UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934
For the quarter ended December 31, 2001
Commission File Number 000-27663
SATYAM INFOWAY LIMITED
(Exact name of registrant as specified in its charter)
Not Applicable
(Translation of registrant's name into English)
Republic of India
(Jurisdiction of incorporation or organization)
Tidel Park, 2nd Floor
No. 4, Canal Bank Road, Taramani, Chennai 600 113 India
(91) 44-254-0770
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F. Form 20F [X] Form 40 F [ ]
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [ ] No [X]
If "Yes" is marked, indicate below the file number assigned to registrant in
connection with Rule 12g3-2(b). Not applicable.
CURRENCY OF PRESENTATION AND CERTAIN DEFINED TERMS
Unless the context otherwise requires, references herein to "we," "us,"
the "company," "Sify" or "Satyam Infoway" are to Satyam Infoway Limited, a
limited liability company organized under the laws of the Republic of India.
References to "U.S." or the "United States" are to the United States of America,
its territories and its possessions. References to "India" are to the Republic
of India. We are presently a majority-owned subsidiary of Satyam Computer
Services Limited, a leading Indian information technology services company which
is traded on the New York Stock Exchange and the major Indian stock exchanges
("Satyam Computer Services"). "Satyam" is a trademark owned by Satyam Computer
Services, which has licensed the use of the "Satyam" trademark to us subject to
specified conditions. "Sify.com," "Sify," "SatyamOnline," "Satyam.Net,"
"satyamonline.com" and "Satyam iway" are trademarks used by us for which we have
registration applications pending in India. All other trademarks or tradenames
used in this Report on Form 6-K are the property of their respective owners.
In this report, references to "$," "Dollars" or "U.S. dollars" are to
the legal currency of the United States, references to "Rs.," "rupees" or
"Indian Rupees" are to the legal currency of India, and references to "GBP" are
to the legal currency of the United Kingdom. References to a particular "fiscal"
year are to our fiscal year ended March 31 of such year.
For your convenience, this report contains translations of some Indian
rupee amounts into U.S. dollars which should not be construed as a
representation that those Indian rupee or U.S. dollar amounts could have been,
or could be, converted into U.S. dollars or Indian rupees, as the case may be,
at any particular rate, the rate stated below, or at all. Except as otherwise
stated in this report, all translations from Indian rupees to U.S. dollars
contained in this report have been based on the noon buying rate in the City of
New York on December 31, 2001 for cable transfers in Indian rupees as certified
for customs purposes by the Federal Reserve Bank of New York. The noon buying
rate on December 31, 2001 was Rs.48.27 per $1.00.
Our financial statements are prepared in Indian rupees and presented in
accordance with United States generally accepted accounting principles or U.S.
GAAP. Solely for your convenience, some of the information contained in our
financial statements has been translated into U.S. dollars. In this report, any
discrepancies in any table between totals and the sums of the amounts listed are
due to rounding.
Information contained in our websites, including our principal corporate
website, www.sifycorp.com, is not part of this report.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
IN ADDITION TO HISTORICAL INFORMATION, THIS REPORT CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE SUBJECT TO RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE REFLECTED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH
A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION
ENTITLED "ITEM 2. OPERATING AND FINANCIAL REVIEW AND PROSPECTS--RISKS RELATED TO
OUR BUSINESS" AND ELSEWHERE IN THIS REPORT. YOU ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT MANAGEMENT'S
ANALYSIS ONLY AS OF THE DATE OF THIS REPORT. IN ADDITION, YOU SHOULD CAREFULLY
REVIEW THE OTHER INFORMATION IN THIS REPORT AND IN OUR PERIODIC REPORTS AND
OTHER DOCUMENTS FILED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION
(THE "SEC") FROM TIME TO TIME. OUR FILINGS WITH THE SEC ARE AVAILABLE ON ITS
EDGAR DATABASE MAINTAINED AT ITS WEBSITE, WWW.SEC.GOV.
1
ITEM 1. FINANCIAL STATEMENTS
SATYAM INFOWAY LIMITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data and as otherwise stated)
As of
--------------------------------------------------------
December 31,
March 31, -----------------------------------
2001 2001 2001
--------------------------------------------------------
(unaudited) (unaudited)
--------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents Rs. 1,444,307 Rs. 644,723 $ 13,357
Accounts receivable 826,273 548,872 11,371
Due from officers and employees 11,487 3,137 65
Inventories 110,092 80,300 1,664
Prepaid expenses 209,335 147,557 3,057
Net assets of discontinued business -- 277,706 5,753
Other current assets 276,390 164,788 3,414
--------------------------------------------------------
Total current assets 2,877,884 1,867,083 38,681
Property, plant and equipment, net 2,365,798 1,954,516 40,491
Goodwill and other intangible assets 4,475,597 210,830 4,368
Investments in affiliates 1,506,244 318,223 6,593
Investments 9,834 9,637 200
Other assets 266,527 204,715 4,241
--------------------------------------------------------
Total assets Rs. 11,501,884 Rs. 4,565,004 $ 94,574
========================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of capital lease obligations 4,807 6,114 127
Accounts payable 505,869 439,475 9,105
Deferred revenue 189,117 194,556 4,031
Advances from customers 99,708 17,070 354
Other current liabilities 46,176 35,120 728
--------------------------------------------------------
Total current liabilities 845,677 692,335 14,345
Non-current liabilities:
Capital lease obligations, excluding current
installments 8,028 3,981 82
Other liabilities 26,164 32,785 679
--------------------------------------------------------
Total liabilities 879,869 729,101 15,106
--------------------------------------------------------
Minority interest 33,677 21,854 453
Stockholders' equity
Common stock, Rs.10 par value; 35,000,000
equity shares authorized; Issued and
outstanding: 23,183,103 shares as of
March 31,2001 and 23,202,176 shares as
of December 31, 2001 231,831 232,022 4,807
Additional paid-in capital 13,669,572 13,689,619 283,605
Deferred compensation - employee stock offer plan (101,105) (105,008) (2,175)
Accumulated deficit (3,205,864) (9,999,739) (207,163)
Accumulated other comprehensive income (6,096) (2,845) (59)
--------------------------------------------------------
Total stockholders' equity 10,588,338 3,814,049 79,015
--------------------------------------------------------
Total liabilities and stockholders' equity Rs. 11,501,884 Rs. 4,565,004 $ 94,574
========================================================
See accompanying notes to unaudited condensed consolidated financial statements
2
SATYAM INFOWAY LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data and as otherwise stated)
-----------------------------------------------------------------------------------------------------------------------------
Quarter ended December 31, Nine months ended December 31,
2000 2001 2001 2000 2001 2001
--------------------------------------------- ---------------------------------------------
Revenues Rs. 307,857 Rs. 418,213 $ 8,664 Rs. 881,576 Rs. 1,177,507 $ 24,394
Cost of revenues (excluding
depreciation and
amortization) (339,296) (308,887) (6,399) (732,293) (905,055) (18,750)
--------------------------------------------- ---------------------------------------------
Gross (loss)/profit (excluding
depreciation and
amortization) (31,439) 109,326 2,265 149,283 272,452 5,644
--------------------------------------------- ---------------------------------------------
Operating expenses:
Selling, general and
administrative expenses 564,087 444,367 9,206 1,430,762 1,395,051 28,901
Acquisition expenses -- -- -- -- 20,000 414
Amortization of goodwill 278,530 -- -- 637,342 292,964 6,069
Impairment of goodwill -- -- -- -- 4,115,145 85,253
Amortization of deferred stock
compensation expense 21,056 7,846 163 63,946 21,847 453
Foreign exchange gain (40,974) (8,253) (171) (166,694) (42,806) (887)
--------------------------------------------- ---------------------------------------------
Total operating expenses 822,699 443,960 9,198 1,965,356 5,802,201 120,203
--------------------------------------------- ---------------------------------------------
Operating loss (854,138) (334,634) (6,933) (1,816,073) (5,529,749) (114,559)
Other income, net 56,899 (3,277) (68) 245,645 30,767 637
--------------------------------------------- ---------------------------------------------
Loss before equity in loss of
affiliates, minority
interest and taxes (797,239) (337,911) (7,001) (1,570,428) (5,498,982) (113,922)
Equity in loss of affiliates (121,886) (30,419) (630) (196,413) (145,871) (3,022)
Impairment of investment in
affiliate -- -- -- -- (1,089,870) (22,579)
Minority interest 10,404 3,380 70 10,787 7,323 152
--------------------------------------------- ---------------------------------------------
Loss before taxes (908,721) (364,950) (7,561) (1,756,054) (6,727,400) (139,371)
Taxes 12,584 (8,470) (175) 27,207 (17,804) (369)
--------------------------------------------- ---------------------------------------------
Net loss from continuing
operations Rs. (896,137) Rs. (373,420) $ (7,736) Rs.(1,728,847) Rs.(6,745,204) $ (139,740)
--------------------------------------------- ---------------------------------------------
Income (loss) from
discontinued operations Rs. 34,737 Rs. (22,902) $ (474) Rs. 74,209 Rs. (48,671) $ (1,008)
--------------------------------------------- ---------------------------------------------
Net loss Rs. (861,400) Rs. (396,322) $ (8,210) Rs.(1,654,638) Rs.(6,793,875) $ (140,748)
============================================= =============================================
Net loss per share from
continuing operations (38.79) (16.09) (0.33) (76.01) (290.81) (6.02)
Net gain (loss) per share from
discontinued operations 1.50 (0.99) (0.02) 3.26 (2.10) (0.04)
Net loss per share (37.29) (17.08) (0.35) (72.75) (292.91) (6.07)
Weighted equity shares used
in computing net loss per
share 23,101,714 23,202,176 23,202,176 22,745,053 23,194,477 23,194,477
--------------------------------------------- ---------------------------------------------
See accompanying notes to unaudited condensed consolidated financial statements
3
SATYAM INFOWAY LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data and as stated otherwise)
-----------------------------------------------
Nine months ended December 31,
-----------------------------------------------
2000 2001 2001
-----------------------------------------------
Net loss from continuing operations Rs.(1,728,847) Rs.(6,745,204) $ (139,740)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation, amortization and
impairment of goodwill 949,289 4,839,744 100,264
Impairment of investment in affiliate -- 1,089,870 22,579
Equity in losses of affiliates 196,413 145,871 3,022
Loss on sale of plant and equipment 2,647 3,324 69
Provision for doubtful receivables 9,400 55,191 1,143
Deferred tax (26,882) 17,804 369
Minority interest (10,787) (7,323) (152)
Accounts receivable (292,667) (98,598) (2,043)
Due from officers and employees (2,396) 8,744 181
Inventories (28,622) 27,768 575
Prepaid expenses (3,388) 61,778 1,280
Other assets (96,169) 118,518 2,455
Trade accounts payable 183,220 23,326 483
Deferred revenue 43,813 10,554 219
Advances from customers 9,886 (82,639) (1,712)
Other liabilities (34,291) (47,063) (975)
-----------------------------------------------
Net cash used in continuing operations Rs. (829,381) Rs. (578,335) $ (11,983)
Net cash (used in)/provided by
discontinued operations Rs. (130,086) Rs. 239,324 $ 4,958
-----------------------------------------------
Net cash used in operating activities Rs. (959,467) Rs. (339,011) $ (7,025)
-----------------------------------------------
Cash flows from investing activities:
Expenditure on plant and equipment (1,534,824) (220,783) (4,574)
Proceeds from sale of plant and
equipment 300 10,846 225
Expenditure on investment in
affiliates (107,769) (98,084) (2,032)
Purchase consideration for
acquisition, net of cash (2,199,145) (12,023) (249)
Expenditure on license fee (23,320) (59,434) (1,231)
-----------------------------------------------
Net cash used in continuing
operations Rs.(3,864,758) Rs. (379,478) $ (7,861)
Net cash used in discontinued
operations Rs. (102,253) Rs. (69,916) $ (1,448)
-----------------------------------------------
Net cash used in investing activities Rs.(3,967,011) Rs. (449,394) $ (9,309)
-----------------------------------------------
Cash flows from financing activities:
Principal payments of long-term debt (208,167) -- --
Principal payments under capital lease
obligations 7,194 (7,139) (148)
-----------------------------------------------
Net cash used in continuing operations Rs. (200,973) Rs. (7,139) $ (148)
Net cash used in financing activities Rs. (200,973) Rs. (7,139) $ (148)
-----------------------------------------------
Effect of exchange rate changes on
cash -- (4,040) (84)
Net decrease in cash and cash
equivalents (5,127,451) (799,584) (16,566)
Cash and cash equivalents at the
beginning of the year 7,307,625 1,444,307 29,923
-----------------------------------------------
Cash and cash equivalents at the end
of the year Rs. 2,180,174 Rs. 644,723 $ 13,357
-----------------------------------------------
4
-----------------------------------------------------------------------------------------
Supplementary Information
Cash paid towards interest 16,142 -- --
Supplemental schedule of non-cash
financing activity
Capital leases 12,879 4,398 55
Additional common stock issued for
acquisition of business 3,150,655 49,268 1,021
See accompanying notes to unaudited condensed consolidated financial statements
5
SATYAM INFOWAY LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA AND AS OTHERWISE STATED)
(INFORMATION AS OF DECEMBER 31, 2001 AND FOR THE PERIODS ENDED
DECEMBER 31, 2000 AND DECEMBER 31, 2001 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Preparation of Financial Statements
The accompanying financial statements have been prepared in Indian
Rupees (Rs.), the national currency of India. Solely for the convenience
of the reader, the financial statements as of and for the quarter and
nine months ended December 31, 2001 have been translated into United
States dollars at the noon buying rate in New York City on December 31,
2001 for cable transfers in Indian rupees, as certified for customs
purposes by the Federal Reserve Bank of New York of $1 = Rs.48.27. No
representation is made that the Indian rupee amounts have been, could
have been or could be converted into United States dollars at that or
any other rate on December 31, 2001 or on any other date.
b. Interim Information (unaudited)
Interim information presented in the condensed consolidated financial
statements has been prepared by management and is unaudited 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 in
accordance with the generally accepted accounting principles in the
United States. These financial statements should be read in conjunction
with the consolidated financial statements and related notes included in
the Company's annual report on Form 20-F for the fiscal year ended March
31, 2001.
