-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EAfyQruZNUCEsBxwCIGA7no1OTU52mwc+EHChxWg2iXdITF9wcEHsKaHbEdYXbFq kfK89lj87AdULFR3eHh7Lw== 0000950172-04-002275.txt : 20040929 0000950172-04-002275.hdr.sgml : 20040929 20040929122856 ACCESSION NUMBER: 0000950172-04-002275 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040929 DATE AS OF CHANGE: 20040929 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REDIFF COM INDIA LTD CENTRAL INDEX KEY: 0001103783 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 000000000 FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 000-30735 FILM NUMBER: 041051912 BUSINESS ADDRESS: STREET 1: MAHALAXMI ENGINEERING ESTATE, 1ST FLOOR STREET 2: BEHIND KHILANI COLLEGE CITY: MUMBAI STATE: K7 ZIP: 00000 BUSINESS PHONE: 0119122444 MAIL ADDRESS: STREET 1: MAHALAXMI ENGINEERING ESTATE, 1ST FLOOR CITY: BEHIND KHILANI COLLE STATE: K7 ZIP: 00000 FORMER COMPANY: FORMER CONFORMED NAME: REDIFF COMMUNICATION LTD DATE OF NAME CHANGE: 20000119 20-F 1 hk113345.txt FORM 20-F UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 20-F (Mark One) [ ] Registration statement pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934 [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended March 31, 2004 [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________ to _____________ Commission File Number 000-30735 REDIFF.COM INDIA 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) Mahalaxmi Engineering Estate 1st Floor, L. J. First Cross Road Mahim (West) Mumbai - 400016, India +91-22-2444-9144 (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered None Not Applicable Securities registered pursuant to Section 12(g) of the Act: American Depositary Shares, each represented by one-half of one equity share, par value Rs 5 per share. (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: Not Applicable (Title of Class) Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: 12,827,425 equity shares. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 [ ] Item 18 [X] TABLE OF CONTENTS Page Cross Reference Sheet ...................................................... 1 Currency of Presentation and Certain Defined Terms ......................... 3 Forward-Looking Statements ................................................. 3 Exchange Rates ............................................................. 5 Selected Consolidated Financial Data ....................................... 6 Risk Factors ............................................................... 7 Business ................................................................... Overview .............................................................24 Our Markets ..........................................................25 Our Opportunity.......................................................25 Strategy .............................................................26 Our Product and Service Offerings ....................................27 Infrastructure........................................................32 Competition...........................................................35 Intellectual Property.................................................35 Facilities............................................................36 Legal Proceedings ....................................................37 Government Regulation.................................................39 Ownership of Foreign Securities.......................................41 Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................42 Management .................................................................56 Related Party Transactions..................................................63 Exchange Controls ..........................................................64 Trading Market .............................................................66 Restriction on Foreign Ownership of Indian Securities ......................67 Principal Shareholders .....................................................70 Taxation ...................................................................73 Use of Proceeds ............................................................79 Controls and Procedures ....................................................80 Principal Accountant fees and services......................................80 Presentation of Financial Information ......................................81 Additional Information .....................................................81 Exhibit Index ............................................................ E-1 Index to U.S. GAAP Financial Statements ...................................F-1 CROSS REFERENCE SHEET PART I Item 1. Identity of Directors, Senior Management and Advisers Not applicable. Item 2. Offer Statistics and Expected Timetable Not applicable. Item 3. Key Information See "Exchange Rates", "Risk Factors" and "Selected Consolidated Financial Data". Item 4. Information on the Company See "Business", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Additional Information". Item 5. Operating and Financial Review and Prospects See "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". Item 6. Directors, Senior Management and Employees See "Management". Item 7. Major Shareholders and Related Party Transactions. See "Principal Shareholders" and "Related Party Transactions". Item 8. Financial Information See the Report of Independent Registered Public Accounting firm, U.S. GAAP