purchase commitment.
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At our request, certain of the underwriters have reserved up to 5% of the
ADSs for sale at the initial public offering price to persons who are our
directors, officers or employees, or who are otherwise associated with us and
our affiliates, and who have advised us of their desire to purchase such ADSs.
The number of ADSs available for sale to the general public will be reduced to
the extent of sales of these reserved ADSs. Any ADSs not so purchased will be
offered by the underwriters on the same basis as all other ADSs offered hereby.
We have agreed to indemnify those certain underwriters against certain
liabilities and expenses, including liabilities under the Securities Act of
1933, in connection with the sales of these reserved ADSs.
The underwriters for each of the offerings have entered into an agreement in
which they agree to restrictions on where and to whom they and any dealer
purchasing from them may offer ADSs. The U.S. and international underwriters
also have agreed that they may sell ADSs between their respective underwriting
syndicates. The number of ADSs actually allocated to each offering may differ
from the amount offered due to reallocation among the U.S. offering and the
international offering.
Our officers and directors and certain other stockholders of Silverline
Technologies Limited have agreed that, for a period of 180 days from the date
of this prospectus, they will not, without the prior written consent of Salomon
Smith Barney Inc., dispose of or hedge any equity shares or ADSs of Silverline
Technologies Limited or any securities convertible into or exchangeable for
such equity shares or ADSs. Of these 30,420,221 equity shares, our Chairman has
pledged 6,500,000 under a loan and pledge agreement. The lender will not be
subject to the 180-day lockup and the pledged shares may be sold by the lender
in the event of a default under the loan and pledge agreement. There are no
payments due under the loan and pledge agreement until after the 180-day lockup
expires. Salomon Smith Barney Inc. in its sole discretion may release any of
the securities subject to these lock-up agreements at any time without notice.
Prior to this offering, there has been no public market for the ADSs.
Consequently, the initial public offering price for the ADSs was determined by
negotiations among us and the representatives. Among the factors considered in
determining the initial public offering price were the price of Silverline
equity shares on The Stock Exchange, Mumbai, and our record of operations, our
current financial condition, our future prospects, our markets, the economic
conditions in and future prospects for the industry in which we compete, our
management, the economic conditions in and future prospects for the information
technology industry and currently prevailing general conditions in the equity
securities markets, including current market valuations of publicly traded
companies considered comparable to us. The prices at which the ADSs will sell
in the public market after this offering may be lower than the price at which
they are sold by the underwriters and an active trading market in the ADSs may
not develop and continue after this offering.
We have been approved to have our ADSs listed on The New York Stock Exchange
under the symbol "SLT", subject to official notice of issuance.
The following table shows the underwriting discounts and commissions to be
paid to the U.S. underwriters and the international underwriters by Silverline
in connection with this offering. These amounts are shown assuming both no
exercise and full exercise of the underwriters' option to purchase additional
ADSs.
<TABLE>
<CAPTION>
Paid by Silverline
---------------------
No Full
Exercise Exercise
---------- ----------
<S> <C> <C>
Per ADS................................................... $ 1.75 $ 1.75
Total..................................................... $7,612,500 $8,750,000
</TABLE>
In connection with the global offering, Salomon Smith Barney Inc. and
Salomon Brothers International Limited, on behalf of the underwriters, may
purchase and sell ADSs or equity shares in the open market. These transactions
may include over-allotment, covering transactions and stabilizing transactions.
Over-allotment involves syndicate sales of ADSs or equity shares in excess of
the number of ADSs to be purchased by the underwriters in the offering, which
creates a syndicate short position. Syndicate covering transactions involve
purchases of ADSs or equity shares in the open market after the distribution
has been completed in order to cover syndicate short positions. Stabilizing
transactions consist of certain bids or purchases of ADSs or equity shares made
for the purpose of preventing or retarding a decline in the market price of the
ADSs or equity shares while the offering is in progress.
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The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from an underwriter when Salomon
Smith Barney Inc., in covering syndicate short positions or making stabilizing
purchases, repurchases shares originally sold by that underwriter.
Any of these activities may cause the price of the ADSs or the equity shares
to be higher than the price that otherwise would exist in the open market in
the absence of such transactions. These transactions may be effected on The
Stock Exchange, Mumbai, the Madras Stock Exchange Ltd., Chennai and The Stock
Exchange, Ahmedabad on which we are listed and on The National Stock Exchange
and most other major exchanges in India on which our equity shares are also
traded and the New York Stock Exchange and, if commenced, may be discontinued
at any time.
Prior to this offering, Jefferies & Company, Inc. owned an aggregate of
approximately 4.79% of Silverline Holdings, Corp. equity shares. Jefferies &
Company, Inc. sold this interest in February, 2000. As a result, Jefferies &
Company, Inc. could be deemed to have a "Conflict of Interest" with us under
paragraph (b) (7) of Rule 2720 of the Conduct Rules of the National Association
of Securities Dealers, Inc., or the NASD. Accordingly, the representatives are
offering the ADSs in compliance with the applicable provisions of Rule 2720.
Subject to NASD review, Salomon Smith Barney Inc. proposes to act as "qualified
independent underwriter" for the purposes of this offering. The public offering
price of ADSs will be no higher than that recommended by the qualified
independent underwriter.
The representatives have performed certain investment banking and advisory
services for us from time to time for which they have received customary fees
and expenses. The representatives may, from time to time, engage in
transactions with and perform services for us in the ordinary course of their
business.
Silverline has agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, or to
contribute to payments the underwriters may be required to make in respect of
any of those liabilities.
LEGAL MATTERS
The validity of the ADSs offered by the Company by this prospectus will be
passed upon for the Company by Greenberg Traurig, LLP, special United States
counsel for the Company. The validity of the ADSs offered by the Company by
this prospectus, and certain other matters in connection with this offering,
will be passed upon for the Company by Sidley & Austin, special United States
counsel for the Company. The validity of the equity shares represented by the
ADSs offered by the Company by this prospectus and certain other Indian legal
matters will be passed upon by Nishith Desai Associates, Mumbai (Bombay),
India, Indian counsel for the Company. Certain matters in connection with this
offering will be passed upon on behalf of the underwriters by Cravath, Swaine &
Moore, United States counsel for the underwriters.
EXPERTS
Deloitte Haskins and Sells (a member firm of Deloitte Touche Tohmatsu),
independent auditors, have audited our consolidated financial statements at
December 31, 1998 and 1999, and for each of the years in the three-year period
ended December 31, 1999, as set forth in their report. We have included our
consolidated financial statements in this prospectus in reliance upon the
report of Deloitte Haskins and Sells, India, a member firm of Deloitte Touche
Tohmatsu, given upon the authority of such firm as experts in accounting and
auditing.
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WHERE YOU CAN FIND MORE INFORMATION
In accordance with the Securities Act of 1933, we have filed with the
Securities and Exchange Commission a registration statement on Form F-1, which
includes amendments, exhibits, schedules and supplements, with respect to the
ADSs and the underlying equity shares offered by this prospectus. This
prospectus, which constitutes a part of the registration statement, omits
certain parts of the registration statement in accordance with the rules and
regulations of the Securities and Exchange Commission. A related registration
statement on Form F-6 has also been filed to register our ADSs. Statements
made in this prospectus describing any contract, agreement or other document
referred to are not necessarily complete and are qualified in their entirety
by reference to each such contract, agreement or other document which is filed
as an exhibit to the registration statement.
For further information about our company, our equity shares and the ADSs,
please refer to the registration statement.
The registration statement including its exhibits and schedules may be
inspected without charge at:
. the principal office of the Securities and Exchange Commission located
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549; and
. the regional offices of the Securities and Exchange Commission located
at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New
York 10048.
Copies of the material may also be obtained by mail from the Public
Reference Branch of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Securities and
Exchange Commission also maintains a web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. We did not file
the registration statement electronically.
After the ADSs are listed on the New York Stock Exchange, Inc. information
concerning Silverline will also be available for inspection at the offices of
the exchange, 20 Broad Street, New York, New York 10005.
