UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934
For the quarter ended September 30, 2001
Commission File Number 000-27663
SATYAM INFOWAY LIMITED
(Exact name of registrant as specified in its charter)
Not Applicable
(Translation of registrant's name into English)
Republic of India
(Jurisdiction of incorporation or organization)
Tidel Park, 2nd Floor
No. 4, Canal Bank Road, Taramani, Chennai 600 113 India
(91) 44-254-0770
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F. Form 20F [X] Form 40 F [ ]
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [ ] No [X]
If "Yes" is marked, indicate below the file number assigned to registrant in
connection with Rule 12g3-2(b). Not applicable.
1
CURRENCY OF PRESENTATION AND CERTAIN DEFINED TERMS
Unless the context otherwise requires, references herein to "we," "us,"
the "company," "SIFY" or "Satyam Infoway" are to Satyam Infoway Limited, a
limited liability company organized under the laws of the Republic of India.
References to "U.S." or the "United States" are to the United States of America,
its territories and its possessions. References to "India" are to the Republic
of India. We are presently a majority-owned subsidiary of Satyam Computer
Services Limited, a leading Indian information technology services company which
is traded on the New York Stock Exchange and the major Indian stock exchanges
("Satyam Computer Services"). "Satyam" is a trademark owned by Satyam Computer
Services, which has licensed the use of the "Satyam" trademark to us subject to
specified conditions. "Sify.com," "Sify," "SatyamOnline," "Satyam:Net,"
"satyamonline.com" and "Satyam iway" are trademarks used by us for which we have
registration applications pending in India. All other trademarks or tradenames
used in this Report on Form 6-K are the property of their respective owners.
In this report, references to "$," "Dollars" or "U.S. dollars" are to the
legal currency of the United States, references to "Rs.," "rupees" or "Indian
Rupees" are to the legal currency of India, and references to "GBP" are to the
legal currency of the United Kingdom. References to a particular "fiscal" year
are to our fiscal year ended March 31 of such year.
For your convenience, this report contains translations of some Indian
rupee amounts into U.S. dollars which should not be construed as a
representation that those Indian rupee or U.S. dollar amounts could have been,
or could be, converted into U.S. dollars or Indian rupees, as the case may be,
at any particular rate, the rate stated below, or at all. Except as otherwise
stated in this report, all translations from Indian rupees to U.S. dollars
contained in this report have been based on the noon buying rate in the City of
New York on September 30, 2001 for cable transfers in Indian rupees as certified
for customs purposes by the Federal Reserve Bank of New York. The noon buying
rate on September 30, 2001 was Rs.47.80 per $1.00.
Our financial statements are prepared in Indian rupees and presented in
accordance with United States generally accepted accounting principles or U.S.
GAAP. Solely for your convenience, some of the information contained in our
financial statements has been translated into U.S. dollars. In this report, any
discrepancies in any table between totals and the sums of the amounts listed are
due to rounding.
Information contained in our websites, including our principal corporate
website, www.sifycorp.com, is not part of this report.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
IN ADDITION TO HISTORICAL INFORMATION, THIS REPORT CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE SUBJECT TO RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE REFLECTED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH
A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION
ENTITLED "ITEM 2-OPERATING AND FINANCIAL REVIEW AND PROSPECTS--RISKS RELATED TO
OUR BUSINESS" AND ELSEWHERE IN THIS REPORT. YOU ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT MANAGEMENT'S
ANALYSIS ONLY AS OF THE DATE OF THIS REPORT. IN ADDITION, YOU SHOULD CAREFULLY
REVIEW THE OTHER INFORMATION IN THIS REPORT AND IN OUR PERIODIC REPORTS AND
OTHER DOCUMENTS FILED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION
(THE "SEC") FROM TIME TO TIME. OUR FILINGS WITH THE SEC ARE AVAILABLE ON ITS
EDGAR DATABASE MAINTAINED AT ITS WEBSITE, WWW.SEC.GOV.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SATYAM INFOWAY LIMITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN THOUSANDS, EXCEPT SHARE DATA AND AS OTHERWISE STATED)
AS OF
-----------------------------------------------
MARCH 31, SEPTEMBER 30, SEPTEMBER 30,
2001 2001 2001
----------- ----------- -----------
RS. RS. US $
----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 1,444,307 853,167 17,849
Accounts receivable 826,273 460,388 9,632
Due from officers and employees 11,487 2,925 61
Inventories 110,092 96,621 2,021
Prepaid expenses 209,335 182,847 3,825
Net assets of discontinued operation -- 289,791 6,061
Other current assets 276,390 208,063 4,353
----------- ----------- -----------
TOTAL CURRENT ASSETS 2,877,884 2,093,802 43,802
Property, plant and equipment--net 2,408,253 2,087,747 43,677
Goodwill and other intangible assets 4,433,142 87,199 1,824
Investments in affiliates 1,506,244 250,883 5,249
Investments 9,834 7,740 162
Other assets 266,527 331,133 6,927
----------- ----------- -----------
TOTAL ASSETS 11,501,884 4,858,504 101,641
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of capital lease obligations 4,807 3,868 81
Trade accounts payable 136,351 87,006 1,820
Accrued expenses 369,518 305,399 6,389
Deferred revenue 189,117 134,579 2,815
Advances from customers 99,708 26,262 549
Other current liabilities 46,176 37,433 783
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 845,677 594,547 12,437
NON-CURRENT LIABILITIES:
Capital lease obligations, excluding current installments 8,028 6,993 146
Other liabilities 26,164 30,300 634
----------- ----------- -----------
TOTAL LIABILITIES 879,869 631,840 13,217
----------- ----------- -----------
MINORITY INTEREST 33,677 25,234 528
STOCKHOLDERS' EQUITY
Common stock, Rs.10 par value; 35,000,000 equity shares authorized;
issued and outstanding: 23,183,103 shares as of March 31, 2001 and
23,202,176 shares as of September 30, 2001 231,831 232,022 4,854
Additional paid-in capital 13,669,572 13,630,390 285,155
Deferred compensation - employee stock offer plan (101,105) (54,614) (1,143)
Accumulated deficit (3,205,864) (9,603,418) (200,908)
Accumulated other comprehensive income (6,096) (2,950) (62)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY 10,588,338 4,201,430 87,896
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 11,501,884 4,858,504 101,641
=========== =========== ===========
See accompanying notes to condensed consolidated financial statements
3
SATYAM INFOWAY LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in thousands, except share data and as otherwise stated)
QUARTER ENDED SEPTEMBER 30,
-----------------------------------------
2000 2001 2001
RS. RS. US $
----------- ----------- -----------
Revenues 309,152 410,350 8,585
Cost of revenues (excluding depreciation and
amortization) (230,727) (310,336) (6,492)
----------- ----------- -----------
GROSS PROFIT (excluding depreciation and amortization) 78,425 100,014 2,093
----------- ----------- -----------
OPERATING EXPENSES:
Selling, general and administrative expenses 513,169 465,775 9,744
Acquisition expenses -- 20,000 418
Amortization of goodwill 271,818 -- --
Impairment of goodwill -- 4,115,145 86,091
Amortization of deferred stock compensation expense 25,730 (2,355) (49)
Foreign exchange gain (68,166) (24,820) (519)
----------- ----------- -----------
TOTAL OPERATING EXPENSES 742,551 4,573,745 95,685
----------- ----------- -----------
Operating loss (664,126) (4,473,731) (93,592)
Other income, net 68,998 5,126 107
Loss before taxes, equity in losses of affiliates and
minority interest (595,128) (4,468,605) (93,485)
Equity in losses of affiliates (69,103) (1,106,980) (23,159)
Minority interest -- 1,351 28
Loss from continuing operations before income taxes (664,231) (5,574,234) (116,616)
Income taxes 13,120 (4,750) (99)
----------- ----------- -----------
NET LOSS FROM CONTINUING OPERATIONS (651,111) (5,578,984) (116,715)
DISCONTINUED OPERATIONS
Income/(loss) from discontinued operations,
net of applicable taxes 36,220 (13,114) (274)
NET LOSS (614,891) (5,592,098) (116,989)
Net loss per equity share -
Continuing operation (28.46) (240.49) (5.03)
Discontinued operation 1.58 (0.57) (0.01)
Net loss (26.88) (241.06) (5.04)
Weighted equity shares used in computing net loss per
equity share 22,876,541 23,198,237 23,198,237
SIX MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2000 2001 2001
RS. RS. US $
----------- ----------- -----------
Revenues 573,719 759,294 15,885
Cost of revenues (excluding depreciation and
amortization) (392,997) (596,168) (12,472)
----------- ----------- -----------
GROSS PROFIT (excluding depreciation and amortization) 180,722 163,126 3,413
----------- ----------- -----------
OPERATING EXPENSES:
Selling, general and administrative expenses 866,674 950,684 19,889
Acquisition expenses -- 20,000 418
Amortization of goodwill 358,813 292,964 6,129
Impairment of goodwill -- 4,115,145 86,091
Amortization of deferred stock compensation expense 42,890 14,001 293
Foreign exchange gain (125,720) (34,552) (723)
----------- ----------- -----------
TOTAL OPERATING EXPENSES 1,142,657 5,358,242 112,097
----------- ----------- -----------
Operating loss (961,935) (5,195,116) (108,684)
Other income, net 188,746 34,044 712
Loss before taxes, equity in losses of affiliates and
minority interest (773,189) (5,161,072) (107,972)
Equity in losses of affiliates (74,526) (1,205,322) (25,216)
Minority interest 382 3,943 82
Loss from continuing operations before income taxes (847,333) (6,362,451) (133,106)
Income taxes 14,623 (9,334) (195)
----------- ----------- -----------
NET LOSS FROM CONTINUING OPERATIONS (832,710) (6,371,785) (133,301)
DISCONTINUED OPERATIONS
Income/(loss) from discontinued operations,
net of applicable taxes 39,472 (25,769) (540)
NET LOSS (793,238) (6,397,554) (133,841)
Net loss per equity share -
Continuing operation (36.91) (274.76) (5.75)
Discontinued operation 1.75 (1.11) (0.02)
Net loss (35.16) (275.87) (5.77)
Weighted equity shares used in computing net loss per
equity share 22,562,982 23,190,711 23,190,711
See accompanying notes to condensed consolidated financial statements.
4
SATYAM INFOWAY LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN THOUSANDS, EXCEPT SHARE DATA AND AS OTHERWISE STATED)
SIX MONTHS ENDED SEPTEMBER 30,
---------------------------------------------
2000 2001 2001
----------- ----------- -----------
RS. RS. US$
----------- ----------- -----------
NET LOSS FROM CONTINUING OPERATIONS (832,710) (6,371,785) (133,301)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Depreciation, amortization and impairment of goodwill 547,644 4,696,204 98,247
Equity in losses of affiliates 74,526 1,205,322 25,216
Loss on sale of plant and equipment 2,647 2,846 60
Provision for doubtful receivables 6,000 34,090 713
Minority interest and others (14,680) 5,391 113
Changes in assets and liabilities:
Accounts receivable (187,461) 10,987 230
Due from officers and employees (3,312) 22,386 468
Inventories (8,503) 11,447 239
Prepaid expenses (109,734) 26,488 554
Other assets (217,175) (15,352) (321)
Accrued expenses 162,278 (64,120) (1,341)
Trade accounts payable 66,779 2,739 57
Deferred revenue 60,889 (49,424) (1,034)
Advances from customers 14,214 (73,447) (1,537)
Other liabilities 9,930 (9,107) (191)
---------- -------- -------
NET CASH USED IN CONTINUING OPERATIONS (428,668) (565,335) (11,828)
NET CASH PROVIDED BY/(USED IN) DISCONTINUED OPERATION (84,907) 190,498 3,985
---------- -------- -------
NET CASH USED IN OPERATING ACTIVITIES (513,575) (374,837) (7,843)
---------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditure on plant and equipment (1,134,261) (175,742) (3,677)
Proceeds from sale of plant and equipment 300 4,636 97
Expenditure on investment in affiliates (107,769) (18,900) (395)
Purchase consideration for acquisition, net of cash (2,173,136) (12,023) (252)
Expenditure on license fee (23,320) -- --
---------- -------- -------
NET CASH USED IN CONTINUING OPERATIONS (3,438,186) (202,029) (4,227)
NET CASH USED IN DISCONTINUED OPERATIONS (13,982) (7,082) (148)
---------- -------- -------
NET CASH USED IN INVESTING ACTIVITIES (3,452,168) (209,111) (4,375)
---------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (208,167) -- --
Principal payments under capital lease obligations (3,588) (4,618) (95)
---------- -------- -------
NET CASH USED IN CONTINUING OPERATIONS (211,755) (4,618) (95)
---------- -------- -------
NET CASH USED IN FINANCING ACTIVITIES (211,755) (4,618) (95)
---------- -------- -------
Effect of exchange rate changes on cash -- (2,574) (54)
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,177,498) (591,140) (12,367)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 7,307,625 1,444,307 30,216
---------- -------- -------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 3,130,127 853,167 17,849
---------- -------- -------
SUPPLEMENTARY INFORMATION
Cash paid towards interest 16,142 -- --
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITY
Capital leases 8,414 2,644 55
Additional common stock issued for acquisition of business 2,777,359 49,268 1,031
See accompanying notes to condensed consolidated financial statements.
5
SATYAM INFOWAY LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN RUPEES THOUSANDS, EXCEPT SHARE DATA AND AS OTHERWISE STATED)
(INFORMATION AS OF SEPTEMBER 30, 2001 AND FOR THE PERIOD ENDED SEPTEMBER 30,
2000 AND SEPTEMBER 30, 2001 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Preparation of Financial Statements
The accompanying financial statements have been prepared in Indian Rupees
(Rs.), the national currency of India. Solely for the convenience of the
reader, the financial statements as of and for the Quarter ended September
30, 2001 have been translated into United States dollars at the noon
buying rate in New York City on September 30, 2001 for cable transfers in
Indian rupees, as certified for customs purposes by the Federal Reserve
Bank of New York of $1 = Rs.47.80. No representation is made that the
Indian rupee amounts have been, could have been or could be converted into
United States dollars at such a rate or at any other certain rate on
September 30, 2001 or at any other date.
b. Interim Information (unaudited)
Interim information presented in the consolidated financial statements has
been prepared by the management without audit and, in the opinion of
management, includes all adjustments of a normal recurring nature that are
necessary for the fair presentation of the financial position, results of
operations, and cash flows for the periods shown, is in accordance with
the generally accepted accounting principles in the United States. These
financial statements should be read in conjunction with the consolidated
financial statements and related notes included in the Company's Annual
Report on Form 20-F for the fiscal year ended March 31, 2001.
2. ACQUISITION OF BUSINESS
On October 12, 2000, Sify entered into an agreement (the "Agreement") to
acquire a 100% equity stake in Kheladi.com (India) Private Limited
(Kheladi), a sports portal promoted by sports personalities in India.
Sify's intention is to assimilate the strengths of Kheladi, including the
network of sports personalities, into its sports portal, Khel.com. The
acquisition was consummated on July 20, 2001 upon completion of regulatory
formalities when Sify issued an aggregate of 19,073 equity shares to the
shareholders of Kheladi on July 20, 2001 of which 5,019 shares and 10,039
shares were subject to lock-in until September 14, 2001 and September 14,
2002, respectively.