2. 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 Company's operations predominantly relate to
connectivity, co-location and software development for businesses and
providing Internet access to retail subscribers (both home access and
public access). The Company also operates a portal, "Sify.com," that
provides a variety of India-related content to audiences both in India
and abroad, and which generates revenue from advertisements and other
value added services. The Company also has subsidiaries to exploit other
opportunities provided by the Internet in e-learning, business to
business marketplaces, digital signatures and Internet security.
The primary operating segments of the Company include:
- corporate network/data services, which provides private network
services, messaging services and web hosting to businesses;
- software services (e-business services), which provides business
to business e-commerce and web site development and which has
been discontinued in connection with the pending sale of this
segment to Satyam Computer Services;
- consumer Internet access services, which provides dial-up
Internet access and public Internet access through cybercafes;
and
- online portal services and content offerings.
The chief operating decision maker (CODM) evaluates the Company's
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 catered to. The measure of loss reviewed
by the CODM was "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 between the
corporate network/data services and consumer Internet access services
businesses based on certain norms and assumptions and on total demand of
bandwidth from each of these businesses. Certain expenses, such as
depreciation and technology, which form a significant component of total
expenses, are not specifically allocable to specific segments as the
underlying services are used interchangeably. Management believes that
it is not practical to provide segment disclosure of these expenses and,
accordingly, they are separately disclosed as "unallocated" and adjusted
only against the total income of the Company.
6
A significant part of the fixed assets used in the Company's business
are not identifiable to any of the reportable segments and can be used
interchangeably between segments. Management believes that it is not
practicable to provide segment disclosures relating to total assets
since a meaningful segregation of the available data would be onerous.
The Company's operating segment information for the quarter and nine
months ended December 31, 2001 and 2000 is presented below:
QUARTER ENDED DECEMBER 31, 2001
CORPORATE
NETWORK/ INTERNET ONLINE
DATA ACCESS PORTAL OTHER CONTINUING DISCONTINUED
SERVICES SERVICES SERVICES SERVICES OPERATIONS OPERATIONS
---------- -------- -------- -------- -------- ---------
Revenues 204,918 138,506 54,380 20,409 418,213 95,433
Operating expenses (134,574) (260,709) (63,615) (26,761) (485,659) (102,375)
Equity in loss of affiliates -- -- (17,027) -- (17,027) --
Minority interest -- 2,778 602 -- 3,380 --
-------- -------- -------- -------- -------- --------
Segment operating income/
(loss) 70,344 (119,425) (25,660) (6,352) (81,093) (6,942)
Corporate expenses (114,497) --
Foreign exchange gain 8,253 --
Other income/(expense), net (229) --
-------- --------
Loss before interest, taxes,
depreciation and amortization (187,566) (6,942)
Depreciation and amortization (174,336) (24,430)
Interest income (3,048) --
Income taxes (8,470) 8,470
-------- --------
Net loss (373,420) (22,902)
-------- --------
QUARTER ENDED DECEMBER 31, 2000
CORPORATE
NETWORK/ INTERNET ONLINE
DATA ACCESS PORTAL OTHER CONTINUING DISCONTINUED
SERVICES SERVICES SERVICES SERVICES OPERATIONS OPERATIONS
---------- -------- -------- -------- ---------- ------------
Revenues 190,481 83,827 31,366 2,183 307,857 163,754
Operating expenses (171,331) (276,565) (130,210) (76,307) (654,413) (99,552)
Equity in loss of affiliates -- -- (37,834) -- (37,834) --
Minority interest -- 3,839 -- 6,565 10,404 --
-------- -------- -------- -------- -------- --------
Segment operating income/
(loss) 19,150 (188,899) (136,678) (67,559) (373,986) 64,202
Corporate expenses (146,490) --
Foreign exchange gain 40,974 --
Other income/(expense), net 16,978 --
-------- --------
Loss before interest, taxes,
depreciation and amortization (462,524) 64,202
Depreciation and amortization (486,118) (16,881)
Interest income 39,921 --
Income taxes 12,584 (12,584)
-------- --------
Net loss (896,137) 34,737
-------- --------
7
NINE MONTHS ENDED DECEMBER 31, 2001
CORPORATE
NETWORK/ INTERNET ONLINE
DATA ACCESS PORTAL OTHER CONTINUING DISCONTINUED
SERVICES SERVICES SERVICES SERVICES OPERATIONS OPERATIONS
---------- ---------- ---------- ---------- ---------- ------------
Revenues 589,154 381,956 157,671 48,726 1,177,507 300,178
Operating expenses (402,483) (783,109) (205,422) (102,209) (1,493,223) (304,945)
Equity in loss of affiliates -- -- (53,222) -- (53,222) --
Minority interest -- 5,506 1,817 -- 7,323 --
---------- ---------- ---------- ---------- ---------- ----------
Segment operating income/
(loss) 186,671 (395,647) (99,156) (53,483) (361,615) (4,767)
Corporate expenses (399,323) --
Foreign exchange gain 42,806 --
Other income/(expense), net (2,269) --
---------- ----------
Loss before interest, taxes,
depreciation and amortization (720,401) (4,767)
Depreciation and amortization (6,040,035) (61,708)
Interest income 33,036 --
Income taxes (17,804) (17,804)
---------- ----------
Net loss (6,745,204) (48,671)
---------- ----------
NINE MONTHS ENDED DECEMBER 31, 2000
CORPORATE
NETWORK/ INTERNET ONLINE
DATA ACCESS PORTAL OTHER CONTINUING DISCONTINUED
SERVICES SERVICES SERVICES SERVICES OPERATIONS OPERATIONS
---------- ---------- ---------- ---------- ---------- ------------
Revenues 437,886 337,886 102,867 2,937 881,576 346,874
Operating expenses (391,927) (732,308) (310,122) (118,618) (1,553,038) (211,068)
Equity in loss of affiliates -- -- (55,553) -- (55,553) --
Minority interest -- 3,839 382 6,565 10,787 --
---------- ---------- ---------- ---------- ---------- ----------
Segment operating income/(loss) 45,959 (390,583) (262,426) (109,179) (716,228) 135,806
Corporate expenses (361,585) --
Foreign exchange gain 166,694 --
Other income/(expense), net 7,720 --
---------- -----------
Loss before interest, taxes,
depreciation and amortization (903,399) 135,806
Depreciation and amortization (1,090,580) (34,715)
Interest income 237,925 --
Income taxes 27,207 (26,882)
---------- -----------
Net loss (1,728,847) 74,209
---------- -----------
8
3. CRICINFO
On October 5, 2001, Sify entered into an agreement to subscribe for
unsecured convertible notes to be issued by CricInfo Limited in an
aggregate amount of up to GBP 1,000 (Rs.70,199) to meet CricInfo's short
to medium term working capital requirements. These notes are redeemable
on October 5, 2004. The subscription will be in tranches of such amounts
and on such dates as agreed to in writing from time to time by Sify and
CricInfo. The terms of the note instrument provide for the payment of
interest on the principal amount at the rate of 8% per annum. In
addition, Sify shall be entitled, at any time upon 5 business days notice
to CricInfo, to convert the notes into CricInfo shares based on a
predetermined conversion formula. Sify will not be obligated to subscribe
for notes if it is not satisfied that CricInfo has met certain agreed
upon performance measures. At December 31, 2001, Sify had purchased
convertible notes with an aggregate principal amount of Rs.53,317
(approximately GBP 775.5).
4. DISCONTINUED OPERATIONS
On October 24, 2001, Sify announced its proposal to divest its software
services (e-business services) division to its parent company, Satyam
Computer Services. The software services division, which provides
business-to-business e-commerce and web site development, covers
information technology services in India, Australia and the U.S.
Revenues from this segment represented approximately 19% of Sify's total
revenue during the quarter ended December 31, 2001. The objective of the
divestment is to permit Satyam Computer Services to concentrate on its
core business of software services and to permit Sify to concentrate on
Internet services. The buyout of this division by Satyam Computer
Services, although subject to necessary approvals of stockholders, is
expected to be effective January 1, 2002 with a price of approximately
$6.9 million. It is estimated that the Company will not incur a loss in
this transaction.
The Company, in accordance with the provisions of Accounting Principles
Board Opinion 30 ("APB 30") and the Emerging Issues Task Force 95-18,
has concluded that its software services division is the subject of a
formal plan for disposal and that the measurement date as defined in APB
30 occurred prior to the approval of the stockholders because management
and members of the board of directors controlled enough votes to approve
the plan of disposal at the next stockholder meeting. Accordingly, the
results of operations of the software services division for all periods
have been reported separately as "Income/(loss) from discontinued
operations."
The assets and liabilities of the software services division as of
December 31, 2001 are set forth below:
Assets:
Accounts receivable Rs.104,417
Inventories 3,924
Other current assets 7,048
Total current assets 115,389
Other assets 1,478
Property, plant and equipment, net 195,069
Goodwill and other intangible assets 7,610
----------
Total assets 319,546
----------
Liabilities:
Current liabilities:
Accounts payable 38,128
Deferred revenue 2,306
Advances from customers 1,406
----------
Total liabilities 41,840
----------
Net assets of discontinued operations 277,706
----------
9
The summarized information on the results of discontinued operations for
the three and nine months ended December 31, 2001 and 2000 is set forth
below:
QUARTER ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-----------------------------------------------
2000 2001 2000 2001
Revenues 163,754 95,433 346,874 300,178
Operating expenses net of other income (116,433) (126,805) (245,783) (366,653)
Income/(loss) from discontinued operations before taxes 47,321 (31,372) 101,091 (66,475)
Income taxes (12,584) 8,470 (26,882) 17,804
-------- -------- -------- --------
Net income/(loss) from discontinued operations 34,737 (22,902) 74,209 (48,671)
-------- -------- -------- --------
5. LEGAL PROCEEDINGS
On November 5, 2001, a securities class action lawsuit was filed in the
United States District Court for the Southern District of New York on
behalf of all persons who acquired Sify's ADSs between October 20, 1999
and December 6, 2000. The Company, certain executive officers of the
Company, and certain underwriters involved in the Company's initial
public offering are named as defendants in the complaint. This complaint
alleges that certain of the underwriters of the initial public offering
violated the federal securities laws by failing to disclose that they
had solicited and received undisclosed commissions from, and entered
into undisclosed arrangements with, certain investors who purchased the
Company's ADSs in the initial public offering, and had entered into
undisclosed arrangements with certain investors whereby the underwriters
allocated shares in the initial public offering to those investors in
exchange for their agreement to purchase Sify's shares in the
after-market at pre-determined prices. The complaint also alleges that
the defendants violated the federal securities laws by issuing a
registration statement in connection with the initial public offering
that contained material misstatements and/or omissions because it did
not disclose these allegedly undisclosed arrangements. The complaint
seeks damages on behalf of all those who purchased or otherwise acquired
Sify's ADSs during the period covered by the complaint. The deadline for
defendants to respond to the complaint has not yet expired. The Company
believes that it has meritorious defenses and intends to defend this
action vigorously. However, the Company could be forced to incur
material expenses in the litigation and, in the event there is an
adverse outcome, the Company's business could be harmed.
6. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS 141, 142
In July 2001, the FASB issued Statement No. 141, Business Combinations,
and Statement No. 142, Goodwill and Other Intangible Assets. Statement
141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 as well as all
purchase method business combinations completed after June 30, 2001.
Statement 141 also specifies criteria intangible assets acquired in a
purchase method business combination must meet to be recognized and
reported apart from goodwill, noting that any purchase price allocable
to an assembled workforce may not be accounted for separately. Statement
142 will require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment
at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with definite
useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
Furthermore, any goodwill and any intangible asset determined to have an
indefinite useful life that are acquired in a purchase business
combination completed after June 30, 2001 will not be amortized, but
will continue to be evaluated for impairment in accordance with the
appropriate pre-Statement 142 accounting literature. Goodwill and
intangible assets acquired in business combinations completed before
July 1, 2001 will continue to be subject to amortization prior to the
adoption of Statement 142.
The Company is required to adopt the provisions of Statement 141
immediately, except with regard to business combinations initiated prior
to July 1, 2001, and Statement 142 effective April 1, 2002. Upon
adoption of Statement 142, Statement 141 will require the Company to
reassess the useful lives and residual values of all intangible assets
acquired in purchase business combinations and make any necessary
amortization period adjustments by the end of the first interim period
after adoption, expected to be the quarter ended June 30, 2002. In
addition, to the extent an intangible asset is identified as having an
indefinite useful life, the Company will be required to test the
intangible asset for impairment in accordance with the provisions of
Statement 142 within that first interim period. Any impairment
10
loss will be measured as of the date of adoption and recognized as the
cumulative effect of a change in accounting principle in the first
interim period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 requires the Company to perform an assessment of whether
there is an indication that goodwill and equity-method goodwill is
impaired as of the date of adoption. To accomplish this the Company must
identify our reporting units and determine the carrying value of each
reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units as of
the date of adoption. The Company will then have up to six months from
the date of adoption to determine the fair value of each reporting unit
and compare it to the reporting unit's carrying amount. To the extent a
reporting unit's carrying amount exceeds its fair value, an indication
exists that the reporting unit's goodwill may be impaired and the
Company must perform the second step of the transitional impairment
test. In the second step, the Company must compare the implied fair
value of the reporting unit's goodwill, determined by allocating the
reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price
allocation in accordance with Statement 141, to its carrying amount,
both of which would be measured as of the date of adoption. This second
step is required to be completed as soon as possible, but no later than
the end of the year of adoption. Any transitional impairment loss will
be recognized as the cumulative effect of a change in accounting
principle in the Company's statement of operations.