Information from Software Productivity Research may be obtained by
contacting them at (781) 273-0140.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. If
anyone provides you with different or inconsistent information, you should not
rely on it. We are not offering to sell ADSs and seeking offers to buy ADSs in
any jurisdiction where offers and sales are not permitted. You should not
assume that the information provided by this prospectus is accurate as of any
date other than the date on the front cover of this prospectus.
100
<PAGE>
REPORTS TO SECURITY HOLDERS
Upon consummation of this offering, we will become subject to the
information requirements of the Securities Exchange Act of 1934 that are
applicable to foreign private issuers. In accordance with these requirements,
we will file reports, including annual reports on Form 20-F, reports on Form 6-
K and other information with the Securities and Exchange Commission. These
reports and other information filed by us can be inspected and copied at the
public reference facilities maintained by the Securities and Exchange
Commission identified in this prospectus under "Where You Can Find More
Information". However, we currently do not file such reports electronically.
As a foreign private issuer, we will be exempt from the rules under the
Securities Exchange Act of 1934 regarding the delivery and content of proxy
statements. Our executive officers, directors and principal shareholders are
exempt from the reporting and short-swing profit recovery provisions contained
in Section 16 of the Securities Exchange Act of 1934.
Under the Exchange Act, we will not be required to publish consolidated
financial statements as frequently or as promptly as U.S. companies. However,
we will deliver to the depositary our annual reports, which will include annual
audited consolidated financial statements prepared in accordance with U.S.
GAAP, and quarterly reports, which will include unaudited quarterly
consolidated financial information prepared in accordance with U.S. GAAP. The
depositary has agreed with us that, upon our request, it will promptly mail
these reports to all registered holders of our ADSs. We will also furnish to
the depositary all notices of shareholders' meetings and other reports and
communications that are made generally available by us to our shareholders. The
depositary will arrange for the mailing of these documents to record holders of
our ADSs. For additional information, please see "Description of American
Depositary Shares" and "Where You Can Find More Information".
101
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of December 31, 1998, 1999 and March 31,
2000 (unaudited)......................................................... F-3
Consolidated Statements of Income for the Years Ended December 31, 1997,
1998, 1999 and the three-month period ended March 31, 2000 (unaudited)... F-4
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1998, 1999 and the three-month period ended March 31, 2000
(unaudited).............................................................. F-5
Notes to Consolidated Financial Statements................................ F-6
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Silverline Technologies Limited:
We have audited the accompanying consolidated balance sheets of Silverline
Technologies Limited and subsidiaries, as of December 31, 1999 and 1998 and the
related consolidated statements of income and cash flows for each of the years
in the three-year period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Silverline
Technologies Limited and subsidiaries as of December 31, 1999 and 1998 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States of America.
As described in Note 1, these consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America, which differ in certain material respects from the
generally accepted accounting principles in India, which form the basis of the
Company's general purpose financial statements.
DELOITTE HASKINS & SELLS
Place: Mumbai, India
Date: May 2, 2000
F-2
<PAGE>
SILVERLINE TECHNOLOGIES LTD AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Unaudited
December 31, December 31, March 31,
1998 1999 2000
------------ ------------ ------------
(in U.S. $)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 12,528,234 $20,661,829 $ 20,609,336
Accounts receivable--net............ 24,394,589 22,776,996 33,633,433
Unbilled project costs.............. 315,672 687,399 435,932
Prepaid expenses and other current
assets............................. 4,742,131 3,274,459 6,853,450
Deferred taxes...................... 287,724 362,743 362,743
------------ ----------- ------------
Total current assets.............. 42,268,350 47,763,426 61,894,894
Property, plant and equipment--net.... 21,021,891 34,596,930 34,185,532
Intangible assets--net................ 4,541,542 4,373,498 4,131,590
Deferred taxes........................ 74,175 109,493 109,493
Investments........................... 115,886 115,389 115,389
Other assets.......................... 1,253,304 686,770 688,020
------------ ----------- ------------
Total assets...................... $ 69,275,148 $87,645,506 $101,124,918
============ =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses........................... $ 3,452,342 $ 5,709,568 $ 7,139,820
Advance from customers.............. 7,072 14,893 --
Current portion of long-term debt
and capital lease obligation....... 1,473,290 2,150,382 2,052,107
Working capital facilities from
banks.............................. 10,770,515 6,925,504 11,716,438
Other accrued liabilities........... 4,781,844 3,888,085 3,112,114
------------ ----------- ------------
Total current liabilities......... 20,485,063 18,688,432 24,020,479
Long-term debt and capital lease
obligations.......................... 5,510,404 316,732 329,155
Commitments and contingencies......... -- -- --
Stockholders' equity:
Equity shares, $0.23 per share par
value--85,000,000 authorized as of
1999, 65,000,000 authorized as of
1998: issued and outstanding--
64,500,000 as of 1999 and March 31,
2000 42,449,970 as of 1998......... 13,237,731 18,305,532 18,305,532
Additional paid-in capital.......... 14,407,281 23,156,472 24,665,866
Accumulated other comprehensive
income/(expense)................... (3,546,454) (3,942,243) (4,061,122)
Deferred, stock-based compensation.. -- (2,164,486) (1,302,846)
Retained earnings................... 19,181,123 33,285,067 39,167,854
------------ ----------- ------------
Total stockholders' equity........ 43,279,681 68,640,342 76,775,284
------------ ----------- ------------
Total liabilities and
stockholders' equity............. $ 69,275,148 $87,645,506 $101,124,918
============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
SILVERLINE TECHNOLOGIES LTD AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1997, 1998, and 1999
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(in U.S. $) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenue................. $46,768,627 $60,219,458 $87,576,908 $16,996,795 $30,998,158
Cost of revenue......... 25,052,547 31,273,001 49,445,513 9,093,140 16,112,368
----------- ----------- ----------- ----------- -----------
Gross profit............ 21,716,080 28,946,457 38,131,395 7,903,655 14,885,790
----------- ----------- ----------- ----------- -----------
Operating expenses:
Selling, general and
administrative
expenses............. 10,342,019 11,316,545 13,140,710 2,564,259 5,688,153
Stock-based
compensation......... -- -- 532,065 -- 861,640
Depreciation and
amortization......... 4,944,901 4,414,991 4,095,227 1,024,093 939,462
----------- ----------- ----------- ----------- -----------
Total operating
expenses............... 15,286,920 15,731,536 17,768,002 3,588,352 7,489,255
----------- ----------- ----------- ----------- -----------
Operating income........ 6,429,160 13,214,921 20,363,393 4,315,303 7,396,535
Other income/(expense),
net.................... (878,155) (894,515) (1,379,763) (544,087) (283,755)
----------- ----------- ----------- ----------- -----------
Income before income
taxes and extraordinary
item................... 5,551,005 12,320,406 18,983,630 3,771,216 7,112,780
Provision for income
taxes.................. 1,215,757 1,481,606 2,808,449 598,061 1,229,993
----------- ----------- ----------- ----------- -----------
Income before
extraordinary item..... 4,335,248 10,838,800 16,175,181 3,173,155 5,882,787
Extraordinary item (net
of taxes).............. 10,105 -- 374,624 374,624 --
----------- ----------- ----------- ----------- -----------
Net income.............. $ 4,325,143 $10,838,800 $15,800,557 $ 2,798,531 $ 5,882,787
=========== =========== =========== =========== ===========
Earnings per equity
share before
extraordinary item
Basic:
Income before
extraordinary
item............... $ 0.10 $ 0.26 $ 0.28 $ 0.07 $ 0.09
Extraordinary item.. -- -- $ (0.01) $ (0.01) $ --