The fair value of consideration aggregated to Rs.52,291 and acquisition
has been accounted for under the purchase method. The cost of acquisition
would be allocated primarily to intangible assets such as employment
contracts and domain names acquired. Pending such allocation the excess of
the cost of acquisition over net assets of Rs. 196 amounting to Rs 52,095
has been recognized as goodwill. In accordance with the provisions of SFAS
141, the goodwill has not been amortized post acquisition. The cash paid
and common stock issued in connection with this acquisition was as
follows:
Cash consideration 3,023
Common stock issued 49,268
------
Total consideration 52,291
Assets acquired 196
------
Goodwill, including intangibles 52,095
The terms of the purchase also provide for contingent consideration of
3,089 equity shares based on the achievement of certain specified
profitability and revenue targets. The Company will record contingent
payments as compensation for post-combination services to be expensed in
the periods in which the contingency is resolved.
6
3. IMPAIRMENT OF GOODWILL
Due to a general decline in market valuation for technology stocks the
Company has reassessed the goodwill to be carried forward relating to its
acquisitions. As a result, the Company recorded a charge of Rs.4,115,145
relating to the impairment of goodwill of its subsidiaries. This was
measured at enterprise level in accordance with the Company's accounting
policy.
Acquired Company Amount written off(Rs.) Date of acquisition
---------------- ----------------------- -------------------
IndiaWorld 3,714,848 November 1999
IndiaPlaza 397,799 December 2000
Others 2,498 December 2000
Total 4,115,145
4. IMPAIRMENT OF INVESTMENTS IN AFFILIATE
The Company recorded an impairment charge of Rs.1,089,870 relating to a
decline in the value of investment in Cricinfo Limited (Cricinfo) deemed
to be other than temporary which is disclosed in the statement of
operations under equity in loss of affiliates.
5. SEGMENTAL REPORTING
SFAS No 131, Disclosures about Segments of an Enterprise and related
Information, establishes standards for the way that public business
enterprises report information about operating segments and related
disclosures about products and services, geographic areas, and major
customers. The Company's operations predominantly relate to connectivity,
co-location and software development for Corporates, providing internet
access to retail subscribers (both home access and public access). The
Company also operates a Portal, "Sify.com", that provides a variety of
India centric content to audiences both in India and abroad, and which
generates revenue from advertisements and other value added services. The
company also has subsidiaries to exploit other opportunities provided by
the internet in e-Learning, B2B Marketplaces, and in Digital Signatures
and Internet Security.
The Operating segments of the Company include:
- Corporate Network/Data services, which provides private network
services, messaging services and web hosting to corporates;
- E-business services (Software services), which provides business
to business e-commerce and web site development;
- Internet access services, which provides dial-up internet access and
public internet access through cyber cafes;
- Online portal services; and
- Others, which include e-Learning and B2B marketplaces.
The Chief Operating Decision Maker (CODM) evaluates the Company's
performance and allocates resources to various Strategic Business Units
(SBU)'s that are identified based on the products and services that they
offered and on the basis of the market catered to. The measure of loss
reviewed by the CODM during the current year was Losses before Interest,
Taxes, Depreciation and Amortization.
Revenue in relation to segments is categorized based on items that are
individually identifiable to that segment. Bandwidth costs, which form a
significant part of the total expenses, are allocated between the
corporate and retail business based on certain norms and assumptions and
on total demand of bandwidth from each of these businesses. Certain
expenses such as depreciation and technology, which form a significant
component of total expenses, are not specifically allocable to specific
segments as the underlying services are used interchangeably. Management
believes that it is not practical to provide segment disclosures to those
costs and expenses and accordingly these expenses are separately disclosed
as "unallocated" and adjusted only against the total income of the
Company.
7
A significant part of the fixed assets used in the Company's business are not
identifiable to any of the reportable segments and can be used interchangeably
between segments. Management believes that it is not practicable to provide
segment disclosures relating to total assets since a meaningful segregation of
the available data is onerous
The Company's operating segment information for the months and six months ended
September 31, 2001 and 2000 is presented below:
THREE MONTHS ENDED SEPTEMBER 30, 2001
CORPORATE
NETWORK/ INTERNET
DATA E-BUSINESS ACCESS ONLINE
SERVICES SERVICES* SERVICES PORTALS OTHERS TOTAL
-------- ---------- -------- -------- -------- ----------
Revenues 204,055 107,795 142,606 50,480 13,209 518,145
Operating expenses (134,839) (107,345) (271,921) (66,641) (33,246) (613,992)
Equity in loss of affiliates -- -- -- (14,610) -- (14,610)
Minority Interest -- -- 961 390 -- 1,351
-------- -------- -------- -------- -------- ----------
Segment operating income/(loss) 69,216 450 (128,354) (30,381) (20,037) (109,106)
Corporate expenses (137,795)
Foreign exchange gain 24,820
Other income, net (10,201)
Loss before interest, tax,
depreciation and amortization (232,282)
Depreciation and amortization (5,375,143)
Interest income 15,327
----------
NET LOSS (5,592,098)
----------
* Subsequently reported separately as discontinued operations
THREE MONTHS ENDED SEPTEMBER 30, 2000
CORPORATE
NETWORK/ INTERNET
DATA E-BUSINESS ACCESS ONLINE
SERVICES SERVICES* SERVICES PORTALS OTHERS TOTAL
-------- ---------- -------- -------- -------- --------
Revenues 142,779 126,009 125,484 40,035 854 435,161
Operating expenses (119,888) (63,545) (254,771) (120,864) (34,759) (593,827)
Equity in loss of affiliates -- -- -- (12,296) -- (12,296)
-------- -------- -------- -------- -------- --------
Segment operating income/(loss) 22,891 62,464 (129,287) (93,125) (33,905) (170,962)
Corporate expenses (130,006)
Foreign exchange gain 68,166
Other income, net 179
--------
Loss before interest, tax,
depreciation and amortization (232,623)
Depreciation and amortization (451,087)
Interest income 68,819
--------
NET LOSS (614,891)
--------
* Subsequently reported separately as discontinued operations
8
SIX MONTHS ENDED SEPTEMBER 30, 2001
CORPORATE
NETWORK/ INTERNET
DATA E-BUSINESS ACCESS ONLINE
SERVICES SERVICES* SERVICES PORTALS OTHERS TOTAL
-------- ---------- -------- -------- -------- ----------
Revenues 384,236 204,744 243,450 103,291 28,317 964,039
Operating expenses (267,909) (202,570) (522,400) (141,807) (75,448) (1,210,134)
Equity in loss of affiliates -- -- -- (36,195) -- (36,195)
Minority Interest -- -- 2,728 1,215 -- 3,943
-------- ---------- -------- -------- -------- ----------
Segment operating income/(loss) 116,327 2,175 (276,222) (73,496) (47,131) (278,347)
Corporate expenses (284,826)
Foreign exchange gain 34,552
Other income, net (2,040)
----------
Loss before interest, tax,
depreciation and amortization (530,661)
Depreciation and amortization (5,902,977)
Interest income 36,084
----------
NET LOSS (6,397,554)
----------
* Subsequently reported separately as discontinued operations
SIX MONTHS ENDED SEPTEMBER 30, 2000
CORPORATE
NETWORK/ INTERNET
DATA E-BUSINESS ACCESS ONLINE
SERVICES SERVICES* SERVICES PORTALS OTHERS TOTAL
-------- ---------- -------- -------- -------- ----------
Revenues 247,405 183,120 254,059 71,501 754 756,839
Operating expenses (220,596) (111,516) (455,743) (179,912) (42,374) (1,010,141)
Equity in loss of affiliates -- -- -- (17,719) -- (17,719)
Minority Interest -- -- -- 382 -- 382
-------- ---------- -------- -------- -------- ----------
Segment operating income/(loss) 26,809 71,604 (201,684) (125,748) (41,620) (270,639)
Corporate expenses (214,769)
Foreign exchange gain 125,720
Other income, net (9,258)
----------
Loss before interest, tax,
depreciation and amortization (368,946)
Depreciation and amortization (622,296)
Interest income 198,004
----------
NET INCOME/(LOSS) (793,238)
----------
* Subsequently reported separately as discontinued operations
9
6. SUBSEQUENT EVENTS
a. Cricinfo
On October 5, 2001, Sify entered into an agreement to subscribe for
unsecured convertible loan notes (loan notes) to be issued by Cricinfo in
an aggregate amount of up to GBP 1,000 to meet Cricinfo's short-medium
term working capital requirements over the next year. These loan notes are
redeemable on October 5, 2004. The subscription would be in tranches of
such amounts and on such dates as would be agreed to in writing from time
to time by Sify and Cricinfo. The terms of the loan note instrument
provide for the payment of interest on the principal amount at the rate of
8% per annum. In addition Sify shall be entitled, at any time on giving 5
days notice to Cricinfo, to convert the principal amount of the loan notes
into equity shares in Cricinfo based on a predetermined conversion
formula. Sify will not be obligated to subscribe for loan notes if it is
not satisfied that Cricinfo has met certain agreed performance measures.
b. Discontinued operations
On October 24, 2001, Sify announced its proposal to divest its e-business
(software services) division to Satyam Computer Services (Parent Company).
The software services division which provides business-to-business
e-commerce and web site development, covers IT services in India,
Australia and USA. Revenues from this segment represented approximately
21% of Sify's total revenue during quarter ended September 30, 2001. The
objective of the divestment is that Satyam Computer Services would
concentrate on its core business of software services and Sify will
concentrate in Internet services. The buyout of this division by Satyam
Computer Services is expected to be effective January 1, 2002 with a price
ranging in the region of $7 million. It is estimated that the Company
would not incur a loss in this transaction.
The divestment and final fair value of this transaction will be determined
subject to due processes of the Board of Directors of the Company as well
as any necessary approval of our shareholders. However, the Company, in
accordance with the provisions of Accounting Principles Board (APB)
Opinion 30 and the Emerging Issues Task Force 95-18, has concluded that
the software services division is the subject of a formal plan for
disposal and that the measurement date as defined in APB 30 occurred prior
to the approval of the shareholders because management and members of the
board of directors controlled enough votes to approve the plan of disposal
at the next shareholder meeting. Accordingly, the results of operations of
the software services division for all periods have been reported
separately as "Income / Loss from discontinued operations".
The assets and liabilities of the division as at September 30, 2001 is
given below.
ASSETS
Accounts receivable 116,900
Inventories 935
Other current assets 22,642
-------
Total current assets 140,477
Capital Advances 12,626
Property, plant and equipment -- net 144,127
-------
Total assets 297,230
-------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Deferred revenue 5,375
Advances from customers 2,064
-------
Total current liabilities 7,439
-------
Total liabilities 7,439
-------
Net assets of discontinued operation 289,791
10
The summarised information on results of discontinued operation for the
three and six months ended September 30, 2001 and 2000 is given below.
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2000 2001 2000 2001
Revenues 126,009 107,795 183,120 204,745
Operating expenses (76,669) (125,659) (129,350) (239,848)
Income/ (loss) from discontinued
operations before taxes 49,340 (17,864) 53,770 (35,103)
Income taxes (13,120) 4,750 (14,298) 9,334
Net income/(loss) from discontinued
operations 36,220 (13,114) 39,472 (25,769)
c. On October 24, 2001, Satyam Computer Services released its financial
results for the September 30, 2001 fiscal quarter in a press release. That
press release included a section with comments on Sify. In that section,
Satyam Computer Services announced several initiatives including:
- the proposed sale of Sify's software services division to Satyam
Computer Services;
- the strategic decision by Satyam Computer Services to divest its
Sify stake; and
- the determination by Satyam Computer Services that, based on the
current financial status of Sify and the expected software services
divestment transaction, Satyam Computer Services will not invest any
further funds in Sify
d. Legal proceedings
On November 5, 2001, a securities class action lawsuit was filed in the
United States District Court for the Southern District of New York on
behalf of all persons who acquired Sify's ADSs between October 20, 1999
and December 6, 2000. The Company, certain executive officers of the
Company, and certain underwriters involved in the Company's initial public
offering are named as defendants in the complaint. This complaint alleges
that certain of the underwriters of the initial public offering violated
the federal securities laws by failing to disclose that they had solicited
and received undisclosed commissions from, and entered into undisclosed
arrangements with, certain investors who purchased the Company's ADSs in
the initial public offering, and had entered into undisclosed arrangements
with certain investors whereby the underwriters allocated ADSs in the
initial public offering to those investors in exchange for their agreement
to purchase Sify's ADSs in the after-market at pre-determined prices. The
complaint also alleges that the defendants violated the federal securities
laws by issuing a registration statement in connection with the initial
public offering that contained material misstatements and/or omissions
because it did not disclose that these allegedly undisclosed arrangements
had occurred. The complaint seeks damages on behalf of all those who
purchased or otherwise acquired Sify's ADSs during the period covered by
the complaint. The deadline for defendants to respond to the complaint has
not yet expired. Substantially similar lawsuits have been filed or
announced against approximately 200 companies that completed initial
public offerings in the U.S. in the same general time period that the
Company completed its initial public offering. The Company believes that
it has meritorious defenses and intends to defend this action vigorously.
However, the Company could be forced to incur material expenses in the
litigation, and in the event there is an adverse outcome, the business
could be harmed.
11
7. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS 141, 142 In July 2001, the FASB issued Statement No. 141, Business
Combinations, and Statement No. 142, Goodwill and Other Intangible Assets.
Statement 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001 as well as all
purchase method business combinations completed after June 30, 2001.
Statement 141 also specifies criteria intangible assets acquired in a
purchase method business combination must meet to be recognized and
reported apart from goodwill, noting that any purchase price allocable to
an assembled workforce may not be accounted for separately. Statement 142
will require that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement 142
will also require that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of.
Furthermore, any goodwill and any intangible asset determined to have an
indefinite useful life that are acquired in a purchase business
combination completed after June 30, 2001 will not be amortized, but will
continue to be evaluated for impairment in accordance with the appropriate
pre-Statement 142 accounting literature. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001 will
continue to be subject to amortization prior to the adoption of Statement
142.
We are required to adopt the provisions of Statement 141 immediately,
except with regard to business combinations initiated prior to July 1,
2001, and Statement 142 effective April 1, 2002. Statement 141 will
require upon adoption of Statement 142, that we evaluate our existing
intangible assets and goodwill that were acquired in a prior purchase
business combination, and to make any necessary reclassifications in order
to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, we will be required to
reassess the useful lives and residual values of all intangible assets
acquired in purchase business combinations, and make any necessary
amortization period adjustments by the end of the first interim period
after adoption, expected to be the fiscal quarter ended June 30, 2002. In
addition, to the extent an intangible asset is identified as having an
indefinite useful life, we will be required to test the intangible asset
for impairment in accordance with the provisions of Statement 142 within
that first interim period. Any impairment loss will be measured as of the
date of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require us to perform an assessment of whether there is
an indication that goodwill and equity-method goodwill is impaired as of
the date of adoption. To accomplish this we must identify our reporting
units and determine the carrying value of each reporting unit by assigning
the assets and liabilities, including the existing goodwill and intangible
assets, to those reporting units as of the date of adoption. We will then
have up to six months from the date of adoption to determine the fair
value of each reporting unit and compare it to the reporting unit's
carrying amount. To the extent a reporting unit's carrying amount exceeds
its fair value, an indication exists that the reporting unit's goodwill
may be impaired and we must perform the second step of the transitional
impairment test. In the second step, we must compare the implied fair
value of the reporting unit's goodwill, determined by allocating the
reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price
allocation in accordance with Statement 141, to its carrying amount, both
of which would be measured as of the date of adoption. This second step is
required to be completed as soon as possible, but no later than the end of
the year of adoption. Any transitional impairment loss will be recognized
as the cumulative effect of a change in accounting principle in our
statement of operations.
