e6vk
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 quarterly period ended December 31, 2006
Commission File Number 000-27663
SIFY LIMITED
(Translation of registrants name into English)
Tidel Park, Second Floor
No. 4, Canal Bank Road, Taramani
Chennai 600 113, India
(91) 44-254-0770
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports under cover Form
20-F or Form 40-F. Form 20F þ
Form 40 F o
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by
Regulation S-T Rule 101(b)(1). Yes o No þ
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by
Regulation S-T Rule 101(b)(7). Yes o No þ
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 o No þ
If Yes is marked, indicate below the file number assigned to registrant in connection with Rule
12g3-2(b). Not applicable.
Sify Limited is incorporating by reference the information and exhibits set forth in this Form 6-K
into its registration statements on Form S-8 (Registration Nos. 333-101322, 333-107938 and
333-135804) and on Form F-3 (Registration Nos. 333-101915 and 333-121047).
The number of equity shares of the Registrant outstanding as of December 31, 2006 was 42,781,922.
Table of Contents
SIFY LIMITED
FORM 6-K
For the Quarter ended December 31, 2006
INDEX
|
|
|
|
|
Part
I Financial Information |
|
|
4 |
|
Item 1. Financial Statements |
|
|
4 |
|
a)
Unaudited Condensed Consolidated Balance Sheets |
|
|
4 |
|
b)
Unaudited Condensed Consolidated Statements of Income |
|
|
5 |
|
c)
Unaudited Condensed Consolidated Statements of Cash Flows |
|
|
6 |
|
d)
Unaudited Condensed Consolidated Statements of Stockholders Equity and Comprehensive Income |
|
|
7 |
|
e)
Notes to Unaudited Condensed Consolidated Financial Statements |
|
|
8 |
|
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
|
|
19 |
|
Item 3. Quantitative and Qualitative Disclosure About Market Risk |
|
|
28 |
|
Item 4. Controls and Procedures |
|
|
28 |
|
Part II Other Information |
|
|
28 |
|
Item 1. Legal Proceedings |
|
|
28 |
|
Item 1A. Risk Factors |
|
|
28 |
|
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds |
|
|
40 |
|
Item 3. Defaults Upon Senior Securities |
|
|
40 |
|
Item 4. Submission of Matters to a Vote of Security Holders |
|
|
40 |
|
Item 5. Other Information |
|
|
40 |
|
Item 6. Exhibits |
|
|
40 |
|
2
Currency of Presentation and Certain Defined Terms
Unless the context otherwise requires, references herein to we, us, the company or
Sify are to Sify 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. Until December
2002, we were a majority-owned subsidiary of Satyam Computer Services Limited (Satyam Computer
Services), a leading Indian information technology services company which is traded on the New
York Stock Exchange and the major Indian stock exchanges. In January 2003, we changed the name of
our company from Satyam Infoway Limited to Sify Limited. Sify, SifyMax.in, satyamonline.com
and Satyam iway are trademarks used by us for which we have registration applications pending in
India. All other trademarks or trade names used in this quarterly report are the property of their
respective owners.
In this report, references to $, US$, Dollars or U.S. dollars are to the legal
currency of the United States, and references to Rs., rupees or Indian Rupees are to the
legal currency of India. References to a particular fiscal year are to our fiscal year ended
March 31 of that 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 December 31, 2006 for cable transfers in
Indian rupees as certified for customs purposes by the Federal Reserve Bank of New York. The noon
buying rate on December 31, 2006 was Rs.44.11 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. 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 RISK FACTORS AND ELSEWHERE IN
THIS REPORT. YOU ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS,
WHICH REFLECT MANAGEMENTS 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 WEBSITE, WWW.SEC.GOV.
3
Part I. Financial Information
Item 1. Financial Statements
SIFY LIMITED and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data and as otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at March 31, |
|
|
As at December 31, |
|
|
|
2006 |
|
|
2006 |
|
|
2006 |
|
|
|
Rs. |
|
|
Rs. |
|
|
$ |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
Rs. |
2,822,501 |
|
|
Rs. |
2,338,453 |
|
|
$ |
53,014 |
|
Accounts receivable |
|
|
838,433 |
|
|
|
1,028,911 |
|
|
|
23,326 |
|
Due from employees |
|
|
23,818 |
|
|
|
5,472 |
|
|
|
124 |
|
Inventories |
|
|
30,462 |
|
|
|
30,315 |
|
|
|
687 |
|
Prepaid expenses |
|
|
91,158 |
|
|
|
131,284 |
|
|
|
2,976 |
|
Net investment in leases |
|
|
10,776 |
|
|
|
18,713 |
|
|
|
424 |
|
Other current assets |
|
|
212,696 |
|
|
|
348,700 |
|
|
|
7,905 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
4,029,844 |
|
|
|
3,901,848 |
|
|
|
88,456 |
|
Cash restricted |
|
|
1,000 |
|
|
|
1,000 |
|
|
|
23 |
|
Net investment in leases |
|
|
10,842 |
|
|
|
13,025 |
|
|
|
295 |
|
Property, plant and equipment-net |
|
|
1,423,246 |
|
|
|
1,609,680 |
|
|
|
36,493 |
|
Goodwill and other intangible assets |
|
|
62,436 |
|
|
|
199,185 |
|
|
|
4,516 |
|
Investments in affiliated companies |
|
|
233,060 |
|
|
|
275,604 |
|
|
|
6,249 |
|
Other assets |
|
|
191,343 |
|
|
|
95,863 |
|
|
|
2,173 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
Rs. |
5,951,771 |
|
|
Rs. |
6,096,205 |
|
|
$ |
138,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Current installments of capital lease obligations |
|
|
2,759 |
|
|
|
2,225 |
|
|
|
50 |
|
Trade accounts payable |
|
|
440,841 |
|
|
|
296,391 |
|
|
|
6,719 |
|
Accrued liabilities |
|
|
584,264 |
|
|
|
636,378 |
|
|
|
14,428 |
|
Deferred revenue |
|
|
444,333 |
|
|
|
391,037 |
|
|
|
8,865 |
|
Due to employees |
|
|
1,300 |
|
|
|
|
|
|
|
|
|
Advances from customers |
|
|
112,512 |
|
|
|
62,566 |
|
|
|
1,418 |
|
Other current liabilities |
|
|
74,174 |
|
|
|
110,928 |
|
|
|
2,515 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,660,183 |
|
|
|
1,499,525 |
|
|
|
33,995 |
|
Capital lease obligations, excluding current installments |
|
|
2,546 |
|
|
|
3,035 |
|
|
|
69 |
|
Other liabilities |
|
|
234,533 |
|
|
|
104,692 |
|
|
|
2,373 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,897,262 |
|
|
|
1,607,252 |
|
|
|
36,437 |
|
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
|
|
|
|
147,130 |
|
|
|
3,336 |
|
Stockholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, Rs 10 par value; 50,000,000 equity shares
authorized (as of March 31, 2006 : 50,000,000) ; Issued and
outstanding: 42,781,922 shares as of December 31,2006 and
42,389,514 shares as of March 31, 2006 |
|
|
423,895 |
|
|
|
427,819 |
|
|
|
9,699 |
|
Additional paid-in capital |
|
|
16,238,413 |
|
|
|
16,307,348 |
|
|
|
369,697 |
|
Deferred compensation employee stock offer plan |
|
|
(41,925 |
) |
|
|
|
|
|
|
|
|
Accumulated deficit |
|
|
(12,565,874 |
) |
|
|
(12,393,344 |
) |
|
|
(280,964 |
) |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
4,054,509 |
|
|
|
4,341,823 |
|
|
|
98,432 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
Rs. |
5,951,771 |
|
|
Rs. |
6,096,205 |
|
|
$ |
138,205 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements
4
SIFY LIMITED and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data and as otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended December 31, |
|
|
Nine Months ended December 31, |
|
|
|
2005 |
|
|
2006 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2006 |
|
|
|
Rs. |
|
|
Rs. |
|
|
$ |
|
|
Rs. |
|
|
Rs. |
|
|
$ |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
Rs. |
82,337 |
|
|
Rs. |
136,457 |
|
|
$ |
3,094 |
|
|
Rs. |
229,985 |
|
|
Rs. |
385,407 |
|
|
$ |
8,738 |
|
Services |
|
|
1,113,351 |
|
|
|
1,254,830 |
|
|
|
28,448 |
|
|
|
3,090,610 |
|
|
|
3,707,359 |
|
|
|
84,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rs. |
1,195,688 |
|
|
Rs. |
1,391,287 |
|
|
|
31,542 |
|
|
Rs. |
3,320,595 |
|
|
Rs. |
4,092,766 |
|
|
|
92,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from related parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,879 |
|
|
|
|
|
|
|
|
|
Services |
|
|
6,137 |
|
|
|
|
|
|
|
|
|
|
|
31,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,137 |
|
|
|
|
|
|
|
|
|
|
|
75,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
|
1,201,825 |
|
|
|
1,391,287 |
|
|
|
31,542 |
|
|
|
3,395,993 |
|
|
|
4,092,766 |
|
|
|
92,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
63,784 |
|
|
|
121,744 |
|
|
|
2,760 |
|
|
|
229,162 |
|
|
|
334,420 |
|
|
|
7,582 |
|
Services |
|
|
559,544 |
|
|
|
624,536 |
|
|
|
14,159 |
|
|
|
1,635,883 |
|
|
|
1,813,215 |
|
|
|
41,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
623,328 |
|
|
|
746,280 |
|
|
|
16,919 |
|
|
|
1,865,045 |
|
|
|
2,147,635 |
|
|
|
48,689 |
|
Selling, general and administrative expenses |
|
|
482,052 |
|
|
|
437,853 |
|
|
|
9,926 |
|
|
|
1,380,223 |
|
|
|
1,397,427 |
|
|
|
31,681 |
|
Provision for doubtful receivables and advances |
|
|
13,718 |
|
|
|
68,676 |
|
|
|
1,557 |
|
|
|
46,763 |
|
|
|
142,340 |
|
|
|
3,227 |
|
Depreciation |
|
|
102,778 |
|
|
|
102,385 |
|
|
|
2,321 |
|
|
|
317,151 |
|
|
|
297,705 |
|
|
|
6,749 |
|
Amortisation of intangible assets |
|
|
8,306 |
|
|
|
10,964 |
|
|
|
249 |
|
|
|
30,502 |
|
|
|
44,400 |
|
|
|
1,007 |
|
Amortisation of deferred stock compensation expense |
|
|
3,502 |
|
|
|
5,039 |
|
|
|
114 |
|
|
|
5,472 |
|
|
|
46,509 |
|
|
|
1,054 |
|
Foreign exchange fluctuation (gain) / loss |
|
|
(3,976 |
) |
|
|
20,558 |
|
|
|
466 |
|
|
|
(6,609 |
) |
|
|
(23,781 |
) |
|
|
(539 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,229,708 |
|
|
|
1,391,755 |
|
|
|
31,552 |
|
|
|
3,638,547 |
|
|
|
4,052,235 |
|
|
|
91,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit / (loss) |
|
|
(27,883 |
) |
|
|
(468 |
) |
|
|
(10 |
) |
|
|
(242,554 |
) |
|
|
40,531 |
|
|
|
918 |
|
Other income, net |
|
|
9,065 |
|
|
|
31,059 |
|
|
|
704 |
|
|
|
34,592 |
|
|
|
97,125 |
|
|
|
2,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit / (loss) before taxes and equity in profit of affiliate |
|
|
(18,818 |
) |
|
|
30,591 |
|
|
|
694 |
|
|
|
(207,962 |
) |
|
|
137,656 |
|
|
|
3,120 |
|
Equity in profit of affiliate |
|
|
5,849 |
|
|
|
18,650 |
|
|
|
423 |
|
|
|
35,257 |
|
|
|
42,544 |
|
|
|
965 |
|
Gain on sale of investment in subsidiary |
|
|
|
|
|
|
226 |
|
|
|
5 |
|
|
|
|
|
|
|
226 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
|
|
|
|
(7,896 |
) |
|
|
(179 |
) |
|
|
|
|
|
|
(7,896 |
) |
|
|
(179 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit / (loss) before tax |
|
|
(12,969 |
) |
|
|
41,571 |
|
|
|
943 |
|
|
|
(172,705 |
) |
|
|
172,530 |
|
|
|
3,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profit / (loss) after tax |
|
Rs. |
(12,969 |
) |
|
Rs. |
41,571 |
|
|
$ |
943 |
|
|
Rs. |
(172,705 |
) |
|
Rs. |
172,530 |
|
|
$ |
3,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profit / (loss) per share Basic |
|
|
(0.37 |
) |
|
|
0.97 |
|
|
|
0.02 |
|
|
|
(4.88 |
) |
|
|
4.03 |
|
|
|
0.09 |
|
Net profit / (loss) per share Diluted |
|
|
|
|
|
|
0.97 |
|
|
|
0.02 |
|
|
|
|
|
|
|
4.02 |
|
|
|
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average equity shares Basic |
|
|
35,397,821 |
|
|
|
42,743,011 |
|
|
|
42,743,011 |
|
|
|
35,386,149 |
|
|
|
42,822,399 |
|
|
|
42,822,399 |
|
Weighted average equity shares Diluted |
|
|
|
|
|
|
42,842,653 |
|
|
|
42,842,653 |
|
|
|
|
|
|
|
42,927,221 |
|
|
|
42,927,221 |
|
See accompanying notes to unaudited condensed consolidated financial statements
5
SIFY LIMITED and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data and as otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended December 31, |
|
|
|
2005 |
|
|
2006 |
|
|
2006 |
|
|
|
Rs. |
|
|
Rs. |
|
|
$ |
|
Net profit / (loss) |
|
Rs. |
(172,705 |
) |
|
Rs. |
172,530 |
|
|
$ |
3,911 |
|
Adjustments to reconcile net loss to net cash provided by / (used
in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, impairment and amortization of intangible
assets and deferred stock compensation |
|
|
353,125 |
|
|
|
388,614 |
|
|
|
8,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in profit of affiliate |
|
|
(35,257 |
) |
|
|
(42,544 |
) |
|
|
(964 |
) |
Gain on sale of investment |
|
|
(2,548 |
) |
|
|
|
|
|
|
|
|
(Gain) / Loss on sale of property, plant and equipment |
|
|
819 |
|
|
|
(165 |
) |
|
|
(4 |
) |
Provision for doubtful receivables and advances |
|
|
46,763 |
|
|
|
142,340 |
|
|
|
3,227 |
|
Write back of amortisation of intangibles |
|
|
(4,815 |
) |
|
|
|
|
|
|
|
|
Minority interest |
|
|
|
|
|
|
7,896 |
|
|
|
179 |
|
Unrealized
(gain) / loss on account of exchange differences |
|
|
|
|
|
|
(6,400 |
) |
|
|
(145 |
) |
Translation (gain) / loss on cash and cash equivalents |
|
|
(6,454 |
) |
|
|
2,857 |
|
|
|
65 |
|
Gain on disposal of subsidiary |
|
|
(1,595 |
) |
|
|
(226 |
) |
|
|
(5 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(174,251 |
) |
|
|
(325,832 |
) |
|
|
(7,387 |
) |
Due from employees |
|
|
(18,833 |
) |
|
|
17,378 |
|
|
|
394 |
|
Minority interest |
|
|
|
|
|
|
139,460 |
|
|
|
3,162 |
|
Inventories |
|
|
(8,058 |
) |
|
|
147 |
|
|
|
3 |
|
Prepaid expenses |
|
|
(20,612 |
) |
|
|
(40,126 |
) |
|
|
(910 |
) |
Other assets |
|
|
(14,585 |
) |
|
|
(41,016 |
) |
|
|
(930 |
) |
Net investment in leases |
|
|
4,955 |
|
|
|
(10,120 |
) |
|
|
(230 |
) |
Trade accounts payable and accrued liabilities |
|
|
52,927 |
|
|
|
(92,773 |
) |
|
|
(2,103 |
) |
Deferred revenue |
|
|
94,831 |
|
|
|
(53,296 |
) |
|
|
(1,208 |
) |
Advances from customers |
|
|
12,247 |
|
|
|
(49,817 |
) |
|
|
(1,129 |
) |
Other liabilities |
|
|
5,423 |
|
|
|
(116,371 |
) |
|
|
(2,638 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided/(used) by operating activities |
|
Rs. |
113,874 |
|
|
Rs. |
92,536 |
|
|
$ |
2,098 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure on property, plant and equipment |
|
|
(481,370 |
) |
|
|
(481,995 |
) |
|
|
(10,928 |
) |
Proceeds from sale of property, plant and equipment |
|
|
3,487 |
|
|
|
3,909 |
|
|
|
89 |
|
Expenditure on intangible assets |
|
|
|
|
|
|
(66,177 |
) |
|
|
(1,500 |
) |
Business acquisition |
|
|
|
|
|
|
(92,934 |
) |
|
|
(2,107 |
) |
Net movement in cash restricted |
|
|
31,240 |
|
|
|
|
|
|
|
|
|
Proceeds from sale of investments |
|
|
139,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
Rs. |
(306,833 |
) |
|
Rs. |
(637,197 |
) |
|
$ |
(14,446 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments under capital lease obligations |
|
|
(5,855 |
) |
|
|
(4,805 |
) |
|
|
(109 |
) |