Net Income.......... $ 0.10 $ 0.26 $ 0.27 $ 0.06 $ 0.09
Diluted:
Income before
extraordinary
item............... $ 0.10 $ 0.19 $ 0.25 $ 0.05 $ 0.09
Extraordinary item.. -- -- $ (0.01) $ (0.01) --
Net Income.......... $ 0.10 $ 0.19 $ 0.24 $ 0.04 $ 0.09
Number of equity shares
used in computing
earnings per share
--Basic (weighted
average)............. 42,449,970 42,449,970 57,149,990 42,449,970 64,500,000
--Diluted............. 42,449,970 56,314,292 65,596,505 62,289,151 66,296,776
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
SILVERLINE TECHNOLOGIES LTD AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1997 1998 1999 1999 2000
----------- ----------- ------------ ----------- ------------
in U.S. $ (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From
Operating Activities:
Net income.............. $ 4,325,143 $10,838,800 $ 15,800,557 $ 2,798,531 $ 5,882,787
Adjustments to reconcile
net income to net cash
provided by operating
expenses
Stock-based
compensation.......... -- -- 532,065 -- 861,640
Extraordinary Item..... 10,105 -- 374,624 374,624 --
Depreciation and
amortization.......... 4,944,901 4,414,991 4,095,227 1,024,093 939,452
Deferred taxes......... (557,703) (270,328) (110,336) (56,746) --
Loss/(gain) on sale of
assets................ 30,575 -- (13,017) -- (444)
Changes in assets and
liabilities:
Decrease/(increase) in
accounts receivable... 2,508,683 (7,043,133) 1,617,593 (923,417) (10,856,437)
Decrease/(increase) in
unbilled project
costs................. 501,657 1,135,546 (371,727) (60,599) 251,467
Decrease/(increase) in
prepaid expenses and
other current
assets................ (1,271,297) 676,984 1,467,672 (25,998) (3,580,241)
Decrease /(increase)
in other assets....... 2,143,647 311,945 566,534 546,231 --
(Decrease)/increase in
accounts payable and
accrued expenses...... (1,046,541) 977,099 1,564,718 30,589 1,574,412
(Decrease)/increase in
advances from
customers............. (11,245) 2,221 7,821 2,944 (14,893)
(Decrease)/increase in
other accrued
liabilities........... 83,797 1,264,763 (893,760) 1,741,256 (920,131)
(Decrease)/increase in
deferred tax.......... (522,720) -- -- 74,175 --
----------- ----------- ------------ ----------- ------------
Net cash provided by
operating
activities........... 11,139,002 12,308,888 24,637,971 5,525,683 (5,862,388)
----------- ----------- ------------ ----------- ------------
Cash Flows From
Investing Activities:
Expenditure on plant and
equipment.............. (9,299,318) (4,591,731) (16,826,753) (6,921,890) (194,105)
Purchase of businesses,
net of cash acquired... (2,840,846) (2,257,467) -- -- --
Purchase of
investments............ 3,274,026 -- -- -- --
Proceeds from sale of
investments............ -- -- 42,638 -- --
Proceeds from sale of
plant and equipment.... 5,504,860 -- 10,688 -- 4,009
----------- ----------- ------------ ----------- ------------
Net cash (used in)
investing
activities........... (3,361,278) (6,849,198) (16,773,427) (6,921,890) (190,096)
----------- ----------- ------------ ----------- ------------
Cash Flows From
Financing Activities:
Proceeds
from/(repayment) of
long-term debt (net)... (2,873,588) 1,072,961 (4,542,821) (2,746,852) (85,852)
Line of credit payable.. 1,922,238 (90,403) (3,845,011) 4,041,103 4,790,934
Net proceeds from
issuance of common
stock.................. 1,752,165 -- 11,120,441 -- --
Advance from issue of
stock options.......... -- -- -- -- 1,672,394
ADS issue expenses...... -- -- -- -- (163,000)
Charges for prepayment
of loans............... (10,105) -- (374,624) (374,624) --
Payment of dividend..... (1,327,767) (1,276,351) (1,696,613) -- --
----------- ----------- ------------ ----------- ------------
Net cash provided
by/(used in)
financing
activities........... (537,057) (293,793) 661,372 919,627 6,214,476
----------- ----------- ------------ ----------- ------------
Effect of exchange rate
changes on cash and
cash equivalents....... (1,002,719) (580,933) (392,321) (259,004) (214,485)
----------- ----------- ------------ ----------- ------------
Net Change in Cash and
Cash Equivalents....... 6,237,948 4,584,964 8,133,595 (735,584) (52,493)
Cash and cash
equivalents at the
beginning of the year.. 1,705,322 7,943,270 12,528,234 12,528,234 20,661,829
----------- ----------- ------------ ----------- ------------
Cash and cash
equivalents at the end
of the year............ $ 7,943,270 $12,528,234 $ 20,661,829 $11,792,650 $ 20,609,336
=========== =========== ============ =========== ============
Supplementary
information of cash
transactions:
Cash paid during the
year for:
Interest............... $ 2,451,183 $ 1,576,125 $ 2,022,522 $321,642 $ 265,184
=========== =========== ============ =========== ============
Income taxes........... $ 251,066 $ 1,665,542 $ 1,733,478 $1,425,325 $ 1,594,391
=========== =========== ============ =========== ============
Supplementary disclosure
of non cash investing
and financing
activities:
Capital lease.......... $ 363,666 $ -- $ 239,649 $ -- $ 24,576
=========== =========== ============ =========== ============
Contingent payment--
Lorin Acquisition..... $ -- $ -- $ 692,508 $ -- $ 175,000
=========== =========== ============ =========== ============
The Company purchased
all of the common stock
of
Silverline Technologies
Inc.
Fair value of assets
acquired............. $44,332,960 $ -- $ -- $ -- $ --
=========== =========== ============ =========== ============
Issue of common stock
of the Company....... $44,332,960 $ -- $ -- $ -- $ --
=========== =========== ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
SILVERLINE TECHNOLOGIES LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1997, 1998 and 1999 (in US dollars).
Information as of March 31, 1999 and 2000 and for the three months ended March
31, 1999 and 2000 is unaudited
1. Summary of Significant Accounting Policies
The Company and its Business
Silverline Technologies Limited and subsidiaries formerly known as
Silverline Industries Limited (hereinafter referred to as the "Company"), is a
publicly traded corporate entity incorporated in India. The Company has a
wholly-owned foreign subsidiary, Silverline Technologies, Inc. ("STI"), a
Delaware corporation, that operates in the United States. STI has subsidiaries,
Silverline Technologies UK Limited and Silverline Technologies, Inc., Canada
that operate in the United Kingdom and Canada, respectively.
The Company is an Indian provider of information technology ("IT") services.
The Company's services are delivered either on a fixed-price, fixed-time or on
a time and materials basis. The Company's fiscal year end is March 31.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared on a
year end December 31 basis and are in accordance with the accounting principles
generally accepted in the United States of America.
On December 28, 1999, the Company acquired 100% of the stock of STI, an
entity that was then under common control with the Company. As such, the
acquisition of STI by the Company has been reflected in the consolidated
balance sheets, statements of operations and cash flows as of the earliest
periods presented in a manner similar to a business combination accounted for
as a "pooling-of-interest".
All significant inter-company transactions and accounts have been
eliminated. Assets and liabilities and revenue and expenses are recognized on
the accrual basis of accounting.
Uses of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenue and expenses during the reported period. Actual results could differ
from those estimates.
Revenue Recognition
The Company derives its revenues primarily from providing IT services and
developing software solutions. Revenue with respect to time and materials
contracts is recognized as and when related costs are incurred. Revenue with
respect to fixed-price, fixed-time contracts is recognized upon achievement of
specified milestones identified in the related contracts, which approximate the
percentage of completion method. Selling, general and administrative expenses
are charged to expense as incurred. Provisions for estimated losses on
incomplete contracts are recorded in the period in which such losses become
probable based on current estimates.
For fixed-price, fixed-time contracts, the Company measures the extent of
project progress based on the ratio of hours performed to date to estimated
total hours at completion. Throughout the life of the project, the Company
periodically reviews the extent of completion based on past experience and
detailed estimates of the remaining time and materials required. Revisions to
previously recognized revenue, giving effect to new information, are accounted
for in the period of change and subsequent periods. Clients generally consider
a project substantially complete upon delivery of the project report and
acceptance. Revenue associated with customer-approved change orders is
recognized upon completion of the related service.