Because of the extensive effort needed to comply with Statements 141 and
142, it is not practicable to reasonably estimate the impact of adopting
these Statements on our financial statements at the date of this report,
including whether any transitional impairment losses will be required to
be recognized as the cumulative effect of a change in accounting
principle. At September 30, 2001 the goodwill and other intangible assets
amounted to Rs.87,199. If either present accounting principles or the new
standards discussed above require that an impairment in value be
recognized the Company would be required to write down the carrying value
of the asset to its estimated fair value with an offsetting charge to the
statement of operations.
12
SFAS 143
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in
which it is incurred. When the liability is initially recorded, the entity
capitalizes a cost by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated over the useful
life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or
loss upon settlement. The standard is effective for fiscal years beginning
after June 15, 2002.
SFAS 144
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires that
those long-lived assets be measured at the lower of carrying amount or
fair value less cost to sell, whether reported in continuing operations or
in discontinued operations. Under SFAS No. 144, discontinued operations
will no longer be measured at net realizable value or include amounts for
operating losses that have not yet been incurred. The provisions of SFAS
No. 144 are effective for financial statements issued for fiscal years
beginning after December 15, 2001.
The Company is currently evaluating the impact of SFAS 143 and 144 on its
operations.
8. RECLASSIFICATIONS
Certain prior-years' amounts have been reclassified to conform to the
current year's presentation.
13
ITEM 2. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.
The following discussion of the operating and financial review and
prospects of our company should be read in conjunction with the unaudited
financial statements and the related notes included elsewhere in this report and
the audited financial statements and the related notes contained in our Annual
Report on Form 20-F for the fiscal year ended March 31, 2001. This discussion
contains forward-looking statements that involve risks and uncertainties. For
additional information regarding these risks and uncertainties, please see "Risk
Related to Our Business."
OVERVIEW
Our company, Satyam Infoway Limited, was organized as a limited liability
company under the laws of the Republic of India pursuant to the provisions of
the Indian Companies Act on December 12, 1995. We are presently a majority-owned
subsidiary of Satyam Computer Services, a leading Indian information technology
services company traded on the New York Stock Exchange and the principal Indian
stock exchanges. We conduct a significant majority of our business in India. The
address of our principal executive office is Tidel Park, 2nd Floor, No. 4, Canal
Bank Road, Taramani, Chennai, 600 113, India, and our telephone number is (91)
44-254-0770.
Our company was formed as an independent business unit of Satyam Computer
Services to develop and offer connectivity-based corporate services allowing
businesses in India to exchange information, communicate and transact business
electronically. From December 1995 through 1997, we focused on the development
and testing of our private data network. In 1997, we began forming strategic
partnerships with a number of leading technology and electronic commerce
companies, including Open Market, Sterling Commerce and UUNet Technologies, in
order to broaden our product and service offerings to our corporate customers.
In March 1998, we obtained network certification for conformity with Indian and
international network operating standards from the Technical Evaluation
Committee of India. In April 1998, we began offering private network services to
businesses in India. Our initial products and services included electronic data
interchange, e-mail and other messaging services, virtual private networks and
related customer support.
In October 1998, we initiated our online content offerings with two
websites: carnaticmusic.com and indiaupdate.com. We also started development of
www.sify.com, our online portal, and other related content sites for personal
finance, movies and automobiles with the goal of offering a comprehensive suite
of websites offering content specifically tailored to Indian interests
worldwide.
On November 6, 1998, the Indian government opened the Internet service
provider marketplace to private competition. Capitalizing on our existing
private data network, we launched our Internet service provider business,
SatyamOnline, on November 22, 1998 and became the first private national
Internet service provider in India. We began offering SatyamOnline Internet
access and related services to India's consumer market as a complement to the
network services offered to our business customers. Our SatyamOnline service was
the first in India to offer ready-to-use CD-ROMs enabling online registration
and immediate usage.
In October 1999, we completed our initial public offering and issued
19,205,000 ADSs (representing 4,801,250 equity shares) at a price of $4.50 per
ADS. We received approximately $79.2 million, net of underwriting discounts,
commissions and other offering costs.
On November 29, 1999, we purchased 24.5% of the outstanding shares of
IndiaWorld Communications, a private company organized under the laws of the
Republic of India, for a cash purchase price of Rs.1,222.5 million. Prior to its
acquisition by our company, IndiaWorld was a leading provider of Internet
content and services in India. In connection with this purchase, we acquired an
option to purchase the remaining 75.5% of the outstanding shares in IndiaWorld
Communications for a cash purchase price of Rs.3,767.4 million. In June 2000, we
amended the option agreement to provide for the payment of the exercise price by
us with a mix of equity shares and cash. We completed the acquisition by
exercising the option in June 2000 through the payment of Rs.2,154.3 million in
cash and the issuance of 268,500 equity shares. For U.S. GAAP reporting
purposes, the financial statements of IndiaWorld Communications have been
consolidated with our financial statements from and after December 1, 1999. The
acquisition has been accounted for as a purchase and most of the purchase price
represented goodwill.
In February 2000, we completed a secondary offering and issued 1,868,700
ADSs (representing 467,175 equity shares) at a price at $80.00 per ADS. We
received approximately $141.2 million, net of underwriting discounts,
commissions and other costs.
In July 2000, we acquired a 25% stake in CricInfo Limited, a private
company incorporated in the United Kingdom, through the issuance of 2,204,720
ADSs (representing 551,180 equity shares). Also in July 2000, we entered into an
agreement to acquire all of the outstanding capital stock of Indiaplaza.com, a
private company incorporated in California. We completed our acquisition of
Indiaplaza.com in December 2000 through the issuance of an aggregate of 455,192
ADSs (representing
14
113,798 equity shares) to the former equity holders of Indiaplaza.com. A portion
of those ADSs are being held by an escrow agent to compensate us for potential
damages relating to any breach of the merger agreement and will be released on
January 1, 2002 if no such breach is identified. For U.S. GAAP reporting
purposes, the financial statements of Indiaplaza.com have been consolidated with
our financials statements from and after December 8, 2000.
On October 24, 2001, Sify announced its proposal to divest its
e-business (software services) division to Satyam Computer Services, its parent
company. The software services division which provides business-to-business
e-commerce and web site development, covers IT services in India, Australia and
USA. Revenues from this segment represented approximately 21% of Sify's total
revenue during quarter ended September 30, 2001. The objective of the
divestment is that Satyam Computer Services would concentrate on its core
business of software services and Sify will concentrate in Internet services.
The buyout of this division by Satyam Computer Services is expected to be
effective January 1, 2002 with a price ranging in the region of $7 million. It
is estimated that the Company would not incur a loss in this transaction.
The divestment and final fair value of this transaction will be
determined subject to due processes of the Board of Directors of the Company as
well as any necessary approval of our stockholders. However, we, in accordance
with the provisions of Accounting Principles Board (APB) Opinion 30 and the
Emerging Issues Task Force 95-18, concluded that the software services division
is the subject of a formal plan for disposal and that the measurement date as
defined in APB 30 occurred prior to the approval of the stockholders because
management and members of the board of directors controlled enough votes to
approve the plan of disposal at the next shareholder meeting. Accordingly, the
results of operations of the software services division for all periods have
been reported separately as "Income/Loss from discontinued operations."
Also in October 2001, we entered into a loan transaction with CricInfo
Limited, a private company incorporated in the United Kingdom in which we
acquired a 25% stake in July 2000, for the issuance of unsecured convertible
loan notes by CricInfo with a principal amount of up to GBP 1,000,000, subject
to the satisfaction of certain performance measures by CricInfo. These loan
notes, which provide for an interest rate of 8% per annum, are convertible into
CricInfo shares by us at any time and redeemable by CricInfo on October 5, 2004.
Approximately 30% of our revenues in fiscal 2001 was denominated in
foreign currency. Our expenses denominated in foreign currency include the cost
of purchasing software from BroadVision, Open Market and Sterling Commerce. Our
foreign exchange loss was Rs.0 and Rs.0.01 million in fiscal 1997 and 1998,
respectively, and our foreign exchange gain was Rs.0.6 million, Rs.5.4 million
and Rs.162 million for fiscal 1999, 2000 and 2001, respectively. Our foreign
exchange gain in fiscal 1999, 2000 and 2001 was primarily due to our short-term
investment of the proceeds from our public offerings in interest bearing
instruments denominated in U.S. dollars.
REVENUES
In the past, for reporting purposes, we classified our revenues into four
divisions:
- corporate network/data services;
- software services (e-business services);
- consumer Internet access services; and
- online portal services and content offerings.
However, as noted elsewhere in this report, since we plan to sell our
software services business to our parent company, Satyam Computer Services, and
have reported that business as discontinued operations.
Our corporate network/data services division derives its revenues from
dial-up and dedicated Internet access, electronic commerce, electronic data
interchange, e-mail and other messaging services, virtual private networks, web
hosting and web-based solutions. An important asset in this business is the
quality and reach of our network which, as of the date of this report, is the
largest IP protocol network in India. We also generate a portion of our revenues
through the sale of third-party hardware. This division also derives its
revenues from website hosting based on our customer's bandwidth requirements,
and we charge co-location customers for use of our physical facilities. Our
corporate private network customers typically enter into arrangements that
provide for an initial installation fee and recurring service fees. We also
generate a portion of our revenues from Internet networking solutions.
Our software services division derives its revenues from providing
information technology services, including developing software codes and systems
or applications related to the Internet.
Our consumer Internet access services division derives its revenues
primarily from the "SatyamOnline" dial-up business and the "iway" public
Internet access business. We offer our prepaid subscriptions in a number of time
period and pricing plans through ready-to-use CD-ROMs sold through our
distribution partners. Our distribution partners resell the CD-ROMs to consumers
for online registration and immediate Internet access. Revenues are recognized
ratably as the prepaid subscription is used with any unused portion recognized
as revenue at the expiration date of the subscription. We also generate revenues
through international roaming and e-mail registration fees. As of September 30,
2001, we had over 550,000 Internet access subscribers and there were 520 iway
cafes operational in five cities providing Internet access to consumers on a
non-subscription basis.
Our online portal services and content offerings division derives
revenues from third-party advertising and commissions from electronic commerce
transactions on our websites. Advertising fees are recognized over the period in
which the advertisements are hosted on our websites.
EXPENSES
Cost of revenues for the
15
corporate network/data services division consists of telecommunications costs
necessary to provide service, customer support costs and the cost of providing
network operations.
Cost of revenues for the software services division consists primarily of
third-party software and hardware purchased from our strategic partners for
resale and direct labor costs for initial installation and recurring customer
support.
Cost of revenues for the consumer Internet access services division
consists primarily of recurring telecommunications costs necessary to provide
service to subscribers. Telecommunications costs include the costs of providing
local telephone lines to our points of presence, the costs of using third-party
networks pursuant to service agreements and leased line costs. Bandwidth costs
are presently controlled to a significant extent by VSNL, the government
controlled provider which also competes with us in the Internet access business.
We are addressing these costs issues through alternative bandwidth sources and
the establishment of our own international access gateways. Until recently,
private companies in India were not permitted to operate their own international
gateways. Our initiatives are expected to result in bandwidth cost relief over
the next several quarters.
Another recurring cost for the consumer Internet access services division
is the personnel and related operating expenses associated with customer support
and network operations. We expect that customer support and network operations
expenses will decrease as a percentage of revenues as we more efficiently
utilize these capabilities across a larger customer base assuming that
subscription rates stabilize.
The cost of revenues for the online portal and content offerings division
includes the labor cost of developing and maintaining our websites, the cost of
third-party software and the cost of obtaining content from third-party vendors.
Selling, general and administrative expenses consist primarily of
salaries and commissions for sales and marketing personnel, salaries and related
costs for executive, financial and administrative personnel, sales, marketing,
advertising and other brand building costs, travel costs, and occupancy and
overhead costs.
As of September 30, 2001, a total of 1,200,000 equity shares were
reserved for issuance under our Associate Stock Option Plan, or ASOP. As of
September 30, 2001, we had outstanding an aggregate of 506,100 options (net of
172,120 options forfeited by employees and 200 options exercised for equity
shares) under our ASOP with a weighted average exercise price equal to
approximately Rs.2,459 per equity share. The unamortized deferred compensation
related to these grants amounted to Rs.54.6 million as at September 30, 2001.
We depreciate our tangible assets on a straight-line basis over the
useful life of assets, ranging from two to five years and, in the case of
buildings, 28 years. Historically, we have amortized the goodwill recognized in
acquisition transactions, including in the Indiaplaza.com and IndiaWorld
transitions, on a straight-line basis over five years. At September 30, 2001,
our management assessed in accordance with our accounting policy the goodwill
that we were carrying on our books in connection with the significant
acquisitions and investments made by us in Internet content and commerce
companies in 1999 and 2000, including IndiaWorld and Indiaplaza. Based on that
evaluation, which was measured at enterprise level, we concluded that these
intangible assets were impaired. Accordingly, for the quarter ended September
30, 2001, we recorded a non-cash charge of Rs.4,115.1 million ($86.1 million) to
write-off substantially all of the goodwill related to these acquisitions and
investments. In addition, at September 30, 2001, we recorded a non-cash charge
of Rs.1,089.9 million ($22.8 million) to reflect an impairment of investment in
affiliate related to our investment in CricInfo.
We face significant competitive pricing pressure from VSNL and a number
of new competitors that are entering India's Internet service provider market.
This competition has resulted in erosion in selling prices in the consumer
Internet access business. In the face of this competition, we do not anticipate
being able to maintain our present subscriber retention rates as our subscriber
base grows.
In addition to our operations and those of our consolidated subsidiaries,
our financial statements include our pro rata share of the financial results of
those companies in which we have significant, non-controlling minority
interests, such as CricInfo Limited, Placements.com Limited and Refco-Sify
Securities India Private Limited. These investments are accounted for under the
equity method of accounting.
Since our inception, we have experienced negative cash flow from
operations and have incurred net losses. Our ability to generate positive cash
flow from operations and achieve profitability is dependent on our ability to
continue to grow our revenue base and achieve further operating efficiencies.
For fiscal 1997 through 2001 and the six months ended September 30, 2001,
we incurred negative cash flow from operations of approximately Rs.30.4 million,
Rs.74.0 million, Rs.172.1 million, Rs.527.2 million, Rs.1,308.4 million and
Rs.374.8 million ($7.8 million), respectively. For fiscal 1997 through 2001 and
the six months ended September 30, 2001, we incurred net losses of approximately
Rs.26.3 million, Rs.100.6 million, Rs.187.4 million, Rs.381.9 million,
Rs.2,509.0 million ($52.5 million) and Rs.6,397.6 million ($133.8 million),
respectively. As of September 30, 2001, we had an accumulated deficit of
approximately Rs.9,603.4 million ($200.9 million).