Consolidated financial statements and the notes thereto for Rediff.com India Limited for the fiscal year ended March 31, 2004 and Report of Independent Registered Public Accounting firm for Rediff Holdings Inc for the fiscal year ended March 31, 2003. Also see "Business--Legal Proceedings" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". Item 9. The Offer and Listing See "Trading Market". Item 10. Additional Information See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Exchange Controls", "Restriction on Foreign Ownership of Indian Securities", "Taxation" and "Additional Information". Item 11. Quantitative and Qualitative Disclosures About Market Risk See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Market Risks". Item 12. Description of Securities Other than Equity Securities Not applicable. PART II Item 13. Defaults, Dividend Arrearages and Delinquencies Not applicable. Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds See "Use of Proceeds". Item 15. Controls and Procedures See "Controls and Procedures". Item 16. A. Independent Audit Committee Financial expert - See "Management" B. Code of Ethics - See "Management" C. Principal Accountant Fees and Services - See "Principal Accountant Fees and Services" D. Exemptions from the Listing Standards for Audit Committees Not applicable E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers Not applicable PART III Item 17. Financial Statements Not applicable. Item 18. Financial Statements See the Report of Independent Registered Public Accounting firm, U.S. GAAP Consolidated financial statements and the notes thereto for Rediff.com India Limited for the fiscal year ended March 31, 2004 and Report of Independent Registered Public Accounting firm for Rediff Holdings Inc for the fiscal year ended March 31, 2003. Item 19. Exhibits See the Exhibit Index and the attached exhibits. CURRENCY OF PRESENTATION AND CERTAIN DEFINED TERMS In this annual report all references to "we", "our", "us", "Rediff", "rediff.com" and the "Company", unless otherwise relevant to the context, are to Rediff.com India Limited, a limited liability company organized under the laws of the Republic of India, and its consolidated subsidiaries. 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. In this annual report, references to "$" or "US$" or "dollars" or "U.S. dollars" are to the legal currency of the United States and references to "Rs." or "Rupees" or "Indian Rupees" are to the legal currency of India. Our financial statements are prepared in Indian Rupees and presented in U.S. dollars except in case of our U.S. subsidiaries which are prepared in U.S. dollars. Our financial statements are prepared in accordance with United States Generally Accepted Accounting Principles ("U.S. GAAP"). References to a particular "fiscal" or "financial" year are to Rediff's fiscal year ended March 31 of such year. Although we have presented Indian Rupee amounts in this annual report in U.S. dollars, this does not mean that the Indian Rupee amounts referred to have been, or could be, converted into dollars at any particular rate, the rates stated below in the section of this annual report entitled "Exchange Rates", or at all. Except as otherwise stated in this annual report and for information derived from our financial statements included in this annual report, all translations from Indian Rupees to U.S. dollars contained in this annual report are based on the noon buying rate, in the City of New York, on March 31, 2004, for cable transfers in Indian Rupees as certified for customs purposes by the Federal Reserve Bank of New York, which was Rs.43.40 per US$1.00. FORWARD-LOOKING STATEMENTS We have included statements in this annual report which contain words or phrases such as "may", "will", "aim", "will likely result", "believe", "expect", "will continue", "anticipate", "estimate", "intend", "plan", "contemplate", "seek to", "future", "objective", "goal", "project", "should", "will pursue" and similar expressions or variations of such expressions, that are "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, and reflect our current expectations. We have made forward-looking statements with respect to the following, among others: o our goals and strategies; o our recently acquired businesses and other acquisitions, investments and divestments; o the importance and expected growth of Internet technology; o the pace of change in the Internet market; o the demand for Internet services; and o advertising demand and revenues. Actual results may differ materially from those suggested by the forward-looking statements due to certain risks or uncertainties associated with our expectations with respect to, but not limited to, our ability to successfully implement our strategy, our ability to successfully integrate the businesses we have acquired with our business, demand for e-commerce and changes in the Internet marketplace, technological changes, investment income, cash flow projections and our exposure to market risks. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occur in the future. As a result, actual future gains, losses or impact on net interest income could materially differ from those that have been estimated. In addition, other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to, general economic and political conditions in India and the United States, changes in the value of the Rupee, foreign exchange rates, equity prices or other rates or prices and level of Internet penetration in India and globally, changes in domestic and foreign laws, regulations and taxes, changes in competition, and other factors beyond our control. For further discussion on the factors that could cause actual results to differ, see the discussion under "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in this annual report. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. In addition, readers should review the other information contained in this annual report and in our periodic reports filed with the U.S. Securities and Exchange Commission (the "SEC"), from time to time. We undertake no obligation to update forward-looking statements to reflect events or circumstances after the date hereof. EXCHANGE RATES Fluctuations in the exchange rate between the Indian Rupee and the U.S. dollar may affect the market price of our American Depositary Shares (the "ADSs") which, beginning on June 24, 2002, have been traded on the NASDAQ Small Cap Market. Such fluctuations will also affect the U.S. dollar conversion by our depositary for the ADSs, Citibank, N.A., (the "Depositary"), of any cash dividends paid in Indian Rupees on our equity shares represented by the ADSs. The following table sets forth, for the periods indicated, certain information concerning the exchange rates between Indian Rupees and U.S. dollars based on the noon buying rate in the City of New York for cable transfers in Rupees as certified for customs purposes by the Federal Reserve Bank of New York:
Fiscal Year Ended March 31, Period End (1) Average (1)(2) High Low -------------- -------------- ------- ----------- 2000 Rs.43.65 Rs.43.46 Rs.43.75 Rs. 42.50 2001 46.85 45.88 47.47 43.68 2002 48.83 47.80 48.91 46.58 2003 47.53 48.36 49.07 47.53 2004 43.40 45.78 47.46 43.40
The following table sets forth the high and low exchange rates for the previous six months and are based on the average of the noon buying rate in the City of New York on the last business day of each month during the period for cable transfers in Indian rupees as certified for customs purposes by the Federal Reserve Bank of New York: Month High Low ---- ------ March 2004 45.32 43.40 April 2004 44.14 43.40 May 2004 45.57 44.55 June 2004 46.21 44.94 July 2004 46.45 45.66 August 2004 46.40 46.21 - ----------------------- (1) The noon buying rate at each period end and the average rate for each period differed from the exchange rates used in the preparation of our financial statements. (2) Represents the average of the noon buying rate on the last day of each month during the period. On September 23, 2004, the noon buying rate in the city of New York was Rs. 45.87. SELECTED CONSOLIDATED FINANCIAL DATA Our consolidated financial statements are presented in U.S. dollars and prepared in accordance with U.S. GAAP. The selected balance sheet data set forth below as of March 31, 2003 and 2004 and the selected statement of operations data for the fiscal years ended March 31, 2002, 2003 and 2004 has been derived from our audited financial statements presented elsewhere in this annual report and which have been audited by Deloitte Haskins & Sells, independent auditors. The selected balance sheet data set forth below as of March 31, 2000, 2001 and 2002 and the selected statement of operations data for the fiscal years ended March 31, 2000 and 2001 are derived from U.S. GAAP financial statements which are not included in this annual report.*
Fiscal Years Ended March 31, ------------------------------------------------------------------------------- 2000 2001 2002 2003 2004 ---------- ------------- ------------ ------------ ----------- (In thousands, except per share data) Statement of Operations data: Revenues.......................... US$1,906 US$5,233 US$7,859 US$8,572 US$9,446 Cost of goods sold................ 392 147 - - - Cost of revenues.................. 561 2,155 5,098 5,560 4,738 Gross profit...................... 954 2,931 2,761 3,012 4,708 Operating expenses................ 7,869 14,837 20,938 14,903 7,927 Loss from continuing operations... (6,915) (6,360) (16,101) (12,177) (3,349) Profit/(Loss) from discontinuing operations........................ - (5) 1,336 (6,804) (2,371) Net loss.......................... US$(6,666) US$(6,365) US$(14,765) US$(18,981) US$(5,720) Loss per equity share (from continuing operations) - basic and diluted........................... US$(0.79) US$(0.51) US$(1.25) US$(0.95) US$(0.26) Loss per equity share - basic and diluted........................... US$(0.76) US$(0.52) US$(1.15) US$(1.48) US$(0.45) Weighted average number of equity shares - basic and diluted........ 8,765 12,253 12,795 12,795 12,800 As of March 31, -------------------------------------------------------------------------------- 2000 2001 2002 2003 2004 ----------- ----------- ------------- ----------- ------------ (In thousands) Balance Sheet Data: Cash and cash equivalents......... US$11,576 US$47,654 US$26,520 US$14,384 US$11,639 Working capital................... 10,522 43,507 22,412 13,238 11,468 Total assets...................... 16,062 67,497 52,250 30,332 24,868 Total shareholders' equity........ 12,722 60,249 44,004 25,541 21,027 - --------------- * The selected financial data set forth below should be read in conjunction with Item 5. "Operating and Financial Review and Prospects" and the financial statements and the notes to those statements included elsewhere in this annual report.