F-6
<PAGE>
SILVERLINE TECHNOLOGIES LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accounting for Long-Lived Assets
The Company periodically evaluates the recoverability of its long-lived
assets and certain identifiable intangibles. Whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable, the assets are written down to their net realizable value. For
recoverability of the assets, the Company estimates the future cash flows
expected to be generated from those assets and their eventual disposition. If
the sum of the expected cash flows (undiscounted and without interest charges)
is less than the carrying amount of the asset, an impairment loss is
recognized. Measurement of an impairment loss for long-lived assets and
identifiable intangibles that the Company expects to hold and use is based on
the fair value of the asset.
Foreign Currency Translation
The functional currency of the Company is the Indian Rupee and the
functional currency of STI is the U.S. dollar. The accompanying financial
statements are reported in U.S. dollars. The translation of Indian Rupees into
U.S. dollars is performed for balance sheet accounts using exchange rates as of
the balance sheet date and at average monthly rates for revenue and expense
accounts for the respective years.
The gains and losses resulting from such translation are reported in
"accumulated other comprehensive income-expense" as a separate component of
stockholders' equity.
Earnings Per Equity Share
On January 1, 1997, the Company adopted SFAS No. 128, "Earnings Per Share".
In accordance with SFAS No. 128, basic earnings per equity share is computed
using the weighted average number of common shares outstanding during the
period. Diluted earnings per equity share is computed using the weighted
average number of common and dilutive common equivalent shares outstanding
during the period, using the treasury stock method for options and warrants,
except where the results would be anti-dilutive.
Income Taxes
Income taxes are accounted for using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
The measurement of deferred tax assets is reduced, if necessary, by a valuation
allowance for any tax benefits of which future realization is uncertain.
Fair Value of Financial Instruments
The carrying amounts reflected in the consolidated balance sheet for cash,
cash equivalents, accounts receivable, accounts payable and accrued expenses
approximate their respective fair values due to the short maturity of these
instruments. The Company's long-term debt is at a variable rate; therefore the
carrying amounts approximate fair value.
Concentration of Risks
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash equivalents and accounts receivable.
The Company's cash and cash equivalents are generally invested in corporations
and banks with high credit ratings and the Company performs periodic
evaluations of the relative credit standing of these institutions. The Company
establishes limitations on the maximum amount that may be invested in any
single entity and performs credit evaluation of customers to minimize credit
risk.
F-7
<PAGE>
SILVERLINE TECHNOLOGIES LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997, 1998 and 1999 the Company's two
largest clients, together accounted for approximately 46%, 45% and 45%,
respectively, of its revenues and individually accounted for approximately 26%
and 20%, and 29% and 16%, and 30% and 15%, respectively, for each of those
years.
Employee Benefit Plans
Provident and 401(k) Funds
All employees of the Company receive benefits from a provident fund, which
is a defined contribution plan. Both the employee and the employer each make
monthly contributions to the plan equal to 12% of the covered employee's basic
salary. The Company has no further obligations under the plan beyond its
monthly contributions.
STI provides a 401(k) defined contribution plan for all full-time employees
who are over the age of twenty-one and have completed six months of service.
Employees fully vest in matching contributions after five years of service.
Employees may contribute up to 15% of their salary to the Plan. The Company may
match 25% of the employee's contribution, up to a maximum of 6% of the
employee's annual salary.
Gratuity
In addition to the above benefits, the Company provides for gratuity, a
defined benefit retirement plan (the "Plan" or "Gratuity Plan"), covering all
Company employees. The Gratuity Plan commenced on March 1, 1998. The Plan
provides a lump sum payment to vested employees at retirement or termination of
employment in an amount based on the respective employee's salary and the years
of employment with the Company. The Company contributes each year to a gratuity
fund maintained by the Life Insurance Corporation of India ("LIC") based upon
actuarial valuations. No additional contributions were required to be made by
the Company in excess of the unpaid contributions to the Plan. The LIC has no
recourse to the Company in the event of any shortfall in its obligations to
vested employees and is entirely responsible for meeting all unfunded
liabilities. Consequently, all additional liabilities that may arise will be
borne by the LIC. Further, vested employees do not have any recourse to the
Company in the event the LIC does not fulfill its obligations to them. The
Company does not carry any pension liability in its financial statements and
has no further obligations under the Plan beyond its monthly contributions.
Superannuation
In addition to the Gratuity Plan described above, the senior officers of the
Company are also participants in a defined contribution plan maintained by the
LIC. The Company contributes a specified percentage of the employee's salary to
the fund. The Company has no further obligations beyond this contribution.
Cash, Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with maturities not
exceeding three months to be cash equivalents. Cash and cash equivalents
consist of cash, cash on deposit with banks and marketable securities.
The Company classifies its investments as either "Available for Sale", "Held
to Maturity" or "Trading". Available for sale securities are carried at fair
value based on quoted market prices with unrealized gains or losses shown as
"Accumulated Other Comprehensive Income." The cost of securities sold is based
on the specific identification method. Interest and dividends on securities
classified as available for sale are included in "Other Income/Expense".
Unbilled Project Costs
Unbilled project costs are valued at cost.
F-8
<PAGE>
SILVERLINE TECHNOLOGIES LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Investments
Investments are stated at fair market value. Unrealized loss in value is
recognized and shown as a reduction from the respective investment by
adjustment to "accumulated other comprehensive income".
Intangibles
Goodwill and other intangibles are amortized on the straight-line method.
Goodwill is amortized principally over a seven-year period. The non-compete
agreement is amortized over the contractual period of 80 months.
Research and Development
Research and development activities are integrated with the software
development process with the object of devising efficient methods of product
development. The Company has in place a quality assurance team intended to
ensure adherence to stringent quality norms. R & D expenditures are expensed as
incurred.
Employee Stock Options
The Company accounts for its employee stock options in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" under which deferred compensation expense is recorded on the date of
the grant only if the current market price of the stock exceeds the exercise
price of the options.
2. Cash and Cash Equivalents
Cash and cash equivalents are as follows:
<TABLE>
<CAPTION>
December 31, (Unaudited)
------------------------ March 31,
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Cash and checks on hand.................. $ 24,615 $ 19,960 $ 15,812
Balances with bank:
in current account..................... 8,067,316 5,554,151 3,236,604
in term deposit account................ 4,436,303 15,087,718 17,356,920
----------- ----------- -----------
Total................................ $12,528,234 $20,661,829 $20,609,336
=========== =========== ===========
3. Accounts Receivable
Accounts receivable are as follows:
<CAPTION>
December 31, (Unaudited)
------------------------ March 31,
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Accounts receivable...................... $24,556,009 $23,202,364 $34,103,140
Allowance for doubtful accounts.......... (161,420) (425,368) (469,707)
----------- ----------- -----------
Accounts receivable, net................. $24,394,589 $22,776,996 $33,633,433
=========== =========== ===========
4. Unbilled Project Costs
Unbilled project costs are as follows:
<CAPTION>
December 31, (Unaudited)
------------------------ March 31,
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Unbilled Project Costs................... $ 310,850 $ 687,399 $ 435,932
Other.................................... 4,822 -- --
----------- ----------- -----------
Total.................................. $ 315,672 $ 687,399 $ 435,932
=========== =========== ===========
</TABLE>
F-9
<PAGE>
SILVERLINE TECHNOLOGIES LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Prepaid expenses and other current assets
Prepaid expenses and other current assets are as follows:
<TABLE>
<CAPTION>
December 31, (Unaudited)
--------------------- March 31,
1998 1999 2000
---------- ---------- -----------
<S> <C> <C> <C>
Notes receivable.............................. $ 500,000 $ 500,000 $ 0
Deposits...................................... 1,497,007 742,283 527,452
Loans to employees............................ 250,365 86,195 129,768
Prepaid expenses.............................. 455,998 684,731 271,426
Other receivables............................. 1,840,029 959,086 5,093,552
Taxes receivable.............................. 198,732 302,164 831,252
---------- ---------- ----------
Total....................................... $4,742,131 $3,274,459 $6,853,450
========== ========== ==========
</TABLE>
On December 31, 1997, the Company sold to International Technologies
Ventures LLC ("ITV") rights to software products, computer equipment and the
intellectual property rights, if any, which the Company may have developed,
and may in the future develop, in connection with specific projects. Under the
terms of the sale agreement, ITV issued a promissory note to STI for
$1,500,000. Additionally, STI has agreed to provide support services for two
years by providing upgrades and enhancements as well as the support of ITV's
sales efforts. ITV is a start-up corporation and future payments of the notes
are dependent on the cash flow from operating profits of ITV.