Net proceeds from issuance of common stock |
|
|
14,850 |
|
|
|
68,275 |
|
|
|
1,548 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
Rs. |
8,995 |
|
|
Rs. |
63,470 |
|
|
$ |
1,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
8,679 |
|
|
|
(2,857 |
) |
|
|
(65 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase / (decrease) in cash and cash equivalents |
|
|
(175,285 |
) |
|
|
(484,048 |
) |
|
$ |
(10,974 |
) |
Cash and cash equivalents at the beginning of the period |
|
|
1,323,912 |
|
|
|
2,822,501 |
|
|
|
63,988 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period |
|
Rs. |
1,148,627 |
|
|
Rs. |
2,338,453 |
|
|
$ |
53,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary Information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid towards interest |
|
|
9,702 |
|
|
|
566 |
|
|
|
13 |
|
Cash paid / (refund received) towards income taxes |
|
|
(15,843 |
) |
|
|
46,102 |
|
|
|
1,045 |
|
Additions to property, plant and equipment represented by
capital lease obligations |
|
|
2,186 |
|
|
|
4,453 |
|
|
|
101 |
|
See accompanying notes to unaudited condensed consolidated financial statements
6
SIFY LIMITED and Subsidiaries
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
(in thousands, except share data and as stated otherwise)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation - |
|
|
|
|
|
|
Total |
|
|
|
Common Stock |
|
|
Additional Paid In |
|
|
Comprehensive |
|
|
Employee Stock Offer |
|
|
Accumulated |
|
|
Stockholders |
|
|
|
Shares |
|
|
Par Value |
|
|
Capital |
|
|
Income |
|
|
Plan |
|
|
Deficit |
|
|
Equity |
|
|
|
Nos. |
|
|
Rs. |
|
|
Rs. |
|
|
Rs. |
|
|
Rs. |
|
|
Rs. |
|
|
Rs. |
|
Balance as of March 31, 2006 |
|
|
42,389,514 |
|
|
|
423,895 |
|
|
|
16,238,413 |
|
|
|
|
|
|
|
(41,925 |
) |
|
|
(12,565,874 |
) |
|
|
4,054,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue of common stock |
|
|
392,408 |
|
|
|
3,924 |
|
|
|
64,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,275 |
|
Compensation related to stock option grants |
|
|
|
|
|
|
|
|
|
|
46,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,509 |
|
Reversal of unamortized compensation cost
pursuant to adoption of SFAS 123R |
|
|
|
|
|
|
|
|
|
|
(41,925 |
) |
|
|
|
|
|
|
41,925 |
|
|
|
|
|
|
|
|
|
|
Net profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172,530 |
|
|
|
|
|
|
|
172,530 |
|
|
|
172,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006 |
|
|
42,781,922 |
|
|
|
427,819 |
|
|
|
16,307,348 |
|
|
|
|
|
|
|
|
|
|
|
(12,393,344 |
) |
|
|
4,341,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006 (in US$) |
|
|
|
|
|
|
9,699 |
|
|
|
369,697 |
|
|
|
|
|
|
|
|
|
|
|
(280,964 |
) |
|
|
98,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
SIFY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data and as stated otherwise)
1. Description of business
|
|
|
Sify Limited (Sify) together with its subsidiaries (the Company) and its affiliates is
engaged in providing various services, such as corporate network and data services, Internet
access services, online portal and content offerings, and selling products related to such
services. |
2. Summary of significant accounting policies
|
a. |
|
Basis of preparation of financial statements |
|
|
|
|
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States (US GAAP) in
Indian Rupees, the national currency of India. Solely for the convenience of the reader, the
financial statements as of and for the quarter and nine months ended December 31, 2006 have
been translated into United States dollars at the noon buying rate in New York City on
December 31, 2006 for cable transfers in Indian rupees, as certified for customs purposes by
the Federal Reserve Bank of New York of US$1 = Rs. 44.11. 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 rate on December 31, 2006 or at any other date. |
|
|
b. |
|
Interim Information |
|
|
|
|
Interim information presented in the condensed 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 U.S. GAAP. These financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Companys annual report
on Form 20-F for the fiscal year ended March 31, 2006. |
|
|
c. |
|
Business combinations |
|
|
|
|
Business combinations have been accounted using the purchase method under the provisions of
Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard (SFAS)
No. 141, Business Combinations. Cash and amounts of consideration that are determinable at
the date of acquisition are included in determining the cost of the acquired business. |
|
|
d. |
|
Recent accounting pronouncements |
|
|
|
|
In 2006, the Financial Accounting Standards Board issued SFAS No. 158 Employers accounting
for Defined Benefit Pension and Other Postretirement Plans. New Statement 158 requires the
company to recognize on balance sheets the funded status of pension and other postretirement
benefit plans as of March 31, 2007. The company is required to recognize actuarial gains and
losses, prior service cost, and any remaining transition amounts from the initial application
of Statements 87 and 106 when recognizing a plans funded status, with the offset to
accumulated other comprehensive income. Statement 158 will also require fiscal-year-end
measurements of plan assets and benefit obligations. The new Statement amends Statements 87,
88, 106, and 132R, but retains most of their measurement and disclosure guidance and will not
change the amounts recognized in the income statement as net periodic benefit cost. The
company does not believe that adoption of SFAS 158 will have a material impact on the
financial statements. |
|
|
|
|
In July 2006, the FASB issued Interpretation (FIN) No. 48, Uncertainty in Income Taxes. FIN
48 applies to all tax positions within the scope of Statement 109 and clarifies when and how
to recognize tax benefits in the financial statements with a two-step approach of recognition
and measurement. Fin No. 48 is effective for fiscal years beginning after December 15, 2006.
FIN No. 48 also requires the enterprise to make explicit disclosures about uncertainties in
their income tax positions, including a detailed roll forward of tax benefits taken that do
not qualify for financial statement recognition. |
8
|
|
|
The company is currently evaluating the impact of this pronouncement and will adopt the
guidelines stated FIN No.48 from fiscal year beginning April 1, 2007. |
3. Acquisition of Globe Travel Business
|
|
|
During the quarter ended June 30, 2006, the Company acquired Globe Travels which operates an
online travel agency. The management believes this acquisition marks Sifys entry into the
fast growing online travel business, particularly e-ticketing, the category with highest
revenues and fastest growth in online e-commerce today. The management also believes that the
addition of a travel portal is in line with the Companys strategy of providing end-to-end
services to Sify users. The results of Globe Travels operations have been consolidated in
the financial statements effective May 10, 2006, the date of acquisition. The purchase price
in respect of the business acquisition comprises the following: |
|
|
|
|
|
|
|
|
|
Cash price |
|
Rs. |
112,220 |
|
( |
USD |
2,500 |
) |
Stock options (No. of options) |
|
|
|
|
|
|
140,000 |
|
Earn out payments |
|
|
|
|
|
USD |
500 |
|
|
|
|
The Cash price of USD 2,500 includes an amount of USD 500 as holdback amount payable upon the
Airlines Reporting Corporation (ARC) approval of the Companys application for change of
ownership of the travel portal. The said holdback amount has been included and accounted as
purchase consideration since the management, based on advice, believes that the resolution of
the contingency (i.e approval of ARC) is beyond reasonable doubt. |
|
|
|
|
The Stock Options have been treated as compensation cost in accordance with the provisions of
EITF 95-8 Accounting for Contingent Consideration Paid to the Shareholders of an Acquired
Enterprise in a Purchase Business Combination. Further, as the Earn Out Payment is
contingent upon continuing employment and achievement of specified earning levels the same
will be treated as compensation cost in accordance with the provisions of EITF 95-8. As the
cost of Stock Options and Contingency Earn out payments are treated as compensation cost,
the cost of acquisition comprises of only cash price of Rs.112,220 and other incidental
direct acquisition cost of Rs.3,999. |
|
|
|
|
The Cash Price has been allocated to the estimated fair value of the assets, properties
including rights at the date of purchase of business. |
|
|
|
|
The following table summarizes the preliminary allocation of estimated fair value of the
assets, properties including rights at the date of purchase of the business. The allocation
of the purchase price is subject to obtaining third party valuation of certain intangibles. |
|
|
|
|
|
Property and Equipment |
|
Rs. |
1,246 |
|
Intangible Assets |
|
|
88,052 |
|
Goodwill |
|
|
26,921 |
|
Total |
|
|
116,219 |
|
|
|
|
The acquired intangible assets, in the opinion of the management, have a weighted average
useful life of five years. The intangible assets are as follows: |
|
|
|
|
|
Customer and Contract related intangibles |
|
Rs. |
85,797 |
|
Software |
|
|
2,255 |
|
9
4. IP VPN License
In December 2004, as per the Government of India (GOI) guidelines regarding Virtual Private
Network(IP-VPN) services by Internet Service Providers (ISPs), the Company paid Rs.100,000
as an entry fee for a 15 year license and submitted a financial bank guarantee of Rs.10,000 .
In addition, the ISP licensees were required to pay an annual fee at a prescribed rate of the
adjusted gross revenues generated under the ISP license for IP-VPN services.
On November 10, 2005, the GOI issued guidelines for obtaining National Long Distance (NLD)
and International Long Distance (ILD) licenses including the terms and conditions for the
licenses. These guidelines eliminated the IP-VPN license, entitling the Company to a full
refund of the Rs.100,000 entry fee, and permitting existing IP-VPN license holders to migrate
to the NLD and ILD service licenses effective January 1, 2006. The Company discontinued
amortization of the IP-VPN license effective November 10, 2005 and reversed the amortization of
the license fee.
As the NLD / ILD licenses were under the regime of Department of Telecommunications, the
notification of the GOI dated 7 November 2005 was required to be complied with to receive NLD /
ILD licenses. The primary condition set out in the notification among other conditions was
that, the total composite foreign holding by the applicant should not exceed 74 per cent.
Given that the foreign shareholding in Sify was higher than the aforesaid threshold limit, Sify
Communications Limited (Sify Comm), a wholly-owned subsidiary of the Company proposed to obtain
the NLD/ILD licenses in its name and made necessary applications in this regard. To facilitate
this, Sify divested its stake in Sify Comm to the extent of 26% (refer to note 5 below) and
the Company decided to transfer the IP-VPN business to Sify Comm effective from the date the
NLD/ILD licences are received.
On November 21, 2006, Sify Comm executed two License Agreements with GOI, for NLD / ILD
services respectively, which enabled Sify Comm to provide IP-VPN services. Accordingly, the
Company has transferred its IP VPN business to Sify Comm effective November 22, 2006 and the
latter commenced the said services on the same day. Sify Comm has also furnished bank
guarantees for Rs.200,000 each for NLD and ILD licenses to GOI. These licenses are valid for
an initial period of 20 years and can be renewed for another 10 years at one time, upon request
of the licensee made during the 19th year of license.
Pursuant to its arrangements with Sify Comm and GOI notification dated 7 November 2005,
allowing adjustment of the one time entry fee of Rs. 100,000 paid by Sify towards the entry fee
payable by Sify Comm, during the quarter ended December 31, 2006, the Company has adjusted Rs
75,000 towards the annual recurring fees and the balance Rs. 25,000 towards the entry fee
payable by Sify Comm. Sify Comm paid the balance Rs. 25,000 towards entry fee for NLD / ILD
Licenses.
5. Sale of 26% holding in Sify Communications Limited (Sify Comm)
The new guidelines issued by the GOI for NLD / ILD licenses limit foreign direct investment
(FDI) for the telecommunication sector to 74% of the equity shares outstanding. As the
foreign shareholding in Sify was more than the threshold limit, Sify would not be eligible for
the NLD / ILD licenses. Accordingly, the Company determined to provide the IP-VPN services
through Sify Comm, a subsidiary of Sify.
On December 19, 2005 Sify contributed Rs.700,000 as additional equity in Sify Comm to make the
net worth of Sify Comm positive. Pursuant to the agreement entered with Infinity Satcom, Sify
divested 26% of its holding in Sify Comm, or 4,680 shares, to M/s Infinity Satcom Universal (P)
Ltd (Infinity Satcom), a related party, for a sale consideration of Rs.139,810 during the
quarter ended December 31, 2005. M/s Infinity Satcom a company incorporated under the laws of
India, is owned by Anand Raju, who is the brother of Raju Vegesna, Chairman of Sifys Board of
Directors and the principal of Infinity Capital Ventures, LP (Infinity Capital). Infinity
Capital owns approximately 41.92 % of Sifys outstanding equity shares.
Pending receipt of the ILD / NLD licences by Sify Comm, based on legal advice, Sify continued
to carry on IP VPN business and accordingly, the amount received as against the sale proceeds,
was included under other liabilities and the corresponding gain on divestment of 26% was also
not recognized at that stage.
As indicated in note 4 above, the ILD / NLD licences were granted by GOI on November 21, 2006.
Accordingly, during the quarter ended 31 December, 2006, the Company has recognized a gain of
Rs. 226 on the divestment of 26% holding in Sify Comm.
6. Cash and cash equivalents
Cash and cash equivalents as on December 31, 2006 amounted to Rs. 2,338,453 (Rs 2,822,501 as
at March 31, 2006) and restricted cash included in non-current assets of Rs. 1,000 (Rs.1,000
as at March 31, 2006) representing deposits held under lien
against bank guarantees given by the Company towards future performance obligations and
letters of credit given to suppliers of the Company against purchase obligations.
10
7. Goodwill and other intangible assets
At December 31, 2006, the Companys goodwill and other intangible assets amounted to Rs.