16
RESULTS OF OPERATIONS
Quarter ended September 30, 2001 compared to quarter ended September 30, 2000
Revenues. We recognized Rs.410.4 million ($8.6 million) in revenues for
the quarter ended September 30, 2001, as compared to Rs.309.2 million ($6.5
million) for the quarter ended September 30, 2000, representing an increase of
Rs.101.2 million, or 32.7 %. This increase was attributable to a significant
increase in the corporate network/data services, which increased by 43% over the
same period in the prior year. From September 30, 2000 to September 30, 2001,
our number of corporate customers grew from more than 550 to more than 650. The
corporate services businesses successfully obtained a significant number of new
orders from prominent customers with operations throughout India. Internet
access revenues increased by 14%, due to an increase in the number of
subscribers offset by a sharp decrease in prices of consumer access. We expect
the market for consumer Internet access to remain extremely price competitive.
Our online portal and content offerings division accounted for Rs.50.5 million
of revenues for the quarter ended September 30, 2001 as compared to Rs.40.0
million for the quarter ended September 30, 2000, representing an increase of
26%.
Cost of Revenues. Cost of revenues was Rs.310.3 million ($6.5 million),
or 75.6 % of revenues, for the quarter ended September 30, 2001, compared to
Rs.230.7 million, or 74.6% of revenues, for the quarter ended September 30,
2000, representing an increase of Rs.79.6 million, or 34.5%. This increase was
primarily attributable to a Rs.65.8 million increase in leased line charges due
to the increased requirement for international bandwidth and last mile
connectivity.
Selling, general and administrative expenses. Selling, general and
administrative expenses were Rs.465.8 million ($ 9.7 million) for the quarter
ended September 30, 2001, compared to Rs.513.2 million for the quarter ended
September 30, 2000, representing a decrease of Rs.47.4 million, or 9.2%. This
decrease was primarily attributable to a Rs.126.0 million decrease in marketing
expenses, a Rs.53.1 million increase in depreciation, a Rs.10.5 million increase
in personnel expenses and a Rs.15.1 million increase in provision for doubtful
debts.
Amortization and impairment of goodwill. Amortization and impairment of
goodwill was Rs.4,115.1 million ($86.1 million) for the quarter ended September
30, 2001, compared to Rs.271.8 million for the quarter ended September 30, 2000.
This increase was attributable to the impairment of goodwill arising out of our
acquisitions of IndiaWorld Communications and Indiaplaza.
Amortization of deferred stock compensation gain. Amortization of
deferred stock compensation gain was Rs.2.4 million ($0.05 million) for the
quarter ended September 30, 2001, compared to an expense of Rs.25.7 million for
the quarter ended September 30, 2000. This was attributable to the reversal of
earlier amortization on account of the surrender of options by employees on
resignation.
Equity in losses of affiliate. Equity in losses of affiliate amounted to
Rs.1,107 million ($23.2 million) for the quarter ended September 30, 2001
compared to Rs.69.1 million for the quarter ended September 30, 2000. This
increase was primarily attributable to the impairment of our investment in
CricInfo Limited amounting to Rs.1,089.1 million.
Other income (Net). Other income was Rs.5.1 million ($0.1 million) for
the quarter ended September 30, 2001, compared to Rs.69 million for the quarter
ended September 30, 2000, representing a decrease of Rs.63.9 million, or 92.6%.
This decrease was primarily attributable to a reduction in interest income
earned on deposits placed with banks.
Loss from discontinued operation. Loss from discontinued operation was
Rs.13.1 million ($0.3 million) for the quarter ended September 30, 2001,
compared to a profit of Rs.36.2 million for the quarter ended September 30,
2000. This decrease was primarily attributable to an increase of Rs.22.2 million
in personnel expenses, an increase in web development charges by Rs.2.4 million,
an increase in administrative expenses by Rs.22.4 million, an increase in
depreciation of Rs.7.3 million which was partly offset by a decrease in
marketing expenses by Rs.5.9 million.
Net Loss. Our net loss was Rs.5,592.1 million ($117 million) for the
quarter ended September 30, 2001, compared to a net loss of Rs.614.9 million for
the quarter ended September 30, 2000. This increase was primarily attributable
to the write-off of goodwill arising out of our acquisitions of IndiaWorld and
IndiaPlaza and the impairment of investment in Cricinfo.
Six months ended September 30, 2001 compared to six months ended September 30,
2000.
Revenues. We recognized Rs.759.3 million ($15.9 million) in revenues for
the six months ended September 30, 2001, as compared to Rs.573.7 million ($12.0
million) for the six months ended September 30, 2000, representing an increase
of Rs.185.6 million, or 32.4%. This increase was attributable to a significant
increase in the corporate network/data services division, which increased by 55%
over the same period in the prior year.
17
Cost of Revenues. Cost of revenues were Rs.596.2 million ($12.5 million),
or 78.5% of revenues, for the six months ended September 30, 2001, compared to
Rs.393.0 million, or 68.5% of revenues, for the six months ended September 30,
2000, representing an increase of Rs.203.2 million, or 51.7%. This increase was
primarily attributable to an increase of Rs.142.07 million in leased line
charges due to the increased requirement for international bandwidth and last
mile connectivity and a Rs.21.9 million increase in direct personnel costs
partially offset by a reduction in product development expenses, hosting charges
and other costs.
Selling, general and administrative expenses. Selling, general and
administrative expenses were Rs.950.7 million ($19.9 million) for the six months
ended September 30, 2001, compared to Rs.866.7 million for the six months ended
September 30, 2000, representing an increase of Rs.84.0 million, or 9.7%. This
increase was primarily attributable to a Rs.187.2 million decrease in marketing
expenses, a Rs.106.9 million increase in depreciation, a Rs.73.2 million
increase in personnel expenses and a Rs.26.7 million increase in provision for
doubtful debts.
Amortization and impairment of goodwill. Amortization and impairment of
goodwill was Rs.4,408.1 million ($92.2 million) for the six months ended
September 30, 2001, compared to Rs. 358.8 million for the six months ended
September 30, 2000. This increase was attributable to the impairment of the
goodwill arising out of our acquisitions of IndiaWorld Communications and
Indiaplaza during the six months ended September 30,2001.
Amortization of deferred stock compensation. Amortization of deferred
stock compensation expense was Rs.14 million ($0.3 million) for the six months
ended September 30, 2001 compared to Rs.42.9 million for the six months ended
September 30, 2000. This decrease was attributable to the reversal of earlier
amortization due to the surrender of options by employees on resignation.
Equity in losses of affiliate. Equity in losses of affiliate amounted to
Rs.1,205.3 million ($25.2 million) for the six months ended September 30, 2001
compared to Rs.74.5 million for the six months ended September 30, 2000. This
increase was attributable to the impairment of our investment in Cricinfo
Limited amounting to Rs.1,089.1 million.
Other income (Net). Other income was Rs.34.0 million ($0.7 million) for
the six months ended September 30, 2001, compared to Rs.188.7 million for the
six months ended September 30, 2000, representing a decrease of Rs.154.7
million, or 82.0%. This decrease was primarily attributable to a reduction in
interest income earned on deposits placed with banks.
Loss from discontinued operation. Loss from discontinued operation was
Rs.25.8 million ($0.5 million) for the six months ended September 30, 2001,
compared to a profit of Rs.39.5 million for the six months ended September 30,
2000. This decrease was primarily attributable to an increase of Rs.67.6 million
in personnel expenses, an increase in web development charges by Rs.5.6 million,
an increase in administrative expenses by Rs.28.5 million, an increase in
provision for depreciation of Rs.21.7 million and partly offset by a decrease in
marketing expenses by Rs.5.4 million.
Net Loss. Our net loss was Rs.6,397.6 million ($133.8 million) for the
six months ended September 30, 2001, compared to a net loss of Rs.793.2 million
for the six months ended September 30, 2000. This increase was primarily
attributable to the write-off of goodwill arising out of our acquisitions of
IndiaWorld and IndiaPlaza and the impairment of investment in Cricinfo during
the six months ended September 30,2001.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through a
combination of equity sales and borrowings from institutions and banks. During
fiscal 1998, 1999 and 2000, we received Rs.38.5 million, Rs.307.5 million and
Rs.10,220.0 million, respectively, in net proceeds from the sale of equity
shares.
In July 1999, we agreed to sell 481,000 equity shares to Sterling
Commerce for $5.0 million. We completed this transaction in September 1999 and
used the funds for general corporate purposes, primarily the repayment of debt.
In October 1999, we completed our initial public offering and issued
19,205,000 ADSs (representing 4,801,250 equity shares) at a price of $4.50 per
share. We received approximately $79.2 million in cash, net of underwriting
discounts, commissions and other offering costs. We used approximately $28.0
million of these proceeds to purchase 24.5% of the outstanding shares of
IndiaWorld Communications and an additional $12.0 million as a non-refundable
deposit towards purchasing the remaining 75.5% of the outstanding shares of
IndiaWorld Communications. We used the balance of these proceeds to fund network
expansion and enhancements, to advertise and promote our brand and for general
corporate purposes. Pending these uses we invested these proceeds in interest
bearing instruments denominated in dollars.
In February 2000, we completed a secondary offering and issued 1,868,700
ADSs (representing 467,175 equity shares) at a price of $80.00 per ADS. We
received approximately $141.2 million, net of underwriting discounts, commission
and other
18
offering costs. We used approximately $48.0 million of the proceeds from our
public offering to complete our acquisition of IndiaWorld Communications. The
balance of the proceeds are being used for general corporate purposes. Pending
this use we invested these proceeds in interest bearing instruments denominated
in dollars.
On October 24, 2001, Satyam Computer Services released its financial
results for the September 30, 2001 fiscal quarter in a press release. That press
release included a section with comments on each significant subsidiary of
Satyam Computer Services. In that section, Satyam Computer Services announced
several initiatives including:
- the proposed sale of our software services division to Satyam Computer
Services (see Notes to the financial statements included with this
report);
- the strategic decision by Satyam Computer Services to divest its Sify
stake; and
- the determination by Satyam Computer Services that, based on the
current financial status of Sify and the expected software services
divestment transaction, Satyam Computer Services will not invest any
further funds in Sify (none of which had been provided since well
prior to our initial public offering of ADSs on Nasdaq).
Please see our Form 6-K dated October 24, 2001 for the full text of the
comments made by Satyam Computer Services and a related press release by us.
The following table summarizes our statements of cash flows for the
periods presented:
SIX MONTHS ENDED
FISCAL YEAR ENDED MARCH 31, SEPTEMBER 30,
-------------------------------------------------------------------- ---------------------------
1997 1998 1999 2000 2001 2001 2001
----------- ------------ ------------ ----------- -------------- -------------- -----------
INDIAN RUPEES U.S. DOLLARS
------------------------------------------------------------------------------------ -----------
(IN THOUSANDS)
Net loss from continuing
operations .................... Rs.(26,337) Rs.(100,590) Rs.(187,376) Rs(381,896) Rs.(2,684,187) Rs.(6,371,785) $ (133,301)
Net decrease (increase) in
working capital ............... (4,625) 7,257 (34,434) (406,189) (236,303) (137,403) (2,876)
Other adjustments for non-
cash items .................... 536 19,383 49,703 260,837 1,718,073 5,943,853 124,349
Net cash provided by (used
in) operating activities
- continuing operations ....... (30,426) (73,950) (172,107) (527,248) (1,202,417) (565,335) (11,828)
- discontinued operations ..... (105,944) 190,498 3,985
Net cash provided by (used
in) investing activities
- continuing operations ....... (3,230) (77,070) (144,196) (2,458,384) (4,056,600) (202,029) (4,227)
- discontinuing operations .... (281,892) (7,082) (148)
Net cash provided by (used
in) financing activities
- continuing operations ....... 35,138 159,449 431,939 10,167,709 (216,466) (4,618) (95)
Effect of exchange rate
Changes on cash ............... -- -- -- -- -- (2,574) (54)
Net increase (decrease) in
cash and cash equivalents ..... 1,482 8,429 115,636 7,182,077 (5,863,319) (591,140) (12,367)
Our principal capital and liquidity needs historically have related to
developing our network infrastructure and our corporate network and electronic
commerce products, establishing our customer service and support operations,
developing our sales and marketing activities and for general working capital
needs. Prior to 1998, our capital needs were primarily met by funding from our
parent company, Satyam Computer Services, and borrowings from institutions and
banks. As we placed greater emphasis on expanding our network infrastructure and
developing our consumer Internet access and online portal and content services,
we sought additional capital from other sources, including vendor capital leases
and other vendor financing arrangements and through private placements of our
securities. During recent periods, we have also expended significant funds in
our acquisition and investment program, including the IndiaWorld Communications
transaction.
Cash used in operating activities for the six months ended September 30,
2001 was Rs.374.8 million ($7.8 million) and was attributable to cash used in
continuing operations of Rs.565.3 million ($11.8 million) which was partly
offset by cash provided by discontinued operations of Rs.190.5 million ($4.0
million). Cash used in operating activities of continuing operations for the
half year ended September 30, 2001 was primarily attributable to a net loss of
Rs.6,371.8 million ($133.3 million), decrease in advances from customers of
Rs.73.4 million ($1.5 million), decrease in accrued expenses of Rs.64.1 million
($1.3 million) and decrease in deferred revenue of Rs.110.3 million ($2.3
million), which was partly offset by depreciation, amortisation and impairment
of goodwill of Rs.4,696.2 million ($98.2 million), an increase in equity in
losses of affiliates of Rs.1,205.3 million ($25.2 million) and an increase in
provision for doubtful receivables of Rs.28.1 million ($0.6 million).
19
Cash used in investing activities of continuing operations during the six
months ended September 30, 2001 was Rs.202 million ($4.2 million), principally
as a result of the purchase of routers, modems, ports, servers and other capital
equipment in connection with the expansion of our servers and other capital
equipment in connection with the expansion of our network. Cash used in
investing activities of discontinued operations was Rs.7.1 million ($0.1
million)
Cash used in financing activities for the six months ended September 30,
2001 was Rs.4.6 million ($0.1 million), which pertained to the repayment of
Rs.4.6 million ($0.1 million) principal payments under capital lease
obligations.
As of September 30, 2001, we had spent approximately Rs.1,197.9 million
to develop and deploy our network infrastructure. As of September 30, 2001, we
had aggregate commitments for capital expenditures in an amount equal to
approximately Rs.81.4 million ($1.7 million), of which we had advanced
approximately Rs.21.5 million ($0.5 million).
In the ordinary course of our business we regularly engage in discussions
and negotiations relating to potential investments, strategic partnerships and
acquisitions. We will continue to be aggressive in our efforts to identify one
or more such opportunities. However, we cannot assure you that we will be able
to identify or complete any such transaction on favorable terms, or at all.