At December 31, 1999, notes receivable are from ITV in conjunction with the
purchase of these assets. The note bears interest at a rate of 8.5% and is
payable in two annual principal installments due as follows:
<TABLE>
<S> <C>
December 31, 2000 (classified as a current asset at December
31, 1999)..................................................... $ 500,000
December 31, 2001.............................................. 500,000
----------
$1,000,000
==========
</TABLE>
The carrying value of the note exceeded the fair value at December 31, 1999
by approximately $25,000.
Deposits represent advances to the Indian government for electricity and
other utility services.
Other receivables include accrued interest on deposits and advances to
vendors of services.
Taxes receivable represent withholding tax deducted by various authorities
in India on the income received by the Company. These amounts are recoverable
from the revenue authorities.
6. Income Taxes
No provision for income tax has been considered on profits derived from
"export processing zones" ("EPZ's") and "100% export oriented units" ("EOU's")
in India as such profits are exempt from Indian tax. Since most of the
Company's income generated in India will be free of tax under the Indian
Income Tax Laws for the ten-year period ending March 2003 in the case of EPZ's
and March 2004 in the case of EOU's based on existing tax legislation, no
deferred tax has been recognized in the financial statements. In addition,
after the expiry of the above tax exemption period, the company can avail
itself of tax deductions in a phased manner up to a period ending March 2005
on the export of its software services. For the Company's two new software
development facilities commissioned in July 1999 and February 2000 under the
Software Technology Parks of India Scheme (STP), the tax exemption benefits
will be available until March 2009.
F-10
<PAGE>
SILVERLINE TECHNOLOGIES LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Three Months Ended
For the Year Ended March 31,
---------------------------------- -----------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Current:
Local................. $ 54,750 $ (4,647) $ -- -- --
Foreign............... 1,718,710 1,756,581 2,918,785 868,389 $1,340,329
---------- ---------- ---------- -------- ----------
1,773,460 1,751,934 2,918,785 868,389 1,340,329
Deferred:
Foreign............... (557,703) (270,328) (110,336) (270,328) (10,336)
---------- ---------- ---------- -------- ----------
Provision for income
taxes.................. $1,215,757 $1,481,606 $2,808,449 598,061 1,229,993
========== ========== ========== ======== ==========
</TABLE>
The components of deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31
----------------- Unaudited
March 31,
1998 1999 2000
-------- -------- ---------
<S> <C> <C> <C>
Allowance for doubtful accounts receivable....... $ 64,697 $145,781 $145,781
Expenses currently not deductible................ 223,027 216,962 216,962
-------- -------- --------
Total current deferred tax assets................ $287,724 $362,743 $362,743
======== ======== ========
Fixed assets..................................... $ 53,239 $(54,917) $(54,917)
Goodwill and non-compete agreement............... 20,936 164,410 164,410
Net operating loss of consolidated subsidiary.... -- 67,350 67,350
-------- -------- --------
74,175 176,843 176,843
Less: valuation allowance........................ -- (67,350) (67,350)
-------- -------- --------
Net non-current deferred tax assets.............. $ 74,175 $109,493 $109,493
======== ======== ========
</TABLE>
The effective tax rate varies from the Indian statutory tax rate for the
years ended December 31, 1997, 1998 and 1999 as follows:
<TABLE>
<CAPTION>
For the Year Ended Unaudited
---------------------- -------------------
March 31, March 31,
1997 1998 1999 1999 2000
------ ------ ------ --------- ---------
<S> <C> <C> <C> <C> <C>
Statutory rate...................... 35.0% 35.0% 38.5% 35.0% 38.5
Indian tax holiday.................. (18.0) (24.4) (27.1) (20.3) (24.0)
U.S. state income taxes............. 2.4 2.1 2.0 2.0 2.0
Other............................... 2.5 (0.7) 1.4 (0.7) 0.8
------ ------ ------ ----- -----
Effective tax rate.................. 21.9% 12.0% 14.8% 16.0% 17.3%
====== ====== ====== ===== =====
</TABLE>
The Company has established a valuation allowance for the net operating loss
carryover of its Canadian subsidiary because it is more likely than not that
this carryover will not be realized. The Company has determined that as of
December 31, 1999 earnings of approximately $9,600,000 of which approximately
$450,000 were earned subsequent to the business combination described in Note
1, of its foreign subsidiaries will remain invested overseas for the indefinite
future. It is impractical to determine the ultimate tax effects of remittance
of those earnings.
F-11
<PAGE>
SILVERLINE TECHNOLOGIES LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Property, Plant and Equipment
Property, plant and equipment are as follows:
<TABLE>
<CAPTION>
December 31, (Unaudited)
-------------------------- March 31,
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Owned assets:
Land................................ $ 699,746 $ 706,067 $ 706,067
Buildings........................... 2,558,705 9,837,954 15,237,744
Furniture and fixtures.............. 3,981,455 5,764,101 5,770,430
Office equipment.................... 2,649,588 4,735,647 4,832,783
Computer equipment.................. 9,445,925 9,710,441 9,844,416
Vehicles............................ 264,963 225,287 238,409
Construction-in-progress............ 11,933,372 17,091,467 11,724,185
Leased Assets:
Land................................ 956,801 956,801 956,801
Vehicles............................ -- 230,986 230,985
Computer equipment.................. 393,517 393,517 393,517
Office equipment.................... 80,099 80,099 80,099
------------ ------------ ------------
Total................................. 32,964,171 49,732,367 50,015,436
Accumulated depreciation.............. (11,942,280) (15,135,437) (15,829,904)
------------ ------------ ------------
Net property, plant & equipment....... $ 21,021,891 $ 34,596,930 $ 34,185,532
============ ============ ============
</TABLE>
Depreciation expense for the years ended December 31, 1998 and 1999 and for
the three months ended March 31, 2000, aggregate to $3,815,065, $3,234,675 and
$697,544, respectively.
Property, plant and equipment are stated at cost less accumulated
depreciation. The Company computes depreciation for all property, plant and
equipment using the straight line method over the estimated useful lives of
assets, as follows:
<TABLE>
<S> <C>
Owned assets
Buildings....................... 40 years
Furniture and fixtures.......... 7 years
Computer equipment.............. 3 years
Office equipment................ 10 years
Vehicles........................ 5 years
</TABLE>
Leased assets
Land: amortized over the life of the lease.
Computer Equipment: amortized over the life of lease.
Vehicles: amortized over the life of lease.
During 1999, our capital expenditures totaled approximately $16.8 million,
including $2.7 million related to the construction and build-out of our new
facility at Thane, $12.0 million for the construction and build-out of our new
facility at Chennai, and $2.1 million for the construction of a residential
complex for employees constructed at Mumbai (Bombay).
8. Sale of Buildings & Other Assets and Sale/Lease Back
On December 31, 1997, the Company sold its New Jersey office building to
International Real Estate Ventures, LLC ("IREV"). Under the terms of the sale
agreements, IREV obtained a $4,000,000 mortgage from
F-12
<PAGE>
SILVERLINE TECHNOLOGIES LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Chase Manhattan Bank to finance the purchase price of $4,000,000. IREV is a
start-up corporation which will receive rents from STI and other tenants. STI
has entered into a sale and lease back of half its New Jersey office building
on December 31, 1997. The lease is classified as an operating lease. The annual
lease payment over the life of the lease is $480,000. In February 2000, IREV
sold the building to Silverline Holdings, Corp., the Company's major
shareholder.