At December 31, 2001, the Company's goodwill and other intangible assets
amounted to Rs.210,830. If either present accounting principles or the
new standards discussed above require that an impairment in value be
recognized, the Company would be required to write down the carrying
value of the asset to its estimated fair value with an offsetting charge
to the statement of operations.
SFAS 143
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires entities to record the
fair value of a liability for an asset retirement obligation in the
period in which it is incurred. When the liability is initially
recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement
of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The standard
is effective for fiscal years beginning after June 15, 2002.
SFAS 144
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires that
long-lived assets be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discontinued operations. Under SFAS No. 144, discontinued operations
will no longer be measured at net realizable value or include amounts
for operating losses that have not yet been incurred. The provisions of
SFAS No. 144 are effective for financial statements issued for fiscal
years beginning after December 15, 2001.
The Company is currently evaluating the impact of SFAS 143 and 144 on
its operations.
7. RECLASSIFICATIONS
Certain prior-years' amounts have been reclassified to conform to the
current year's presentation.
11
ITEM 2. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.
The following discussion of the operating and financial review and
prospects of our company should be read in conjunction with the unaudited
condensed consolidated financial statements and the related notes included
elsewhere in this report and the audited financial statements and the related
notes contained in our annual report on Form 20-F for the fiscal year ended
March 31, 2001. This discussion contains forward-looking statements that involve
risks and uncertainties. For additional information regarding these risks and
uncertainties, please see "Risk Related to Our Business."
OVERVIEW
Our company, Satyam Infoway Limited, was organized as a limited
liability company under the laws of the Republic of India pursuant to the
provisions of the Indian Companies Act on December 12, 1995. We are presently a
majority-owned subsidiary of Satyam Computer Services, a leading Indian
information technology services company traded on the New York Stock Exchange
and the principal Indian stock exchanges. We conduct a significant majority of
our business in India. The address of our principal executive office is Tidel
Park, 2nd Floor, No. 4, Canal Bank Road, Taramani, Chennai 600 113 India, and
our telephone number is (91) 44-254-0770.
Our company was formed as an independent business unit of Satyam
Computer Services to develop and offer connectivity-based corporate services
allowing businesses in India to exchange information, communicate and transact
business electronically. From December 1995 through 1997, we focused on the
development and testing of our private data network. In 1997, we began forming
strategic partnerships with a number of leading technology and electronic
commerce companies, including UUNet Technologies, in order to broaden our
product and service offerings to our corporate customers. In March 1998, we
obtained network certification for conformity with Indian and international
network operating standards from the Technical Evaluation Committee of India. In
April 1998, we began offering private network services to businesses in India.
Our initial products and services included electronic data interchange, e-mail
and other messaging services, virtual private networks and related customer
support.
In October 1998, we initiated our online content offerings with two
websites: carnaticmusic.com and indiaupdate.com. We also started development of
www.sify.com, our online portal, and other related content sites for personal
finance, movies and automobiles with the goal of offering a comprehensive suite
of websites offering content specifically tailored to Indian interests
worldwide.
On November 6, 1998, the Indian government opened the Internet service
provider marketplace to private competition. Capitalizing on our existing
private data network, we launched our Internet service provider business,
SatyamOnline, on November 22, 1998 and became the first private national
Internet service provider in India. We began offering SatyamOnline Internet
access and related services to India's consumer market as a complement to the
network services offered to our business customers. Our SatyamOnline service was
the first in India to offer ready-to-use CD-ROMs enabling online registration
and immediate usage.
In October 1999, we completed our initial public offering and issued
19,205,000 ADSs (representing 4,801,250 equity shares) at a price of $4.50 per
ADS. We received approximately $79.2 million, net of underwriting discounts,
commissions and other offering costs.
On November 29, 1999, we purchased 24.5% of the outstanding shares of
IndiaWorld Communications, a private company organized under the laws of the
Republic of India, for a cash purchase price of Rs.1,222.5 million. Prior to its
acquisition by our company, IndiaWorld Communications was a leading provider of
Internet content and services in India. In connection with this purchase, we
acquired an option to purchase the remaining 75.5% of the outstanding shares in
IndiaWorld Communications for a cash purchase price of Rs.3,767.4 million. In
June 2000, we amended the option agreement to provide for the payment of the
exercise price by us with a mix of equity shares and cash. We completed the
acquisition by exercising the option in June 2000 through the payment of
Rs.2,154.3 million in cash and the issuance of 268,500 equity shares. For U.S.
GAAP reporting purposes, the acquisition was accounted for as a purchase and the
financial statements of IndiaWorld Communications have been consolidated with
our financial statements from and after December 1, 1999.
In February 2000, we completed a secondary offering and issued 1,868,700
ADSs (representing 467,175 equity shares) at a price at $80.00 per ADS. We
received approximately $141.2 million, net of underwriting discounts,
commissions and other costs. In July 2000, we acquired a 25% stake in CricInfo
Limited, a private company incorporated in the United Kingdom, through the
issuance of 2,204,720 ADSs (representing 551,180 equity shares). Also in July
2000, we entered into an agreement to acquire all of the outstanding capital
stock of Indiaplaza.com, a private company incorporated in California. We
completed our acquisition of Indiaplaza.com in December 2000 through the
issuance of an aggregate of 455,192 ADSs (representing 113,798 equity shares) to
the former equity holders of Indiaplaza.com. For U.S. GAAP reporting purposes,
the financial statements of Indiaplaza.com have been consolidated with our
financials statements from and after December 8, 2000.
12
In October 2001, we announced our proposal to divest our software
services business, which principally involves business to business e-commerce
and website development services and includes our strategic relationships with
Open Market and Sterling Commerce, to our parent company, Satyam Computer
Services, for approximately $6.9 million. Our software services business
represented approximately 19% of our revenues for the quarter ended December 31,
2001. The objective of the divestment is to permit Satyam Computer Services to
concentrate on its core business of software services and to permit us to
concentrate in Internet services. The divestment and fair value of this
transaction is subject to receipt of the approval of our stockholders. An
extraordinary general meeting of our stockholders has been called on February
28, 2002. For additional information, please see our report on Form 6-K dated
January 15, 2002. Also in October 2001, we entered into a loan transaction with
CricInfo Limited for the issuance of unsecured convertible notes by CricInfo
with a principal amount of up to GBP 1,000,000, subject to the satisfaction of
certain performance measures by CricInfo. These notes, which provide for an
interest rate of 8% per annum, are convertible into CricInfo shares by us at any
time and redeemable by CricInfo on October 5, 2004.
Approximately 30% of our revenues in fiscal 2001 was denominated in
foreign currency. Our expenses denominated in foreign currency include the cost
of purchasing software from BroadVision and other strategic partners. Our
foreign exchange loss was Rs.0 and Rs.0.01 million in fiscal 1997 and 1998,
respectively, and our foreign exchange gain was Rs.0.6 million, Rs.5.4 million
and Rs.162 million for fiscal 1999, 2000 and 2001, respectively. Our foreign
exchange gain in fiscal 1999, 2000 and 2001 was primarily due to our short-term
investment of the proceeds from our public offerings in interest bearing
instruments denominated in U.S. dollars.
REVENUES
For reporting purposes, we classify our revenues into
three divisions:
- corporate network/data services;
- consumer Internet access services; and
- online portal services and content offerings.
Our corporate network/data services division derives its revenues from
dial-up and dedicated Internet access, electronic commerce, electronic data
interchange, e-mail and other messaging services, virtual private networks, web
hosting and web-based solutions. An important asset in this business is the
quality and reach of our large IP network in India. This division also generates
a portion of its revenues through the sale of third-party hardware, website
hosting based on our customer's bandwidth requirements, co-location fees for the
use of our physical facilities and from Internet networking solutions. Our
corporate private network customers typically enter into arrangements that
provide for an initial installation fee and recurring service fees.
Our consumer Internet access services division derives its revenues
primarily from the "SatyamOnline" dial-up business and the "iway" public
Internet access business. We offer our prepaid subscriptions in a number of time
period and pricing plans through ready-to-use CD-ROMs sold through our
distribution partners. Our distribution partners resell the CD-ROMs to consumers
for online registration and immediate Internet access. Revenues are recognized
ratably as the prepaid subscription is used with any unused portion recognized
as revenue at the expiration date of the subscription. We also generate revenues
through international roaming and e-mail registration fees. As of December 31,
2001, we had approximately 600,000 Internet access subscribers and there were
616 iway cafes operational in ten cities providing Internet access to consumers
on a non-subscription basis.
We face significant competitive pricing pressure from VSNL and a number
of new competitors that are entering India's Internet service provider market.
This competition has resulted in erosion in selling prices in the consumer
Internet access business. In the face of this competition, we do not anticipate
being able to maintain our present subscriber retention rates as our subscriber
base grows.
13
Our online portal services and content offerings division derives
revenues from third-party advertising and commissions from electronic commerce
transactions on our websites. Advertising fees are recognized over the period in
which the advertisements are hosted on our websites.
EXPENSES
Cost of revenues for the corporate network/data services division
consists of telecommunications costs necessary to provide service, customer
support costs and the cost of providing network operations.
Cost of revenues for the consumer Internet access services division
consists primarily of recurring telecommunications costs necessary to provide
service to subscribers. Telecommunications costs include the costs of providing
local telephone lines to our points of presence, the costs of using third-party
networks pursuant to service agreements and leased line costs. Bandwidth costs
are presently controlled to a significant extent by VSNL, the government
controlled provider which also competes with us in the Internet access business.
We are addressing these costs issues through alternative bandwidth sources and
the establishment of our own international access gateways. Private companies in
India were not previously permitted to operate their own international gateways.
Our initiatives are expected to result in bandwidth cost relief over the next
several quarters.
Another recurring cost is the personnel and related operating expenses
associated with customer support and network operations. We expect that customer
support and network operations expenses will decrease as a percentage of
revenues as we more efficiently utilize these capabilities across a larger
customer base assuming that subscription rates stabilize.
The cost of revenues for our online portal and content offerings
division includes the labor cost of developing and maintaining our websites, the
cost of third-party software and the cost of obtaining content from third-party
vendors.
Selling, general and administrative expenses consist primarily of the
following: salaries and commissions for sales and marketing personnel; salaries
and related costs for executive, financial and administrative personnel; sales,
marketing, advertising and other brand building costs; travel costs; and
occupancy and overhead costs.
As of December 31, 2001, a total of 1,200,000 equity shares were
reserved for issuance under our Associate Stock Option Plan, or ASOP. As of
December 31, 2001, we had outstanding an aggregate of 713,400 options (net of
222,220 options forfeited by employees and 200 options exercised for equity
shares) under our ASOP with a weighted average exercise price equal to
approximately Rs.1,663 per equity share. The unamortized deferred compensation
related to these grants amounted to Rs.105.0 million as of December 31, 2001.
We depreciate our tangible assets on a straight-line basis over the
useful life of assets, ranging from two to five years and, in the case of
buildings, 28 years. Historically, we have amortized the goodwill recognized in
acquisition transactions on a straight-line basis over five years. In accordance
with our accounting policy, at September 30, 2001, our management assessed the
goodwill that we were carrying on our books in connection with the significant
acquisitions and investments made by us in Internet content and commerce
companies in 1999 and 2000, including IndiaWorld Communications and Indiaplaza.
Based on that evaluation, which was measured at the enterprise level, we
concluded that these intangible assets were impaired. Accordingly, for the
quarter ended September 30, 2001, we recorded a non-cash charge of Rs.4,115.1
million ($85.3 million) to write-off the goodwill related to these acquisitions
and investments. In addition, at September 30, 2001, we recorded a non-cash
charge of Rs.1,089.9 million ($22.6 million) to reflect an impairment of
investment in affiliate related to our investment in CricInfo Limited.
In addition to our operations and those of our consolidated
subsidiaries, our financial statements include our pro rata share of the
financial results of those companies in which we have significant,
non-controlling minority interests, such as CricInfo Limited, Placements.com
Limited and Refco-Sify Securities India Private Limited. These investments are
accounted for under the equity method of accounting.
Since our inception, we have experienced negative cash flow from
operations and have incurred net losses. Our ability to generate positive cash
flow from operations and achieve profitability is dependent on our ability to
continue to grow our revenue base and achieve further operating efficiencies.
For fiscal 1997 through 2001 and the nine months ended December 31,
2001, we incurred negative cash flow from operations of approximately Rs.30.4
million, Rs.74.0 million, Rs.172.1 million, Rs.527.2 million, Rs.1,308.4 million
and Rs.339.0 million ($7.0 million), respectively. For fiscal 1997 through 2001
and the nine months ended December 31, 2001, we incurred net losses of
approximately Rs.26.3 million, Rs.100.6 million, Rs.187.4 million, Rs.381.9
million, Rs.2,509.0 million
14
and Rs.6,793.9 million ($140.7 million), respectively. As of December 31, 2001,
we had an accumulated deficit of approximately Rs.9,999.7 million ($207.2
million).