41,516 and Rs. 157,668 respectively (Rs 14,596 and Rs.47,840, as at March 31, 2006
respectively). The following are the details of other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at March 31, 2006 |
|
As at December 31, 2006 |
|
|
Weighted |
|
Gross |
|
|
|
|
|
Weighted |
|
Gross |
|
|
|
|
Average |
|
carrying |
|
Accumulated |
|
average |
|
carrying |
|
Accumulated |
|
|
Life |
|
amount |
|
Amortization |
|
life |
|
amount |
|
Amortization |
Technical know how fees |
|
|
5.00 |
|
|
Rs. |
82,753 |
|
|
Rs. |
79,240 |
|
|
|
5.00 |
|
|
|
82,753 |
|
|
|
82,753 |
|
Portals and web content |
|
|
4.91 |
|
|
|
52,730 |
|
|
|
50,065 |
|
|
|
4.91 |
|
|
|
52,730 |
|
|
|
52,690 |
|
Customer contracts and
others |
|
|
4.04 |
|
|
|
56,084 |
|
|
|
39,119 |
|
|
|
4.62 |
|
|
|
141,883 |
|
|
|
54,506 |
|
IP VPN Licence |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.00 |
|
|
|
50,000 |
|
|
|
281 |
|
Software |
|
|
2.90 |
|
|
|
222,119 |
|
|
|
197,422 |
|
|
|
2.91 |
|
|
|
235,742 |
|
|
|
215,210 |
|
Total |
|
|
|
|
|
Rs |
413,686 |
|
|
Rs. |
365,846 |
|
|
|
|
|
|
|
563,108 |
|
|
|
405,440 |
|
The aggregate amortization expense for the quarter ended December 31, 2006 was Rs. 10,964
(Rs. 8,306 for the quarter ended December 31, 2005) and for the nine months ended December 31,
2006 was Rs. 44,400 (Rs. 30,502 for the nine months ended December 31, 2005).
Estimated amortization expense
|
|
|
|
|
For the year ending March 31, |
|
|
|
|
2007 |
|
Rs. |
49,619 |
|
2008 |
|
|
35,423 |
|
2009 |
|
|
29,525 |
|
2010 |
|
|
21,597 |
|
2011 |
|
|
20,110 |
|
2012 |
|
|
4,394 |
|
2013-2026 |
|
|
35,000 |
|
2027 |
|
|
1,594 |
|
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the Company does not
amortize goodwill but tests it for impairment on an annual basis. The Company has not
recognized any impairment of goodwill during the year ended March 31, 2006 or the nine months
ended December 31, 2006.
8. Employee Stock Options
Prior to March 31, 2006, the Company applied the intrinsic value based method of accounting
prescribed by the Accounting Principles Board (APB) Opinion (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations including FASB Interpretation No.
44, Accounting for Certain Transactions involving Stock Compensation an interpretation of
APB Opinion No. 25, issued in March 2000 to account for fixed Stock Option Plans. Under this
method, compensation expense is recorded on the date of grant only if the current market
price of the underlying stock exceeds the exercise price.
SFAS 123, Accounting for Stock Based Compensation, established accounting and disclosure
requirements using a fair value based method of accounting for Stock based employee
compensation plans. As allowed by SFAS 123, the Company elected to continue to apply the
intrinsic value based method of accounting described above, and adopted the disclosure
requirements of SFAS 148, Accounting for
Stock based Compensation Transition and Disclosure, and amendment of FASB Statement 123.
All Stock options issued to date have been accounted as fixed stock option plan.
11
The following table illustrates the effect on net income and earnings per share if the
Company has applied the fair value recognition provisions of SFAS No. 123, Accounting for
Stock Based Compensation, to account for stock based employee compensation.
|
|
|
|
|
|
|
|
|
|
|
Quarter ended December 31, |
|
Nine months ended December 31, |
|
|
2005 |
|
|
2005 |
|
Net loss as reported |
|
Rs. |
(10,421 |
) |
|
Rs. |
(170,157 |
) |
|
|
|
|
|
|
|
|
|
Add: Stock based compensation expense
included in reported net loss |
|
|
3,502 |
|
|
|
5,472 |
|
|
|
|
|
|
|
|
|
|
Less: Stock based compensation expense
determined under fair value method |
|
|
18,370 |
|
|
|
39,524 |
|
|
|
|
|
|
|
|
|
|
Pro forma net loss |
|
Rs. |
(25,289 |
) |
|
Rs. |
(204,209 |
) |
|
|
|
|
|
|
|
|
|
Loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted reported |
|
Rs. |
(0.29 |
) |
|
Rs. |
(4.81 |
) |
|
Basic and diluted proforma |
|
Rs. |
(0.71 |
) |
|
Rs. |
(5.77 |
) |
On April 01, 2006,the Company adopted FASB Statement No.123 (revised 2004), Share-Based
Payment using the modified prospective approach .The Company recorded amortization of stock
compensation expense of Rs. 5,039 for the quarter ended December 31, 2006 and Rs. 46,509
for nine months ended December 31, 2006
During the nine months ended December 31, 2006, the Company has issued 221,000 shares under
Associate stock option plan 2005 and has been accounted under SFAS 123R.
The fair value of each option is estimated on the date of grant using the Black-Scholes model
with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended December 31, |
|
|
Nine months ended December 31 |
|
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
Dividend Yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed volatility |
|
|
78.5% - 116.6 |
% |
|
|
57.70% - 95.45 |
% |
|
|
78.5% - 116.6 |
% |
|
|
57.70% - 95.45 |
% |
|
Risk-free interest rate |
|
|
7.5 |
% |
|
|
4.84% - 7.5 |
% |
|
|
7.5 |
% |
|
|
4.84% - 7.5 |
% |
|
Expected Term |
|
12-40 months |
|
18 40 months |
|
12-40 months |
|
18 40 months |
12
9. Gratuity
The Company provides for gratuity, a defined benefit retirement plan (the Gratuity
Plan) covering all employees. The Gratuity Plan commenced on April 1, 1997. The plan
provides a lump sum payment to vested employees at retirement or termination of employment
based on the respective employees salary and the years of employment with the Company. The
Company provides the gratuity benefit through annual contributions to a fund managed by the
Life Insurance Corporation of India (LIC). Under this scheme, the settlement obligation
remains with the Company, although the LIC administers the scheme and determines the
contribution premium required to be paid by the Company. The Gratuity Plan is accounted for
in accordance with SFAS No. 87, Employers Accounting for Pensions.
The following table sets out the funded status of the Gratuity Plan and the amounts
recognized in the Companys financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended December 31, |
|
Nine months ended December 31, |
|
|
2005 |
|
2006 |
|
2005 |
|
2006 |
Service cost |
|
Rs. |
1,702 |
|
|
|
1,904 |
|
|
Rs. |
5,105 |
|
|
|
5,712 |
|
|
Interest cost |
|
|
348 |
|
|
|
416 |
|
|
|
1,044 |
|
|
|
1,249 |
|
|
Expected returns on plan assets |
|
|
(135 |
) |
|
|
(41 |
) |
|
|
(404 |
) |
|
|
(122 |
) |
|
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized net actuarial (gain)/ loss |
|
|
(122 |
) |
|
|
(117 |
|
|
|
(367 |
) |
|
|
(350 |
) |
|
|
|
|
|
|
Net gratuity costs |
|
Rs. |
1,793 |
|
|
|
2,163 |
|
|
Rs. |
5,378 |
|
|
|
6,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended December 31, |
|
Nine months ended December 31, |
|
|
2005 |
|
2006 |
|
2005 |
|
2006 |
Principal actuarial assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
8.0 |
% |
|
|
8.0 |
% |
|
|
8.0 |
% |
|
|
8.0 |
% |
|
Long-term rate of compensation increase |
|
|
6.0 |
% |
|
|
6.0 |
% |
|
|
6.0 |
% |
|
|
6.0 |
% |
|
Rate of return on plan assets |
|
|
7.5 |
% |
|
|
7.5 |
% |
|
|
7.5 |
% |
|
|
7.5 |
% |
The Company estimates the long term return on Gratuity Plan assets at 7.5% based on the
average long term rate of return expected to prevail over the next 15 to 20 years on the type
of investments held with LIC.
The Companys best estimate of contributions expected to be paid to the Gratuity Plan during
fiscal 2007 amounts to Rs. 5,000 . Further, the benefits expected to be paid in each of the
next five fiscal years, and in the aggregate for the five fiscal years thereafter are:
|
|
|
|
|
For the year ending March 31, |
|
|
|
|
2007 |
|
Rs. |
1,337 |
|
|
2008 |
|
|
1,672 |
|
|
2009 |
|
|
2,523 |
|
|
2010 |
|
|
4,125 |
|
|
2011 |
|
|
6,607 |
|
|
2012-2017 |
|
|
37,694 |
|
13
10. Deferred revenue:
Deferred revenue includes the following amounts of unearned income:
|
|
|
for the Companys corporate network / data services division, revenue relating to the connectivity / hosting
charges and from provision of digital certificates; |
|
|
|
|
for the Companys Internet access services and online portal services divisions,
revenue relating to the internet access charges and the advertisement charges respectively; and |
|
|
|
|
for the Companys other service division, revenue relating to development of e- learning software. |
The components of deferred revenue for these segments are:
|
|
|
|
|
|
|
|
|
|
|
As at |
|
|
|
March 31, 2006 |
|
|
December 31, 2006 |
|
Corporate network / data services |
|
Rs. |
305,028 |
|
|
Rs. |
250,681 |
|
Internet access services |
|
|
133,613 |
|
|
|
75,894 |
|
Online portal services |
|
|
623 |
|
|
|
602 |
|
Other services |
|
|
5,069 |
|
|
|
63,860 |
|
|
|
|
|
|
|
|
Total |
|
Rs. |
444,333 |
|
|
Rs. |
391,037 |
|
|
|
|
|
|
|
|
11. Advertising costs
Advertising costs incurred during the quarter have been expensed. The total amount of
advertising costs expensed during the quarter ended December 31, 2006 was Rs. 9,282 (Rs.
10,855 for the quarter ended December 31, 2005) and for the nine months ended December 31,
2006 was Rs. 33,391 (Rs. 40,378 for the nine months ended December 31, 2005).
12. Products and services
Break-up of revenues and cost of revenues against products and services are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended December 31, |
|
Nine months ended December 31, |
|
|
2005 |
|
2006 |
|
2005 |
|
2006 |
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services revenue |
|
Rs. |
1,028,751 |
|
|
Rs. |
1,176,129 |
|
|
Rs. |
2,856,571 |
|
|
Rs. |
3,458,028 |
|
Initial franchisee fee |
|
|
25,811 |
|
|
|
11,666 |
|
|
|
79,319 |
|
|
|
47,244 |
|
Installation services revenue |
|
|
64,926 |
|
|
|
67,035 |
|
|
|
186,239 |
|
|
|
202,087 |
|
|
|
|
|
|
|
|
|
1,119,488 |
|
|
|
1,254,830 |
|
|
|
3,122,129 |
|
|
|
3,707,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products revenue |
|
Rs. |
82,337 |
|
|
Rs. |
136,457 |
|
|
Rs. |
273,864 |
|
|
Rs. |
385,407 |
|
|
|
|
|
|
|
|
|
Rs. |
1,201,825 |
|
|
Rs. |
1,391,287 |
|
|
Rs. |
3,395,993 |
|
|
Rs. |
4,092,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended December 31, |
|
Nine months ended December 31, |
|
|
2005 |
|
2006 |
|
2005 |
|
2006 |
Cost of revenues (excluding
depreciation and amortization) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
Rs. |
63,784 |
|
|
Rs. |
121,744 |
|
|
Rs. |
229,162 |
|
|
Rs. |
334,420 |
|
Services |
|
|
549,225 |
|
|
|
605,562 |
|
|
|
1,611,321 |
|
|
|
1,747,686 |
|
Annual fee on IP VPN revenue |
|
|
10,319 |
|
|
|
18,974 |
|
|
|
24,562 |
|
|
|
65,529 |
|
|
|
|
|
|
|
|
Rs. |
623,328 |
|
|
Rs. |
746,280 |
|
|
Rs. |
1,865,045 |
|
|
Rs. |
2,147,635 |
|
|
|
|
|
|
14
13. Segment 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 Companys operations predominantly relate to connectivity to enterprises and
providing Internet access to retail subscribers (both home access and public access). The
Company also operates Portals, Sify.com. , Samachar.com and SifyMax.in, that provide a
variety of India-related content to audiences both in India and abroad, and which generates
revenue from advertisements and other value added services.
The primary operating segments of the Company are:
|
|
Corporate network/data services, which provides private network services, messaging services and web hosting to businesses; |
|
|
Internet access services; |
|
|
Online portals services and content offerings; and |
|
|
Other services such as development of e-learning software. |
The Chief Operating Decision Maker (CODM) evaluates the Companys performance and allocates
resources to various strategic business units that are identified based on the products and
services that they offer and on the basis of the market served. The measure of profit/loss
reviewed by the CODM was Earnings/loss 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 primarily between the corporate network/data services and Internet
access services businesses as described below:
International bandwidth refers to bandwidth that is required for access to sites and offices
outside the country. For all these businesses, bandwidth is allocated based on actual
utilization captured by monitoring traffic per IP pool assigned at the egress points. The
Company has packet shapers in the main locations to monitor bandwidth use by each of the
above categories of users. This information is used in determining norms like bandwidth per
port and bandwidth per PC. The actual utilization is cross validated against assumptions /
norms for each business.
National bandwidth refers to the inter-city link bandwidth implemented within the country.
Inter-city link bandwidth was allocated based on the number of subscribers or iway cyber
cafés at non gateway points and the bandwidth sold to and used by business enterprises
(determined using packet shapers). However, in order to strengthen its corporate business,
the Company enhanced its national backbone to carry Internet traffic to the international
fibre gateways, shifting from hybrid satellite and fibre gateways to fibre only gateways for
international bandwidth. National bandwidth costs are now allocated based on international
bandwidth allocation ratios because most of the traffic carried on the national backbone is
directed towards the international gateways. The Company believes that the resulting
allocations are reasonable.