9. Intangible Assets
On October 23, 1998, STI purchased substantially all the assets of Lorin
Management Services Inc., Lorimar Services Inc. and Nova Technical Services
Inc. for $2,257,467. STI entered into an eighty-month noncompete agreement with
the former owner of those businesses. This acquisition has been accounted for
as a purchase in accordance with Accounting Principles Board Opinion No. 16.
Results of operations since the acquisition date have been included in the
consolidated statement of income. The following table represents the allocation
of the purchase price:
<TABLE>
<S> <C>
Property, plant and equipment.................................... $ 18,215
Goodwill......................................................... 1,609,252
Non-compete agreement............................................ 630,000
----------
$2,257,467
==========
</TABLE>
The asset purchase agreement provides for contingent payments to the sellers
upon the achievement of certain financial performance measures through the year
2000. During the period ended December 31, 1999, STI accrued an additional
$692,508 relating to the achievement of these measures. Additional
consideration, if any, contingently issuable to the sellers in 2000 will be
recorded by the Company only after achievement of such financial performance
measures.
Intangible assets are as follows:
<TABLE>
<CAPTION>
December 31
------------------------
(Unaudited)
March 31,
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Goodwill............................... $ 5,038,170 $ 5,730,678 $5,730,678
Non-compete agreement.................. 630,000 630,000 630,000
Accumulated amortization............... (1,126,628) (1,987,180) (2,229,088)
----------- ----------- -----------
Total................................ $ 4,541,542 $ 4,373,498 $ 4,131,590
=========== =========== ===========
</TABLE>
Amortization expense for the years ended December 31, 1998 and 1999 and for
the three months ended March 31, 2000, was $599,926, $860,552 and $241,908,
respectively.
10. Related Parties
1. During 1997, STI made payments on behalf of Mr. Ravi Subramanian, the
Company's Chairman, totaling $27,251. The amount was repaid to STI by Mr. Ravi
Subramanian during 1998.
2. At December 31, 1997, STI had a receivable from ITV of $207,811.
3. At December 31, 1998, STI had receivables from Mr. Ravi Subramanian, the
Chairman, and from Lorimar Services Inc. of $27,867 and $5,775, respectively.
The amount due from Mr. Ravi Subramanian was repaid during 1999.
F-13
<PAGE>
SILVERLINE TECHNOLOGIES LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. During 1999, STI made advances, in the form of payments made on behalf of
Mr. Ravi Subramanian, its Chairman, totaling $787,640. The amount has been
repaid as of December 31, 1999.
5. During 1998, STI loaned $165,307 to IREV, to be used in connection with
special alterations and renovations to be made by IREV at STI's request. During
the period ended December 31, 1999, STI had advanced further amounts of
$505,437 for the purpose of carrying out further renovations. These amounts
have been repaid as of December 31, 1999.
6. In 1997, 1998 and 1999, STI made advances of $947,165, $1,572,626 and
$3,558,911, respectively, in the form of payments made on behalf of Silverline
Holdings, Corp. in connection with its corporate restructuring. The entire
amounts advanced have been repaid as of December 31, 1999.
11. Investments
Investments are as follows:
<TABLE>
<CAPTION>
December 31, (Unaudited)
-------------------- March 31,
1998 1999 2000
--------- --------- -----------
<S> <C> <C> <C>
Investments in equity securities (available
for sale):
Spectrum Corporate Services Limited
100,000 Equity Shares of $0.23 each (Rs.
10)...................................... $ 25,445 $ 25,445 $ 25,445
Industrial Development Bank of India
89,200 Equity Shares of $0.23 each (Rs.
10)...................................... 322,559 322,559 322,559
Less: unrealized loss....................... (232,118) (232,615) (232,615)
--------- --------- --------
Total....................................... $ 115,886 $ 115,389 $115,389
========= ========= ========
</TABLE>
12. Other Accrued Liabilities
Other accrued liabilities are as follows:
<TABLE>
<CAPTION>
December 31, (Unaudited)
--------------------- March 31,
1998 1999 2000
---------- ---------- -----------
<S> <C> <C> <C>
Taxes payable................................. $1,845,210 $3,264,232 $2,899,834
Other current liabilities..................... 1,431,206 479,693 68,120
Unclaimed dividend............................ 278,212 144,160 144,160
Dividend payable.............................. 1,227,216 -- --
---------- ---------- ----------
Total....................................... $4,781,844 $3,888,085 $3,112,114
========== ========== ==========
</TABLE>
F-14
<PAGE>
SILVERLINE TECHNOLOGIES LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Lines Of Credit, Long-Term Debt and Capital Lease Obligations
The long term debt and capital lease obligations are as follows:
<TABLE>
<CAPTION>
December 31, (Unaudited)
--------------------- March 31,
1998 1999 2000
---------- ---------- -----------
<S> <C> <C> <C>
Foreign currency term loans from IDBI under
equipment finance plan..................... $3,096,675 $ -- $ --
Columbia Savings Bank--loan................. 462,500 312,500 275,000
Bank of Baroda (New York)................... 1,125,000 937,500 890,625
Chase Manhattan Bank--loan.................. 1,125,000 937,500 890,625
Cash credit from banks...................... 984,048 -- --
Capital lease obligations................... 190,471 279,614 325,012
---------- ---------- ----------
Total..................................... 6,983,694 2,467,114 2,381,262
Less: current portion....................... 1,473,290 2,150,382 2,052,107
---------- ---------- ----------
Total long-term debt and capital lease
obligation................................. $5,510,404 $ 316,732 $ 329,155
========== ========== ==========
</TABLE>
The future minimum capital lease payments as of December 31, 1999 are as
follows:
<TABLE>
<S> <C>
Year ending December 31,
2000............................................................ $ 171,155
2001............................................................ 135,001
2002............................................................ 52,228
2003............................................................ 20,698
2004............................................................ 3,169
---------
Total minimum lease payments...................................... 382,251
Less: amount representing interest................................ (102,637)
---------
Present value of net minimum capital lease payments............... 279,614
Less: current portion of obligations under capital leases......... (123,827)
---------
Obligations under capital leases.................................. $ 155,787
=========
</TABLE>
The loan maturities for the next five years are as follows:
<TABLE>
<S> <C>
Year ending December 31,
2000............................................................ $2,025,000
2001............................................................ 150,000
2002............................................................ 12,500
2003............................................................ --
2004............................................................ --
----------
Total maturities.................................................. $2,187,500
==========
</TABLE>
1. The term loans from IDBI were secured by a personal guarantee of our
directors, an equitable mortgage on the Company's registered office premises at
Mumbai and a first lien by way of collateralizing all movables, having pari-
passu rights, subject to prior charges of the Company's bankers towards working
capital facilities. During 1999, the Company has repaid all the foreign
currency term loans and has obtained release of all liens.
2. Loan payable to Columbia Savings Bank is collateralized by equipment and
is payable in 60 equal installments of $12,500 plus interest calculated at a
rate of prime plus 3/4%. Final payment is due December 31, 2001.
3. The loan payable to The Chase Manhattan Bank and the Bank of Baroda (New
York) is collateralized by equipment and receivables and is payable in 17 equal
monthly installments of $46,875 plus interest calculated at a rate of prime
beginning May 1, 1999. The final balloon payment of $1,453,125 is due
October 1, 2000.