RESULTS OF OPERATIONS
Quarter ended December 31, 2001 compared to quarter ended December 31, 2000
Revenues. We recognized Rs.418.2 million ($8.7 million) in revenues for
the quarter ended December 31, 2001, as compared to Rs.307.9 million for the
quarter ended December 31, 2000, representing an increase of Rs.110.3 million,
or 35.8%. This increase was attributable to a significant increase in the
corporate network/data services business, which increased by 7.6% over the same
period in the prior year, and an increase in the consumer Internet access
services business, which increased by 65.2% over the same period in the prior
year. The corporate network/data services business obtained a significant number
of new orders from prominent customers with operations throughout India. The
increase in consumer Internet access revenues was primarily on account of an
increase in the number of subscribers and an increase in revenues from iway
cafes. We expect the market for consumer Internet access to remain extremely
price competitive. Our online portal and content offerings division accounted
for Rs.54.4 million of revenues for the quarter ended December 31, 2001, as
compared to Rs.31.4 million for the quarter ended December 31, 2000,
representing an increase of 73.2%.
Cost of Revenues. Cost of revenues was Rs.308.9 million ($6.4 million),
or 73.9% of revenues, for the quarter ended December 31, 2001, compared to
Rs.339.3 million, or 110.2% of revenues, for the quarter ended December 31,
2000, representing a decrease of Rs.30.4 million, or 8.9%. This decrease was
primarily attributable to a Rs.53.7 million decrease in leased line charges,
partially offset by a Rs.21.4 million increase in cost of goods sold.
Selling, general and administrative expenses. Selling, general and
administrative expenses were Rs.444.4 million ($9.2 million) for the quarter
ended December 31, 2001, compared to Rs.564.1 million for the quarter ended
December 31, 2000, representing a decrease of Rs.119.7 million, or 21.2%. This
decrease was attributable to a Rs.126.4 million decrease in marketing expenses,
a Rs.46.3 million decrease in administrative and other expenses and a Rs.9.9
million decrease in personnel expenses, partially offset by a Rs.43.7 million
increase in depreciation and a Rs.19.2 million increase in provision for
doubtful debts.
Amortization and impairment of goodwill. We had no amortization and
impairment of goodwill for the quarter ended December 31, 2001, compared to an
expense of Rs.278.5 million for the quarter ended December 31, 2000. This
decrease was attributable to the write-off during the quarter ended September
30, 2001 of all of the goodwill arising out of our acquisitions of IndiaWorld
Communications and Indiaplaza.
Amortization of deferred stock compensation. Amortization of deferred
stock compensation expense was Rs.7.8 million ($0.2 million) for the quarter
ended December 31, 2001, compared to Rs.21.1 million for the quarter ended
December 31, 2000. This decrease was attributable to the surrender of options.
Other income, net. Other income, net was Rs.3.3 million ($0.1 million)
for the quarter ended December 31, 2001, compared to Rs.56.9 million for the
quarter ended December 31, 2000, representing a decrease of Rs.60.2 million, or
105.8%. This decrease was primarily attributable to a reduction in interest
income earned on deposits placed with banks.
Loss from discontinued operations. Loss from discontinued operations was
Rs.22.9 million ($0.5 million) for the quarter ended December 31, 2001, compared
to a profit of Rs.34.7 million for the quarter ended December 31, 2000. This
decrease was attributable to a Rs.68.3 million decrease in revenues, a Rs.23.0
million increase in personnel expenses, a Rs.9.4 million increase in
depreciation and a Rs.1.4 million increase in administration and other expenses,
partially offset by a Rs.21.1 million decrease in income taxes, a Rs.12.7
million decrease in cost of goods sold, a Rs.8.8 million decrease in marketing
and promotional expenses and a Rs.1.9 million decrease in amortization of
deferred stock compensation expense.
Net Loss. Our net loss was Rs.396.3 million ($8.2 million) for the
quarter ended December 31, 2001, compared to a net loss of Rs.861.4 million for
the quarter ended December 31, 2000. This decrease was primarily attributable to
decreases in our selling, general and administrative expenses and the
amortization of goodwill.
15
Nine months ended December 31, 2001 compared to nine months ended December 31,
2000.
Revenues. We recognized Rs.1,177.5 million ($24.4 million) in revenues
for the nine months ended December 31, 2001, as compared to Rs.881.6 million for
the nine months ended December 31, 2000, representing an increase of Rs.295.9
million, or 33.6%. This increase was attributable to a significant increase in
revenues generated by our corporate network/data services and online portal
services divisions, which increased by 34.6% and 53.3%, respectively, over the
same period in the prior year.
Cost of Revenues. Cost of revenues was Rs.905.1 million ($18.8 million),
or 76.9% of revenues, for the nine months ended December 31, 2001, compared to
Rs.723.3 million, or 83.1% of revenues, for the nine months ended December 31,
2000, representing an increase of Rs.172.8 million, or 23.6%. This increase was
primarily attributable to a Rs.89.3 million increase in leased line charges due
to the increased requirement for international bandwidth and last mile
connectivity, a Rs.46.7 million increase in cost of goods sold, a Rs.28.9
million increase in direct personnel costs and a Rs.7.9 million increase in
other costs.
Selling, general and administrative expenses. Selling, general and
administrative expenses were Rs.1,395.1 million ($28.9 million) for the nine
months ended December 31, 2001, compared to Rs.1,430.8 million for the nine
months ended December 31, 2000, representing a decrease of Rs.35.7 million, or
2.5%. This decrease was primarily attributable to a Rs.313.3 million decrease in
marketing expenses, partially offset by a Rs.150.6 million increase in
depreciation, a Rs.63.2 million increase in personnel expenses, a Rs.45.9
million increase in provision for doubtful debts and a Rs.17.9 million increase
in administrative and other expenses.
Amortization and impairment of goodwill. Amortization and impairment of
goodwill was Rs.4,408.1 million ($91.3 million) for the nine months ended
December 31, 2001, compared to Rs.637.3 million for the nine months ended
December 31, 2000. This increase was attributable to the impairment of the
goodwill arising out of our acquisitions of IndiaWorld Communications and
Indiaplaza recorded during the nine months ended December 31, 2001.
Amortization of deferred stock compensation. Amortization of deferred
stock compensation expense was Rs.21.8 million ($0.5 million) for the nine
months ended December 31, 2001, compared to Rs.63.9 million for the nine months
ended December 31, 2000. This decrease was attributable to the surrender of
options.
Impairment of investment in affiliate. Impairment of investment in
affiliate of Rs.1,089.9 million ($22.6 million) for the nine months ended
December 31, 2001 was attributable to the impairment of our investment in
CricInfo Limited.
Other income, net. Other income, net was Rs.30.8 million ($0.6 million)
for the nine months ended December 31, 2001, compared to Rs.245.6 million for
the nine months ended December 31, 2000, representing a decrease of Rs.214.8
million, or 87.5%. This decrease was primarily attributable to a reduction in
interest income earned on deposits placed with banks.
Loss from discontinued operation. Loss from discontinued operation was
Rs.48.7 million ($1.0 million) for the nine months ended December 31, 2001,
compared to a profit of Rs.74.2 million for the nine months ended December 31,
2000. This decrease was primarily attributable to a Rs.46.7 million decrease in
revenues, a Rs.90.6 million increase in personnel expenses, a Rs.38.3 million
increase in administrative expenses and a Rs.31.2 million increase in
depreciation, partially offset by a Rs.44.7 million decrease in income taxes, a
Rs.20.8 million decrease in cost of goods sold, a Rs.14.2 million decrease in
marketing expenses and a Rs.4.2 million decrease in amortization of deferred
stock compensation expense.
Net Loss. Our net loss was Rs.6,793.9 million ($140.7 million) for the
nine months ended December 31, 2001, compared to a net loss of Rs.1,654.6
million for the nine months ended December 31, 2000. This increase was primarily
attributable to the write-off of goodwill arising out of our acquisitions of
IndiaWorld Communications and Indiaplaza and the impairment of investment in
CricInfo Limited during the nine months ended December 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through a
combination of equity sales and borrowings from institutions and banks. During
fiscal 1998, 1999 and 2000, we received Rs.38.5 million, Rs.307.5 million and
Rs.10,220.0 million, respectively, in net proceeds from the sale of equity
shares. We did not issue any equity shares in financing transactions in fiscal
2001 or the nine months ended December 31, 2001.
In July 1999, we agreed to sell 481,000 equity shares to a former
strategic partner for $5.0 million. We completed this transaction in September
1999 and used the funds for general corporate purposes, primarily the repayment
of debt.
In October 1999, we completed our initial public offering and issued
19,205,000 ADSs (representing 4,801,250 equity shares) at a price of $4.50 per
share. We received approximately $79.2 million in cash, net of underwriting
discounts,
16
commissions and other offering costs. We used approximately $28.0 million of
these proceeds to purchase 24.5% of the outstanding shares of IndiaWorld
Communications and an additional $12.0 million as a non-refundable deposit
towards purchasing the remaining 75.5% of the outstanding shares of IndiaWorld
Communications. We used the balance of these proceeds to fund network expansion
and enhancements, to advertise and promote our brand and for general corporate
purposes. Pending these uses we invested these proceeds in interest bearing
instruments denominated in dollars.
In February 2000, we completed a secondary offering and issued 1,868,700
ADSs (representing 467,175 equity shares) at a price at $80.00 per ADS. We
received approximately $141.2 million, net of underwriting discounts,
commissions and other offering costs. We used approximately $48.0 million of the
proceeds to complete our acquisition of IndiaWorld Communications. The balance
of the proceeds are being used for general corporate purposes. Pending this use,
we have invested these proceeds in interest bearing instruments denominated in
dollars.
On October 24, 2001, Satyam Computer Services released its financial
results for the September 30, 2001 fiscal quarter in a press release. That press
release included a section with comments on each significant subsidiary of
Satyam Computer Services. In that section, Satyam Computer Services announced
several initiatives involving Sify including:
- the proposed sale of our software services division to Satyam
Computer Services (see notes to unaudited condensed consolidated
financial statements included with this report);
- the strategic decision by Satyam Computer Services to divest its
investment in our company; and
- the determination by Satyam Computer Services that, based on our
current financial status and the expected software services division
divestment transaction, Satyam Computer Services will not invest any
further funds our company (none of which had been provided since
well prior to our initial public offering on Nasdaq).
Please see our Form 6-K dated October 24, 2001 for the full text of the
comments made by Satyam Computer Services and a related press release by us, as
well as the public filings of Satyam Computer Services, for additional
information.
The following table summarizes our statements of cash flows for the
periods presented:
NINE MONTHS ENDED
FISCAL YEAR ENDED MARCH 31, DECEMBER 31,
---------------------------------------------------------------------------- ----------------------------
1997 1998 1999 2000 2001 2001 2001
------------ ------------- ------------- ------------- ------------- ------------- ------------
INDIAN RUPEES U.S. DOLLARS
-------------------------------------------------------------------------------------------- ------------
(IN THOUSANDS)
Net loss from
continuing
operations Rs. (26,337) Rs. (100,590) Rs. (187,376) Rs. (381,896) Rs.(2,684,187) Rs.(6,745,204) $ (139,740)
Net decrease
(increase) in
working capital (4,625) 7,257 (34,434) (406,189) (236,451) 22,388 464
Other adjustments
for non-cash items 536 19,383 49,703 260,837 1,718,221 6,144,481 127,294
Net cash provided
by (used in)
operating
activities
- continuing
operations (30,426) (73,950) (172,107) (527,248) (1,202,417) (578,335) (11,982)
- discontinued
operations (105,944) 239,324 4,958
Net cash provided
by (used in)
investing
activities
- continuing
operations (3,230) (77,070) (144,196) (2,458,384) (4,056,600) (379,478) (7,862)
- discontinued
operations (281,892) (69,916) (1,448)
17
Net cash provided
by (used in)
financing
activities
- continuing
operations 35,138 159,449 431,939 10,167,709 (216,466) (7,139) (148)
Effect of exchange
rate changes on cash -- -- -- -- -- (4,040) (84)
Net increase
(decrease) in
cash and cash
equivalents 1,482 8,429 115,636 7,182,077 (5,863,319) (799,584) (16,566)
Our principal capital and liquidity needs historically have related to
developing our network infrastructure and our corporate network and electronic
commerce products, establishing our customer service and support operations,
developing our sales and marketing activities and for general working capital
needs. Prior to 1998, our capital needs were primarily met by funding from our
parent company, Satyam Computer Services, and borrowings from institutions and
banks. As we placed greater emphasis on expanding our network infrastructure and
developing our consumer Internet access and online portal and content services
divisions, we sought additional capital from other sources, including vendor
capital leases and other vendor financing arrangements and through private
placements of our securities. During recent periods, we have also expended
significant funds in our acquisition and investment program, including the
IndiaWorld Communications transaction.
Cash used in operating activities for nine months ended December 31,
2001 was Rs.339.0 million ($7.0 million) and was attributable to cash used in
continuing operations of Rs.578.3 million ($12.0 million), partially offset by
cash provided by discontinued operation of Rs.239.3 million ($5.0 million). Cash
used in operating activities of continuing operations for the nine months ended
December 31, 2001 was primarily attributable to a Rs.6,745.2 million ($139.7
million) net loss from continuing operations, a Rs.98.6 million ($2.0 million)
increase in account receivables, a Rs.82.6 million ($1.7 million) decrease in
advances from customers and a Rs.47.1 million ($1.0 million) increase in other
liabilities, partially offset by depreciation, amortization and write off of
goodwill of Rs.4,839.7 million ($100.3 million), impairment of investment in
affiliate of Rs.1,089.9 million ($22.6 million), equity in losses of affiliates
of Rs.145.9 million ($3.0 million), a Rs.118.5 million ($2.5 million) decrease
in other assets and a Rs.61.8 million ($1.3 million) decrease in prepaid
expenses.