Our highest operational priority for the fiscal year ending March 31,
2002 is to reduce the negative cash flow incurred by our company during its
rapid growth stage and, ideally, to reach a cash flow neutral or cash flow
positive operating position by the end of this fiscal year. Accomplishment of
these objectives will require continued progress in our business, including
continued significant growth in revenues, which cannot be assured. Nonetheless,
we expect to incur continued losses in the near future. Based upon our present
business and funding plans and a May 2001 government policy change that
increased the permissible foreign ownership in certain Internet service
providers, including our company, from 49.0% to 74.0%, we believe that our cash
and cash equivalents of $17.8 million as of September 30, 2001 and, if
necessary, other resources believed to be available to us, are sufficient to
meet our currently known requirements in foreseeable future In light of the
highly dynamic nature of our business, however, we cannot assure you that our
capital requirements and sources will not change significantly in the future.
In order to provide further financial flexibility, we are actively
investigating opportunities to raise additional capital, which could be in the
form of debt, equity, or a combination. As noted elsewhere in this report, our
ability to raise funds through the sale of equity is limited by foreign
ownership restrictions imposed on us by Indian law and the terms of our Internet
service provider license. Until recently, Government of India policies limited
the total foreign equity in an Internet service provider to 49%. Our license
currently provides that the total foreign equity in our company may not, at any
time, exceed 49% of our total equity. In May 2001, the Department of Commerce
and Industry increased the limit on foreign direct investment for Internet
companies, including our company, from 49% to 74%. If additional funds are
raised through the issuance of equity or convertible debt securities, the
percentage ownership of our stockholders and the holders of our ADSs will be
reduced and these securities may have rights, preferences or privileges senior
to those of our stockholders and the holders of our ADSs. We cannot assure you
that additional financing will be available on terms favorable to us, or at all.
If adequate funds are not available or are not available on acceptable terms,
our ability to fund and expand our operations, take advantage of unanticipated
opportunities, develop or enhance Internet content, features or services, or
otherwise respond to competitive pressures will be significantly limited. Our
business, results of operations and financial condition would be materially
adversely affected by any such limitation.
INCOME TAX MATTERS
As of March 31, 2001, the end of our most recently completed fiscal year,
we had a net operating loss carryforward of approximately Rs.1,777.5 million
($37.2 million) for financial reporting purposes. Under Indian law, loss
carryforwards from a particular year may be used to offset taxable income over
the next eight years.
The statutory corporate income tax rate in India is currently 35.0%. For
fiscal 2001, this tax rate was subject to a 13.0% surcharge resulting in an
effective tax rate of 39.6%. The tax surcharge for fiscal 2002 has been reduced
to 2.0%. We cannot assure you that the surcharge will be in effect for a limited
period of time or that additional surcharges will not be implemented by the
Government of India. Dividends declared, distributed or paid by an Indian
corporation are subject to a dividend tax of 10.2%, including the applicable
surcharge for fiscal 2001, of the total amount of the dividend declared,
distributed or paid. This tax is not paid by stockholders nor is it a
withholding requirement, but rather it is a direct tax payable by the
corporation.
EFFECTS OF INFLATION
Inflation has not had a significant effect on our results of operations
and financial condition to date. However, India has experienced relatively high
rates of inflation. According to the Economist Intelligence Unit, the rates of
inflation in India for 1997 through 2000 were 7.2%, 13.2%, 5.0% and 4.3%,
respectively. Under our Internet service provider license, we are given
20
the right to establish the prices we charge to our subscribers, as determined by
market forces. However, under the conditions of our license, the Telecom
Regulatory Authority of India, or TRAI, may review and fix the prices we charge
our subscribers at any time. If the TRAI were to fix prices for the Internet
service provider services we provide, we might not be able to increase the
prices we charge our subscribers to mitigate the impact of inflation, which
could have a material adverse effect on our business, results of operations and
financial condition.
FOREIGN EXCHANGE LOSS
Our foreign exchange gain was Rs.24.8 million ($0.5 million) and Rs.68.2
million for the quarters ended September 30, 2001 and September 30, 2000,
respectively. Our foreign exchange gain was primarily due to our short-term
investment of the proceeds from our public offerings in interest bearing
instruments denominated in U.S. dollars.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued Statement No. 141, Business Combinations,
and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. Statement 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of.
Furthermore, any goodwill and any intangible asset determined to have an
indefinite useful life that are acquired in a purchase business combination
completed after June 30, 2001 will not be amortized, but will continue to be
evaluated for impairment in accordance with the appropriate pre-Statement 142
accounting literature. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001 will continue to be subject to
amortization prior to the adoption of Statement 142.
We are required to adopt the provisions of Statement 141 immediately,
except with regard to business combinations initiated prior to July 1, 2001, and
Statement 142 effective April 1, 2002. Statement 141 will require upon adoption
of Statement 142, that we evaluate our existing intangible assets and goodwill
that were acquired in a prior purchase business combination, and to make any
necessary reclassifications in order to conform with the new criteria in
Statement 141 for recognition apart from goodwill. Upon adoption of Statement
142, we will be required to reassess the useful lives and residual values of all
intangible assets acquired in purchase business combinations, and make any
necessary amortization period adjustments by the end of the first interim period
after adoption, expected to be the fiscal quarter ended June 30, 2002. In
addition, to the extent an intangible asset is identified as having an
indefinite useful life, we will be required to test the intangible asset for
impairment in accordance with the provisions of Statement 142 within that first
interim period. Any impairment loss will be measured as of the date of adoption
and recognized as the cumulative effect of a change in accounting principle in
the first interim period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require us to perform an assessment of whether there is an
indication that goodwill and equity-method goodwill is impaired as of the date
of adoption. To accomplish this we must identify our reporting units and
determine the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of the date of adoption. We will then have up to six months
from the date of adoption to determine the fair value of each reporting unit and
compare it to the reporting unit's carrying amount. To the extent a reporting
unit's carrying amount exceeds its fair value, an indication exists that the
reporting unit's goodwill may be impaired and we must perform the second step of
the transitional impairment test. In the second step, we must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in our statement of operations.
Because of the extensive effort needed to comply with Statements 141 and
142, it is not practicable to reasonably estimate the impact of adopting these
Statements on our financial statements at the date of this report, including
whether any transitional impairment losses will be required to be recognized as
the cumulative effect of a change in accounting principle. At
21
September 30, 2001, we were carrying on our consolidated balance sheet goodwill
amounting to Rs.87.2 million pertaining to goodwill and other intangible assets.
If either present accounting principles or the new standards discussed above
require that an impairment in value be recognized, we would be required to write
down the carrying value of the asset to its estimated fair value with an
offsetting charge to our statement of operations.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The standard is
effective for fiscal years beginning after June 15, 2002.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires that
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. Under SFAS No. 144, discontinued operations will no longer be
measured at net realizable value or include amounts for operating losses that
have not yet been incurred. The provisions of SFAS No. 144 are effective for
financial statements issued for fiscal years beginning after December 15, 2001.
The Company is currently evaluating the impact of SFAS 143 and 144
on its operations.
RECENT DEVELOPMENTS
On October 24, 2001, Satyam Computer Services released its financial
results for the September 30, 2001 fiscal quarter in a press release. That press
release included a section with comments on each significant subsidiary of
Satyam Computer Services. In that section, Satyam Computer Services announced
several initiatives including:
- the proposed sale of our software services division to Satyam
Computer Services (see Notes to the financial statements included
with this report);
- the strategic decision by Satyam Computer Services to divest its
Sify stake; and
- the determination by Satyam Computer Services that, based on the
current financial status of Sify and the expected software
services divestment transaction, Satyam Computer Services will not
invest any further funds in Sify (none of which had been provided
since well prior to our initial public offering of ADSs on
Nasdaq).
Please see our Form 6-K dated October 24, 2001 for the full text of the
comments made by Satyam Computer Services and a related press release by us.
RISKS RELATED TO OUR BUSINESS
Any investment in our ADSs involves a high degree of risk. You should
consider carefully the following information about these risks, together with
the other information contained in this report, before you decide to buy our
ADSs. If any of the following risks actually occurs, our company could be
seriously harmed. In any such case, the market price of our ADSs could decline,
and you may lose all or part of the money you paid to buy our ADSs.
RISKS RELATED TO INVESTMENTS IN INDIAN COMPANIES
We are incorporated in India, and a significant majority of our assets
and employees are located in India. Consequently, our financial performance and
the market price of our ADSs will be affected by changes in exchange rates and
controls, interest rates, Government of India policies, including taxation
policies, as well as political, social and economic developments affecting
India.
Political instability could halt or delay the liberalization of the
Indian economy and adversely affect business and economic conditions in
India generally and our business in particular.
During the past decade, the Government of India has pursued policies of
economic liberalization, including significantly relaxing restrictions on the
private sector. Nevertheless, the role of the Indian central and state
governments in the Indian economy as producers, consumers and regulators has
remained significant. The Government of India has changed five times since 1996.
The rate of economic liberalization could change, and specific laws and policies
affecting technology companies, foreign investment, currency exchange rates and
other matters affecting investment in our securities could change as well. A
significant change in India's economic liberalization and deregulation policies
could adversely affect business and economic conditions in India generally and
our business in particular.
Conflicts in South Asia and terrorist activities in the United States
could adversely affect the economy and cause our business to suffer.
South Asia has from time to time experienced instances of civil unrest
and hostilities among neighboring countries, including between India and
Pakistan. In April 1999, India and Pakistan conducted long-range missile tests.
Since May 1999, military confrontations between India and Pakistan have occurred
in the Himalayan region of Kargil and other border areas. Further, in October
1999 the leadership of Pakistan changed as a result of a coup led by the
military. On September 11, 2001, terrorist attacks were conducted in the United
States, which caused various adverse consequences, including adverse economic
consequences. In addition, in October 2001, the U.S. commenced military
operations against various targets located in Afghanistan. These events are
widely believed to be provoking a further slow-down in worldwide economic
activity. Events of this nature could influence the global economy and/or Indian
economy and could have a material adverse effect on the market for securities of
Indian companies, including our ADSs, and on the market for our services.
22
We are subject to foreign investment restrictions under Indian law that
limit our ability to attract foreign investors which, together with the
lack of a public market for our equity shares, may adversely impact the
value of our ADSs.
Currently, there is no public trading market for our equity shares in
India or elsewhere nor can we assure you that we will take steps to develop one.
Our equity securities are not traded publicly in India, but are only traded on
Nasdaq through the ADSs as described in this report. Until recently, under
Indian laws and regulations our depositary could not accept deposits of
outstanding equity shares and issue ADRs evidencing ADSs representing such
equity shares without prior approval of the Government of India. The Reserve
Bank of India recently announced new fungibility regulations permitting the
conversion of ADSs to equity shares and the reconversion of equity shares to
ADSs provided that the actual number of ADSs outstanding after such reconversion
is not greater than the original number of ADSs outstanding. If you elect to
surrender your ADSs and receive equity shares, you will not be able to trade
those equity shares on any securities market and under present law likely will
not be permitted to reconvert those equity shares to ADSs.
If in the future a market for our equity shares is established in India
or another market outside of the United States, those shares may trade at a
discount or premium to the ADSs in part because of restrictions on foreign
ownership of the underlying shares. Under current Indian regulations and
practice, the approval of the Reserve Bank of India is required for the sale of
equity shares underlying ADSs by a non-resident of India to a resident of India
as well as for renunciation of rights to a resident of India, unless the sale of
equity shares underlying the ADSs is through a recognized stock exchange or in
connection with the offer made under the regulations regarding takeovers. Since
exchange controls still exist in India, the Reserve Bank of India will approve
the price at which the equity shares are transferred based on a specified
formula, and a higher price per share may not be permitted. Holders who seek to
convert the rupee proceeds from a sale of equity shares in India into foreign
currency and repatriate that foreign currency from India will have to obtain
Reserve Bank of India approval for each transaction. We cannot assure you that
any required approval from the Reserve Bank of India or any other government
agency can be obtained.
Because we operate our business in India, exchange rate fluctuations may
affect the value of our ADSs independent of our operating results.
The exchange rate between the rupee and the U.S. dollar has changed
substantially in recent years and may fluctuate substantially in the future.
During the three-year period from October 1, 1998 through September 30, 2001,
the value of the rupee against the U.S. dollar declined by approximately 13%.
Devaluations of the rupee will result in higher expenses to our company for the
purchase of capital equipment, such as servers, routers, modems and other
telecommunications and computer equipment, which is generally manufactured in
the U.S. In addition, our market valuation could be materially adversely
affected by the devaluation of the rupee if U.S. investors analyze our value
based on the U.S. dollar equivalent of our financial condition and results of
operations.
The Government of India may change its regulation of our business or the
terms of our license to provide Internet access services without our
consent, and any such change could decrease our revenues and/or increase
our costs which would adversely affect our operating results.
Our business is subject to government regulation under Indian law and to
significant restrictions under our Internet service provider license issued by
the Government of India. These regulations and restrictions include the
following:
- Our Internet service provider license has a term of 15 years and
we have no assurance that the license will be renewed. If we are
unable to renew our Internet service provider license in 2013 for
any reason, we will be unable to operate as an Internet service
provider in India and will lose one of our primary sources of
revenue.
- The Telecom Regulatory Authority of India, or TRAI, a statutory
authority constituted under the Telecom Regulatory Authority of
India Act, 1997, maintains the right to regulate the prices we
charge our subscribers. The success of our business model depends
on our ability to price our services at levels we believe are
appropriate. If the TRAI sets a price floor, we may not be able to
attract and retain subscribers. Likewise, if the TRAI sets a price
ceiling, we may not be able to generate sufficient revenues to
fund our operations. Similarly, an action of the Indian Parliament
may impact our ability to set the prices for our services.
- The Government of India maintains the right to take over our
entire operations or revoke, terminate or suspend our license for
national security and similar reasons without compensation to us.
If the Government of India were to take any of these actions, we
would be prevented from conducting all or part of our business.
We had outstanding performance guarantees for various statutory purposes
totaling Rs.23.1 million ($0.5 million) as of September 30, 2001. These
guarantees are generally provided to government agencies, primarily the TRAI and
the Department of Telecommunications, or DOT, as security for compliance with
and performance of terms and conditions contained in our Internet service
provider license, and Videsh Sanchar Nigam Limited, or VSNL, the
government-controlled provider of international telecommunications services in
India, towards the supply and installation of an electronic commerce platform.
These guarantees may be seized by the governmental agencies if they suffer any
losses or damage by reason of our failure to perform our obligations. Any
failure on our part to comply with governmental regulations and the terms of our
Internet service
23
provider license could result in the loss of our license and any amount
outstanding as performance guarantees, which would also prevent us from carrying
on a very significant part of our business. Further, additional laws regulating
telecommunications, electronic records, the enforceability of electronic
documents and the liability of network service providers are under consideration
and, if enacted, could impose additional restrictions on our business.
The charges for international gateways and other services presently being
provided by VSNL are the subject of a dispute pending before the TRAI and the
Telecom Disputes Settlement and Appellate Tribunal between VSNL and private
Internet service providers, including our company. VSNL has priced these
services at levels which we believe are inconsistent with the terms and
conditions on which VSNL has secured the bandwidth for its international
gateways. This is a pending matter and, as of the date of this report, no
decision has been announced. The resolution of this dispute could have a
material impact on our business.
Surcharges on Indian income taxes will increase our tax liability and
decrease any profits we might have in the future.