F-15
<PAGE>
SILVERLINE TECHNOLOGIES LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. STI has a loan agreement with The Chase Manhattan Bank and the Bank of
Baroda (New York) providing for aggregate lines of credit including an
overdraft protection provision not to exceed $14,000,000. Interest is
calculated at a variable rate. At December 31, 1997, 1998 and 1999, the bank's
variable rate was 8.50%, 7.75% and 8.25%, respectively. As part of this
agreement, outstanding letters of credit reduce the available amount of
overdraft provision. At December 31, 1997, 1998 and 1999, STI had posted
standby letters of credit of $737,000, $1,490,000 and $1,095,000, respectively.
The loan is secured by all movable assets including equipment and receivables
of the Company and is guaranteed by Mr. Ravi Subramanian, the Company's
Chairman.
5. The Company has utilized credit of $0.39 million under the export finance
facility. Interest rates on export finance are based on Reserve Bank Of India
directives issued from time to time. Interest on cash credit facility is
approximately 16-17 % per annum.
6. The working capital facilities extended by Corporation Bank to the
Company are secured by a first lien on the Company's fixed assets including
first equitable mortgage on the office premises at 1405-06, Maker Chambers V,
Nariman Point, Mumbai 400 021, India. IDBI Bank facilities are secured by way
of second lien on the Company's fixed assets. At March 31, 2000 (unaudited),
the Company has these facilities available for approximately $3.5 million and
$2.8 million with Corporation Bank and the IDBI Bank Ltd., respectively. The
interest rates range between 11% and 16% per annum.
14. Stockholders' Equity
The Company has only one class of equity share denominated in Indian Rupees.
The changes in equity shares during the years 1997, 1998 and 1999 are as
follows:
<TABLE>
<CAPTION>
Equity Shares Accumulated
---------------------- Additional Other Deferred stock Total
Number Paid-in Retained Comprehensive based Shareholders
of Shares Par value Capital Earnings Income/(Expense) compensation Equity
---------- ----------- ----------- ----------- ---------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of
December 31, 1996...... 37,949,970 $11,977,221 $ 3,011,655 $ 9,556,736 $(1,571,482) $22,974,130
Adjustments(1).......... 4,500,000 1,260,000 7,047,633 1,412,655 -- 9,720,188
---------- ----------- ----------- ----------- ----------- -----------
42,449,970 13,237,221 10,059,188 10,969,391 (1,571,482) 32,694,318
Cash dividends
declared............... (1,327,767) (1,327,767)
Common stock............ 510 510
Issuance of warrants.... 4,348,093 (4,348,093) --
Currency translation
adjustment/gains and
losses on sale of
investments............ (1,236,752) (1,236,752)
Net income.............. 4,325,143 4,325,143
---------- ----------- ----------- ----------- ----------- -----------
Balance as of
December 31, 1997...... 42,449,970 13,237,731 14,407,281 9,618,674 (2,808,234) 34,455,452
Cash dividends
declared............... (1,276,351) (1,276,351)
Currency translation
adjustment/gains and
losses on sale of
investments............ (738,220) (738,220)
Net income.............. 10,838,800 10,838,800
---------- ----------- ----------- ----------- ----------- -----------
Balance as of
December 31, 1998...... 42,449,970 13,237,731 14,407,281 19,181,123 (3,546,454) 43,279,681
Cash dividends
declared............... (1,696,613) (1,696,613)
Common stock............ 22,050,030 5,067,801 6,052,640 11,120,441
Deferred stock-based
compensation........... 2,696,551 (2,696,551) --
Currency translation
adjustment/gains and
losses on sale of
investments............ (395,789) (395,789)
Amortization of stock
based compensation..... 532,065 532,065
Net income.............. 15,800,557 15,800,557
---------- ----------- ----------- ----------- ----------- ----------- -----------
Balance as of
December 31, 1999...... 64,500,000 18,305,532 23,156,472 33,285,067 (3,942,243) (2,164,486) 68,640,342
Currency translation
adjustment/gains and
losses on sale of
investments
(unaudited)............ (118,879) (118,879)
Advance from issue of
stock options.......... 1,672,394 1,672,394
ADS issue expenses...... (163,000) (163,000)
Amortization of stock
based compensation..... 861,640 861,640
Net Income (unaudited).. $ 5,882,787 5,882,787
---------- ----------- ----------- ----------- ----------- ----------- -----------
Balance as of March 31,
2000................... 64,500,000 $18,305,532 $24,665,866 $39,167,854 $(4,061,122) $(1,302,846) $76,775,284
========== =========== =========== =========== =========== =========== ===========
</TABLE>
--------
(1) Amounts reflect adjustments to consider acquisition of STI by STL as
entities under common control in a manner similar to a pooling-of-
interest.
F-16
<PAGE>
SILVERLINE TECHNOLOGIES LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In May 1999, the Company sold 22,050,030 equity shares to Silverline
Holdings Corp., its major shareholder, pursuant to a warrant issued in December
1997, for net proceeds of $11,120,441. The proceeds from the stock issuance
were used for expansion of the Company's facilities in India.
Authorized Share Capital
The authorized equity shares of the Company for the years 1998 and 1999 were
60 million and 85 million, respectively.
15. Extraordinary Item
Principally using the proceeds received from the sale of our U.S.
subsidiary's building, on December 31, 1997, STI retired two outstanding term
loans. These loans were retired through the payment of $1,872,015 to the
lender, which included accrued interest and prepayment penalties. As a result
of this transaction, the Company recognized an extraordinary after tax loss of
$10,105. The income tax benefit associated with the loss on extinguishment was
$7,600 and the basic and diluted loss per share, net of tax, was less than
$0.01.
In 1999, the Company used internally generated funds to prepay foreign
currency outstanding loans of $3,787,675. For this purpose, the Company
incurred a prepayment penalty of $374,624 (net of zero income tax benefit). The
loss per share due to this prepayment was $0.01.
16. Employees Benefit Plans
Gratuity
The entire liability on this account is accrued based on actuarial valuation
as of March 31 each year and funded with LIC. On funding with LIC, the Company
does not have any further liability.
As of December 31, 1999, the Company has obtained an actuarial valuation of
the liability and has accrued the same. The amount accrued is $11,100, shown in
other accrued liabilities.
Superannuation
The entire liability on this account is accrued based on actuarial valuation
as of March 31 each year and funded with LIC. On funding with LIC, the Company
does not have any further liability.
As of December 31, 1999, the Company has estimated the liability and accrued
the same. The amount accrued is $15,762, shown in other accrued liabilities.
17. Commitments and Contingencies
The Company has various letters of credit outstanding to different vendors
aggregating $100,000 and $32,843 as of December 31, 1998 and 1999,
respectively. The letters of credit are generally established for the import of
hardware, software and other capital items.
The Company has contingent liabilities in respect of counter guarantees
given by the Company which aggregate $104,369, $95,783 and $85,819 as of
December 31, 1997, 1998 and 1999, respectively. As of March 31, 2000
(unaudited), the Company has given additional counter guarantees aggregating
$500,000.
STI has total rent and lease expense for the years ended December 31, 1997,
1998, and 1999 of $764,080, $1,086,645 and $1,052,368, respectively.
F-17
<PAGE>
SILVERLINE TECHNOLOGIES LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Included in total rent and lease expense noted above was rent expense
pertaining to office facilities for 1997, 1998 and 1999 of $338,442, $748,899
and $702,658, respectively. STI has long-term operating leases for its office
facilities in Illinois. STI also leases other office facilities under short
term (one year or less) leases. In conjunction with the sale of the New Jersey
office building, STI has entered into a long-term operating lease for that
facility expiring December 30, 2012 with two optional five year extensions. As
of December 31, 1999, future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Total Illinois office NJ office
---------- --------------- ---------
<S> <C> <C> <C>
Year ending December 31,
2000................................. $ 557,148 $77,148 $480,000
2001................................. 557,148 77,148 480,000
2002................................. 557,148 77,148 480,000
2003................................. 557,148 77,148 480,000
2004................................. 492,858 12,858 480,000
Thereafter............................. 3,500,000
----------
Total future minimum lease payments.... $6,221,450
==========
</TABLE>
The Company has various operating leases for automobiles, furniture and
equipment expiring at various times through 2002. Rent expense for the years
ended December 31, 1997, 1998 and 1999 for such operating leases was $475,638,
$337,746 and $349,710, respectively. As of December 31, 1999, future minimum
lease payments are as follows:
<TABLE>
<S> <C>
Year ending December 31,
2000............................................................. $159,943
2001............................................................. 103,812
2002............................................................. 21,785
--------
Total future minimum lease payments................................ $285,540
========
</TABLE>
18. Litigation
The Company is subject to legal proceedings and claims, which have arisen in
the ordinary course of its business. Those actions, when ultimately concluded
and determined, will not, in the opinion of management, have a material effect
on the results of the operations or the financial position of the Company.
19. Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement Of
Financial Accounting Standards No. 133--Accounting for Derivative Financial
Instruments and Hedging Activities (SFAS-133) in June 1998 effective for all
fiscal years of quarters beginning after June 15, 2000, as amended by SFAS 137.
The Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Management is currently
evaluating the impact on its financial statements.
20. Year 2000
Certain organizations anticipate that they will experience operational
difficulties at the commencement of Year 2000. The Company undertook projects
to ensure compliance verification of the organizations' computer software.
These projects could have an adverse effect on the Company's operations by
virtue of claims on the Company. The Company has not received any such claim to
date.
F-18
<PAGE>
SILVERLINE TECHNOLOGIES LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
21. Employees' Stock Option Plan (ESOP)
The Company has established an "Employees Stock Option Plan" ("ESOP") for
the benefit of the employees, as approved by the shareholders of the Company.
In terms of the Plan, the Company has granted 1,000,000 options convertible
into equity shares on a one-to-one basis at a price of $9.77 per equity share
on November 12, 1999, the date of the grant. The allocation of the grant is
based on future performance and continuous loyalty. All the options have been
granted on November 12, 1999 with vesting period as below:
<TABLE>
<S> <C> <C>
April 1, 2001.............................................. 237,037 Options
April 1, 2002.............................................. 312,960 Options
April 1, 2003.............................................. 450,003 Options
---------
Total.................................................... 1,000,000
=========
</TABLE>
Each employee has a choice of exercising his/ her option either upon vesting
or April 1 following each vesting date by paying the price of $9.77 each.
Options not exercised before the last vesting date shall lapse.
The shareholders of the Company at their meeting held on November 5, 1999
approved and granted the issuance of 2,000,000 options convertible into equity
shares at a price of $8.39 each to the Silverline Group of Companies Employees'
Welfare Trust, for the benefit of the employees of the Company and its
subsidiaries. Such options vest as follows:
<TABLE>
<S> <C> <C>
June 30, 2000.............................................. 1,533,000 Options
July 31, 2000.............................................. 467,000 Options
---------
Total.................................................... 2,000,000
=========
</TABLE>
The Company has recognized deferred compensation expense in connection with
its employee stock option plans using the intrinsic value method. As of
December 31, 1999, the Company has recorded $2,164,486 of deferred compensation
expense which is being amortized to expense over the vesting period of the
options. During the first three months of 2000, the Company recognized $861,640
in stock-based compensation expense. During 1999, the Company recognized
$532,065 in stock-based compensation expense.
The following table is a summary of stock option plans activity for the
years shown:
<TABLE>
<CAPTION>
Weighted Weighted
average Options average
Options exercise price exercisable exercise price
--------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Balance, December 31,
1998..................... 0 $ 0 -- --
Granted................. 3,000,000 8.85 -- --
Exercised............... 0 -- --
Cancelled............... 0 -- --
--------- --- ---
Balance, December 31,
1999..................... 3,000,000 8.85 -- --
--------- --- ---
Granted................. -- -- -- --
Exercised............... -- -- -- --
Cancelled............... -- -- -- --
--------- --- ---
Balance, March 31, 2000... 3,000,000 $8.85 -- --
========= === ===
</TABLE>
F-19
<PAGE>
SILVERLINE TECHNOLOGIES LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information for options outstanding and
exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Options Options Exercisable
Outstanding ---------------------
Weighted Weighted Weighted
Range average average average
of Prices Number remaining life exercise price Number exercise price
--------- --------- -------------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$8.39 2,000,000 1.58 years 8.39 0 0
9.77 1,000,000 3.59 years 9.77 0 0
</TABLE>
If compensation expense for the Company's stock options had been recognized
based on the fair value on the grant date under the methodology prescribed by
FAS 123, the Company's income from continuing operations and earnings per share
for the year ended December 31, 1999 would have been impacted as shown in the
following table (in thousands, except per share).
<TABLE>
<CAPTION>
1999
-------
<S> <C>
Reported income from
continuing operations.. $21,310
Pro forma income from
continuing operations.. 19,767
Reported diluted
earnings per share from
continuing operations.. 0.33
Pro forma diluted
earnings per share from
continuing operations.. 0.31
</TABLE>
The fair value of options granted, which is amortized to expense over the
option vesting period in determining the pro forma impact, is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1999
------
<S> <C>
Expected life of option (in years:)............................... 1.5415
Risk-free interest rate........................................... 5%
Expected volatility of Silverline stock........................... 100%
Expected dividend yield on Silverline stock....................... --
</TABLE>
The weighted average fair value of options granted during 1999 is as
follows:
<TABLE>
<CAPTION>
1999
------
<S> <C>
Fair value of each option granted................................. $ 3.98
Total number of options granted (in millions)..................... 2.00
Total fair value of all options granted (in millions)............. $11.90
</TABLE>
22. Subsequent Events
In April 2000, the Company purchased a software development firm in Canada.
The firm had approximately $3.1 million in revenues in 1999 and 70 employees as
of December 31, 1999.
On March 21, 2000, the shareholders of the Company authorized the Board of
Directors to allow STI to offer a broad-based ESOP plan that will be linked to
ADRs. The plan provisions and the granting of options under the plan are
currently being developed.
F-20
<PAGE>
SILVERLINE TECHNOLOGIES LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
23. Segment Data
The Company operates in one segment as one of India's providers of
information technology services. The following geographic area data include
sales based on customer location and total assets based on physical location:
<TABLE>
<CAPTION>
Three Months Ended March
For the Year Ended December 31, 31,
----------------------------------- ------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Sales
USA and Europe........ $38,817,520 $49,270,374 $73,508,762 $13,658,306 $ 24,852,906
Far East and Japan.... 6,886,092 9,586,073 13,049,135 1,890,000 5,794,050
India and other
countries............ 1,065,015 1,363,011 1,019,011 1,448,495 351,202
----------- ----------- ----------- ----------- ------------
Total............... $46,768,627 $60,219,458 $87,576,908 $16,996,795 $ 30,998,158
=========== =========== =========== =========== ============
<CAPTION>
December 31, March 31,
----------------------------------- ------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Total Assets
USA and Europe........ $25,229,020 $32,747,633 $36,746,739 $33,598,868 $ 40,069,113
Far East and Japan.... -- -- -- -- --
India and other
countries............ 31,995,258 36,527,515 53,063,253 41,119,024 62,358,651
----------- ----------- ----------- ----------- ------------
Total............... $57,224,278 $69,275,148 $89,809,992 $74,717,892 $102,427,764
=========== =========== =========== =========== ============
</TABLE>
F-21
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
4,350,000 American Depositary Shares
Silverline Technologies Limited
Representing 8,700,000 Equity Shares
[LOGO OF SILVERLINE TECHNOLOGIES LIMITED]
--------
U.S. PROSPECTUS
June 20, 2000
--------
Salomon Smith Barney
ABN AMRO Rothschild
a division of ABN AMRO Incorporated
Jefferies & Company, Inc.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
4,350,000 American Depositary Shares
Silverline Technologies Limited
Representing 8,700,000 Equity Shares
[LOGO OF SILVERLINE TECHNOLOGIES LIMITED]
--------
INTERNATIONAL PROSPECTUS
June 20, 2000
--------
Salomon Smith Barney
ABN AMRO Rothschild
CLSA Emerging Markets
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