Cash used in investing activities of continuing operations during the
nine months ended December 31, 2001 was Rs.379.5 million ($7.9 million),
principally as a result of the purchase of routers, modems, ports, servers and
other capital equipment in connection with the expansion of our network,
investment in affiliates of Rs.98.1 million ($2.0 million) and payment of
license fees Rs.59.4 million ($1.2 million). Cash used in investing activities
of discontinued operation was Rs.69.9 million ($1.4 million).
Cash used in financing activities for the nine months ended December 31,
2001 was Rs.7.1 million ($0.1 million) and represented the repayment of
principal under capital lease obligations.
As of December 31, 2001, we had spent approximately Rs.1,210.1 million
to develop and deploy our network infrastructure. As of December 31, 2001, we
had aggregate commitments for capital expenditures in an amount equal to
approximately Rs.103.8 million ($2.2 million), of which we had advanced
approximately Rs.54.0 million ($1.1 million).
In the ordinary course of our business, we regularly engage in
discussions and negotiations relating to potential investments, strategic
partnerships and acquisitions. We will continue to be aggressive in our efforts
to identify one or more such opportunities. However, we cannot assure you that
we will be able to identify or complete any such transaction on favorable terms,
or at all.
Our highest operational priority for the fiscal year ending March 31,
2002 has been to reduce the negative cash flow incurred by our company during
its rapid growth stage. Accomplishment of this objectives will require
continued progress in our business, including continued significant growth in
revenues, which cannot be assured. Nonetheless, we expect to incur continued
losses in the near future. Based upon our present business and funding plans,
including the proposed divestment of our software services business to Satyam
Computer Services for approximately $6.9 million, we believe that our cash and
cash equivalents of Rs.644.7 million ($13.4 million) as of December 31, 2001
and, if necessary, other resources believed to be available to us, are
sufficient to meet our currently known requirements in the foreseeable future.
In light of the highly dynamic nature of our business, however, we cannot
assure you that our capital requirements and sources will not change
significantly in the future.
In order to provide further financial flexibility, we are actively
investigating opportunities to raise additional capital, which could be in the
form of debt, equity or a combination. As noted elsewhere in this report, our
ability to raise funds through the sale of equity is limited by foreign
ownership restrictions imposed on us by Indian law and the terms of our Internet
service provider license. Until recently, Government of India policies limited
the total foreign equity in an Internet service provider to
18
49%. Our license currently provides that the total foreign equity in our company
may not, at any time, exceed 49% of our total equity. In May 2001, the
Department of Commerce and Industry increased the limit on foreign direct
investment for Internet companies, including our company, from 49% to 74%. If
additional funds are raised through the issuance of equity or convertible debt
securities, the percentage ownership of our stockholders, including the holders
of our ADSs, will be reduced and these securities may have rights, preferences
or privileges senior to those of our stockholders, including the holders of our
ADSs. We cannot assure you that additional financing will be available on terms
favorable to us, or at all. If adequate funds are not available or are not
available on acceptable terms, our ability to fund and expand our operations,
take advantage of unanticipated opportunities, develop or enhance Internet
content, features or services, or otherwise respond to competitive pressures
will be significantly limited. Our business, results of operations and financial
condition would be materially adversely affected by any such limitation.
INCOME TAX MATTERS
As of March 31, 2001, the end of our most recently completed fiscal
year, we had a net operating loss carryforward of approximately Rs.1,777.5
million ($36.8 million) for financial reporting purposes. Under Indian law, loss
carryforwards from a particular year may be used to offset taxable income over
the next eight years.
The statutory corporate income tax rate in India is currently 35.0%. For
fiscal 2002, this tax rate is subject to a 2.0% surcharge resulting in an
effective tax rate of 35.7%. We cannot assure you that the surcharge will be in
effect for a limited period of time or that additional surcharges will not be
implemented by the Government of India. Dividends declared, distributed or paid
by an Indian corporation are subject to a dividend tax of 10.2%, including the
applicable surcharge for fiscal 2002, of the total amount of the dividend
declared, distributed or paid. This tax is not paid by stockholders nor is it a
withholding requirement, but rather it is a direct tax payable by the
corporation.
EFFECTS OF INFLATION
Inflation has not had a significant effect on our results of operations
and financial condition to date. However, India has at times experienced
relatively high rates of inflation. According to the Economist Intelligence
Unit, the rates of inflation in India for 1997 through 2000 were 7.2%, 13.2%,
5.0% and 4.3%, respectively. Under our Internet service provider license, we are
given the right to establish the prices we charge to our subscribers, as
determined by market forces. However, under the conditions of our license, the
Telecom Regulatory Authority of India, or TRAI, may review and fix the prices we
charge our subscribers at any time. If the TRAI were to fix prices for the
Internet service provider services we provide, we might not be able to increase
the prices we charge our subscribers to mitigate the impact of inflation, which
could have a material adverse effect on our business, results of operations and
financial condition.
FOREIGN EXCHANGE GAIN
Our foreign exchange gain was Rs.8.3 million ($0.2 million) and Rs.41.0
million for the quarter ended December 31, 2001 and December 31, 2000,
respectively. Our foreign exchange gain was primarily due to our short-term
investment of the proceeds from our public offerings in interest bearing
instruments denominated in U.S. dollars.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued Statement No. 141, Business Combinations,
and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. Statement 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of.
Furthermore, any goodwill and any intangible asset determined to have an
indefinite useful life that are acquired in a purchase business combination
completed after June 30, 2001 will not be amortized, but will continue to be
evaluated for impairment in accordance with the appropriate pre-Statement 142
accounting literature. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001 will continue to be subject to
amortization prior to the adoption of Statement 142.
We are required to adopt the provisions of Statement 141 immediately,
except with regard to business combinations initiated prior to July 1, 2001, and
Statement 142 effective April 1, 2002. Upon adoption of Statement 142,
19
Statement 141 will require us to reassess the useful lives and residual values
of all intangible assets acquired in purchase business combinations and make any
necessary amortization period adjustments by the end of the first interim period
after adoption, expected to be the quarter ended June 30, 2002. In addition, to
the extent an intangible asset is identified as having an indefinite useful
life, we will be required to test the intangible asset for impairment in
accordance with the provisions of Statement 142 within that first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require us to perform an assessment of whether there is an
indication that goodwill and equity-method goodwill is impaired as of the date
of adoption. To accomplish this we must identify our reporting units and
determine the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of the date of adoption. We will then have up to six months
from the date of adoption to determine the fair value of each reporting unit and
compare it to the reporting unit's carrying amount. To the extent a reporting
unit's carrying amount exceeds its fair value, an indication exists that the
reporting unit's goodwill may be impaired and we must perform the second step of
the transitional impairment test. In the second step, we must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in our statement of operations.
At December 31, 2001, our goodwill and other intangible assets amounted
to Rs.210.8 million. If either present accounting principles or the new
standards discussed above require that an impairment in value be recognized, we
would be required to write down the carrying value of the asset to its estimated
fair value with an offsetting charge to our statement of operations.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset.
Upon settlement of the liability, an entity either settles the obligation for
its recorded amount or incurs a gain or loss upon settlement. The standard is
effective for fiscal years beginning after June 15, 2002.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. Under SFAS No. 144, discontinued operations will no longer be
measured at net realizable value or include amounts for operating losses that
have not yet been incurred. The provisions of SFAS No. 144 are effective for
financial statements issued for fiscal years beginning after December 15, 2001.
We are currently evaluating the impact of SFAS 143 and 144 on our
operations.
RISKS RELATED TO OUR BUSINESS
Any investment in our ADSs involves a high degree of risk. You should
consider carefully the following information about these risks, together with
the other information contained in this report, before you decide to buy our
ADSs. If any of the following risks actually occurs, our company could be
seriously harmed. In any such case, the market price of our ADSs could decline,
and you may lose all or part of the money you paid to buy our ADSs.
RISKS RELATED TO INVESTMENTS IN INDIAN COMPANIES
We are incorporated in India, and a significant majority of our assets
and employees are located in India. Consequently, our financial performance and
the market price of our ADSs will be affected by changes in exchange rates and
controls, interest rates, Government of India policies, including taxation
policies, as well as political, social and economic developments affecting
India.
Political instability could halt or delay the liberalization of the
Indian economy and adversely affect business and economic conditions in
India generally and our business in particular.
During the past decade, the Government of India has pursued policies of
economic liberalization, including significantly relaxing restrictions on the
private sector. Nevertheless, the role of the Indian central and state
governments in the Indian economy as producers, consumers and regulators has
remained significant. The Government of India has changed five times since 1996.
The rate of economic liberalization could change, and specific laws and policies
affecting technology companies, foreign investment, currency exchange rates and
other matters affecting investment in our securities could change as
20
well. A significant change in India's economic liberalization and deregulation
policies could adversely affect business and economic conditions in India
generally and our business in particular.
Conflicts in South Asia and terrorist activities in the United States
and South Asia could adversely affect the economy and cause our business
to suffer.
South Asia has from time to time experienced instances of civil unrest
and hostilities among neighboring countries, including between India and
Pakistan. In April 1999, India and Pakistan conducted long-range missile tests.
Since May 1999, military confrontations between India and Pakistan have occurred
in the Himalayan region of Kargil and other border areas. Further, in October
1999 the leadership of Pakistan changed as a result of a coup led by the
military. 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 U.S. commenced military
operations against various 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. These
events are widely believed to be provoking a further slow-down in worldwide
economic activity. Events of this nature could influence the global economy
and/or the Indian economy and could have a material adverse effect on the market
for securities of Indian companies, including our ADSs, and on the market for
our services.
We are subject to foreign investment restrictions under Indian law that
limit our ability to attract foreign investors which, together with the
lack of a public market for our equity shares, may adversely impact the
value of our ADSs.
Currently, there is no public trading market for our equity shares in
India or elsewhere nor can we assure you that we will take steps to develop one.
Our equity securities are not traded publicly in India, but are only traded on
Nasdaq through the ADSs as described in this report. Until recently, under
Indian laws and regulations our depositary could not accept deposits of
outstanding equity shares and issue ADRs evidencing ADSs representing such
equity shares without prior approval of the Government of India. The Reserve
Bank of India recently announced new fungibility regulations permitting, 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 in part because of restrictions on foreign
ownership of the underlying shares. Under current Indian regulations and
practice, the approval of the Reserve Bank of India is required for the sale of
equity shares underlying ADSs by a non-resident of India to a resident of India
as well as for renunciation of rights to a resident of India, unless the sale of
equity shares underlying the ADSs is through a recognized stock exchange or in
connection with an offer made under the Indian regulations regarding takeovers.
Since exchange controls still exist in India, the Reserve Bank of India will
approve the price at which the equity shares are transferred based on a
specified formula, and a higher price per share may not be permitted. Holders
who seek to convert the rupee proceeds from a sale of equity shares in India
into foreign currency and repatriate that foreign currency from India will have
to obtain Reserve Bank of India approval for each transaction. We cannot assure
you that any required approval from the Reserve Bank of India or any other
government agency can be obtained.
Because we operate our business in India, exchange rate fluctuations may
affect the value of our ADSs independent of our operating results.
The exchange rate between the rupee and the U.S. dollar has changed
substantially in recent years and may fluctuate substantially in the future.
During the three-year period from January 1, 1999 through December 31, 2001, the
value of the rupee against the U.S. dollar declined by approximately 14%.
Devaluations of the rupee will result in higher expenses to our company for the
purchase of capital equipment, such as servers, routers, modems and other
telecommunications and computer equipment, which is generally manufactured in
the U.S. In addition, our market valuation could be materially adversely
affected by the devaluation of the rupee if U.S. investors analyze our value
based on the U.S. dollar equivalent of our financial condition and results of
operations.
The Government of India may change its regulation of our business or the
terms of our license to provide Internet access services without our
consent, and any such change could decrease our revenues and/or increase
our costs which would adversely affect our operating results.
Our business is subject to government regulation under Indian law and to
significant restrictions under our Internet service provider license issued by
the Government of India. These regulations and restrictions include the
following:
21
- Our Internet service provider license has a term of 15 years and we
have no assurance that the license will be renewed. If we are unable
to renew our Internet service provider license in 2013 for any
reason, we will be unable to operate as an Internet service provider
in India and will lose one of our primary sources of revenue.
- The Telecom Regulatory Authority of India, or TRAI, a statutory
authority constituted under the Telecom Regulatory Authority of
India Act, 1997, maintains the right to regulate the prices we
charge our subscribers. The success of our business model depends on
our ability to price our services at levels we believe are
appropriate. If the TRAI sets a price floor, we may not be able to
attract and retain subscribers. Likewise, if the TRAI sets a price
ceiling, we may not be able to generate sufficient revenues to fund
our operations. Similarly, an action of the Indian Parliament may
impact our ability to set the prices for our services.
- The Government of India maintains the right to takeover our entire
operations or revoke, terminate or suspend our license for national
security and similar reasons without compensation to us. If the
Government of India were to take any of these actions, we would be
prevented from conducting all or part of our business.
We had outstanding performance guarantees for various statutory purposes
totaling Rs.22.9 million ($0.5 million) as of December 31, 2001. These
guarantees are generally provided to government agencies, primarily the TRAI and
the Department of Telecommunications, or DOT, as security for compliance with
and performance of terms and conditions contained in our Internet service
provider license, and Videsh Sanchar Nigam Limited, or VSNL, the
government-controlled provider of international telecommunications services in
India, towards the supply and installation of an electronic commerce platform.