The statutory corporate income tax rate in India is currently 35.0%. For
fiscal 2001, this tax rate was subject to a 13.0% surcharge resulting in an
effective tax rate of 39.6%. The tax surcharge for fiscal 2002 has been reduced
to 2.0%. We cannot assure you that the surcharge will be in effect for a limited
period of time or that additional surcharges will not be implemented by the
Government of India. Dividends declared, distributed or paid by an Indian
corporation are subject to a dividend tax of 10.2%, including the applicable
surcharge for fiscal 2001, of the total amount of the dividend declared,
distributed or paid. This tax is not paid by stockholders nor is it a
withholding requirement, but rather it is a direct tax payable by the
corporation before the distribution of a dividend.
RISKS RELATED TO THE INTERNET MARKET IN INDIA
Our success will depend in large part on the increased use of the
Internet by consumers and businesses in India. However, our ability to exploit
the Internet service provider and other data service markets in India is
inhibited by a number of factors. If India's limited Internet usage does not
grow substantially, our business may not succeed.
The success of our business depends on the acceptance of the Internet in
India which may be slowed or halted by high bandwidth costs and other
technical obstacles in India.
Bandwidth, the measurement of the volume of data capable of being
transported in a communications system in a given amount of time, remains very
expensive in India, especially when compared to bandwidth costs in the United
States. Bandwidth rates are commonly expressed in terms of Kbps (kilobits per
second, or thousands of bits of data per second) or Mbps (megabits per second,
or millions of bits of data per second). Although prices for bandwidth in India
have declined recently, they are high due to, among other things, capacity
constraints.
The limited installed personal computer base in India limits our pool of
potential customers and restricts the amount of revenues that our
consumer Internet access services division may generate.
The market penetration rates of personal computers and online access in
India are far lower than such rates in the United States. For example, according
to International Data Corporation, in 2000 the Indian market contained
approximately 4.4 million Internet users compared to a total population in India
of 1.0 billion, while the U.S. market contained approximately 135 million
Internet users compared to a total population in the U.S. of 275 million.
Alternate methods of obtaining access to the Internet, such as through set-top
boxes for televisions, are currently not popular in India. There can be no
assurance that the number or penetration rate of personal computers in India
will increase rapidly or at all or that alternate means of accessing the
Internet will develop and become widely available in India. While the personal
computer penetration level in India is relatively low, we are addressing the
demand for public Internet access through the establishment of a retail chain of
public Internet access centers, which we refer to as "cybercafes," under the
"iway" brand name. Although this service creates a larger market, it also
imposes on the operator of the cybercafe the considerable costs of providing the
consumer access to a personal computer and related hardware and software.
The high cost of accessing the Internet in India limits our pool of
potential customers and restricts the amount of revenues that our
consumer Internet access services division may generate.
Our growth is limited by the cost to Indian consumers of obtaining the
hardware, software and communications links necessary to connect to the Internet
in India. If the costs required to access the Internet do not significantly
decrease, most of India's population will not be able to afford to use our
services. The failure of a significant number of additional Indian consumers to
obtain affordable access to the Internet would make it very difficult to execute
our business plan.
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The success of our business depends on the acceptance and growth of
electronic commerce in India which is uncertain and, to a large extent,
beyond our control.
Many of our existing and proposed products and services are designed to
facilitate electronic commerce in India, although there is relatively little
electronic commerce currently being conducted in India. Demand and market
acceptance for these products and services by businesses and consumers,
therefore, are highly uncertain. Although the Indian Parliament has passed the
Information Technology Act, 2000, several critical issues concerning the
commercial use of the Internet in India, such as legal recognition of electronic
records, validity of contracts entered into online and the validity of digital
signatures, remain uncertain. In addition, many Indian businesses have deferred
purchasing Internet access and deploying electronic commerce initiatives for a
number of reasons, including the existence or perception of, among other things:
- inconsistent quality of service;
- the need to deal with multiple and frequently incompatible
vendors;
- inadequate legal infrastructure relating to electronic commerce in
India;
- a lack of security of commercial data, such as credit card
numbers; and
- low number of Indian companies accepting credit card numbers over
the Internet.
If usage of the Internet in India does not increase substantially and the
legal infrastructure and network infrastructure in India are not developed
further, we are not likely to realize any benefits from our investment in the
development of electronic commerce products and services.
RISKS RELATED TO SATYAM INFOWAY
Our limited operating history makes it difficult to evaluate our
business.
We commenced operation of our private data network business in April 1998
and launched our Internet service provider operations and Internet portal
website in November 1998. Accordingly, we have a limited operating history to
evaluate our business. You must consider the risks and difficulties frequently
encountered by companies in the early stages of development, particularly
companies in the new and rapidly evolving Internet service markets. These risks
and difficulties include our ability to:
- continue to develop and upgrade our technology, including our
network infrastructure;
- maintain and develop strategic relationships with business
partners;
- offer compelling online services and content; and
- promptly address the challenges faced by early stage, rapidly
growing companies which do not have an experience or performance
base to draw on.
Not only is our operating history short, but we have determined to
compete in four businesses that we believe are complementary. These four
businesses are corporate network/data services, software services, consumer
Internet access services and online portal and content offerings. Our four
businesses were started at different times and have only been functioning
together since late in 1998. In addition, we intend to divest our software
services division to Satyam Computer Services. We do not yet know whether these
businesses will prove complementary. We cannot assure you that we will
successfully address the risks or difficulties described above. Failure to do so
could lead to an inability to attract and retain corporate customers for our
network services and subscribers for our consumer Internet services as well as
the loss of advertising revenues.
We have a history of losses and negative cash flows and anticipate this
to continue because our business plan, which is unproven, calls for
additional corporate customers and subscribers to attain profitability.
Since our founding, we have incurred significant losses and negative cash
flows. As of September 30, 2001, we had an accumulated deficit of approximately
$200.9 million. We have not been profitable and expect to incur operating losses
as we expand our services, invest in expansion of our network/data and
technology infrastructure, and advertise and promote our brand. Our business
plan assumes that businesses in India will demand private network and related
electronic commerce and web-based services. Our business plan also assumes that
consumers in India will be attracted to and use Internet access services and
content available on the Internet in increasing numbers. This business model is
not yet proven in India, and we cannot assure you that we will ever achieve or
sustain profitability or that our operating losses will not increase in the
future.
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Our ability to compete in the Internet service provider market is
hindered by the fact that our principal competitor is a
government-controlled provider of international telecommunications
services in India which enjoys significant competitive advantages over
our company.
VSNL is a government-controlled provider of international
telecommunications services in India. VSNL is also the largest Internet service
provider in India and, according to information published on VSNL's website, had
650,000 subscribers as of September 30, 2001. VSNL enjoys significant
competitive advantages over our company, including the following:
- Longer service history. VSNL has offered Internet service provider
services since August 1995, whereas we have offered Internet
service provider services only since November 1998.
- Access to network infrastructure. Because VSNL is controlled by
the Government of India, it has direct access to network
infrastructure which is owned by the Indian government.
- Greater financial resources. VSNL has significantly greater total
assets and annual revenues than our company.
Recently, VSNL has continued to aggressively reduce consumer Internet
access prices despite the lack of offsetting reductions in prevailing bandwidth
tariffs payable by private competitors, such as our company. We believe that
these practices constitute an improper cross-subsidy funded by VSNL's present
monopoly in long distance telephone service. The charges for international
gateways and other services presently being provided by VSNL are the subject of
a dispute pending before the TRAI and the Telecom Disputes Settlement and
Appellate Tribunal between VSNL and private Internet service providers,
including our company. This is a pending matter and, as of the date of this
report, no decision has been announced. Unless there is a change in government
policy or favorable resolution of this dispute, or until we are able to reduce
our bandwidth costs through other means, we will continue to face difficult
market conditions in the consumer Internet access services business.
These competitive issues may prevent us from attracting and retaining
subscribers and generating advertising revenue. This could result in loss of
market share, price reductions, reduced margins or negative cash flow for our
company's operations.
We may be required to further lower the rates we charge for our products
and services in response to new pricing models introduced by new and
existing competition in the Internet services market which would
significantly decrease our revenues.
Our corporate and software services business faces significant
competition from well-established companies, including Global E-Commerce
Limited, Sprint-RPG Limited and WIPRO-CSD. Reliance Infocom, a member of the
Reliance Group, is building a nationwide fiber optic network in India and has
announced plans to provide a range of value-added services, including corporate
connectivity services.
A significant number of new competitors have recently entered India's
recently liberalized Internet service provider market, and we expect additional
competitors to emerge in the near future. As of September 30 2001, approximately
437 companies had obtained Internet service provider licenses in India,
including 79 companies which have obtained licenses to offer Internet service
provider services throughout India. New entrants into the national Internet
service provider market in India may enjoy significant competitive advantages
over our company, including greater financial resources, which could allow them
to charge Internet access fees that are lower than ours in order to attract
subscribers. Since May 2000, we have offered unlimited Internet access to
consumers for a fixed price. A number of our competitors, including VSNL,
Dishnet and Mantra, also offer unlimited Internet access for a fixed price. In
addition, some competitors offer free Internet service. These factors have
resulted in significant reduction in actual average selling prices for consumer
ISP services over the past several quarters. We expect the market for consumer
Internet access to remain extremely price competitive.
Our online portal, www.sify.com, faces significant competition from
well-established Indian content providers, including rediff.com, which completed
its initial public offering in the United States in June 2000. Some of these
sites currently have greater traffic than our site and offer some features that
we do not. Further, the dominant Internet portals continue to be the online
services and search engine companies based in the United States, such as America
Online, Excite@Home, Lycos, Microsoft Network and Yahoo!. These companies have
been developing specially branded or co-branded products designed for audiences
in specific markets. We expect that these companies will deploy services that
are targeted at the Indian market. For example, Yahoo! launched an Indian
service in June 2000.
Increased competition may result in reduced operating margins or
operating losses, loss of market share and diminished value in our services, as
well as different pricing, service or marketing decisions. We cannot assure you
that we will be able to successfully compete against current and future
competitors.
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Our marketing campaign to establish brand recognition and loyalty for the
SatyamOnline, SIFY and iway brands could be unsuccessful or, if
successful, may not benefit our company if in the future we are no longer
permitted to use the "Satyam" trademark that we license from Satyam
Computer Services.
In order to expand our customer base and increase traffic on our
websites, we must establish, maintain and strengthen the SatyamOnline, SIFY and
iway brands. We plan to continue to incur significant marketing expenditures to
establish brand recognition and brand loyalty. If our marketing efforts do not
produce a significant increase in consumer traffic to offset our marketing
expenditures, our losses will be increased or, to the extent that we are
generating profits, our profits will be decreased. Furthermore, our Internet
portal will be more attractive to advertisers if we have a large audience of
consumers with demographic characteristics that advertisers perceive as
favorable. Therefore, we intend to introduce additional and enhanced content,
interactive tools and other services and features in the future in an effort to
retain our current subscribers and users and attract new ones. Our reputation
and brand name could be adversely affected if we are unable to do so
successfully.
"Satyam" is a trademark owned by Satyam Computer Services, our parent
company. We have a license to use the "Satyam" trademark for so long as Satyam
Computer Services continues to own at least 51% of our company. If its ownership
is reduced below 51%, however, Satyam Computer Services may terminate our
license to use the "Satyam" trademark upon two years' prior written notice.
Termination of our license to use the "Satyam" trademark could require us to
invest significant funds in building a new brand name and have a material
adverse effect on our business, results of operations and financial condition.
If our efforts to retain our subscribers through investment in network
infrastructure, online content offerings and customer and technical
support are unsuccessful, our revenues will decrease without a
corresponding reduction in costs.
Our sales, marketing and other costs of acquiring new subscribers are
substantial relative to the fees actually derived from these subscribers.
Accordingly, our long-term success depends to a great extent on our ability to
retain our existing subscribers, while continuing to attract new subscribers. We
invest significant resources in our network infrastructure, online content
offerings and in our customer and technical support capabilities to provide high
levels of customer service. We cannot be certain, however, that these
investments will maintain or improve subscriber retention. We believe that
intense competition from our competitors, some of whom may offer free hours of
service or other enticements for new subscribers, has caused, and may continue
to cause, some of our subscribers to switch to our competitors' services. In
addition, some new subscribers use the Internet only as a novelty and do not
become consistent users of Internet services, and therefore are more likely to
discontinue their service. Any decline in our subscriber retention rate could
decrease the revenues generated by our consumer Internet access services
division. Therefore, we may not be able to realize sufficient future revenues to
offset our present investment in network infrastructure, online content
offerings and technical support or achieve positive cash flow or profitability
in the future.
Our future operating results could fluctuate in part because our expenses
are relatively fixed in the short-term while future revenues are
uncertain, and any adverse fluctuations could negatively impact the price
of our ADSs.
Our revenues, expenses and operating results have varied in the past and
may fluctuate significantly in the future due to a number of factors, many of
which are outside our control. Our business involves significant capital outlays
and, thus, a significant portion of our investment and cost base is relatively
fixed in the short term. Our revenues for the foreseeable future will depend on
the following:
- the products developed by our strategic partners and the usage
thereof by our customers determines the amount of revenues
generated by our corporate network/data services
division;
- the number of subscribers to our Internet service provider service
and the prevailing prices charged determine the amount of revenues
generated by our consumer Internet access services division; and
- advertising and electronic commerce activity on www.sify.com and
its related sites determines the amount of revenues generated by
our online portal and content offerings division.
Our future revenues are difficult to forecast and, in addition to the
foregoing, will depend on the following:
- the timing and nature of any agreements we enter into with
strategic partners will determine the amount of revenues generated
by our corporate network/data services division;
- new Internet sites, services, products or pricing policies
introduced by our competitors may require us to introduce new
offerings or reduce the prices we charge our customers for
Internet access;
- our capital expenditures and other costs relating to the expansion
of our operations could affect the expansion of our network or
could require us to generate additional revenue in order to be
profitable;
- the timing and nature of our marketing efforts could affect the
number of our subscribers and the level of electronic commerce
activity on our websites;
27
- our ability to successfully integrate operations and technologies
from any acquisitions, joint ventures or other business
combinations or investments, including our acquisitions of
IndiaWorld Communications and Indiaplaza.com and our investment in
CricInfo Limited;
- the introduction of alternative technologies may require us to
reevaluate our business strategy and/or to adapt our products and
services to be compatible with such technologies; and
- technical difficulties or system failures affecting the
telecommunication infrastructure in India, the Internet generally
or the operation of our websites.
We plan to continue to expand and develop content and enhance our
technology and infrastructure. Many of our expenses are relatively fixed in the
short-term. We cannot assure you that our revenues will increase in proportion
to the increase in our expenses. We may be unable to adjust spending quickly
enough to offset any unexpected revenues shortfall. This could lead to a
shortfall in revenues in relation to our expenses.
You should not rely on yearly comparisons of our results of operations as
indicators of future performance. It is possible that in some future periods our
operating results may be below the expectations of public market analysts and
investors. In this event, the price of our ADSs may underperform or fall.
Because we lack full redundancy for our computer systems, a systems
failure could prevent us from operating our business.
We rely on the Internet and, accordingly, depend upon the continuous,
reliable and secure operation of Internet servers, related hardware and software
and network infrastructure such as lines leased from service providers operated
by the Government of India. We have a back-up data facility but we do not have
full redundancy for all of our computer and telecommunications facilities. As a
result, failure of key primary or back-up systems to operate properly could lead
to a loss of customers, damage to our reputation and violations of our Internet
service provider license and contracts with corporate customers. These failures
could also lead to a decrease in value of our ADSs, significant negative
publicity and litigation. From time to time, a number of several large Internet
companies have suffered highly publicized system failures resulting in adverse
reactions to their stock prices, significant negative publicity and, in some
instances, litigation.