Last mile costs related to dial-up access (E1/R2 costs) and spectrum fees for wireless
connectivity that can be directly identified to businesses are allocated directly. Certain
expenses, such as depreciation, technology and administrative overheads, which form a
significant component of total expenses, are not allocable to specific segments as the
underlying services are used interchangeably. Management believes that it is not practical to
provide segment disclosure of these expenses and, accordingly, they are separately disclosed
as unallocated and adjusted only against the total income of the Company
15
A significant part of the fixed assets used in the Companys 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
Companys operating
segment information for the quarters ended December 31, 2005 and 2006 and for the nine
months ended December 31, 2005 and 2006 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended December 31, 2005 |
|
|
|
Corporate |
|
|
Internet |
|
|
|
|
|
|
|
|
|
|
|
|
Network/Data |
|
|
Access |
|
|
Online Portal |
|
|
|
|
|
|
|
|
|
Services |
|
|
Services |
|
|
Services |
|
|
Other Services |
|
|
Total |
|
|
Revenues |
|
Rs. |
644,804 |
|
|
Rs. |
463,306 |
|
|
Rs. |
47,932 |
|
|
Rs. |
45,783 |
|
|
Rs. |
1,201,825 |
|
Allocated expenses |
|
|
(349,352 |
) |
|
|
(448,767 |
) |
|
|
(48,441 |
) |
|
|
(37,903 |
) |
|
|
(884,463 |
) |
Equity in profits of affiliates |
|
|
|
|
|
|
|
|
|
|
5,849 |
|
|
|
|
|
|
|
5,849 |
|
Minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income / (loss) |
|
Rs. |
295,503 |
|
|
Rs. |
14,539 |
|
|
Rs. |
5,340 |
|
|
Rs. |
7,880 |
|
|
Rs. |
323,211 |
|
Unallocated corporate expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(241,034 |
) |
Foreign exchange gain / (loss), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,976 |
|
Other income / (expense), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,702 |
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(114,585 |
) |
Interest income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,761 |
|
|
Net Profit/(loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rs. |
(12,969 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended December 31, 2006 |
|
|
|
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network / Data |
|
|
Internet Access |
|
|
Online Portal |
|
|
|
|
|
|
|
|
|
Services |
|
|
Services |
|
|
Services |
|
|
Other Services |
|
|
Total |
|
|
Revenues |
|
Rs. |
810,151 |
|
|
|
458,311 |
|
|
|
75,668 |
|
|
|
47,157 |
|
|
|
1,391,287 |
|
Allocated expenses |
|
|
(519,090 |
) |
|
|
(431,031 |
) |
|
|
(86,354 |
) |
|
|
(39,598 |
) |
|
|
(1,076,073 |
) |
Equity in profits of affiliates |
|
|
|
|
|
|
|
|
|
|
18,650 |
|
|
|
|
|
|
|
18,650 |
|
Minority Interest |
|
|
(7,896 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,896 |
) |
|
|
|
Segment operating income / (loss) |
|
|
283,165 |
|
|
|
27,280 |
|
|
|
7,964 |
|
|
|
7,559 |
|
|
|
325,968 |
|
Unallocated corporate expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(180,958 |
) |
Foreign exchange gain / (loss), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,558 |
) |
Other income / (expense), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,518 |
) |
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(118,388 |
) |
Interest income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,025 |
|
|
Net Profit/(loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended December 31, 2005 |
|
|
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network / Data |
|
|
Internet Access |
|
|
Online Portal |
|
|
|
|
|
|
|
|
|
Services |
|
|
Services |
|
|
Services |
|
|
Other Services |
|
|
Total |
|
|
Revenues |
|
Rs. |
1,833,593 |
|
|
Rs. |
1,333,167 |
|
|
Rs. |
122,543 |
|
|
Rs. |
106,690 |
|
|
Rs. |
3,395,993 |
|
Allocated expenses |
|
|
(1,080,744 |
) |
|
|
(1,339,858 |
) |
|
|
(132,274 |
) |
|
|
(105,685 |
) |
|
|
(2,658,561 |
) |
Equity in profits of affiliates |
|
|
|
|
|
|
|
|
|
|
35,257 |
|
|
|
|
|
|
|
35,257 |
|
Minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income / (loss) |
|
Rs. |
752,900 |
|
|
Rs. |
(6,691 |
|
|
Rs. |
25,526 |
|
|
Rs. |
1,005 |
|
|
Rs. |
772,689 |
|
Unallocated corporate expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(639,868 |
) |
Foreign exchange gain / (loss), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,609 |
|
Other income / (expense), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,014 |
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(353,125 |
) |
Interest income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,976 |
|
|
Net Profit/ (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rs. |
(172,705 |
) |
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended December 31, 2006 |
|
|
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network / Data |
|
|
Internet Access |
|
|
Online Portal |
|
|
|
|
|
|
|
|
|
Services |
|
|
Services |
|
|
Services |
|
|
Other Services |
|
|
Total |
|
|
Revenues |
|
|
2,351,441 |
|
|
|
1,410,435 |
|
|
|
211,409 |
|
|
|
119,481 |
|
|
|
4,092,766 |
|
Allocated expenses |
|
|
(1,420,130 |
) |
|
|
(1,353,647 |
) |
|
|
(203,658 |
) |
|
|
(106,365 |
) |
|
|
(3,083,800 |
) |
Equity in profits of affiliates |
|
|
|
|
|
|
|
|
|
|
42,544 |
|
|
|
|
|
|
|
42,544 |
|
Minority interest |
|
|
(7,896 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,896 |
) |
|
|
|
Segment operating income / (loss) |
|
|
923,415 |
|
|
|
56,788 |
|
|
|
50,295 |
|
|
|
13,116 |
|
|
|
1,043,614 |
|
Unallocated corporate expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(614,368 |
) |
Foreign exchange gain / (loss), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,781 |
|
Other income / (expense), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,721 |
) |
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(388,614 |
) |
Interest income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,838 |
|
|
Net Profit/(loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172,530 |
|
|
14. Leases
The Companys leasing arrangement consist of leasing various types of routers, modems and
other equipment for setting up virtual private network and providing bandwidth to its
customers in corporate connectivity business. The leases are classified as Sales-Type Leases
and expire after a period of three years.
The following lists the components of the net investment in sales-type leases as of December
31, 2006:
|
|
|
|
|
Minimum lease payments receivable |
|
Rs. |
33,997 |
|
|
Less: Unearned income |
|
|
(2,259 |
) |
|
Net investment in sales-type leases |
|
|
31,738 |
|
The minimum lease payments receivable for each of the fiscal years are as follows:
|
|
|
|
|
For the year ending March 31, |
|
|
|
|
2007 |
|
Rs. |
4,602 |
|
|
2008 |
|
|
17,455 |
|
|
2009 |
|
|
6,934 |
|
|
2010 |
|
|
5,006 |
|
17
15. Commitments and contingencies
a) The Company had received a notice from the Income-Tax Department of India for the financial
years 2002 and 2003 for a sum of Rs.77,724 stating that no withholding tax has been deducted in
respect of international bandwidth and leased line payments made by the Company to
international bandwidth / lease line service providers.
Based on the legal opinion, withholding taxes need not be deducted if the service provider did
not have any permanent establishment in India and has not installed any equipment at the
Companys premises. The Company is able to demonstrate that international service providers has
neither had a permanent establishment in India nor has installed any equipment at the Companys
premises. Accordingly, the likelihood of the loss contingency is remote and no provision for
the loss contingency is considered necessary.
The Commissioner of Income Tax (Appeals) heard the Companys appeal against the order of the
Income Tax Officer and directed the Assessing Officer to comment on the submissions filed by
the Company. The appeal will be disposed off only after the remand report is received from the
Assessing Officer.
Subsequent to the quarter ended December 31, 2006, the Company has also filed a petition for
stay of collection of tax demanded in the order until the disposal of the appeal. The appeal
was rejected and the Company has been directed to pay the same in installments. Hence, the
Company is paying under protest the entire demand in twelve equal installments. This is
subject to the outcome of the appeals filed by the Company.
b) The Company has outstanding financial and performance guarantees for various statutory
purposes and letters of credit totalling Rs. 475,600 and Rs.635,116 as of December 31, 2005
and 2006, respectively. These guarantees are generally provided to governmental agencies.
c) Provident Fund contribution not provided for on leave encashment in respect of periods
prior to April 01, 2005 is estimated at Rs.4,326.
16. Legal proceedings
The Company and certain of its officers and directors are named as defendants in a
securities class action lawsuit filed in the United States District Court for the Southern
District of New York. This action, which is captioned In re Satyam Infoway Ltd. Initial
Public Offering Securities Litigation, also names several of the underwriters involved in
Sifys initial public offering of American Depositary Shares as defendants. This class
action is brought on behalf of a purported class of purchasers of Sifys ADSs from the time
of Sifys Initial Public Offering (IPO) in October 1999 through December 2000. The
central allegation in this action is that the underwriters in Sifys IPO solicited and
received undisclosed commissions from, and entered into undisclosed arrangements with,
certain investors who purchased Sifys ADSs in the IPO and the aftermarket. The complaint
also alleges that Sify violated the United States federal securities laws by failing to
disclose in the IPO prospectus that the underwriters had engaged in these allegedly
undisclosed arrangements. More than 300 issuers have been named in similar lawsuits.
In July 2002, an omnibus motion to dismiss all complaints against issuers and individual
defendants affiliated with issuers was filed by the entire group of issuer defendants in these
similar actions. In October 2002, the cases against the Companys executive officers who were
named as defendants in this action were dismissed without prejudice. In February 2003, the
court in this action issued its decision on defendants omnibus motion to dismiss. This
decision denied the motion to dismiss the Section 11 claim as to the Company and virtually all
of the other issuer defendants. The decision also denied the motion to dismiss the Section
10(b) claim as to numerous issuer defendants, including the Company. On June 26, 2003, the
plaintiffs in the consolidated IPO class action lawsuits currently pending against Sify and
over 300 other issuers who went public between 1998 and 2000, announced a proposed settlement
with Sify and the other issuer defendants. The proposed settlement provides that the insurers
of all settling issuers will guarantee that the plaintiffs recover $1 billion from non-settling
defendants, including the investment banks who acted as underwriters in those offerings. In the
event that the plaintiffs do not recover $1 billion, the insurers for the settling issuers will
make up the difference.
The Company believes that it has sufficient insurance coverage to cover the maximum amount that
it may be responsible for under the proposed settlement. Although the Federal District Court
has preliminarily approved the settlement, it is possible that the Federal District Court may
not finally approve the settlement in whole or part. The Company believes the maximum exposure
under this settlement, in the event that the plaintiffs recover nothing from the non-settling
defendants, is approximately U.S. $3.9 million, an amount which the Company believes is fully
recoverable from the Companys insurer.
18
The Company is party to additional legal actions arising in the ordinary course of
business. Based on the available information, as of December 31, 2006 Sify believes that it
has adequate legal defenses for these actions and that the ultimate outcome of these actions
will not have a material adverse effect on Sify.
17. Reclassifications
Certain prior period/year amounts have been reclassified to conform to the current years
presentation.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of the financial condition and results of operations of our company
should be read in conjunction with the unaudited consolidated financial statements and the related
condensed 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, 2006.
This discussion contains forward-looking statements that involve risks and uncertainties. For
additional information regarding these risks and uncertainties, please see the section in this
report captioned Risk Factors.
Overview
Sify is among the largest Internet, network and e-Commerce services companies in India, offering
end-to-end solutions with a comprehensive range of products delivered over a common Internet
backbone infrastructure. This Internet backbone reaches 186 cities and towns in India. A
significant part of the companys revenue is derived from Corporate Services, which include
corporate connectivity, network and communications solutions, security, network management
services and hosting. A host of blue chip customers use Sifys corporate service offerings.
Consumer services include broadband home access, dial up connectivity and the iWay cyber café
chain across 158 cities and towns. The companys network services, Data Center operations and
customer relationship management are accredited ISO 9001:2000.
Investment Strategy
In evaluating investment opportunities through acquisition of business, we consider important
factors, such as strategic fit, competitive advantage and financial benefit, through an appropriate
evaluation. There is no significant difference in the analysis undertaken in connection with an
investment in an affiliate compared to other uses of cash. Our investment strategy has not
undergone major changes in the last four years.
Globe Travels Inc.
In April 2006, we acquired Globe Travels Inc., a company engaged in the business of online
travel and travel related business, for a total consideration of USD 4.50 million . This
acquisition marks Sifys entry into the fast growing online travel business, particularly
e-ticketing, the category with significant revenues and fastest growth in online e-commerce today.
19
Revenues
The primary operating segments of our company are:
|
|
|
corporate network/data services, which include private network services, messaging
services, security services, remote management services and web hosting for businesses; |
|
|
|
|
Internet access services; |
|
|
|
|
online portal services and content offerings; and |
|
|
|
|
other services, such as development of content for e-learning. |
Corporate network/data services
Corporate network service revenues primarily include connectivity services and, to a lesser
extent, the revenues from the sale of hardware and software purchased from third party vendors,
installation of the link, and other ancillary services such as e-mail, document management and
domain registration. Generally, these elements are sold as a package consisting of all or some of
the elements. These multiple element arrangements are recognized as separable elements because each
element constitutes a separate earnings process, each element has a fair value that is reliable,
verifiable and objectively determinable, and the undelivered element is not essential to
functionality of the delivered elements. In this arrangement involving delivery of multiple
elements, in accordance with EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables
(EITF 00-21), the units of accounting are determined based on whether the delivered items have a
value to the customer on a stand alone basis, whether there is objective and reliable evidence of
fair value of the undelivered elements and if the arrangement includes a general right of return
relative to the delivered item, whether delivery or performance of the undelivered item(s) is
considered probable and substantially in the control of the Company. The arrangement consideration
is allocated to the units of accounting based on their fair values. Revenue on delivered items is
recognized when the revenue recognition criteria applicable to that unit of accounting are met.
The Company provides connectivity for a fixed period of time at a fixed rate regardless of
usage. Connectivity is the last element that is provided in the case of a bundled contract. The
connectivity charges are the same when sold alone or as part of a package. The revenue attributable
to connectivity services is recognized ratably over the period of the contract. The hardware and
software are standard products that are being freely traded in and purchased from the market, have
standard specifications and are not otherwise customized for the specific needs of a customer. The
software sold by the Company is off-the-shelf software, such as anti-virus utilities and firewalls.
The fair value for the hardware and software is available from the market. The revenue attributable
to hardware/software is recognized on delivery. Installation consists of commissioning of the last
mile connectivity to the customer premises either through the Companys wireless mode of broadband
delivery or through the carrier exchange (primarily Bharat Sanchar Nigam Limited, or BSNL, a
Government of India entity). However, once commissioned, this last mile connectivity can be used by
the customer to access any other service provider. The installation normally takes 4-6 weeks. When
the customer has such last mile connectivity, the Company does not charge any installation fee. The
revenue attributable to the installation of the link is recognized on completion of the
installation work. Revenue from ancillary services such as e-mail, document management and domain
registration are recognized over the period such facilities are provided. All revenues are shown
exclusive of sales tax and service tax and net of applicable discounts and allowances.
Web hosting service revenues primarily include co-location services and connectivity services.
On occasion, the Company also sells related hardware/software to its web hosting customers. At all
times, such hardware and software belongs to the customer. This hardware and software is purchased
from outside vendors and is freely traded in the market. The Company treats each element of the
arrangement as a separate earnings process. The value of the hosting service is determined based on
vendor specific objective evidence from similar services sold separately by the Company. When
hardware and/or software is also included with hosting services and sold as a package the vendor
specific objective evidence of the undelivered element is considered to arrive at the residual
value of the delivered element. Revenue from hosting services is recognized over the period during
which the service is provided.
20
Internet access services
Internet access services include Internet access at homes and businesses through dial-up or
cable operator and Internet access through a network of cybercafés. It also includes revenues from
VoIP.
Dial-up Internet access is sold to customers either for a specified number of hours or for an
unlimited usage within a specified period of time. Customers purchase a CD that allows them to
access the Internet. The amounts received from customers on the sale of these CDs are not
refundable. Sify recognizes revenue from sale of CDs based on usage by the customer. At the end of
the specified period, the remaining unutilized hours, if any, are recognized as revenue. Revenue
from unlimited Internet access is recognized ratably over the specified period.
VoIP services are mainly provided through Internet Telephony Booths at iway cybercafés and to
a smaller extent through Cable TV operators, or CTOs, and through multi-dwelling units, or MDUs.
The user purchases the packs that enables them to use the Internet telephone facility through CTO
and MDUs. We recognize revenue on the basis of usage by the customer. The customer uses Internet
telephony facilities at the iway cybercafés and makes the payment to the extent of usage of the
facility. We recognize revenue on the basis of usage.
Internet access at homes and businesses through cable networks is provided through a
franchised network of cable operators in India. Customers buy user accounts for a specified usage
or volume of data transfer or for a specified period of time all within a contracted period. We
recognize revenue on actual usage by customer (where access is for a specified quantum of usage)
and based on time (where access is for a specified period of time). Any unused hours at the end of
the contracted period are recognized as revenue.
Public Internet access is provided to customers through a chain of franchisee operated
cybercafé outlets and, to a lesser extent, Sify-owned cybercafés. Sify enters into an arrangement
with franchisees that provides for the payment of an initial non-refundable franchisee fee in
consideration for establishing the franchisee relationship and providing certain initial services.