These guarantees may be seized by the governmental agencies if they suffer any
losses or damage by reason of our failure to perform our obligations. Any
failure on our part to comply with governmental regulations and the terms of our
Internet service provider license could result in the loss of our license and
any amount outstanding as performance guarantees, which would also prevent us
from carrying on a very significant part of our business. Further, additional
laws regulating telecommunications, electronic records, the enforceability of
electronic documents and the liability of network service providers are under
consideration and, if enacted, could impose additional restrictions on our
business.
The charges for international gateways and other services presently
being provided by VSNL are the subject of a dispute pending before the TRAI and
the Telecom Disputes Settlement and Appellate Tribunal between VSNL and private
Internet service providers, including our company. VSNL has priced these
services at levels which we believe are inconsistent with the terms and
conditions on which VSNL has secured the bandwidth for its international
gateways. This is a pending matter and, as of the date of this report, no
decision has been announced. The resolution of this dispute could have a
material impact on our business.
Surcharges on Indian income taxes will increase our tax liability and
decrease any profits we might have in the future.
The statutory corporate income tax rate in India is currently 35.0%. For
fiscal 2002, this tax rate was subject to a 2.0% surcharge resulting in an
effective tax rate of 35.7%. We cannot assure you that the surcharge will be in
effect for a limited period of time or that additional surcharges will not be
implemented by the Government of India. Dividends declared, distributed or paid
by an Indian corporation are subject to a dividend tax of 10.2%, including the
applicable surcharge for fiscal 2002, of the total amount of the dividend
declared, distributed or paid. This tax is not paid by stockholders nor is it a
withholding requirement, but rather it is a direct tax payable by the
corporation before the distribution of a dividend.
RISKS RELATED TO THE INTERNET MARKET IN INDIA
Our success will depend in large part on the increased use of the
Internet by consumers and businesses in India. However, our ability to exploit
the Internet service provider and other data service markets in India is
inhibited by a number of factors. If India's limited Internet usage does not
grow substantially, our business may not succeed.
The success of our business depends on the acceptance of the Internet in
India which may be slowed or halted by high bandwidth costs and other
technical obstacles in India.
Bandwidth, the measurement of the volume of data capable of being
transported in a communications system in a given amount of time, remains very
expensive in India, especially when compared to bandwidth costs in the United
States. Bandwidth rates are commonly expressed in terms of Kbps (kilobits per
second, or thousands of bits of data per second) or Mbps (megabits per second,
or millions of bits of data per second). Although prices for bandwidth in India
have declined recently, they are high due to, among other things, capacity
constraints.
The limited installed personal computer base in India limits our pool of
potential customers and restricts the amount of revenues that our
consumer Internet access services division may generate.
The market penetration rates of personal computers and online access in
India are far lower than such rates in the United States. For example, according
to International Data Corporation, in 2000 the Indian market contained
approximately 4.4
22
million Internet users compared to a total population in India of 1.0 billion,
while the U.S. market contained approximately 135 million Internet users
compared to a total population in the U.S. of 275 million. Alternate methods of
obtaining access to the Internet, such as through set-top boxes for televisions,
are currently not popular in India. There can be no assurance that the number or
penetration rate of personal computers in India will increase rapidly or at all
or that alternate means of accessing the Internet will develop and become widely
available in India. While the personal computer penetration level in India is
relatively low, we are addressing the demand for public Internet access through
the establishment of a retail chain of public Internet access centers, which we
refer to as "cybercafes," under the "iway" brand name. Although this service
creates a larger market, it also imposes on the operator of the cybercafe the
considerable costs of providing the consumer access to a personal computer and
related hardware and software.
The high cost of accessing the Internet in India limits our pool of
potential customers and restricts the amount of revenues that our
consumer Internet access services division may generate.
Our growth is limited by the cost to Indian consumers of obtaining the
hardware, software and communications links necessary to connect to the Internet
in India. If the costs required to access the Internet do not significantly
decrease, most of India's population will not be able to afford to use our
services. The failure of a significant number of additional Indian consumers to
obtain affordable access to the Internet would make it very difficult to execute
our business plan.
The success of our business depends on the acceptance and growth of
electronic commerce in India which is uncertain and, to a large extent,
beyond our control.
Many of our existing and proposed products and services are designed to
facilitate electronic commerce in India, although there is relatively little
electronic commerce currently being conducted in India. Demand and market
acceptance for these products and services by businesses and consumers,
therefore, are highly uncertain. Many Indian businesses have deferred purchasing
Internet access and deploying electronic commerce initiatives for a number of
reasons, including the existence or perception of, among other things:
- inconsistent quality of service;
- the need to deal with multiple and frequently incompatible vendors;
- inadequate legal infrastructure relating to electronic commerce in
India;
- a lack of security of commercial data, such as credit card numbers;
and
- low number of Indian companies accepting credit card numbers over
the Internet.
If usage of the Internet in India does not increase substantially and
the legal infrastructure and network infrastructure in India are not developed
further, we are not likely to realize any benefits from our investment in the
development of electronic commerce products and services.
RISKS RELATED TO SATYAM INFOWAY
Our limited operating history makes it difficult to evaluate our
business.
We commenced operation of our private data network business in April
1998 and launched our Internet service provider operations and Internet portal
website in November 1998. Accordingly, we have a limited operating history to
evaluate our business. You must consider the risks and difficulties frequently
encountered by companies in the early stages of development, particularly
companies in the new and rapidly evolving Internet service markets. These risks
and difficulties include our ability to:
- continue to develop and upgrade our technology, including our
network infrastructure;
- maintain and develop strategic relationships with business partners;
- offer compelling online services and content; and
- promptly address the challenges faced by early stage, rapidly
growing companies which do not have an experience or performance
base to draw on.
Not only is our operating history short, but we have determined to
compete in three businesses that we believe are complementary. These three
businesses are corporate network/data services, consumer Internet access
services and online portal and content offerings. In October 2001, we announced
our plan to divest a fourth business (software services) to Satyam Computer
Services. We do not yet know whether our three remaining businesses will prove
complementary. We cannot assure you that we will successfully address the risks
or difficulties described above. Failure to do so could lead to an inability to
attract
23
and retain corporate customers for our network services and subscribers for our
consumer Internet services as well as the loss of advertising revenues.
We have a history of losses and negative cash flows and anticipate this
to continue because our business plan, which is unproven, calls for
additional corporate customers and subscribers to attain profitability.
Since our founding, we have incurred significant losses and negative
cash flows. As of December 31, 2001, we had an accumulated deficit of
approximately Rs.9,999.7 ($207.2) million. We have not been profitable and
expect to incur operating losses as we expand our services, invest in expansion
of our network/data and technology infrastructure, and advertise and promote our
brand. Our business plan assumes that businesses in India will demand private
network and related services. Our business plan also assumes that consumers in
India will be attracted to and use Internet access services and content
available on the Internet in increasing numbers. This business model is not yet
proven in India, and we cannot assure you that we will ever achieve or sustain
profitability or that our operating losses will not increase in the future.
Our ability to compete in the Internet service provider market is
hindered by the fact that our principal competitor is a
government-controlled provider of international telecommunications
services in India which enjoys significant competitive advantages over
our company.
VSNL is a government-controlled provider of international
telecommunications services in India. VSNL is also the largest Internet service
provider in India and, according to information published on VSNL's website, had
approximately 661,000 subscribers as of December 31, 2001. VSNL enjoys
significant competitive advantages over our company, including the following:
- Longer service history. VSNL has offered Internet service provider
services since August 1995, whereas we have offered Internet service
provider services only since November 1998.
- Access to network infrastructure. Because VSNL is controlled by the
Government of India, it has direct access to network infrastructure
which is owned by the Indian government.
- Greater financial resources. VSNL has significantly greater total
assets and annual revenues than our company.
Recently, VSNL has continued to aggressively reduce consumer Internet
access prices despite the lack of offsetting reductions in prevailing bandwidth
tariffs payable by private competitors, such as our company. We believe that
these practices constitute an improper cross-subsidy funded by VSNL's present
monopoly in international telephone service. The charges for international
gateways and other services presently being provided by VSNL are the subject of
a dispute pending before the TRAI and the Telecom Disputes Settlement and
Appellate Tribunal between VSNL and private Internet service providers,
including our company. This is a pending matter and, as of the date of this
report, no decision has been announced. Unless there is a change in government
policy or favorable resolution of this dispute, or until we are able to reduce
our bandwidth costs through other means, we will continue to face difficult
market conditions in the consumer Internet access services business.
These competitive issues may prevent us from attracting and retaining
subscribers and generating advertising revenue. This could result in loss of
market share, price reductions, reduced margins or negative cash flow for our
company's operations.
We may be required to further lower the rates we charge for our products
and services in response to new pricing models introduced by new and
existing competition in the Internet services market which would
significantly decrease our revenues.
Our corporate network/data services business faces significant
competition from well-established companies, including Global E-Commerce
Limited, Sprint-RPG Limited and WIPRO-CSD. Reliance Infocom, a member of the
Reliance Group, is building a nationwide fiber optic network in India and has
announced plans to provide a range of value-added services, including corporate
connectivity services.
A significant number of new competitors have recently entered India's
recently liberalized Internet service provider market, and we expect additional
competitors to emerge in the near future. As of December 31, 2001, approximately
437 companies had obtained Internet service provider licenses in India,
including 79 companies which have obtained licenses to offer Internet service
provider services throughout India. New entrants into the national Internet
service provider market in India may enjoy significant competitive advantages
over our company, including greater financial resources, which could allow them
to charge Internet access fees that are lower than ours in order to attract
subscribers. Since May 2000, we have offered unlimited Internet access to
consumers for a fixed price. A number of our competitors, including VSNL,
Dishnet and Mantra, also offer unlimited Internet access for a fixed price. In
addition, some competitors offer free Internet service. These factors have
resulted in significant reduction in actual average selling prices for consumer
ISP services. We expect the market for consumer Internet access to remain
extremely price competitive.
24
Our online portal, www.sify.com, faces significant competition from
well-established Indian content providers, including rediff.com, which completed
its initial public offering in the United States in June 2000. Some of these
sites currently have greater traffic than our site and offer some features that
we do not. Further, the dominant Internet portals continue to be the online
services and search engine companies based in the United States, such as America
Online, Yahoo!, Microsoft Network and Lycos. These companies have been
developing specially branded or co-branded products designed for audiences in
specific markets. We expect that these companies will deploy services that are
targeted at the Indian market. For example, Yahoo! launched an Indian service in
June 2000.
Increased competition may result in reduced operating margins or
operating losses, loss of market share and diminished value in our services, as
well as different pricing, service or marketing decisions. We cannot assure you
that we will be able to successfully compete against current and future
competitors.
Our marketing campaign to establish brand recognition and loyalty for
the SatyamOnline, Sify and iway brands could be unsuccessful or, if
successful, may not benefit our company if in the future we are no
longer permitted to use the "Satyam" trademark that we license from
Satyam Computer Services.
In order to expand our customer base and increase traffic on our
websites, we must establish, maintain and strengthen the SatyamOnline, Sify and
iway brands. We plan to continue to incur significant marketing expenditures to
establish brand recognition and brand loyalty. If our marketing efforts do not
produce a significant increase in consumer traffic to offset our marketing
expenditures, our losses will be increased or, to the extent that we are
generating profits, our profits will be decreased. Furthermore, our Internet
portal will be more attractive to advertisers if we have a large audience of
consumers with demographic characteristics that advertisers perceive as
favorable. Therefore, we intend to introduce additional and enhanced content,
interactive tools and other services and features in the future in an effort to
retain our current subscribers and users and attract new ones. Our reputation
and brand name could be adversely affected if we are unable to do so
successfully.
"Satyam" is a trademark owned by Satyam Computer Services, our parent
company. We have a license to use the "Satyam" trademark for so long as Satyam
Computer Services continues to own at least 51% of our company. If its ownership
is reduced below 51%, however, Satyam Computer Services may terminate our
license to use the "Satyam" trademark upon two years' prior written notice. In
October 2001, Satyam Computer Services announced its plan to divest its
investment in our company, and our license to use the "Satyam" trademark may be
terminated, subject to the two-year notice period, in connection with any such
divestment. Termination of our license to use the "Satyam" trademark could
require us to invest significant funds in building a new brand name and have a
material adverse effect on our business, results of operations and financial
condition.
If our efforts to retain our subscribers through investment in network
infrastructure, online content offerings and customer and technical
support are unsuccessful, our revenues will decrease without a
corresponding reduction in costs.
Our sales, marketing and other costs of acquiring new subscribers are
substantial relative to the fees actually derived from these subscribers.
Accordingly, our long-term success depends to a great extent on our ability to
retain our existing subscribers, while continuing to attract new subscribers. We
invest significant resources in our network infrastructure, online content
offerings and in our customer and technical support capabilities to provide high
levels of customer service. We cannot be certain, however, that these
investments will maintain or improve subscriber retention. We believe that
intense competition from our competitors, some of whom may offer free hours of
service or other enticements for new subscribers, has caused, and may continue
to cause, some of our subscribers to switch to our competitors' services. In
addition, some new subscribers use the Internet only as a novelty and do not
become consistent users of Internet services, and therefore are more likely to
discontinue their service. Any decline in our subscriber retention rate would
likely decrease the revenues generated by our consumer Internet access services
division. Therefore, we may not be able to realize sufficient future revenues to
offset our present investment in network infrastructure, online content
offerings and technical support or achieve positive cash flow or profitability
in the future.
Our future operating results could fluctuate in part because our
expenses are relatively fixed in the short-term while future revenues
are uncertain, and any adverse fluctuations could negatively impact the
price of our ADSs.