We have at times suffered service outages. We guarantee to a number of
our corporate customers that our network will meet or exceed contractual
reliability standards, and our Internet service provider license requires that
we provide an acceptable level of service quality and that we remedy customer
complaints within a specified time period. Our computer and communications
hardware are protected through physical and software safeguards. However, they
are still vulnerable to fire, storm, flood, power loss, telecommunications
failures, physical or software break-ins and similar events. We do not carry
business interruption insurance to protect us in the event of a catastrophe even
though such an event could lead to a significant negative impact on our
business. Any sustained disruption in Internet access provided by third parties
could also have a material adverse effect on our business.
Security breaches could damage our reputation or result in liability to
us.
Our facilities and infrastructure must remain secure, and be perceived by
our corporate and consumer customers to be secure, because we retain
confidential customer information in our database. Despite the implementation of
security measures, our infrastructure may be vulnerable to physical break-ins,
computer hacking, computer viruses, programming errors or similar disruptive
problems. If a person circumvents our security measures, he or she could
jeopardize the security of confidential information stored on our systems,
misappropriate proprietary information or cause interruptions in our operations.
We may be required to make significant additional investments and efforts to
protect against or remedy security breaches. A material security breach could
damage our reputation or result in liability to us, and we do not carry
insurance that protects us from this kind of loss.
The security services that we offer in connection with our business
customers' networks cannot assure complete protection from computer viruses,
break-ins and other disruptive problems. Although we attempt to limit
contractually our liability in such instances, the occurrence of these problems
could result in claims against us or liability on our part. These claims,
regardless of their ultimate outcome, could result in costly litigation and
could damage our reputation and hinder our ability to attract and retain
customers for our service offerings.
If we are unable to manage the rapid growth required by our business
strategy, our results of operations will be adversely affected.
We have experienced and are currently experiencing a period of
significant growth. This growth has placed, and the future growth we anticipate
in our operations will continue to place, a significant strain on our
managerial, operational, financial and information systems resources. As part of
this growth, we will have to implement new operational and financial systems and
procedures and controls, expand our office facilities, train and manage our
employee base and maintain close coordination among
28
our technical, accounting, finance, marketing, sales and editorial staffs. If we
are unable to manage our growth effectively, we will be unable to implement our
growth strategy, upon which the success of our business depends.
We face a competitive labor market for skilled personnel and therefore
are highly dependent on our existing key personnel and on our ability to
hire additional skilled employees.
Our success depends upon the continued service of our key personnel,
particularly Mr. Ramaraj, our Chief Executive Officer, Mr. Zacharias, our
President and Chief Operating Officer, Mr. Santhanakrishnan, our Chief Financial
Officer, and each other member of our senior management. Although we recently
opened a branch in Northern California, substantially all of our employees are
located in India. Each of our employees may voluntarily terminate his or her
employment with us. We do not carry key person life insurance on any of our
personnel. Our success also depends on our ability to attract and retain
additional highly qualified technical, marketing and sales personnel. The labor
market for skilled employees in India and Northern California is extremely
competitive, and the process of hiring employees with the necessary skills is
time consuming and requires the diversion of significant resources. While we
have not experienced difficulty in employee retention or integration to date, we
may not be able to continue to retain or integrate existing personnel or
identify and hire additional personnel in the future. The loss of the services
of key personnel, especially the unexpected death or disability of such
personnel, or the inability to attract additional qualified personnel, could
disrupt the implementation of our growth strategy, upon which the success of our
business depends.
We are highly dependent on our relationships with strategic partners to
provide key products and services to our customers.
We rely on our arrangements with strategic partners to provide key
network and electronic commerce products and services to our business clients.
Our relationships with Open Market, Sterling Commerce, a unit of SBC
Communications, and UUNet Technologies can be terminated by our partners in some
circumstances. We also rely on some of our strategic partners to provide us with
access to their customer base. If our relationships with our strategic partners
do not continue, the ability of our corporate network/data and software services
division to generate revenues will be decreased significantly. We also provide
access to a co-branded version of the AOL Instant Messenger service to our
portal customers, and this proprietary service is an important feature of our
website.
If there is an adverse outcome in the class action litigation that has
been filed against SIFY, our business may be harmed.
On November 5, 2001, a securities class action lawsuit was filed in the
United States District Court for the Southern District of New York on behalf of
all persons who acquired our ADSs between October 20, 1999 and December 6, 2000.
Satyam Infoway, certain of the executive officers of Satyam Infoway, and certain
underwriters involved in our initial public offering of ADSs are named as
defendants in the complaint. This complaint alleges that certain of the
underwriters of our initial public offering violated the federal securities laws
by failing to disclose that they had solicited and received undisclosed
commissions from, and entered into undisclosed arrangements with, certain
investors who purchased our ADSs in our initial public offering, and had entered
into undisclosed arrangements with certain investors whereby the underwriters
allocated shares in our initial public offering to those investors in exchange
for their agreement to purchase our ADSs in the after-market at pre-determined
prices. The complaint also alleges that the defendants violated the federal
securities laws by issuing a registration statement in connection with the our
initial public offering that contained material misstatements and/or omissions
because it did not disclose that these allegedly undisclosed arrangements had
occurred. The complaint seeks damages on behalf of all those who purchased or
otherwise acquired our ADSs during the period covered by the complaint. The
deadline for defendants to respond to the complaint has not yet expired. We
believe we have meritorious defenses and intend to defend this action
vigorously. However, we could be forced to incur material expenses in the
litigation, and in the event there is an adverse outcome, our business could be
harmed.
We and our subsidiary IndiaWorld Communications are engaged in disputes
which, if resolved unfavorably, could impose material costs on us or have
other undesirable effects.
Our subsidiary IndiaWorld Communications is involved in pending
litigation relating to the IndiaWorld trademark in Federal Court in San Diego,
California with a third party located in the United States. IndiaWorld
Communications commenced the lawsuit alleging, among other things, that the
third party fraudulently registered and used the IndiaWorld trademark, and
committed copyright infringement and misappropriation of content of IndiaWorld
Communications' website. The third party filed a counterclaim against us and
IndiaWorld Communications alleging, among other things, that the activities of
IndiaWorld Communications infringe a United States trademark for the term
"Indiaworld" and associated logos and trade dress purportedly owned by this
third party, and that the third party has an ownership interest in the
underlying assets of IndiaWorld Communications. On August 9, 2001, the Court
granted our motion to dismiss us from this case because the Court found that it
did not have personal jurisdiction over us. IndiaWorld Communications is still
involved in the case. We have been advised by the prior owners of IndiaWorld
Communications that no infringement or misappropriation has taken place. Our
contract with the prior owners of IndiaWorld Communications includes an
indemnity for past infringement or misappropriation. We and
29
IndiaWorld Communications have also been contacted by a party that alleges,
among other things, that he is entitled to an equity ownership in IndiaWorld
Communications. We believe that this claim is also covered by the contractual
indemnity provided by the prior owners of IndiaWorld Communications.
Nonetheless, any dispute such as those described above creates uncertainty as to
the possible outcome, including whether or not our indemnity will be effective
in protecting us, and also could divert management time and attention away from
our business. An adverse outcome that is not indemnified could be material.
We face risks associated with our joint venture with Refco-Sify
Securities India Private Limited, our strategic partnership with VeriSign
and our co-branding agreement with America Online, our acquisitions of
Indiaplaza.com and IndiaWorld Communications, our investment in CricInfo
Limited and with other potential acquisitions, investments, strategic
partnerships or other ventures, including whether any such transactions
can be identified, completed and the other party integrated with our
business on favorable terms.
In November 1999, we acquired 24.5% of the outstanding shares of
IndiaWorld Communications, together with an option to acquire IndiaWorld
Communications' remaining outstanding shares which we exercised in June 2000. In
May 2000, we entered into a strategic partnership with VeriSign to provide
managed digital certificate-based authentication services in India. In June
2000, we acquired a 25% stake in CricInfo Limited, entered into an agreement
with America Online to distribute a co-branded version of the AOL Instant
Messenger and made an investment in Refco-Sify Securities India Private Limited.
In July 2000, we completed our investment in CricInfo Limited and agreed to
acquire Indiaplaza.com. In December 2000, we completed our acquisition of
Indiaplaza.com. These transactions were only recently entered into and most of
them are not yet fully operational. These alliances may not provide all or any
portion of the anticipated benefits. We may acquire or make investments in other
complementary businesses, technologies, services or products, or enter into
additional strategic partnerships with parties who can provide access to those
assets, if appropriate opportunities arise in the future. From time to time we
have had discussions and negotiations with a number of companies regarding our
acquiring, investing in or partnering with their businesses, products, services
or technologies, and we regularly engage in such discussions and negotiations in
the ordinary course of our business. Some of those discussions also contemplate
the other party making an investment in our company. We may not identify
suitable acquisition, investment or strategic partnership candidates in the
future, or if we do identify suitable candidates, we may not complete those
transactions on commercially acceptable terms or at all. In addition, the key
personnel of an acquired company may decide not to work for us. If we make other
types of acquisitions, we could have difficulty in integrating the acquired
products, services or technologies into our operations. These difficulties could
disrupt our ongoing business, distract our management and employees and increase
our expenses which could adversely affect our operating results and cause the
price of our ADSs to decline. Furthermore, we may incur indebtedness or issue
additional equity securities to pay for any future acquisitions. The issuance of
additional equity securities would dilute the ownership interests of the holders
of our ADSs.
Our financial results are impacted by the financial results of entities
that we do not control.
We have a significant, non-controlling minority interest in CricInfo
Limited, Placements.com Limited and Refco-Sify Securities India Private Limited
that is accounted for under U.S. GAAP using the equity method of accounting.
Under this method, we are obligated to report as "Equity in losses (gains) of
affiliates" a pro rata portion of the financial results of any such company in
our statement of operations even though we do not control the other company.
Thus, our reported results of operations can be significantly increased or
decreased depending on the results of CricInfo Limited, Placements.com Limited
and Refco-Sify Securities India Private Limited or other companies in which we
may make similar investments even though we may have only a limited ability to
influence these activities.
Satyam Computer Services presently controls our company and may have
interests which conflict with those of our other stockholders or holders
of our ADSs.
As of the date of this report, Satyam Computer Services beneficially owns
approximately 52.5% of our equity shares. As a result, it is presently able to
exercise control over many matters requiring approval by our stockholders,
including the election of directors and approval of significant corporate
transactions. Satyam Computer Services has, however, recently announced its
intention to seek to divest its Sify shares. Under Indian law, a simple majority
is sufficient to control all stockholder action except for those items which
require approval by a special resolution. If a special resolution is required,
the number of votes cast in favor of the resolution must not be less than three
times the number of votes cast against it. Examples of actions that require a
special resolution include:
- altering our Articles of Association;
- issuing additional shares of capital stock, except for pro rata
issuances to existing stockholders;
- commencing any new line of business; and
- commencing a liquidation.
Circumstances may arise in which the interests of Satyam Computer
Services could conflict with the interests of our other stockholders or holders
of our ADSs. Satyam Computer Services could delay or prevent a change of control
of our
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company even if a transaction of that sort would be beneficial to our other
stockholders, including the holders of our ADSs. In addition, we have an
agreement with South Asia Regional Fund, an investor in our company, which
assures them a board seat and provides specified additional rights to them.
We must continue to make capital expenditures in new network
infrastructure which, if not offset by additional revenue, will adversely
affect our operating results.
We must continue to expand and adapt our network infrastructure as the
number of users and the amount of information they wish to transfer increases
and as the requirements of our customers change. The expansion of our Internet
network infrastructure will require substantial financial, operational and
management resources. The development of private Internet access and other data
networks and related services in India is a new business, and we may encounter
cost overruns, technical difficulties or other project delays in connection with
any or all of the new facilities. We can give no assurance that we will be able
to expand or adapt our network infrastructure to meet the additional demand or
our customers' changing requirements on a timely basis, or at a commercially
reasonable cost, or at all. A portion of our capital expenditures for network
development are fixed, and the success of our business depends on our ability to
grow our business to utilize this capacity. In addition, if demand for usage of
our network were to increase faster than projected, our network could experience
capacity constraints, which would adversely affect the performance of the
system.
The legal system in India does not protect intellectual property rights
to the same extent as those of the United States, and we may be
unsuccessful in protecting our intellectual property rights.
Our intellectual property rights are important to our business. We rely
on a combination of copyright and trademark laws, trade secrets, confidentiality
procedures and contractual provisions to protect our intellectual property.
Our efforts to protect our intellectual property may not be adequate. Our
competitors may independently develop similar technology or duplicate our
products or services. Unauthorized parties may infringe upon or misappropriate
our products, services or proprietary information. In addition, the laws of
India do not protect proprietary rights to the same extent as laws in the United
States, and the global nature of the Internet makes it difficult to control the
ultimate destination of our products and services. For example, the legal
processes to protect service marks in India are not as effective as those in
place in the United States. The misappropriation or duplication of our
intellectual property could disrupt our ongoing business, distract our
management and employees, reduce our revenues and increase our expenses. In the
future, litigation may be necessary to enforce our intellectual property rights
or to determine the validity and scope of the proprietary rights of others. Any
such litigation could be time-consuming and costly.
We could be subject to intellectual property infringement claims as the
number of our competitors grows and the content and functionality of our
websites or other product or service offerings overlap with competitive
offerings. Defending against these claims, even if not meritorious, could be
expensive and divert management's attention from operating our company. If we
become liable to third parties for infringing their intellectual property
rights, we could be required to pay a substantial damage award and forced to
develop non-infringing technology, obtain a license or cease selling the
applications that contain the infringing technology. We may be unable to develop
non-infringing technology or obtain a license on commercially reasonable terms,
or at all.
Our platform infrastructure and its scalability are not proven, and our
current systems may not accommodate increased use while maintaining
acceptable overall performance.
Currently, only a relatively limited number of customers use our
corporate network, our Internet service provider services and our Internet
portal. We must continue to expand and adapt our network infrastructure to
accommodate additional users, increasing transaction volumes and changing
customer requirements. We may not be able to project accurately the rate or
timing of increases, if any, in the use of our websites or expand and upgrade
our systems and infrastructure to accommodate such increases. Our systems may
not accommodate increased use while maintaining acceptable overall performance.
Service lapses could cause our users to use the online services of our
competitors.
We do not plan to pay dividends in the foreseeable future.
We do not anticipate paying cash dividends to the holders of our ADSs in
the foreseeable future. Accordingly, investors must rely on sales of their ADSs
after price appreciation, which may never occur, as the only way to realize a
positive return on their investment. Investors seeking cash dividends should not
purchase our ADSs.
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RISKS RELATED TO THE INTERNET
We may be liable to third parties for information retrieved from the
Internet.