These initial services consist of a number of activities, including installing the broadband
receiver equipment at the cybercafé and connecting it to one of Sifys broadcasting towers,
obtaining regulatory approvals for clearance of the site for wireless transmission at the allotted
frequency range and other ancillary services.
Initial franchisee fee revenue is recognized at the time of commencement of operations by the
franchisee, in accordance with SFAS No. 45, Accounting for Franchisee Fee Revenue, because Sify
believes that substantial performance for which these non-refundable payments are received is
completed at the time of commencement of operations and no uncertainty exists with regard to the
collection of such fees.
Online portal services and content offerings
Online portal services and content offerings revenues include advertising revenues from the
various channels of our Internet portal, www.sify.com. We enter into contracts with customers to
serve advertisements in the portal, and we are paid on the basis of impressions, click-throughs or
leads. Revenues also accrue from commissions earned on products and services rendered through
ecommerce and also from value-added services that are rendered using Sifys mobile telephone short
code, 4545.
Other services
Other services include revenue from e-learning. We develop and upload content for e-learning
to facilitate web-based learning in various organizations. We provide e-learning services on a
time-and-materials or on a fixed-price basis.
In Item 15 of the condensed notes to our unaudited consolidated financial statements for the
quarter ended December 31, 2006, we provided supplemental segment data, which provides separate
revenue and operating income (loss) information for each of these business segments and is
incorporated herein by reference.
Expenses
Corporate network/data services
Cost of revenues for the corporate network/data services division consists of
telecommunications costs necessary to provide services, customer support costs, cost of goods in
respect of communication hardware and security services sold and the cost of providing network
operations. Telecommunications costs include the costs of international bandwidth procured from
VSNL and satellite gateway providers and are required for access to the Internet, providing local
telephone lines to our points of presence, the costs of using third-party networks pursuant to
service agreements, leased line costs and costs towards spectrum fees payable to the Wireless
Planning Commission or WPC for provision of spectrum in the 5.7 GHz range to enable connectivity to
be provided on the wireless mode for the last mile. In addition, the Government of India has
imposed an annual license fee of 6% of the adjusted gross revenue generated from the provision of
VPN services under the NLD/ILD license. Depreciation of plant and equipment has not been included
in the cost of revenues since a significant part of the fixed assets are not directly identifiable.
21
Internet access services
Cost of revenues for the Internet access services division consists primarily of recurring
telecommunications costs necessary to provide service to subscribers, direct costs paid to
franchisees for running the iways and to cable television operators for providing Internet services
through cable to customers. We are also subject to a 6% annual licence fee on the adjusted gross
revenues of our VoIP business. Another recurring cost included in cost of revenues is the personnel
and related operating expenses associated with customer support and network operations.
Online portal services and content offerings
Cost of revenues for the online portal and content offerings division includes the cost of
procuring and managing content for the websites and cost of ring tones downloaded by using Sifys
mobile telephone short code, 4545.
Other Services
Cost of revenues for the eLearning division includes the cost of direct manpower that is
involved in the design and uploading of content for facilitating web-based learning.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consists of salaries and commissions for sales
and marketing personnel, salaries and related costs for executives, financial and administrative
personnel, sales, marketing, advertising and other brand building costs, travel costs, and
occupancy and overhead costs.
We have an Employee Stock Option Plan, which we refer to as our Associate Stock Option Plan,
or ASOP. A total of approximately 3.2 million equity shares are reserved for issuance under our
ASOP. As of December 31, 2006, we had an aggregate of 889,186 options (net of 2,290,415 options
expired or forfeited by employees and 1,231,579 options exercised for equity shares) outstanding
under our ASOP with a weighted-average exercise price equal to approximately Rs.385.98 per equity
share.
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.
We assess for impairment of long-lived assets under SFAS No. 144, Impairment and disposal of
long-lived assets. The carrying values of long-lived assets are compared with the adjusted
estimated future cash flows at the identifiable business segment level. If the sum of such
undiscounted cash flows is less than the aggregate carrying amount, the asset is not recoverable
and the impairment loss is recognized.
In addition to our operations and those of our consolidated subsidiaries, our financial
statements include our pro rata share of the financial results of Man Financial-Sify Securities
India Private Limited, a company in which we have a significant, non-controlling minority interest.
This investment is accounted for under the equity method of accounting.
Since our inception till the year ended March 31, 2006, we have incurred net losses. However,
we have earned net profits during the quarters ended March 31, June 30, September 30 and December
31,2006. Our ability to generate positive cash flow from operations and achieve profitability is
dependent on our ability to continue to grow our revenues base and achieve further operating
efficiencies.
For fiscal 2000 through 2003, we incurred negative cash flow from continuing operations of
approximately Rs.596.9 million, Rs.1,133.4 million, Rs.775.7 million and Rs.238.3 million,
respectively. During fiscal 2004, 2005 and 2006 , we generated cash from operating activities of
Rs.210.0 million, Rs.451.0 million, Rs.223.1 million , respectively. For the nine months ended
December 31, 2006, we used cash for operating activities of Rs. 92.0 million. For fiscal 2001
through 2006, we incurred net losses of approximately Rs.2,509.0 million, Rs.7,202.5 million,
Rs.1,329.4 million, Rs.371.3 million, Rs.307.6 million and Rs.149.2 million, respectively. During
the quarter ended December 31, 2006 we made a net profit of Rs.41.5 million ($0.9 million) and for
the nine months ended December 31, 2006 we made a net profit of Rs. 172.5 million ($3.9 million).
As of December 31, 2006, we had an accumulated deficit of approximately Rs.12,393.3 million ($280.9
million).
Operating Results
Quarter ended December 31, 2006 compared to quarter ended December 31, 2005
Revenues . We recognized Rs.1,391.3 million ($31.5 million) in revenues for the quarter ended
December 31, 2006, as compared to Rs.1,201.8 million for the quarter ended December 31, 2005,
representing an increase of Rs.189.5 million, or 15.8%.
The revenues generated by our corporate network/data services businesses increased by Rs.165.3
million, or 25.6%, over the same period in the previous year. The increase is attributable to
increases in connectivity revenues of Rs.135.5 million, increase in security consultancy revenues
of Rs.13.1 million, an increase in hardware & software sales revenues of Rs. 14.3 million and an
increase in installation revenues of Rs. 2.4 million. The corporate network/data services
businesses obtained a significant number of new orders and incremental orders from customers with
operations throughout India for providing IP VPN and Internet connectivity. We currently have more
than 1,500 corporate customers for our connectivity services.
22
The decrease in consumer Internet access revenues was Rs.5.0 million, or 1.1%, as compared to
the same period of the previous year. The decrease was a result of decreased revenues from Voice
over IP services of Rs. 27.7 million, or 32.6%, decreased revenues from hardware sales of Rs. 8.3
million, or 79.1%. and decreased revenue from dial up business of Rs. 13.2 million, or 42.9%. These
decreases were partially offset by increase of Rs. 53.2 million, or 34.7%, from home based broad
band subscribers revenues and by increase of Rs. 1.7 million, or 1.1% from public internet access
revenues. The franchise fees and installation fee recognized for the quarter ended December 31,
2006 were at Rs.15.8 million, compared with Rs.26.5 million for the quarter ended December 31,
2005, thereby representing a decrease of Rs. 10.7 million, or 40.4%. This decrease is on account of
the decrease in the number of cybercafés added during the Quarter ended December 31, 2006 compared
with the same period in the previous year. During the quarter, the number of cybercafés increased
from to 3,552 compared to 3,103 as of December 31, 2005. The number of high speed subscribers of
the Sify broadband service increased from 150,530 in December 2005 to 208,951 in December 2006
The increase in the subscriber base was partially offset by a drop in the monthly average revenue
per user or ARPU by about 12.8%. The decrease in sale of hardware during the quarter ended December
31, 2006 was primarily on account of increase in the sale of gaming PCs during the quarter ended
December 31, 2005 due to the scaling up of our gaming initiatives. We experienced more than 0.5
Million minutes decrease in VoIP calls compared with same quarter of previous year, primarily on
account of reduction in call minutes from consumer Internet access points . The average realization
per minute dropped by approximately 29.9% during the above period. Our dial-up business continued
to decline with a decrease in the number of subscribers as well as the usage minutes. Bundling of
services offered by the public sector telephone companies resulted in a marked decline in the
market share of private ISPs in the dial-up market segment.
Our online portal and content offerings division accounted for Rs.75.7 million of revenues for
the quarter ended December 31, 2006, as compared to Rs.47.9 million for the quarter ended December
31, 2005, representing an increase of Rs.27.8 million, or 58.0% growth. Partly attributable to the
increase is the acquisition of Globe Travels, which has contributed revenues of Rs.11.0 million for
the quarter ended December 31, 2006. Advertisement revenues were at Rs.35.4 million as compared to
Rs. 41.4 million for the quarter ended December 31,2005 which is a decrease of Rs. 6.0 million, or
14.5%. Revenues from e-commerce initiatives has contributed to revenues of Rs.29.3 million for the
quarter ended December 31, 2006 compared to Rs.6.5 million for the quarter ended December 31, 2005
representing an increase of Rs.22.8 million.
Revenues from our other businesses increased by Rs.1.4 million, or 3.1%.
Cost of Revenues. Cost of revenues was Rs.746.3 million ($16.9 million) for the quarter ended
December 31, 2006, compared to Rs.623.3 million for the quarter ended December 31, 2005,
representing an increase of Rs.123.0 million, or 19.7%. This increase was primarily on account of
an increase of Rs.35.4 million in the other direct costs incurred on newer installations , royalty
cost and direct cost in line with increase in revenues. The other reasons for the increase are
Rs.20.8 million increase in direct expenses paid to franchisees and Cable Television Operators or
CTOs, for providing broadband delivery through cable, Rs.67.6 million increase in cost of goods
sold and an increase of Rs.2.7 million in lease line expenses. These increases were partially
offset by a marginal decrease of Rs.3.5 million in our directly billable manpower and the
technology department.
Selling, general and administrative expenses. Selling, general and administrative expenses
were Rs.437.9 million ($9.9 million) for the quarter ended December 31, 2006, compared to Rs.482.1
million for the quarter ended December 31, 2005, representing a decrease of Rs.44.2, million, or
9.2%. This decrease was on account of reduction in personnel expenses .
Provision for doubtful receivables and advances. Provision for doubtful receivables and
advances was Rs.68.7 million ($1.6 million) for the quarter ended December 31, 2006 compared to
Rs.13.7 million for the quarter ended December 31, 2005 representing an increase of Rs.55.0
million. The provision for doubtful debts was based on a periodic evaluation of the receivables
and their collectability.
Depreciation. Depreciation for the quarter ended December 31, 2006 was Rs.102.4 million ($2.3
million), as compared to Rs.102.7 million for the quarter ended December 31, 2005, representing a
marginal decrease of Rs.0.3 million, or 0.3%.
Amortization of intangible assets. Amortization of intangible assets was Rs.11.0 million ($0.3
million) for the quarter ended December 31, 2006, compared to Rs.8.31 million for the quarter ended
December 31, 2005, representing a increase of Rs.2.7 million, or 32.4%. The increase is primarily
attributable to amortization of Globes customer and contract related intangibles.
Amortization of deferred stock compensation expenses. Amortization of deferred stock
compensation expenses was Rs. 5.0 million ($0.1 million) for the quarter ended December 31, 2006,
compared to Rs.3.5 million for the quarter ended December 31, 2005, representing an increase of
Rs.1.5 million. The increase is attributable to the charge on account of new stock options granted
subsequent to October 2005 and also on account of adoption of SFAS 123-R, Accounting for Stock
Based Compensation.
Foreign exchange gain/loss. Foreign exchange loss for the quarter ended December 31, 2006 was
Rs.20.6 million , compared to a foreign exchange gain of Rs.4.0 million for the quarter ended
December 31, 2005, representing a change of Rs.24.6 million. During the quarter ended December 31,
2006, the dollar depreciated from Rs.45.95 to Rs.44.11, which impacted the value of our dollar
denominated deposits and resulted in a foreign exchange fluctuation loss, whereas during the
quarter ended December 31, 2005, the dollar appreciated from Rs.43.94 as of September 30 , 2005 to
Rs.45.11 as of December 31, 2005.
Other income (net) . Other income was Rs.31.1 million ($0.8 million) for the quarter ended
December 31, 2006, compared to Rs.8.9 million for the quarter ended December 31, 2005, representing
an increase of Rs.22.2 million, or 249.4%. This increase is mainly on account of increase in
interest income of Rs.27.5 million and a decrease in interest expense and other financial charges
by Rs. 2.4 million which was partially offset by a decrease in miscellaneous income of Rs 7.7
million.
23
Equity in profit of affiliates. Equity in the profit of affiliates was Rs.18.7 million ($0.4
million) for the quarter ended December 31, 2006, compared to Rs.5.9 million for the quarter ended
December 31, 2005, representing an increase of Rs.12.8 million, or 216.9%.
Nine months ended December 31, 2006 compared to nine months ended December 31, 2005
Revenues . We recognized Rs.4,092.8 million ($92.8 million) in revenues for the nine months
ended December 31, 2006, as compared to Rs.3,396.0 million for the nine months ended December 31,
2005, representing an increase of Rs.696.8 million, or 20.52%.
The revenues generated by our corporate network/data services businesses increased by Rs.517.8
million, or 28.2%, over the same period in the previous year. The increase is attributable to
increases in connectivity revenues of Rs.415.3 million, increase in revenues from hardware and
software sales of Rs.47.3 million, increase in security consultancy revenues of Rs.41.3 million and
installation revenues of Rs.13.9 million. The corporate network/data services businesses obtained
significant number of new orders and incremental orders from customers with operations throughout
India for providing IP VPN and Internet connectivity. We currently have more than 1,500 corporate
customers of our connectivity services.
The increase in consumer Internet access revenues was Rs.77.3 million, or 5.8%, over the same
period of the previous year. The increase was a result of increased revenues from home-based
broadband subscribers of Rs.190.10 million, or 48.7% and an increase in public Internet access
revenues by Rs. 9.9 million, or 2.0%. These increases were partially offset by a decrease of
Rs.37.3 million or 16.5% from Voice over IP services, a decrease of 30.8 million or 30.8% in the
revenues from dial up business and a decrease of 31.7 million from the sale of hardware. The
franchise fees and installation fee recognized for the nine months ended December 31, 2006 were at
Rs.59.2 million, compared with Rs.82.1 million for the nine months ended December 31, 2005. This
decrease is on account of the decrease in the number of cyber cafés added during the nine months
ended December 31, 2006 compared with the same period in the previous year. The number of high
speed subscribers of the Sify broadband service increased from about 150,530 in December 2005 to
about 208,951 in December 2006 The increase in the subscriber base was offset by a drop in the
monthly average revenue per user or ARPU by about 14.4%. The decrease in sale of hardware during
the six months ended September 30, 2006 was primarily on account of scaling up of gaming PCs sale
during the nine months ended December 31, 2005. We experienced around 12 Million minutes increase
in VoIP calls compared to the first nine months of previous year, primarily from calls made by
customers in the IT/ITES sector .The average realization per minute dropped by approximately 32%
during the above period. Our dial-up business continued to decline with a decrease in the number of
subscribers as well as the usage minutes. Bundling of services offered by the public sector
telephone companies resulted in a marked decline in the market share of private ISPs in the dial-up
market segment.