Our revenues, expenses and operating results have varied in the past and
may fluctuate significantly in the future due to a number of factors, many of
which are outside our control. Our business involves significant capital outlays
and, thus, a significant portion of our investment and cost base is relatively
fixed in the short term. Our revenues for the foreseeable future will depend on
the following:
- the products developed by us and our strategic partners and the
usage thereof by our customers determines the amount of revenues
generated by our corporate network/data services division;
- the number of subscribers to our Internet service provider service
and the prevailing prices charged determine the amount of revenues
generated by our consumer Internet access services division; and
25
- advertising and electronic commerce activity on www.sify.com and its
related sites determines the amount of revenues generated by our
online portal and content offerings division.
Our future revenues are difficult to forecast and, in addition to the
foregoing, will depend on the following:
- the timing and nature of any agreements we enter into with strategic
partners will determine the amount of revenues generated by our
corporate network/data services division;
- new Internet sites, services, products or pricing policies
introduced by our competitors may require us to introduce new
offerings or reduce the prices we charge our customers for Internet
access;
- our capital expenditures and other costs relating to the expansion
of our operations could affect the expansion of our network or could
require us to generate additional revenue in order to be profitable;
- the timing and nature of our marketing efforts could affect the
number of our subscribers and the level of electronic commerce
activity on our websites;
- our ability to successfully integrate operations and technologies
from any acquisitions, joint ventures or other business combinations
or investments, including our acquisitions of IndiaWorld
Communications and Indiaplaza.com and our investment in CricInfo
Limited;
- the introduction of alternative technologies may require us to
reevaluate our business strategy and/or to adapt our products and
services to be compatible with such technologies; and
- technical difficulties or system failures affecting the
telecommunication infrastructure in India, the Internet generally or
the operation of our websites.
We plan to continue to expand and develop content and enhance our
technology and infrastructure. Many of our expenses are relatively fixed in the
short-term. We cannot assure you that our revenues will increase in proportion
to the increase in our expenses. We may be unable to adjust spending quickly
enough to offset any unexpected revenues shortfall. This could lead to a
shortfall in revenues in relation to our expenses.
You should not rely on yearly comparisons of our results of operations
as indicators of future performance. It is possible that in some future periods
our operating results may be below the expectations of public market analysts
and investors. In this event, the price of our ADSs may underperform or fall.
Because we lack full redundancy for our computer systems, a systems
failure could prevent us from operating our business.
We rely on the Internet and, accordingly, depend upon the continuous,
reliable and secure operation of Internet servers, related hardware and software
and network infrastructure such as lines leased from service providers operated
by the Government of India. We have a back-up data facility but we do not have
full redundancy for all of our computer and telecommunications facilities. As a
result, failure of key primary or back-up systems to operate properly could lead
to a loss of customers, damage to our reputation and violations of our Internet
service provider license and contracts with corporate customers. These failures
could also lead to a decrease in value of our ADSs, significant negative
publicity and litigation. From time to time, a number of Internet companies have
suffered highly publicized system failures resulting in adverse reactions to
their stock prices, significant negative publicity and, in some instances,
litigation.
We have at times suffered service outages. We guarantee to a number of
our corporate customers that our network will meet or exceed contractual
reliability standards, and our Internet service provider license requires that
we provide an acceptable level of service quality and that we remedy customer
complaints within a specified time period. Our computer and communications
hardware are protected through physical and software safeguards. However, they
are still vulnerable to fire, storm, flood, power loss, telecommunications
failures, physical or software break-ins and similar events. We do not carry
business interruption insurance to protect us in the event of a catastrophe even
though such an event could lead to a significant negative impact on our
business. Any sustained disruption in Internet access provided by third parties
could also have a material adverse effect on our business.
Security breaches could damage our reputation or result in liability to
us.
Our facilities and infrastructure must remain secure, and be perceived
by our corporate and consumer customers to be secure, because we retain
confidential customer information in our database. Despite the implementation of
security measures, our infrastructure may be vulnerable to physical break-ins,
computer hacking, computer viruses, programming errors or similar disruptive
problems. If a person circumvents our security measures, he or she could
jeopardize the security of confidential information stored on our systems,
misappropriate proprietary information or cause interruptions in our operations.
We may be required to make significant additional investments and efforts to
protect against or remedy security breaches. A material
26
security breach could damage our reputation or result in liability to us, and we
do not carry insurance that protects us from this kind of loss.
The security services that we offer in connection with our business
customers' networks cannot assure complete protection from computer viruses,
break-ins and other disruptive problems. Although we attempt to limit
contractually our liability in such instances, the occurrence of these problems
could result in claims against us or liability on our part. These claims,
regardless of their ultimate outcome, could result in costly litigation and
could damage our reputation and hinder our ability to attract and retain
customers for our service offerings.
If we are unable to manage the rapid growth required by our business
strategy, our results of operations will be adversely affected.
We have experienced and are currently experiencing a period of
significant growth. This growth has placed, and the future growth we anticipate
in our operations will continue to place, a significant strain on our
managerial, operational, financial and information systems resources. As part of
this growth, we will have to implement new operational and financial systems and
procedures and controls, expand our office facilities, train and manage our
employee base and maintain close coordination among our technical, accounting,
finance, marketing, sales and editorial staffs. If we are unable to manage our
growth effectively, we will be unable to implement our growth strategy, upon
which the success of our business depends.
We face a competitive labor market for skilled personnel and therefore
are highly dependent on our existing key personnel and on our ability to
hire additional skilled employees.
Our success depends upon the continued service of our key personnel,
particularly Mr. Ramaraj, our Chief Executive Officer, Mr. Zacharias, our
President and Chief Operating Officer, Mr. Santhanakrishnan, our Chief Financial
Officer, and each other member of our senior management. Substantially all of
our employees are located in India, and each of them may voluntarily terminate
his or her employment with us. We do not carry key person life insurance on any
of our personnel. Our success also depends on our ability to attract and retain
additional highly qualified technical, marketing and sales personnel. The labor
market for skilled employees in India is extremely competitive, and the process
of hiring employees with the necessary skills is time consuming and requires the
diversion of significant resources. While we have not experienced difficulty in
employee retention or integration to date, we may not be able to continue to
retain or integrate existing personnel or identify and hire additional personnel
in the future. The loss of the services of key personnel, especially the
unexpected death or disability of such personnel, or the inability to attract
additional qualified personnel, could disrupt the implementation of our growth
strategy, upon which the success of our business depends.
We are highly dependent on our relationships with strategic partners to
provide key products and services to our customers.
We rely on our arrangements with strategic partners to provide key
network services to our business clients. Some of these relationships can be
terminated by our partners in some circumstances. We also rely on some of our
strategic partners to provide us with access to their customer base. If our
relationships with our strategic partners do not continue, the ability of our
corporate network/data division to generate revenues will be decreased
significantly. We also provide access to a co-branded version of the AOL Instant
Messenger service to our portal customers, and this proprietary service is an
important feature of our website.
If there is an adverse outcome in the class action litigation that has
been filed against our company, our business may be harmed.
On November 5, 2001, a securities class action lawsuit was filed in the
United States District Court for the Southern District of New York on behalf of
all persons who acquired our ADSs between October 20, 1999 and December 6, 2000.
Our company, certain of our executive officers and certain underwriters involved
in our initial public offering of ADSs are named as defendants in the complaint.
This complaint alleges that certain of the underwriters of our initial public
offering violated the federal securities laws by failing to disclose that they
had solicited and received undisclosed commissions from, and entered into
undisclosed arrangements with, certain investors who purchased our ADSs in our
initial public offering, and had entered into undisclosed arrangements with
certain investors whereby the underwriters allocated shares in our initial
public offering to those investors in exchange for their agreement to purchase
our ADSs in the after-market at pre-determined prices. The complaint also
alleges that the defendants violated the federal securities laws by issuing a
registration statement in connection with the our initial public offering that
contained material misstatements and/or omissions because it did not disclose
that these allegedly undisclosed arrangements had occurred. The complaint seeks
damages on behalf of all those who purchased or otherwise acquired our ADSs
during the period covered by the complaint. The deadline for defendants to
respond to the complaint has not yet expired. We believe we have meritorious
defenses and intend to defend this action vigorously. However, we could be
forced to incur material expenses in the litigation, and in the event there is
an adverse outcome, our business could be harmed.
27
We and our subsidiary IndiaWorld Communications are engaged in disputes
which, if resolved unfavorably, could impose material costs on us or
have other undesirable effects.
Our subsidiary IndiaWorld Communications is involved in pending
litigation relating to the IndiaWorld trademark in Federal Court in San Diego,
California with a third party located in the United States. IndiaWorld
Communications commenced the lawsuit alleging, among other things, that the
third party fraudulently registered and used the IndiaWorld trademark, and
committed copyright infringement and misappropriation of content of IndiaWorld
Communications' website. The third party filed a counterclaim against us and
IndiaWorld Communications alleging, among other things, that the activities of
IndiaWorld Communications infringe a United States trademark for the term
"Indiaworld" and associated logos and trade dress purportedly owned by this
third party, and that the third party has an ownership interest in the
underlying assets of IndiaWorld Communications. On August 9, 2001, the Court
granted our motion to dismiss us from this case because the Court found that it
did not have personal jurisdiction over us. IndiaWorld Communications is still
involved in the case. We have been advised by the prior owners of IndiaWorld
Communications that no infringement or misappropriation has taken place. Our
contract with the prior owners of IndiaWorld Communications includes an
indemnity for past infringement or misappropriation. We and IndiaWorld
Communications have also been contacted by a party that alleges, among other
things, that he is entitled to an equity ownership in IndiaWorld Communications.
We believe that this claim is also covered by the contractual indemnity provided
by the prior owners of IndiaWorld Communications. Nonetheless, any dispute such
as those described above creates uncertainty as to the possible outcome,
including whether or not our indemnity will be effective in protecting us, and
also could divert management time and attention away from our business. An
adverse outcome that is not indemnified could be material.
We face risks associated with our joint venture with Refco-Sify
Securities India Private Limited, our strategic partnership with
VeriSign and our co-branding agreement with America Online, our
acquisitions of Indiaplaza.com and IndiaWorld Communications, our
investment in CricInfo Limited and with other potential acquisitions,
investments, strategic partnerships or other ventures, including whether
any such transactions can be identified, completed and the other party
integrated with our business on favorable terms.
In November 1999, we acquired 24.5% of the outstanding shares of
IndiaWorld Communications, together with an option to acquire IndiaWorld
Communications' remaining outstanding shares which we exercised in June 2000. In
May 2000, we entered into a strategic partnership with VeriSign to provide
managed digital certificate-based authentication services in India. In June
2000, we acquired a 25% stake in CricInfo Limited, entered into an agreement
with America Online to distribute a co-branded version of the AOL Instant
Messenger and made an investment in Refco-Sify Securities India Private Limited.
In July 2000, we completed our investment in CricInfo Limited and agreed to
acquire Indiaplaza.com. In December 2000, we completed our acquisition of
Indiaplaza.com. These transactions were only recently entered into and most of
them are not yet fully operational. These alliances may not provide all or any
portion of the anticipated benefits. We may acquire or make investments in other
complementary businesses, technologies, services or products, or enter into
additional strategic partnerships with parties who can provide access to those
assets, if appropriate opportunities arise in the future. From time to time we
have had discussions and negotiations with a number of companies regarding our
acquiring, investing in or partnering with their businesses, products, services
or technologies, and we regularly engage in such discussions and negotiations in
the ordinary course of our business. Some of those discussions also contemplate
the other party making an investment in our company. We may not identify
suitable acquisition, investment or strategic partnership candidates in the
future, or if we do identify suitable candidates, we may not complete those
transactions on commercially acceptable terms or at all. In addition, the key
personnel of an acquired company may decide not to work for us. If we make other
types of acquisitions, we could have difficulty in integrating the acquired
products, services or technologies into our operations. These difficulties could
disrupt our ongoing business, distract our management and employees and increase
our expenses which could adversely affect our operating results and cause the
price of our ADSs to decline. Furthermore, we may incur indebtedness or issue
additional equity securities to pay for any future acquisitions. The issuance of
additional equity securities would dilute the ownership interests of the holders
of our ADSs.
Our financial results are impacted by the financial results of entities
that we do not control.
We have a significant, non-controlling minority interest in each of
CricInfo Limited and Refco-Sify Securities India Private Limited that is
accounted for under U.S. GAAP using the equity method of accounting. Under this
method, we are obligated to report as "Equity in losses (gains) of affiliates" a
pro rata portion of the financial results of any such company in our statement
of operations even though we do not control the other company. Thus, our
reported results of operations can be significantly increased or decreased
depending on the results of CricInfo Limited and Refco-Sify Securities India
Private Limited or other companies in which we may make similar investments even
though we may have only a limited ability to influence these activities.
Satyam Computer Services presently controls our company and it or a
successor may have interests which conflict with those of our other
stockholders or holders of our ADSs.
As of the date of this report, Satyam Computer Services beneficially
owns approximately 52.5% of our equity shares. As a result, it is presently able
to exercise control over many matters requiring approval by our stockholders,
including the
28
election of directors and approval of significant corporate transactions such as
the sale of our software services business. Satyam Computer Services has,
however, recently announced its intention to seek to divest its Sify shares.
Under Indian law, a simple majority is sufficient to control all stockholder
action except for those items which require approval by a special resolution. If
a special resolution is required, the number of votes cast in favor of the
resolution must not be less than three times the number of votes cast against
it. Examples of actions that require a special resolution include:
- altering our Articles of Association;
- issuing additional shares of capital stock, except for pro rata
issuances to existing stockholders;
- commencing any new line of business; and
- commencing a liquidation.