Because users of our Internet service provider service and visitors to
our websites may distribute our content to others, third parties may sue us for
defamation, negligence, copyright or trademark infringement, personal injury or
other matters. We could also become liable if confidential information is
disclosed inappropriately. These types of claims have been brought, sometimes
successfully, against online services in the United States and Europe. Others
could also sue us for the content and services that are accessible from our
websites through links to other websites or through content and materials that
may be posted by our users in chat rooms or bulletin boards. We do not carry
insurance to protect us against these types of claims, and there is no precedent
on Internet service provider liability under Indian law. Further, our business
is based on establishing our network as a trustworthy and dependable provider of
information and services. Allegations of impropriety, even if unfounded, could
damage our reputation, disrupt our ongoing business, distract our management and
employees, reduce our revenues and increase our expenses.
The success of our strategy depends on our ability to keep pace with
technological changes.
Our future success depends, in part, upon our ability to use leading
technologies effectively, to continue to develop our technical expertise, to
enhance our existing services and to develop new services that meet changing
customer requirements. The markets for our service are characterized by rapidly
changing technology, evolving industry standards, emerging competition and
frequent new service introductions. We may not successfully identify new
opportunities and develop and bring new services to market in a timely manner.
Our business may not be compatible with delivery methods of Internet
access services developed in the future.
We face the risk that fundamental changes may occur in the delivery of
Internet access services. Currently, Internet services are accessed primarily by
computers and are delivered by modems using telephone lines. As the Internet
becomes accessible by cellular telephones, personal data assistants, television
set-top boxes and other consumer electronic devices, and becomes deliverable
through other means involving digital subscriber lines, coaxial cable or
wireless transmission mediums, we will have to develop new technology or modify
our existing technology to accommodate these developments. Our pursuit of these
technological advances, whether directly through internal development or by
third party license, may require substantial time and expense. We may be unable
to adapt our Internet service business to alternate delivery means and new
technologies may not be available to us at all.
Our product and service offerings may not be compatible with industry
standards developed in the future.
Our ability to compete successfully depends upon the continued
compatibility and interoperability of our services with products and
architectures offered by various vendors. Although we intend to support emerging
standards in the market for Internet access, industry standards may not be
established and, if they become established, we may not be able to conform to
these new standards in a timely fashion or maintain a competitive position in
the market. The announcement or introduction of new products or services by us
or our competitors and any change in industry standards could cause customers to
deter or cancel purchases of existing products or services.
RISK RELATED TO THE ADSS AND OUR TRADING MARKET
Holders of ADSs are restricted in their ability to exercise preemptive
rights under Indian law and thereby may suffer future dilution of their
ownership position.
Under the Companies Act, 1956 of India, or Companies Act, a public
company incorporated in India must offer its holders of equity shares preemptive
rights to subscribe and pay for a proportionate number of shares to maintain
their existing ownership percentages prior to the issuance of any new equity
shares, unless the preemptive rights have been waived by adopting a special
resolution by holders of three-fourths of the company's shares which are voted
on the resolution. At our 2000 Annual General Meeting, our stockholders approved
a special resolution permitting us to issue up to one million equity shares
(equivalent to four million ADSs) in connection with acquisitions. We issued
virtually all of these equity shares in connection with our acquisitions of
IndiaWorld Communications Private Limited, Indiaplaza.com and Kheladi.com
(India) Private Limited and our investment in CricInfo Limited. At our 2001
Annual General Meeting, our stockholders approved a special resolution
permitting us to issue up to four million additional equity shares (equivalent
to 16 million ADSs) in connection with acquisitions or capital raising
transactions, and our ADS holders are deemed to have waived their preemptive
rights with respect to these shares and our Board of Directors may approve the
issuance of these shares without further action of our stockholders.
U.S. holders of ADSs may be unable to exercise preemptive rights for
equity shares underlying ADSs unless approval of the Ministry of Finance of the
Government of India is obtained and a registration statement under the
Securities Act of 1933,
32
as amended, is effective with respect to the rights or an exemption from the
registration requirements of the Securities Act is available. Our decision to
file a registration statement will depend on the costs and potential liabilities
associated with any given registration statement as well as the perceived
benefits of enabling the holders of our ADSs to exercise their preemptive rights
and any other factors that we deem appropriate to consider at the time the
decision must be made. We may elect not to file a registration statement related
to preemptive rights otherwise available by law to our stockholders. In the case
of future issuances, the new securities may be issued to our depositary, which
may sell the securities for the benefit of the holders of the ADSs. The value,
if any, our depositary would receive upon the sale of such securities cannot be
predicted. To the extent that holders of ADSs are unable to exercise preemptive
rights granted in respect of the equity shares represented by their ADSs, their
proportional interests in our company would be reduced.
Holders of ADSs may be restricted in their ability to exercise voting
rights and the information provided with respect to stockholder meetings.
As a holder of ADSs, you generally have the right under the deposit
agreement to instruct the depositary bank to exercise the voting rights for the
equity shares represented by your ADSs. At our request, the depositary bank will
mail to you any notice of stockholders' meeting received from us together with
information explaining how to instruct the depositary bank to exercise the
voting rights of the securities represented by ADSs. If the depositary bank
timely receives voting instructions from a holder of ADSs, it will endeavor to
vote the securities represented by the holder's ADSs in accordance with such
voting instructions. However, the ability of the depositary bank to carry out
voting instructions may be limited by practical and legal limitations and the
terms of the securities on deposit. We cannot assure you that you will receive
voting materials in time to enable you to return voting instructions to the
depositary bank in a timely manner.
Under Indian law, subject to the presence in person at a stockholder
meeting of persons holding equity shares representing a quorum, all resolutions
proposed to be approved at that meeting are voted on by a show of hands unless a
stockholder present in person at the meeting demands that a poll be taken.
Equity shares not represented in person at the meeting, including equity shares
underlying ADSs for which a holder has provided voting instructions to the
depositary bank, are not counted in a vote by show of hands. As a result, only
in the event that a stockholder present at the meeting demands that a poll be
taken will the votes of ADSs holders be counted. Securities for which no voting
instructions have been received will not be voted on a poll.
As a foreign private issuer, we are not subject to the SEC's proxy rules
which regulate the form and content of solicitations by United States-based
issuers of proxies from their stockholders. To date, our practice has been to
provide advance notice to our ADS holders of all stockholder meetings and to
solicit their vote on such matters, through the depositary, and we expect to
continue this practice. The form of notice and proxy statement that we have been
using does not include all of the information that would be provided under the
SEC's proxy rules.
The market price of our ADSs has been and may continue to be highly
volatile.
The market price of our ADSs has fluctuated widely and may continue to do
so. For example, since our initial public offering in October 1999 through
October 31, 2001 and, after giving effect to the 4-for-1 split of our ADSs in
January 2000, the trading price of our ADSs has ranged from a high of $113 per
ADS to a low of $0.98 per ADS. Many factors could cause the market price of our
ADSs to rise and fall. Some of these factors include:
- our failure to integrate successfully our operations with those of
acquired companies;
- actual or anticipated variations in our quarterly operating
results, including charges to write-off goodwill and other
acquisition costs;
- announcement of technological innovations;
- conditions or trends in the corporate network services, Internet
and electronic commerce industries;
- the competitive and pricing environment for corporate network and
consumer Internet access services in India and the related cost
and availability of bandwidth;
- the perceived attractiveness of investment in Indian companies;
- acquisitions and alliances by us or others in the industry;
- changes in estimates of our performance or recommendations by
financial analysts;
- market conditions in the industry and the economy as a whole;
- introduction of new services by us or our competitors;
- changes in the market valuations of other Internet service
companies;
33
- announcements by us or our competitors of significant
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- additions or departures of key personnel; and
- other events or factors, many of which are beyond our control.
The financial markets in the United States and other countries have
experienced significant price and volume fluctuations, and the market prices of
technology companies, particularly Internet-related companies, have been and
continue to be extremely volatile with negative sentiment prevailing. Volatility
in the price of our ADSs may be caused by factors outside of our control and may
be unrelated or disproportionate to our operating results. In the past,
following periods of volatility in the market price of a public company's
securities, securities class action litigation has often been instituted against
that company. Such litigation could result in substantial costs and a diversion
of our management's attention and resources.
An active or liquid market for the ADSs is not assured, particularly in
light of Indian legal restrictions on equity share conversion and foreign
ownership of an Internet service provider.
We cannot predict the extent to which an active, liquid public trading
market for our ADSs will exist. Active, liquid trading markets generally result
in lower price volatility and more efficient execution of buy and sell orders
for investors. Liquidity of a securities market is often a function of the
volume of the underlying shares that are publicly held by unrelated parties.
Although ADS holders are entitled to withdraw the equity shares underlying the
ADSs from the depositary at any time, there is no public market for our equity
shares in India or the United States. Furthermore, foreign ownership in our
company, which includes all ADSs, is limited to 74% under present Indian law.
The previous policy limit was 49%. This limitation means that, unless Indian law
changes, at least 26% of our equity shares will never be available to trade in
the United States market.
The future sales of securities by our company or existing stockholders
may hurt the price of our ADSs.
The market price of our ADSs could decline as a result of sales of a
large number of equity shares or ADSs or the perception that such sales could
occur. Such sales also might make it more difficult for us to sell equity
securities in the future at a time and at a price that we deem appropriate. We
intend to issue additional equity shares and ADSs to raise capital and to fund
acquisitions and investments, and the parties to any such future transactions
could also decide to sell them.
Forward-looking statements contained in this report may not be realized.
This report contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of the risks faced by us
described above and elsewhere in this report. We do not intend to update any of
the forward-looking statements after the date of this report to conform such
statements to actual results.
OTHER INFORMATION
LEGAL PROCEEDINGS
Our subsidiary IndiaWorld Communications is involved in pending
litigation relating to the IndiaWorld trademark in Federal Court in San Diego,
California with a third party located in the United States. IndiaWorld
Communications commenced the lawsuit alleging, among other things, that the
third party fraudulently registered and used the IndiaWorld trademark, and
committed copyright infringement and misappropriation of content of IndiaWorld
Communications' website. The third party filed a counterclaim against us and
IndiaWorld Communications alleging, among other things, that the activities of
IndiaWorld Communications infringe a United States trademark for the term
"Indiaworld" and associated logos and trade dress purportedly owned by this
third party, and that the third party has an ownership interest in the
underlying assets of IndiaWorld Communications. On August 9, 2001, the Court
granted our motion to dismiss us from this case because the Court found that it
did not have personal jurisdiction over us. IndiaWorld Communications is still
involved in the case. We have been advised by the prior owners of IndiaWorld
Communications that no infringement or misappropriation has taken place. Our
contract with the prior owners of IndiaWorld Communications includes an
indemnity for past infringement or misappropriation. We and IndiaWorld
Communications have also been contacted by a party that alleges, among other
things, that he is entitled to an equity ownership in IndiaWorld Communications.
We believe that this claim is also covered by the contractual indemnity provided
by the prior owners of IndiaWorld Communications. Nonetheless, any dispute such
as those described above creates uncertainty as to the possible outcome,
including whether or not our indemnity will be effective in protecting us, and
also could divert management time and attention away from our business. An
adverse outcome that is not indemnified could be material.
On November 5, 2001, a securities class action lawsuit was filed in the
United States District Court for the Southern District of New York on behalf of
all persons who acquired our stock between October 20, 1999 and December 6,
2000. Satyam Infoway, certain of the executive officers of Satyam Infoway, and
certain underwriters involved in our initial public offerings of ADSs are named
as defendants in the complaint. This complaint alleges that certain of the
underwriters of our initial public offering
34
violated the federal securities laws by failing to disclose that they had
solicited and received undisclosed commissions from, and entered into
undisclosed arrangements with, certain investors who purchased our ADSs in our
initial public offering, and had entered into undisclosed arrangements with
certain investors whereby the underwriters allocated ADSs in our initial public
offering to those investors in exchange for their agreement to purchase our ADSs
in the after-market at pre-determined prices. The complaint also alleges that
the defendants violated the federal securities laws by issuing a registration
statement in connection with our initial public offering that contained material
misstatements and/or omissions because it did not disclose that these allegedly
undisclosed arrangements had occurred. The complaint seeks damages on behalf of
all those who purchased or otherwise acquired our ADSs during the period covered
by the complaint. The deadline for defendants to respond to the complaint has
not yet expired. Substantially similar lawsuits have been filed or announced
against approximately 200 companies that completed initial public offerings in
the U.S. in the same general time period that we completed ours. We believe we
have meritorious defenses and intend to defend this action vigorously. However,
we could be forced to incur material expenses in the litigation, and in the
event there is an adverse outcome, our business could be harmed.
CHANGES IN SECURITIES AND USE OF PROCEEDS
Under the Companies Act, 1956 of India, or Companies Act, a company
incorporated in India must offer its holders of equity shares preemptive rights
to subscribe and pay for a proportionate number of shares to maintain their
existing ownership percentages prior to the issuance of any new equity shares,
unless the preemptive rights have been waived by adopting a special resolution
by holders of three-fourths of the company's shares which are voted on the
resolution. At our 2000 Annual General Meeting, our stockholders approved a
special resolution permitting us to issue up to one million equity shares
(equivalent to four million ADSs) in connection with acquisitions. We issued
virtually all of these equity shares in connection with our acquisitions of
IndiaWorld Communications, Indiaplaza.com and Kheladi.com (India) Private
Limited and our investment in CricInfo Limited. At our 2001 Annual General
Meeting, our stockholders approved a special resolution permitting us to issue
up to four million additional equity shares (equivalent to 16 million ADSs) in
connection with acquisitions or capital raising transactions, and our ADS
holders are deemed to have waived their preemptive rights with respect to these
shares and our Board of Directors may approve the issuance of these shares
without further action of our stockholders.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
In accordance with practices and procedures established under the Indian
Companies Act, the following actions were approved by our stockholders at our
2001 Annual General Meeting of Stockholders held on August 2, 2001:
- adoption of the Audited Balance Sheet, as of March 31, 2001, and
the Profit and Loss Account, the Auditors' Report and the
Directors' Report for the fiscal year ended March 31, 2001;
- re-appointment of Mr. C. Srinivasa Raju as a director;
- re-appointment of Mr. S. Srinivasan as a director;
- re-appointment of M/s. Bharat S. Raut & Co., Chartered
Accountants, as Statutory Auditors, who retired at the conclusions
of the AGM, for a further period of one year (i.e., until the
conclusion of the next Annual General Meeting) on a remuneration
to be fixed by the Board of Directors;
- an increase in the authorized share capital of our company;
- an amendment to our Memorandum of Association;
- the further issue of shares by our company;
- an additional allocation for our Associate Stock Option Plan;
- an increase in the borrowing powers of our company;
- the creation of mortgages for securing assets of our company; and
- an increase in the remuneration payable to Mr. R. Ramaraj, our
Managing Director.
A description of these resolutions was previously filed in our Form 6-K
dated July 9, 2001 and is incorporated herein by this reference.
35
EXHIBITS AND REPORTS
(a) Our report on Form 6-K which we filed with the SEC on July 9,
2001.
(b) Our report on Form 6-K which we filed with the SEC on July 23,
2001.
(c) Our report on Form 6-K which we filed with the SEC on August 10,
2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunder duly organized.
Date: November 19, 2001
SATYAM INFOWAY LIMITED
By: /s/ T.R. Santhanakrishnan
-------------------------------------
Name: T.R. Santhanakrishnan
Title: Chief Financial Officer
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