Our online portal and content offerings division accounted for Rs.211.4 million of revenues
for the nine months ended December 31, 2006, as compared to Rs.122.5 million for the nine months
ended December 31, 2005, representing an increase of Rs.88.9 million, or 72.6%growth.Partly
attributable to the increase is the acquisition of Globe Travels, which has contributed revenues of
Rs.27.3 million for the nine months ended December 31, 2006. Growth was witnessed across all
segments, as advertisement revenues at Rs.130.1 million, grew by 19.6 million compared to the same
period of the previous year. Revenues from e-commerce initiatives has contributed to revenues of
Rs.54.0 million for the nine months ended December 31, 2006 compared to Rs.12.0 million for the
nine months ended December 31, 2005 representing an increase of Rs.42.0 million.
Revenues from our other businesses increased by Rs.12.8 million, or 12.0%. During the course
of the last few quarters, we have added new customers to our e-learning division, and these
customers contributed to the increase in revenues.
Cost of Revenues. Cost of revenues was Rs.2,147.6 million ($48.7 million) for the nine months
ended December 31, 2006, compared to Rs.1,865.1 million for the nine months ended December 31,
2005, representing an increase of Rs.282.5 million, or 15.2%. This increase was primarily on
account of an increase of Rs.143.3 million in the cost of goods sold. The other reasons for the
increase are a Rs.57.0 million increase in direct expenses paid to franchisees and Cable Television
Operators, or CTOs, for providing broadband delivery through cable, Rs.83.2 million increase in
other direct costs and an increase of Rs. 17.7 million in personnel expenses of our directly
billable manpower and the technology department . These increases were partially offset by a
decrease of Rs.18.7 million in lease line expenses.
Selling, general and administrative expenses. Selling, general and administrative expenses
were Rs.1,397.5 million ($31.7 million) for the nine months ended December 31, 2006, compared to
Rs.1,380.3 million for the nine months ended December 31, 2005, representing an increase of Rs.17.2
million, or 1.3%. This increase was due to an increase in personnel expenses due to increase in
salaries and on account of new recruits.
Provision for doubtful receivables and advances. Provision for doubtful receivables and
advances was Rs.142.4 million ($3.2 million) for the nine months ended December 31, 2006 compared
to Rs.46.7 million for the nine months ended December 31, 2005 representing an increase of Rs.95.7
million. The provision for doubtful debts was based on a periodic evaluation of the receivables
and their collectability..
Depreciation. Depreciation for the nine months ended December 31, 2006 was Rs.302.5 million
($6.9 million), as compared to Rs.300.4 million for the nine months ended December 31, 2005,
representing an increase of Rs.2.1 million, or 0.7%. The increase is primarily on account of
capital expenditure incurred on expansion and also on account of new hosting center set up in
Bangalore.
Amortization of intangible assets. Amortization of intangible assets was Rs.39.6 million ($0.9
million) for the nine months ended December 31, 2006, compared to Rs.47.11 million for the nine
months ended December 31, 2005, representing a decrease of Rs.7.51 million, or 15.9%. This decrease
is mainly attributable to the decrease in amortization of portal and content rights , decrease in
amortization of IP VPN license and decrease in amortization of system software partially offset by
increase in amortization of Globe customer contracts.
24
Amortization of deferred stock compensation expenses. Amortization of deferred stock
compensation expenses was Rs. 46.4 million ($1.1 million) for the nine months ended December 31,
2006, compared to Rs.5.5 million for the nine months ended December 31, 2005, representing an
increase of Rs.40.9 million. The increase is attributable to the charge on account of new stock
options granted subsequent to October 2005 and also on account of adoption of SFAS 123-R,
Accounting for Stock Based Compensation.
Foreign exchange gain/loss. Foreign exchange gain for the nine months ended December 31, 2006
was Rs.23.7 million , compared to Rs.6.7 million for the nine months ended December 31, 2005,
representing a change of Rs.17.0 million. During the nine months ended December 31, 2006, the
dollar depreciated from Rs.44.48 to Rs.44.11, which impacted the value of our dollar denominated
deposits and resulted in a foreign exchange translation gain, whereas during the nine months ended
December 31, 2005, the Rupee had been fairly stable against the dollar, appreciating from Rs.43.62
as of March 31, 2005 to Rs.45.11 as of December 31, 2005.
Other income (net) . Other income was Rs.97.1 million ($2.2 million) for the nine months ended
December 31, 2006, compared to Rs.34.3 million for the nine months ended December 31, 2005,
representing an increase of Rs 62.8 million, or 183.1%. This increase is mainly on account of
increase in interest income of Rs.73.3 million and a decrease in interest expense and other
financial charges by Rs. 4.8 million which was partially offset by a decrease in miscellaneous
income of Rs.15.3 million.
Equity in profit of affiliates. Equity in the profit of affiliates was Rs.42.6 million ($0.9
million) for the nine months ended December 31, 2006, compared to Rs.35.3 million for the nine
months ended December 31, 2005, representing an increase of Rs.7.3 million, or 20.7%.
Liquidity and Capital Resources
The following table summarizes our statements of cash flows for the periods presented:
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|
|
|
|
|
Fiscal year ended |
|
For the nine months ended |
|
|
March 31, |
|
December 31, |
|
|
2004 |
|
2005 |
|
2006 |
|
2006 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
Net profit / (loss) from continuing
operations |
|
Rs. |
(371,284 |
) |
|
Rs. |
(307,576 |
) |
|
Rs. |
(149,245 |
) |
|
Rs. |
172,530 |
|
|
$ |
3,911 |
|
Net decrease/(increase) in working
capital |
|
|
57,288 |
|
|
|
198,707 |
|
|
|
(128,119 |
) |
|
|
(572,366 |
) |
|
|
(12,976 |
) |
Other adjustments for non-cash items |
|
|
524,922 |
|
|
|
559,821 |
|
|
|
500,478 |
|
|
|
492,372 |
|
|
|
11,163 |
|
Net cash provided by/(used in)
operating activities |
|
|
210,926 |
|
|
|
450,952 |
|
|
|
223,114 |
|
|
|
92,536 |
|
|
|
2,098 |
|
Net cash provided by/(used in)
investing activities |
|
|
74,386 |
|
|
|
(523,504 |
) |
|
|
(429,138 |
) |
|
|
(637,197 |
) |
|
|
(14,446 |
) |
Net cash provided by/(used in)
financing activities |
|
|
189,958 |
|
|
|
69,182 |
|
|
|
1,684,055 |
|
|
|
63,470 |
|
|
|
1,439 |
|
Effect of exchange rate changes on
cash |
|
|
(47,063 |
) |
|
|
1,479 |
|
|
|
20,558 |
|
|
|
(2,857 |
) |
|
|
(65 |
) |
Net increase/(decrease) in cash and
cash equivalents |
|
|
428,207 |
|
|
|
(1,891 |
) |
|
|
1,498,589 |
|
|
|
(484,048 |
) |
|
|
(10,974 |
) |
We intend to continue to focus on the reduction of our cash burn and increasing our cash
surplus in fiscal 2007. Based upon our present business and funding plans, we believe that our cash
and cash equivalents of Rs.2,338.5 million ($53.0 million) as of December 31, 2006, excluding
restricted cash included in non-current assets of Rs.1.0 million ($0.02 million), is sufficient to
meet our currently known requirements at least over the next twelve months. 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.
Cash balances held in foreign currency were Rs.557.7 million, Rs.293.2 million, Rs.1,956.4
million and Rs.340.6 million as of March 31, 2004, 2005, 2006 and December 31, 2006, respectively.
Cash balances held in Indian currency were Rs.881.8 million, Rs.1,062.9 million, Rs.867.1 million
and Rs.1,998.9 million as of March 31, 2004, 2005, 2006 and December 31, 2006, respectively. These
amounts include cash and cash equivalents and restricted cash.
Cash used by operating activities for the nine months ended December 31, 2006 was Rs.92.5
million ($2.1 million), representing cash provided by operations of Rs.664.9 million ($15.1
million) and an increase in working capital of Rs.572.4 million ($12.9 million) due to increase in
accounts receivable by Rs.325.8 million, decrease in trade accounts payable by Rs. 92.8 million,
decrease in advances received from customers by Rs.49.8 million, increase in other assets by
Rs.41.0 million, decrease in inventories by Rs.0.1 million, an increase in investment in leases of
Rs.10.1 million, increase in prepaid expenses by Rs.40.1 million, decrease in other liabilities by
Rs.116.4 million, decrease in due from employees by Rs.17.3 million and decrease in deferred
revenues by Rs.53.3 million.
Cash used by investing activities for the nine months ended December 31, 2006 was Rs.637.2
million ($14.4million) and principally consisted of establishment of a new data center and purchase
of routers, modems, ports, servers and other capital equipment in connection with the expansion
of our network of Rs.481.9 million ($10.9 million), acquisition of Globe Travels of Rs.92.9 million
($2.0 million), expenditure on intangible assets of Rs.66.2 million ($1.5 million), partially
offset by proceeds from the sale of property, plant and equipment of Rs.3.9 million ($0.1 million).
25
Cash provided by financing activities for the quarter ended December 31, 2006 was Rs.63.5
million ($1.4 million) represented by proceeds from the issuance of common stock of Rs.68.3 million
($1.5 million), partially offset by principal payment under capital lease obligations of Rs.4.8
million ($0.1 million).
We incurred Rs.533.2 million and Rs.587.5 million for capital expenditure for the fiscal years
ended March 31, 2005 and 2006, respectively. Capital expenditure for the nine months ended December
31, 2006 were Rs.481.9 million.
Although we have 186 points of presence in India, a need for expansion into smaller towns
could arise as our corporate and data network services and broadband businesses grow. There are a
number of ISPs and data/network service providers exiting the business and, depending on pricing
and other terms, we may acquire one or more of these third parties. We will need to invest in
technologies to increase the speed of the backbone and edge networks. We will also have to invest
in wireless and wire line methods of last mile Internet access delivery..
In the ordinary course of our business, we regularly engage in discussions and negotiations
relating to potential investments, strategic partnerships, acquisitions and other strategic
transactions. We will continue in our efforts to identify one or more investment or acquisition
opportunities.
Income Tax Matters
For the year ended March 31, 2006, the end of our most recently completed fiscal year, we had
a net tax loss carry forward of approximately Rs.4,535.5 million ($98.9 million).
For fiscal 2006, the basic rate of corporate tax and surcharge were at 30% and 10%
respectively, the education cess was 2% on the total tax, resulting in an effective tax rate of
33.66%.
Under the Indian Income Tax Act, income tax is payable on the total income as computed under
the Income Tax Act in respect of the previous year (fiscal year) relevant to the assessment year.
Where the tax payable on the total income is less than 10% (excluding surcharges) of the book
profit (profit computed as per the provisions of the Indian Companies Act), the book profit after
adjusting for accumulated losses or carried forward depreciation (which ever is lower) shall be
deemed to be the total income of the assessee, and the tax payable by the assessee on such total
income shall be the amount of income tax at the rate of 10% (excluding surcharges).
Under the current Indian Income Tax Act, we will be liable for payment of income tax only
after we utilize the unabsorbed business loss of Rs.1,288.4 million ($29.2 million) (lower of carry
forward depreciation or business loss). We cannot assure you that the current income tax rate will
remain unchanged in the future. We also cannot assure you that the surcharge will be in effect for
a limited period of time or that additional surcharges will not be levied by the Government of
India.
The Finance Act, 2005 had introduced income tax on fringe benefits which is in addition to the
income tax charged under the Income Tax Act, 1961. Fringe benefits tax (FBT) is payable by every
employer in respect of fringe benefits provided or deemed to have been provided by the employer to
his employees during the year. An employer is required to pay FBT even if no tax is payable on the
total income. We have incurred an expenditure of FBT of Rs.4.3 million ($0.1 million) for the
quarter ended December 31, 2006 and Rs. 13.0 million($0.3 million) for the nine months ended
December 31, 2006.
Off Balance Sheet Arrangement
None.
Contractual obligations / Commitments
As of December 31, 2006, we had spent approximately Rs.2,891.4 million to develop and deploy our
network infrastructure. As of December 31, 2006, our future contractual obligations and commercial
commitments were as follows:
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Contractual |
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Obligations |
|
Payments Due by Period |
|
(Rs. Million) |
|
|
|
|
|
|
|
|
More |
|
|
|
|
|
|
Less than 1 |
|
|
|
|
|
|
|
|
|
than 5 |
|
|
Total |
|
year |
|
1-3 years |
|
3-5 years |
|
years |
Capital Lease Obligations |
|
|
5.3 |
|
|
|
2.2 |
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
Total Contractual Obligations |
|
|
5.3 |
|
|
|
2.2 |
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiration Per Period |
|
|
|
|
|
(Rs. Million) |
Other Commercial |
|
Total Amounts |
|
Less than 1 |
|
|
|
|
|
|
|
|
|
Over 5 |
Commitments |
|
Committed |
|
year |
|
1-3 years |
|
4-5 years |
|
years |
Standby Letters of Credit |
|
|
44.9 |
|
|
|
0.9 |
|
|
|
44.0 |
|
|
|
|
|
|
|
|
|
Guarantees |
|
|
589.1 |
|
|
|
456.0 |
|
|
|
131.8 |
|
|
|
1.3 |
|
|
|
|
|
Other Commercial Commitments |
|
|
61.3 |
|
|
|
61.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Commitments |
|
|
277.6 |
|
|
|
124.4 |
|
|
|
151.9 |
|
|
|
1.3 |
|
|
|
|
|
26
Recent Pronouncements
In 2006, the Financial Accounting Standards Board issued SFAS No. 158 Employers accounting for
Defined Benefit Pension and Other Postretirement Plans. New Statement 158 requires the company to
recognize on balance sheets the funded status of pension and other postretirement benefit plans-as
of March 31, 2007. The company is required to recognize actuarial gains and losses, prior service
cost, and any remaining transition amounts from the initial application of Statements 87 and 106
when recognizing a plans funded status, with the offset to accumulated other comprehensive income.
Statement 158 will also require fiscal-year-end measurements of plan assets and benefit
obligations. The new Statement amends Statements 87, 88, 106, and 132R, but retains most of their
measurement and disclosure guidance and will not change the amounts recognized in the income
statement as net periodic benefit cost. The company does not believe that adoption of SFAS 158 will
have a material impact on the financial statements.
In July 2006, the FASB issued Interpretation (FIN) No. 48, Uncertainty in Income Taxes. FIN 48
applies to all tax positions within the scope of Statement 109 and clarifies when and how to
recognize tax benefits in the financial statements with a two-step approach of recognition and
measurement. Fin No. 48 is effective for fiscal years beginning after December 15, 2006. FIN No. 48
also requires the enterprise to make explicit disclosures about uncertainties in their income tax
positions, including a detailed roll forward of tax benefits taken that do not qualify for
financial statement recognition. The company is currently evaluating the impact of this
pronouncement and will adopt the guidelines stated FIN No. 48 from fiscal year beginning April 1,
2007.
Contingencies
The Company had received a notice from the Income-Tax Department of India for the financial years
2002 and 2003 for a sum of Rs.77,700 stating that no withholding tax has been deducted in respect
of international bandwidth and leased line payments made by the Company to international bandwidth
/ lease line service providers.
Based on the legal opinion, withholding taxes need not be deducted if the service provider did not
have any permanent establishment in India and has not installed any equipment at the Companys
premises. The Company is able to demonstrate that international service providers has neither had a
permanent establishment in India nor has installed any equipment at the Companys premises.
Accordingly, the likelihood of the loss contingency is remote and no provision for the loss
contingency is considered necessary.
The Commissioner of Income Tax (Appeals) heard the Companys appeal against the order of the Income
Tax Officer and directed the Assessing Officer to comment on the submissions filed by the Company.
The appeal will be disposed off only after the remand report is received from the Assessing
Officer.