Circumstances may arise in which the interests of Satyam Computer
Services or a subsequent purchaser of the Sify shares owned by it could conflict
with the interests of our other stockholders or holders of our ADSs. Such a
control stockholder could delay or prevent a change of control of our company
even if a transaction of that sort would be beneficial to our other
stockholders, including the holders of our ADSs. In addition, we have an
agreement with South Asia Regional Fund, an investor in our company, which
assures them a board seat and provides specified additional rights to them,
including "tag-along" rights in the event of a sale of Sify shares by Satyam
Computer Services.
We must continue to make capital expenditures in new network
infrastructure which, if not offset by additional revenue, will
adversely affect our operating results.
We must continue to expand and adapt our network infrastructure as the
number of users and the amount of information they wish to transfer increases
and as the requirements of our customers change. The expansion of our Internet
network infrastructure will require substantial financial, operational and
management resources. The development of private Internet access and other data
networks and related services in India is a new business, and we may encounter
cost overruns, technical difficulties or other project delays in connection with
any or all of the new facilities. We can give no assurance that we will be able
to expand or adapt our network infrastructure to meet the additional demand or
our customers' changing requirements on a timely basis, or at a commercially
reasonable cost, or at all. A portion of our capital expenditures for network
development are fixed, and the success of our business depends on our ability to
grow our business to utilize this capacity. In addition, if demand for usage of
our network were to increase faster than projected, our network could experience
capacity constraints, which would adversely affect the performance of the
system.
The legal system in India does not protect intellectual property rights
to the same extent as those of the United States, and we may be
unsuccessful in protecting our intellectual property rights.
Our intellectual property rights are important to our business. We rely
on a combination of copyright and trademark laws, trade secrets, confidentiality
procedures and contractual provisions to protect our intellectual property.
Our efforts to protect our intellectual property may not be adequate.
Our competitors may independently develop similar technology or duplicate our
products or services. Unauthorized parties may infringe upon or misappropriate
our products, services or proprietary information. In addition, the laws of
India do not protect proprietary rights to the same extent as laws in the United
States, and the global nature of the Internet makes it difficult to control the
ultimate destination of our products and services. For example, the legal
processes to protect service marks in India are not as effective as those in
place in the United States. The misappropriation or duplication of our
intellectual property could disrupt our ongoing business, distract our
management and employees, reduce our revenues and increase our expenses. In the
future, litigation may be necessary to enforce our intellectual property rights
or to determine the validity and scope of the proprietary rights of others. Any
such litigation could be time-consuming and costly.
We could be subject to intellectual property infringement claims as the
number of our competitors grows and the content and functionality of our
websites or other product or service offerings overlap with competitive
offerings. Defending against these claims, even if not meritorious, could be
expensive and divert management's attention from operating our company. If we
become liable to third parties for infringing their intellectual property
rights, we could be required to pay a substantial damage award and forced to
develop non-infringing technology, obtain a license or cease selling the
applications that contain the infringing technology. We may be unable to develop
non-infringing technology or obtain a license on commercially reasonable terms,
or at all.
Our platform infrastructure and its scalability are not proven, and our
current systems may not accommodate increased use while maintaining
acceptable overall performance.
Currently, only a relatively limited number of customers use our
corporate network, our Internet service provider services and our Internet
portal. We must continue to expand and adapt our network infrastructure to
accommodate additional
29
users, increasing transaction volumes and changing customer requirements. We may
not be able to project accurately the rate or timing of increases, if any, in
the use of our websites or expand and upgrade our systems and infrastructure to
accommodate such increases. Our systems may not accommodate increased use while
maintaining acceptable overall performance. Service lapses could cause our users
to use the online services of our competitors.
We do not plan to pay dividends in the foreseeable future.
We do not anticipate paying cash dividends to the holders of our ADSs in
the foreseeable future. Accordingly, investors must rely on sales of their ADSs
after price appreciation, which may never occur, as the only way to realize a
positive return on their investment. Investors seeking cash dividends should not
purchase our ADSs.
RISKS RELATED TO THE INTERNET
We may be liable to third parties for information retrieved from the
Internet.
Because users of our Internet service provider service and visitors to
our websites may distribute our content to others, third parties may sue us for
defamation, negligence, copyright or trademark infringement, personal injury or
other matters. We could also become liable if confidential information is
disclosed inappropriately. These types of claims have been brought, sometimes
successfully, against online services in the United States and Europe. Others
could also sue us for the content and services that are accessible from our
websites through links to other websites or through content and materials that
may be posted by our users in chat rooms or bulletin boards. We do not carry
insurance to protect us against these types of claims, and there is no precedent
on Internet service provider liability under Indian law. Further, our business
is based on establishing our network as a trustworthy and dependable provider of
information and services. Allegations of impropriety, even if unfounded, could
damage our reputation, disrupt our ongoing business, distract our management and
employees, reduce our revenues and increase our expenses.
The success of our strategy depends on our ability to keep pace with
technological changes.
Our future success depends, in part, upon our ability to use leading
technologies effectively, to continue to develop our technical expertise, to
enhance our existing services and to develop new services that meet changing
customer requirements. The markets for our services are characterized by rapidly
changing technology, evolving industry standards, emerging competition and
frequent new service introductions. We may not successfully identify new
opportunities and develop and bring new services to market in a timely manner.
Our business may not be compatible with delivery methods of Internet
access services developed in the future.
We face the risk that fundamental changes may occur in the delivery of
Internet access services. Currently, Internet services are accessed primarily by
computers and are delivered by modems using telephone lines. As the Internet
becomes accessible by cellular telephones, personal data assistants, television
set-top boxes and other consumer electronic devices, and becomes deliverable
through other means involving digital subscriber lines, coaxial cable or
wireless transmission mediums, we will have to develop new technology or modify
our existing technology to accommodate these developments. Our pursuit of these
technological advances, whether directly through internal development or by
third party license, may require substantial time and expense. We may be unable
to adapt our Internet service business to alternate delivery means and new
technologies may not be available to us at all.
Our product and service offerings may not be compatible with industry
standards developed in the future.
Our ability to compete successfully depends upon the continued
compatibility and interoperability of our services with products and
architectures offered by various vendors. Although we intend to support emerging
standards in the market for Internet access, industry standards may not be
established and, if they become established, we may not be able to conform to
these new standards in a timely fashion or maintain a competitive position in
the market. The announcement or introduction of new products or services by us
or our competitors and any change in industry standards could cause customers to
deter or cancel purchases of existing products or services.
RISK RELATED TO OUR ADSS AND OUR TRADING MARKET
Holders of ADSs are restricted in their ability to exercise preemptive
rights under Indian law and thereby may suffer future dilution of their
ownership position.
Under the Companies Act, 1956 of India, or Companies Act, a public
company incorporated in India must offer its holders of equity shares preemptive
rights to subscribe and pay for a proportionate number of shares to maintain
their existing ownership percentages prior to the issuance of any new equity
shares, unless the preemptive rights have been waived by adopting
30
a special resolution by holders of three-fourths of the company's shares which
are voted on the resolution. At our 2000 Annual General Meeting, our
stockholders approved a special resolution permitting us to issue up to one
million equity shares (equivalent to four million ADSs) in connection with
acquisitions. We issued virtually all of these equity shares in connection with
our acquisitions of IndiaWorld Communications, Indiaplaza.com and Kheladi.com
(India) Private Limited and our investment in CricInfo Limited. At our 2001
Annual General Meeting, our stockholders approved a special resolution
permitting us to issue up to four million additional equity shares (equivalent
to 16 million ADSs) in connection with acquisitions or capital raising
transactions, and our ADS holders are deemed to have waived preemptive rights
with respect to these shares and our Board of Directors may approve the issuance
of these shares without further action of our stockholders.
U.S. holders of ADSs may be unable to exercise preemptive rights for
equity shares underlying ADSs unless approval of the Ministry of Finance of the
Government of India is obtained and a registration statement under the
Securities Act of 1933, as amended, is effective with respect to the rights or
an exemption from the registration requirements of the Securities Act is
available. Our decision to file a registration statement will depend on the
costs and potential liabilities associated with any given registration statement
as well as the perceived benefits of enabling the holders of our ADSs to
exercise their preemptive rights and any other factors that we deem appropriate
to consider at the time the decision must be made. We may elect not to file a
registration statement related to preemptive rights otherwise available by law
to our stockholders. In the case of future issuances, the new securities may be
issued to our depositary, which may sell the securities for the benefit of the
holders of the ADSs. The value, if any, our depositary would receive upon the
sale of such securities cannot be predicted. To the extent that holders of ADSs
are unable to exercise preemptive rights granted in respect of the equity shares
represented by their ADSs, their proportional interests in our company would be
reduced.
Holders of ADSs may be restricted in their ability to exercise voting
rights and the information provided with respect to stockholder
meetings.
As a holder of ADSs, you generally have the right under the deposit
agreement to instruct the depositary bank to exercise the voting rights for the
equity shares represented by your ADSs. At our request, the depositary bank will
mail to you any notice of stockholders' meeting received from us together with
information explaining how to instruct the depositary bank to exercise the
voting rights of the securities represented by ADSs. If the depositary bank
timely receives voting instructions from a holder of ADSs, it will endeavor to
vote the securities represented by the holder's ADSs in accordance with such
voting instructions. However, the ability of the depositary bank to carry out
voting instructions may be limited by practical and legal limitations and the
terms of the securities on deposit. We cannot assure you that you will receive
voting materials in time to enable you to return voting instructions to the
depositary bank in a timely manner.
Under Indian law, subject to the presence in person at a stockholder
meeting of persons holding equity shares representing a quorum, all resolutions
proposed to be approved at that meeting are voted on by a show of hands unless a
stockholder present in person at the meeting demands that a poll be taken.
Equity shares not represented in person at the meeting, including equity shares
underlying ADSs for which a holder has provided voting instructions to the
depositary bank, are not counted in a vote by show of hands. As a result, only
in the event that a stockholder present at the meeting demands that a poll be
taken will the votes of ADSs holders be counted. Securities for which no voting
instructions have been received will not be voted on a poll.
As a foreign private issuer, we are not subject to the SEC's proxy rules
which regulate the form and content of solicitations by United States-based
issuers of proxies from their stockholders. To date, our practice has been to
provide advance notice to our ADS holders of all stockholder meetings and to
solicit their vote on such matters, through the depositary, and we expect to
continue this practice. The form of notice and proxy statement that we have been
using does not include all of the information that would be provided under the
SEC's proxy rules.
The market price of our ADSs has been and may continue to be highly
volatile.
The market price of our ADSs has fluctuated widely and may continue to
do so. For example, since our initial public offering in October 1999 through
January 30, 2002 and, after giving effect to the 4-for-1 split of our ADSs in
January 2000, the trading price of our ADSs has ranged from a high of $113 per
ADS to a low of $0.87 per ADS. Many factors could cause the market price of our
ADSs to rise and fall. Some of these factors include:
- our failure to integrate successfully our operations with those of
acquired companies;
- actual or anticipated variations in our quarterly operating results,
including charges to write-off goodwill and other acquisition costs;
- announcement of technological innovations;
- conditions or trends in the corporate network/data services,
Internet and electronic commerce industries;
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- the competitive and pricing environment for corporate network/data
and consumer Internet access services in India and the related cost
and availability of bandwidth;
- the perceived attractiveness of investment in Indian companies;
- acquisitions and alliances by us or others in the industry;
- changes in estimates of our performance or recommendations by
financial analysts;
- market conditions in the industry and the economy as a whole;
- introduction of new services by us or our competitors;
- changes in the market valuations of other Internet service
companies;
- announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
- additions or departures of key personnel; and
- other events or factors, many of which are beyond our control.
The financial markets in the United States and other countries have
experienced significant price and volume fluctuations, and the market prices of
technology companies, particularly Internet-related companies, have been and
continue to be extremely volatile with negative sentiment prevailing. Volatility
in the price of our ADSs may be caused by factors outside of our control and may
be unrelated or disproportionate to our operating results. In the past,
following periods of volatility in the market price of a public company's
securities, securities class action litigation has often been instituted against
that company. Such litigation could result in substantial costs and a diversion
of our management's attention and resources.
An active or liquid market for the ADSs is not assured, particularly in
light of Indian legal restrictions on equity share conversion and
foreign ownership of an Internet service provider.
We cannot predict the extent to which an active, liquid public trading
market for our ADSs will 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. Furthermore, foreign
ownership in our company, which includes all ADSs, is limited to 74% under
present Indian law. The previous policy limit was 49%. This limitation means
that, unless Indian law changes, at least 26% of our equity shares will never be
available to trade in the United States market.
The future sales of securities by our company or existing stockholders
may hurt the price of our ADSs.
The market price of our ADSs could decline as a result of sales of a
large number of equity shares or ADSs or the perception that such sales could
occur. For example, our parent company, Satyam Computer Services, recently
announced its intention to divest its investment in our company. Such sales also
might make it more difficult for us to sell equity securities in the future at a
time and at a price that we deem appropriate. We intend to issue additional
equity shares and ADSs to raise capital and to fund acquisitions and
investments, and the parties to any such future transactions could also decide
to sell them.
Forward-looking statements contained in this report may not be realized.
This report contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of the risks faced by us
described above and elsewhere in this report. We do not intend to update any of
the forward-looking statements after the date of this report to conform such
statements to actual results.
OTHER INFORMATION
EXHIBITS AND REPORTS
(a) Our report on Form 6-K which we filed with the SEC on October 17,
2001.
(b) Our report on Form 6-K which we filed with the SEC on October 24,
2001.
(c) Our report on Form 6-K which we filed with the SEC on November
19, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunder duly organized.
Date: February 14, 2002
SATYAM INFOWAY LIMITED
By: /s/ T.R. Santhanakrishnan
--------------------------------
Name: T.R. Santhanakrishnan
Title: Chief Financial Officer
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