Subsequent to the quarter ended December 31, 2006, the Company has also filed a petition for stay
of collection of tax demanded in the order until the disposal of the appeal. The appeal was
rejected and the Company has been directed to pay the same in installments. Hence, the Company is
paying the demand under protest in twelve equal installments effective February 2007. This is
subject to the outcome of the appeals filed by the Company.
Effects of Inflation
India has experienced relatively high rates of inflation. Inflation in India was 5.58% as of
December 2006. However, inflation has not had a significant effect on our results of operations and
financial condition to date.
27
Item 3. Quantitative And Qualitative Disclosures About Market Risk
Fair value estimates are made at a specific point in time and are based on relevant market
information about the financial instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
We also face market risk relating to foreign exchange rate fluctuations, principally relating
to the fluctuation of U.S. dollar to Indian rupee exchange rate. Our foreign exchange risk
principally arises from accounts payable to overseas vendors. This risk is partially mitigated as
we hold balances in foreign currency with overseas banks. Our foreign exchange gain/(loss) was
Rs.44.5 million, Rs.0.02 million, Rs.(52.1) million, Rs.2.6 million, Rs.23.2 million, Rs.(20.6)
million and Rs.23.7 million for fiscal years ended March 31, 2002, 2003, 2004, 2005 and 2006, for
the quarter ended December 31, 2006 and for the nine months ended December 31, 2006 respectively.
Item 4. Controls and Procedures
Not applicable.
Part II. Other Information
Item 1. Legal Proceedings
See Note 15 and 16 of notes to our unaudited condensed consolidated financial statements in
Part I above and Note 29 of the financial statements included in our Annual Report on Form 20-F for
the year ended March 31, 2006.
Item 1A. Risk Factors
Any investment in our ADSs involves a high degree of risk. You should consider carefully the
following information about these risks, together with the other information contained in the
annual report for the year ended March 31, 2006, before you make an investment decision regarding
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 Sify Limited
Although we commenced operation of our private data network business in April 1998, launched
our Internet portal website in October 1998 and Internet service provider operations in
November 1998, we have added a number of new lines of business in the last five years,
including the operation and licensing of public Internet cafés, as well as the provision of
broadband services, security services and managed network services. It is therefore difficult
to evaluate our company based on our historical results of operations.
We commenced operation of our private data network business in April 1998 and launched our
Internet portal website in October 1998 and Internet service provider operations in November 1998.
We commenced retail Internet services by offering dial-up services from homes in November 1998, and
later began offering public Internet access through a network of cybercafés in March 2000. In April
2002 we began offering VoIP services. In June 2003, we launched our high-speed Internet
access through a network of independent Cable Television Operators, or CTOs. More recently, we
launched our public Internet cafe business and began offering broadband services, security services
and managed network services. The industry we operate in is still evolving and therefore comparable
benchmarks are not readily available. As of December 2005, the Internet penetration in India was
only 0.7% according to figures compiled from Telecom Regulatory Authority of Indias, or TRAIs,
Report on Performance of Telecom Industry, March 2006. You must consider the risks and difficulties
frequently encountered by companies in this stage 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; |
|
|
|
|
maintain and develop strategic relationships with business partners; |
|
|
|
|
offer compelling online services and content; and |
|
|
|
|
promptly address the challenges faced by early stage companies, which do not have
an experience or performance base to draw on. |
We have decided to compete in three primary businesses that we believe are complementary.
These three businesses are corporate network/data services, retail Internet access services, online
portal services and content offerings. 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/data services and subscribers for our Internet access
services as well as the loss of advertising revenues.
28
For the fiscal years ended March 31, 2005 and 2006, we incurred net losses of Rs.307.6 million
and Rs.149.2 million, respectively As of December 31, 2006, we had an accumulated deficit of
approximately Rs.12,393.3 million ($281.0 million). We may incur additional losses in the
future because our business plan, which is unproven, calls for additional corporate customers
and subscribers to maintain profitability.
We have incurred significant losses and negative cash flows. For the fiscal years ended March
31, 2005 and 2006, we incurred net losses of Rs.307.6 million and Rs.149.2 million and for the
quarter ended and nine months ended December 31, 2006 we made a net profit of Rs.41.6 million ($0.9
million) and Rs.172.5 million ($3.9 million) respectively. As of December 31, 2006, we had an
accumulated deficit of approximately Rs.12,393.3 million ($281.0 million). We may incur operating
losses as we expand our services, advertise and promote our brand and respond to competition. Our
business plan assumes that businesses in India will demand private network and related services.
Our business plan also assumes that an increasing number of consumers and corporate customers in
India will be attracted to and use Internet access services, content available on the Internet and
other connectivity services offered by us. This business model is not yet proven in India, and we
cannot assure you that we will be able to sustain profitability or that we may not incur operating
losses in the future.
We may be required to further modify the rates we charge for our services in response to new
pricing models introduced by new and existing competition which would significantly affect our
revenues.
Our corporate network/data services business faces significant competition from
well-established companies, including Bharti Airtel, Videsh Sanchar Nigam Limited, or VSNL,
Reliance Infocomm, HCL Infinet, Tata Teleservices and the incumbent government-owned
telecommunication companies, Bharat Sanchar Nigam Limited, or BSNL, and Mahanagar Telephone Nigam
Limited, or MTNL. A significant number of competitors have entered Indias liberalized Internet
service provider that were operational in India. New entrants into the national Internet service
provider market in India, especially the state run telecommunication companies, may enjoy
significant competitive advantages over our company, including greater financial resources, which
could allow them to charge prices that are lower than ours in order to attract subscribers. These
factors have resulted in periods of significant reduction in actual average selling prices for
consumer Internet Service Provider, or ISP, services. We expect the market for Internet access and
other connectivity services to remain extremely price competitive. Increased competition may result
in 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.
The National Long Distance/International Long Distance or NLD/ILD licenses issued to Sify
Communications Limited or Sify Comm, a subsidiary company, by the Government of India or GOI
has imposed certain conditions to be complied with on a continuous basis during the validity
of the licence period.
On November 21, 2006, Sify Comm executed two License Agreements with the GOI, for NLD / ILD
services respectively, which enable Sify Comm to provide VPN services. Sify Comm furnished bank
guarantees for Rs.200,000 each for NLD and ILD licenses to GOI. These licenses are valid for an
initial period of 20 years and can be renewed for another 10 years at one time, upon request of the
licensee made during the 19th year of license. The Company has transferred its VPN
business to Sify Comm effective November 22, 2006 and the latter commenced the said services on the
same day. The above licenses have imposed certain conditions to be complied with by Sify Comm on
a continuous basis during the validity of the licence period. The following are the important
conditions:
|
|
|
The company to ensure that the foreign holding never exceeds 74% of the outstanding
capital of the company, which is the threshold limit of Foreign Direct Investment for the
Telecom sector. |
|
|
|
|
The Managing Director, Chief Technical Officer and Chief Financial Officer shall be resident Indian citizens. |
|
|
|
|
The company shall always have a net worth as well as paid up capital of Rs.250 million. |
|
|
|
|
The company shall pay the annual fee at 6% of the Adjusted Gross Revenue to Department of Telecommunications or DOT. |
|
|
|
|
In addition to the above, the company is required to furnish all information to DOT and
Telecom Regulatory Authority of India or TRAI. |
Our marketing campaign to establish brand recognition and loyalty for the Sify Broadband, Sify
Max, Sify and iway brands could be unsuccessful.
In order to expand our customer base and increase traffic on our websites, we must establish,
maintain and strengthen the Sify Broadband, Sify Max, Sify and iway and other key brands. We plan
to continue to incur significant marketing expenditure to establish brand recognition and brand
loyalty. If our marketing efforts do not produce a significant increase in business to offset our
marketing expenditure, our losses will increase or, to the extent that we are generating profits,
our profits will decrease. 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.
29
If our efforts to retain our customers through past investment in network infrastructure and
ongoing investment in 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 customers are substantial, relative to
the fees actually derived from these customers. Accordingly, our long-term success depends to a
great extent on our ability to retain our existing customers, while continuing to attract new
customers. We have invested significant resources in our network infrastructure and continue to
invest in 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
has caused, and may continue to cause, some of our customers to switch to our competitors
services. In addition, some new customers 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 customer retention rate would likely decrease the revenues generated by our
Internet access services division. Therefore, we may not be able to realize sufficient future
revenues to offset our past investment in network infrastructure and our ongoing investment in
online content offerings and technical support or achieve positive cash flow or profitability in
the future.
Despite cost-reduction measures, 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. 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 many factors, including the following:
|
|
|
the range of corporate network/data services provided by us and the usage thereof by our customers; and |
|
|
|
|
the number of subscribers to our ISP services and the prevailing prices charged. |
|
|
|
|
advertising revenue generated by our online portal services. |
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 of our corporate network/data services division; |
|
|
|
|
services, products or pricing policies introduced by our competitors; |
|
|
|
|
capital expenditure and other costs relating to our operations; |
|
|
|
|
the timing and nature of our marketing efforts; |
|
|
|
|
our ability to successfully integrate operations and technologies from any
acquisitions, joint ventures or other business combinations or investments; |
|
|
|
|
the introduction of alternative 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. 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 will
likely 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 telecom operators. 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
30
could lead to a loss of customers, damage to our reputation and violations of our Internet
service provider license and contracts with corporate customers. A loss of customers or damage to
our reputation would result in a decrease in the number of our subscribers, which would cause a
material decrease in revenues. A violation of our Internet service provider license could result in
the suspension or termination of that license, which would prevent us from carrying on a
significant portion of our operations and materially adversely affect our operating results.
Violations of our contracts with corporate customers could result in the termination of these
contracts, which would cause a decrease in the revenues generated by our corporate data/network
services division. Any of 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 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.
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 contractually limit 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.
Over the past several years we have experienced significant growth, and continuing this pace
of growth could put excessive strain on our resources, which in turn could adversely affect
our results of operations.
Over the last several years, we have experienced a period of significant revenue growth. This
growth has placed, and will continue to place, a significant strain on our managerial, operational,
financial and information systems resources. We will have to implement new operational and
financial systems and procedures and controls, expand our office facilities, train and manage our
employee base and maintain close coordination among our technical, accounting, finance, marketing,
sales and editorial staff. If we are unable to manage our growth effectively, we will be unable to
implement our 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 including our senior
management team. Most 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
is extremely competitive, and the process of hiring employees with the necessary skills is time
consuming and requires the diversion of significant resources. 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 business strategy, upon which the success of our business depends.
The failure to keep our technical knowledge confidential could erode our competitive
advantage.
Like many of our competitors, we possess extensive technical knowledge about our products. Our
know-how is a significant independent asset, which may not be protected by intellectual property
rights such as patents, but is protected only by maintaining its confidentiality. As a result, we
cannot be certain that our know-how will remain confidential in the long run. Employment contracts
with certain of our employees who have special technical knowledge about our products or our
business contain a general obligation to keep all such knowledge confidential and such obligation
extends for a period of two years after the termination of employment. In addition to the
confidentiality provisions, these employment agreements typically contain non-competition clauses.
If either the confidentiality provisions or the non-competition clauses are unenforceable, we may
not be able to maintain the confidentiality of our know-how. Even if every possible precaution,
whether contractual or otherwise, is taken to
protect confidential technical knowledge about our products or our business, there is still a
danger that such information may be disclosed to others or become public knowledge in circumstance
beyond our control. In the event that confidential technical information or know-how about our
products or business becomes available to third parties or to the public, our competitive advantage
over other companies in the wireless based IP/VPN industry could be harmed which could have a
material adverse effect on our current business, future prospects, financial condition and results
of operations.
31
Compliance with new and changing corporate governance and public disclosure requirements adds
uncertainty to our compliance policies and increases our costs of compliance.
Changing laws, regulations and standards relating to accounting, corporate governance and
public disclosure, including the Sarbanes-Oxley Act of 2002 and, new SEC regulations and Nasdaq
Global Market rules, are creating uncertainty for us and similarly situated companies. These new or
changed laws, regulations and standards may lack specificity and are subject to varying
interpretations. Their application in practice may evolve over time as new guidance is provided by
regulatory and governing bodies. This could result in continuing uncertainty regarding compliance
matters and higher costs of compliance as a result of ongoing revisions to such governance
standards.
In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and
the related regulations regarding our required assessment of our internal controls over financial
reporting and our independent registered public accounting firms audit of that assessment will
require the commitment of significant financial and managerial resources. We have formed an
internal control steering committee and adopted a project work plan to assess the adequacy of our
internal controls over financial reporting, remediate any control deficiencies that may be
identified, and validate through testing that our controls are functioning as documented. Our
independent registered public accounting firm may be unable to issue unqualified attestation
reports on managements assessment on the operating effectiveness of our internal controls over
financial reporting.
We are committed to maintaining high standards of corporate governance and public disclosure,
and our efforts to comply with evolving laws, regulations and standards in this regard have
resulted in, and are likely to continue to result in, increased general and administrative expenses
and a diversion of management time and attention from revenue-generating activities to compliance
activities. In addition, the new laws, regulations and standards regarding corporate governance may
make it more difficult for us to obtain director and officer liability insurance. Further, our
board members, Chief Executive Officer, and Chief Financial Officer could face an increased risk of
personal liability in connection with the performance of their duties. As a result, we may face
difficulties in attracting and retaining qualified board members and executive officers, which
could harm our business. If we fail to comply with new or changed laws or regulations, our business
and reputation may be harmed.
We may not comply with local laws of other countries.
As part of our international business, we may negotiate with and enter into contracts with
strategic partners, clients, suppliers, employees and other third parties in various countries. We
have little or no experience conducting business in many of these countries and we may
inadvertently fail to comply with their laws may result in lawsuits or penalties, which could
adversely affect our business or results of operations.
If there is an adverse outcome in the class action litigation that has been filed against
us, our business may be harmed.
Our company and certain of our officers and directors are named as defendants in a securities
class action lawsuit filed in the United States District Court for the Southern District of New
York. This action, which is captioned In re Satyam Infoway Ltd. Initial Public Offering Securities
Litigation, also names as defendants several of the underwriters involved in our initial public
offering of American Depositary Shares. This class action is brought on behalf of a purported class
of purchasers of our ADSs from the time of our Initial Public Offering, or IPO in October 1999
through December 2000. The central allegation in this action is that the underwriters in our IPO
solicited and received undisclosed commissions from, and entered into undisclosed arrangements
with, certain investors who purchased our ADSs in the IPO and the aftermarket. The complaint also
alleges that we violated the United States federal securities laws by failing to disclose in the
IPO prospectus that the underwriters had engaged in these allegedly undisclosed arrangements. More
than 300 issuers have been named in similar lawsuits. In June 2003, the plaintiffs in the
consolidated IPO class action lawsuits currently pending against us and more than 300 other issuers
who went public between 1998 and 2000 announced a proposed settlement with us and the other issuer
defendants. The proposed settlement provides that the insurers of all settling issuers will
guarantee that the plaintiffs recover $1.0 billion from non-settling defendants, including the
investment banks who acted as underwriters in those offerings. In the event that the plaintiffs do
not recover $1.0 billion, the insurers for the settling issuers will make up the difference. We
believe that we have sufficient insurance coverage to cover the maximum amount that we may be
responsible for under the proposed settlement, which we estimate to be approximately U.S. $3.9
million. Although the Federal District Court has preliminarily approved the settlement, it is
possible that the Federal District Court may not approve the settlement in whole or part. We
believe that we have adequate legal defenses for these actions and that the ultimate outcome of
these actions will not have a material adverse effect on our company.
We face risks associated with 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.
We may attempt to grow our business through acquisitions. We are actively seeking
opportunities to expand our corporate services business, including through possible acquisition
transactions in India, the United States or elsewhere. We may acquire or make investments in other
complementary businesses, technologies, services or products, or enter into additional strategic
partnerships with parties that 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
32
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 Man Financial Sify Securities
India Private Limited (formerly known as Refco Sify Securities India Private Limited) that is
accounted for under U.S. GAAP using the equity method of accounting. Under this method, we
generally 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, subject to limitations in the case of losses that exceed our cost of
investment. Thus, our reported results of operations can be significantly increased or decreased
depending on the results of Man Financial 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.
Our inter-city network is leased from other service providers and is dependent on their
quality and availability.
We have provided inter-city connectivity for our wireless-based IP/VPN business through lease
arrangements rather than through capital investment in connectivity assets. Our ability to offer
high quality telecommunications services depends, to a large extent, on the quality of the networks
maintained by other operators, and their continued availability, neither of which is under our
control. However, the abundance of supply of inter-city connectivity provides us with the ability
of switching to companies offering better services. Although we always use more than one service
provider where required, there can be no assurance that this dependence on external parties would
not affect our network availability.
A significant majority of the iway cybercafés are franchised operations that we do not
operate or control. We also provide Internet access services through a network of Cable
Television Operators, or CTOs, whom we do not control.
As of December 31, 2006, 3,552 cybercafés, representing substantially all of the iway cafes,
were franchised by our company. Broadband Internet access to homes was provided through a network
of about 2,000 CTOs. Our relationships with franchisees and CTOs are subject to a number of special
risks. For example, we do not operate or control our franchisees or CTOs, and they may not meet
their obligations under our agreements with them. The failure of a franchisee or CTO to provide
quality services to its customers could result in end user dissatisfaction with our company. We may
become involved in disputes with our franchisees or CTOs, which may result in litigation or the
termination of one or more of our agreements. Our franchisees or CTOs could attempt to organize
themselves into unions in order to negotiate more favorable terms in our agreements. Any failure to
continue our relationships with our franchisees or CTOs on favorable terms could reduce the size of
our market share for Internet access in India and decrease the revenues generated by our Internet
access services division. Our company does not provide any financial support or guarantee to the
franchisees.
The legal system in India does not protect intellectual property rights to the same extent as
the legal system 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. We hold no patents, and
our competitors may independently develop similar technology or duplicate our services.
Unauthorized parties may infringe upon or misappropriate our 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 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 service offerings
overlap with competitive offerings. Defending against these claims, even if not meritorious, could
be expensive and divert managements 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.
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Our current infrastructure and its scalability 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 add to 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 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.
The success of our newly acquired on line travel business in the United States depends on
various factors, and to a large extent, beyond our control.
The success of our online travel and travel related business, through our acquisition of Globe
Travels, Inc., depends on various factors, among other things:
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Obtaining the ARC Accreditation in the name of Sify from the Airline Reporting
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How quickly we integrate an airlines on line platform for ticketing; |
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Our ability to quickly improve our online sales in the United States; |
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The growth of the tourism and the hospitality industry; |
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The threat of terrorism and outbreak of any epidemic; |
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Lost revenue from credit card fraud. |
If the above risks are not addressed suitably, it may impact the volume and profitability of this
segment of our business.
We do not plan to pay dividends in the foreseeable future.
We do not anticipate paying cash dividends to the holders of our ADSs and equity share holders 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.
Risks Related to the ADSs and Our Trading Market
The interests of our significant shareholder, Infinity Capital Ventures, L.P., may differ
from your interests.
Based on our review of filings made with the SEC, as of the date of this report, we believe
Infinity Capital owns approximately 42% of our outstanding equity capital, and Mr. Raju Vegesna of
Infinity Capital serves as our Chairman of the Board of Directors and we have appointed Mr. P.S.
Raju as the second nominee of Infinity Capital to our Board of Directors. As a result, Infinity
Capital will be able to exercise significant influence over many matters requiring approval by our
Board of Directors and/or our shareholders, including the election of directors and approval of
significant corporate transactions, such as a sale of our company. Under Indian law, a simple
majority is sufficient to control all shareholder action except for those items, which require
approval by a special resolution. If a special resolution is required, the number of votes cast in
favor of the resolution must not be less than three times the number of votes cast against it.
Examples of actions that require a special resolution include:
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altering our Articles of Association; |
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issuing additional shares of capital stock, except for pro rata issuances to existing shareholders; |
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commencing any new line of business; and |
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commencing a liquidation. |
Circumstances may arise in which the interests of Infinity Capital, or a subsequent purchaser
of the shares currently owned by Infinity Capital, could conflict with the interests of our other
shareholders or holders of our ADSs. Infinity Capital could delay or prevent a change of control of
our company even if a transaction of that sort would be beneficial to our other shareholders,
including the holders of our ADSs.
34
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 Indian Companies Act, 1956, 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,
whether on a show of hands or on a poll, holding not less than three times the number of votes, if
any, cast against the resolution. At our 2000 Annual General Meeting, our shareholders approved a
special resolution permitting us to issue up to one million equity shares in connection with
acquisitions. We issued virtually all of these equity shares in connection with our acquisitions of
India World Communications, Indiaplaza.com and Kheladi.com and our investment in CricInfo Limited.
At our 2001 Annual General Meeting, our shareholders approved a special resolution permitting us to
issue up to four million additional equity shares 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. At our December 2002 Extraordinary General Meeting, our shareholders
approved a special resolution permitting us to issue up to 12.5 million additional equity shares in
connection with the sale of equity shares to SAIF and Venture Tech, and our ADS holders are deemed
to have waived their preemptive rights with respect to these shares. In December 2005 at an
extraordinary general meeting, our shareholders waived their preemptive rights with respect to the
issuance of 6.7 million shares to Infinity capital.
U.S. holders of ADSs may be unable to exercise preemptive rights for equity shares underlying
ADSs unless approval of the Ministry of Finance of the Government of India is obtained and a
registration statement under the Securities Act of 1933, as amended, is effective with respect to
the rights or an exemption from the registration requirements of the Securities Act is available.
Our decision to file a registration statement will depend on the costs and potential liabilities
associated with any given registration statement as well as the perceived benefits of enabling the
holders of our ADSs to exercise their preemptive rights and any other factors that we deem
appropriate to consider at the time the decision must be made. We may elect not to file a
registration statement related to preemptive rights otherwise available by law to our shareholders.
In the case of future issuance, 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 shareholder 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 shareholders meeting received from
us together with information explaining how to instruct the depositary bank to exercise the voting
rights of the securities represented by ADSs. If the depositary bank timely receives voting
instructions from a holder of ADSs, it will endeavor to vote the securities represented by the
holders 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 shareholder 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 shareholder present in person and holding at least
10% of the total voting power or on which an aggregate sum of not less than Rs.50,000 has been
paid-up, 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 shareholder present at the meeting demands that a poll be taken will the votes
of ADS 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 SECs proxy rules, which regulate the
form and content of solicitations by United States-based issuers of proxies from their
shareholders. To date, our practice has been to provide advance notice to our ADS holders of all
shareholder 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 SECs 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. Many factors
could cause the market price of our ADSs to rise and fall. Some of these factors include:
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perception of the level of political and economic stability in India; |
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actual or anticipated variations in our quarterly operating results; |
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announcement of technological innovations; |
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conditions or trends in the corporate network/data services, Internet and electronic commerce industries;
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the competitive and pricing environment for corporate network/data services and Internet
access services in India and the related cost and availability of bandwidth; |
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the perceived attractiveness of investment in Indian companies; |
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acquisitions and alliances by us or others in the industry; |
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changes in estimates of our performance or recommendations by financial analysts; |
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market conditions in the industry and the economy as a whole; |
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introduction of new services by us or our competitors; |
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changes in the market valuations of other Internet service companies; |
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announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; |
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our failure to integrate successfully our operations with those of any acquired companies; |
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additions or departures of key personnel; and |
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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 companys securities, securities class action litigation
has often been instituted against that company. Such litigation could result in substantial costs
and a diversion of our managements attention and resources.
We may not be able to maintain our Nasdaq Global Market listing.
In order to maintain the listing of our ADSs on the Nasdaq Global Market, we are required to
comply with, or obtain an exemption from, the continuing listing requirements of Nasdaq, including
the $1.00 minimum bid price requirement. In fiscal 2003, the price of our ADSs on the Nasdaq Global
Market closed below $1.00 for more than 30 consecutive days. Effective September 24, 2002, our
equity share-to-ADS exchange ratio was adjusted to one-to-one in order to reestablish compliance
with Nasdaqs minimum bid price requirement. There are also material changes to the listing
requirements of the Nasdaq Global Market relating to implementation of the Sarbanes-Oxley Act of
2002 and other reforms that have been or will be implemented. These requirements have and will
continue to impose significant additional substantive and administrative requirements on all public
companies listed on the Nasdaq Global Market, including foreign private issuers. We do not know
whether we will be able to maintain our Nasdaq Global Market listing in the future.
An active or liquid market for the ADSs is not assured.
We cannot predict the extent to which an active, liquid public trading market for our ADSs
will continue to 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.
The future sales of securities by our company or existing shareholders may reduce the price of
our ADSs.
Based on our review of filings made with the SEC, as of the date of this report, we believe
Infinity Capital holds approximately 42% of our outstanding equity capital. Any significant sales
of our equity shares or ADSs or a perception that such sales may occur might reduce the price of
our ADSs and 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 may issue additional equity shares to raise capital and to
fund acquisitions and investments, and the parties to any such future transactions could also
decide to sell them.
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.
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Political instability in India and around the world 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 six times since 1996,
including most recently in May 2004. The rate of economic liberalization, specific laws and
policies affecting technology companies, foreign investment, currency exchange rates and other
matters affecting investment in our securities could also change. A significant change in Indias
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 attacks in the United States, South Asia and around the
world 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. In October 1999,
the leadership of Pakistan changed as a result of a coup led by the military. In September 2001,
terrorist attacks were conducted in the United States, which caused various adverse consequences,
including adverse economic consequences. In addition, in October 2001 the United States commenced
military operations against targets located in Afghanistan. In December 2001, terrorist attacks
were conducted on the Indian Parliament building resulting in heightened diplomatic and military
tension between India and Pakistan. In 2003 and continuing through 2006, the United States and
several other countries have conducted military operations against targets in Iraq. Events of this
nature could influence the Indian and/or global economy and could have a material adverse effect on
the market for securities of Indian companies, including our ADSs, and the market for our services.
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 only traded on
Nasdaq through the ADSs as described in this report. Under prior 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 has announced fungibility regulations permitting, under limited circumstances, 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. 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. Historically, the value of the rupee has
declined against the U.S. dollar, although the rupee appreciated against the dollar in late 2003
and 2004. In fiscal 2005, the rupee depreciated in the first six months and thereafter appreciated
considerably. Depreciation 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.
Appreciation of the rupee against the U.S. dollar will result in foreign exchange losses to the
extent we hold excess cash in U.S. dollar-denominated investments.
The Government of India may change its regulation of our business or the terms of our license
to provide Internet access services, VoIP and VPN services without our consent, and any such
change could decrease our revenues and/or increase our costs, which would adversely affect
our operating results.
The Companys business is highly regulated as per extant telecom policy of the Government of
India. The key areas of risks and / or the financial implications of such regulations include:-
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The Companys ISP license issued in the year 1998 runs for a term of 15 years. If he Company
is unable to renew the ISP license for any reason, the Company will not be able to carry on the
said business beyond license term, and run the risk of primary sources of revenue.
The Internet Service Provider Association of India, or ISPAI, has preferred an appeal against
this license with the Telecom disputes Settlement and Arbitration Tribunal, or TDSAT. The tribunal
has directed GOI to consult Telecom Regulatory Authority of India or TRAI for finalising the terms
of license.
The GOI has right to revoke, terminate or suspend or take over entire operations for reasons
such as national security or similar reasons without compensation to the Company.
In view of increasing cyber threats and attacks, the GOI may require telecom licensees
(including ISPs) at their costs to provide monitoring facility across its network, and facilities
for capture and retention of data in terms of traffic flow, usage details, etc. This would result
in significant increase in costs and possible lesser usage due to perceived invasion of privacy by
customers.
ISP as an intermediary is liable for third-party misuse / crimes under Section 79 of the
Information Technology Act, 2000, unless it establishes that it had no knowledge or that it had
undertaken due diligence. However, a recommendation has been made by an expert committee to the
effect that a new0rk service provider is made liable only if there is a direct role.
Certain government departments have been making queries whether use of Session Initiation
Protocol, or SIP, terminal to make calls to phones abroad is permissible within ISP license. The
Company believes that such overseas phone calls are permitted, since, SIP terminal is a computer
as defined in Information Technology Act, 2000. In case this view is not found favour by
authorities, the Company may have to make significant investment as capital outlay in SIP terminals
to make it a PC-equivalent.
Changes in 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 was 30% during fiscal 2006 and was subject to
a 10% surcharge and 2% education cess, resulting in an effective tax rate of 33.66%. For fiscal
year 2007, the effective tax rate continues to remain the same. 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. The Finance Minister of India had introduced a fringe
benefits tax, or FBT, that would be levied on employers. Under this FBT, employers would be
required to pay a tax of 30% exclusive of applicable surcharge and cess on the taxable value of the
fringe benefits or privileges that are provided or deemed to be provided to employees on a
collective, rather than individual, basis. The impact of FBT for the quarter ended and nine months
ended December 31, 2006 was Rs 4.3 million and Rs.13.0 million respectively included under selling
and administration expenses.
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 Indias 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 (kilobytes per second, or thousands of bits of data per second) or Mbps (megabytes 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 and lack of
competition.
The limited installed personal computer base in India limits our pool of potential customers
and restricts the amount of revenues that our 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. 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 cybercafés, under the iway brand name. As
of December 31, 2006, 3,552 iway cybercafés were franchised and 34 iway cybercafés were owned and
operated by our company. Although this service creates a larger market, it also imposes on the
operator of the cybercafé the considerable costs of providing the consumer access to a personal
computer and related hardware and software.
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The high cost of accessing the Internet in India limits our pool of potential customers and
restricts the amount of revenues that our Internet access services division might generate.
The growth of our consumer services 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 Indias population
will not be able to afford to use our services. The failure of a significant number of additional
Indian consumers to obtain affordable access to the Internet would make it very difficult to
execute our business plan.
The success of our business depends on the acceptance and growth of electronic commerce in
India, which is uncertain, and, to a large extent, beyond our control.
Many of our existing and proposed 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 services by businesses and consumers, therefore, are highly
uncertain. 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:
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inconsistent quality of service; |
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the need to deal with multiple and frequently incompatible vendors; |
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inadequate legal infrastructure relating to electronic commerce in India; |
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a lack of security of commercial data, such as credit card numbers; and |
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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 services.
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 or
otherwise acquire 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.
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Our service offerings may not be compatible with industry standards developed in the future.
Our ability to compete successfully depends upon the continued compatibility and
inter-operability 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 services by us or
our competitors and any change in industry standards could cause customers to deter or cancel
purchases of existing services.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
None.
Items 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Mr S R Sukumara, a former member of the Indian Police Service, was appointed as a Director on
the Board of Directors of the company effective January 22, 2007 and for this purpose a Form 6-K
has been filed with SEC on January 30, 2007.
There are no arrangements or understandings between Mr. Sukumara and any other person
pursuant to which Mr. Sukumara was elected as a director of the Company.
Item 6. Exhibits
None.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date:
April 16, 2007
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SIFY LIMITED |
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By:
Name:
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/s/ Pijush Kanti Das
Pijush Kanti Das
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Title:
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Chief Financial Officer |
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