RISK FACTORS An investment in our ADSs involves a high degree of risk. You should carefully consider the following information about risks, together with the other information contained in this annual report on Form 20-F, including our consolidated financial statements and related notes, before you decide to buy our ADSs. If any of the circumstances or events described below actually arises or occurs, our business, results of operations and financial condition would likely suffer. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment. This annual report also contains forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including the risks faced by us described below and elsewhere in this annual report. Risks Related to our Business Pending and potential litigation against us could have a material adverse effect on our business and operating results and lower the market price of our ADSs. On April 16, 2001, four of our officers and directors, including Ajit Balakrishnan, its Chairman and Managing Director, a group of investment banks that acted as underwriters in our June 2000 initial public offering (the "IPO") and listing of ADSs and we were named as defendants in Khanna v. Rediff.com India Ltd. et al., (the "Khanna Action"), a class action lawsuit filed in the U.S. District Court for the Southern District of New York. The plaintiffs allege that our registration statement filed with the SEC contained misleading statements and omissions in violation of the U.S. Securities Act of 1933, as amended (the "Securities Act"), the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 10b-5 of the Exchange Act. The plaintiff class in this lawsuit has been defined as all persons who purchased ADSs from the time of the IPO through April 14, 2001 and seeks unspecified damages. Subsequent to the filing of the Khanna Action, several other actions have been filed against us and the other defendants setting forth substantially the same allegations. All the cases have been consolidated before a single judge in the United States District Court for the Southern District of New York. On May 11, 2001, we received from our underwriters in our IPO a demand for indemnification of the underwriters' legal fees and liabilities. Our board of directors resolved to indemnify our officers and directors named as defendants against their legal fees and liabilities, to the extent permitted under Indian law. At the time of the IPO, we purchased Directors & Officers liability insurance (the "D&O Policy"), providing coverage against federal securities law claims. The D&O Policy includes coverage for our cost of defending the class action lawsuits, our indemnification liabilities to our officers and directors, and our indemnification liabilities to our underwriters. The coverage of the D&O Policy is denominated in Indian Rupees, but the policy proceeds are payable in U.S. dollars. Based on the noon buying rate at March 31, 2004, the face amount of the D&O Policy is approximately US$20.6 million. The proceeds of the D&O Policy available to satisfy any judgment against us, or any judgment against persons whom we are obligated to indemnify, will be reduced by the amount of the legal fees and associated expenses incurred in the course of our defense and the defense of the individual defendants and the underwriters which are paid from the D&O Policy. The D&O Policy includes a deductible of approximately US$259,000 (based on the noon buying rate at March 31, 2004), which must be paid by us before the D&O Policy proceeds would be available. The D&O Policy contains various exclusions, which, if met, may result in the denial of insurance coverage. We have been advised by the insurance carriers who wrote the D&O Policy that they are not aware of any facts or circumstances that would cause any of the exclusions to apply, but that the carriers have reserved their rights to claim that the exclusions do apply if any such facts or circumstances come to their attention. On June 5, 2001, twenty-four companies, including us, who had issued securities to the public in their initial public offerings, together with the investment banks who acted as underwriters in these initial public offerings, were named as defendants in the action of Shives et al. v. Bank of America Securities, LLC et al., (the "Shives Action"), a class action lawsuit filed in the U.S. District Court for the Southern District of New York. Also named as defendants in this lawsuit were four of our officers and directors, including Ajit Balakrishnan. The plaintiffs in this lawsuit allege that the underwriter defendants combined and conspired to inflate the underwriting compensation they received in connection with the initial public offerings of the defendant companies, to manipulate and inflate the prices paid by plaintiffs for securities issued in the initial public offerings and to restrain and suppress competitive pricing for underwriting compensation. The plaintiffs allege claims pursuant to the U.S. Sherman Antitrust Act, 1890, as amended, the U.S. Clayton Antitrust Act, 1914, as amended, and the Securities Act against the underwriter defendants. The plaintiffs further allege that the defendants, including us and certain of our officers and directors, made material misstatements and omissions in violation of the Securities Act and the Exchange Act by concealing or failing to disclose the compensation earned by the underwriters in the initial public offerings. As against us and our officers and directors, the Complaint defines a "Rediff.com Sub-Class" consisting of all persons who purchased securities of Rediff.com India Limited from the time of the IPO through April 4, 2001 and seeks unspecified damages. This case has been consolidated with several hundred other similar cases filed against other issuers who had IPOs in 2000 and 2001. On November 24, 2003, plaintiffs' counsel in the Khanna action and Shives action filed a Consolidated Amended Securities Class Action Complaint ("Consolidated Complaint") which incorporates the material allegations from Khanna action and Shives action. On January 30, 2004, we and our officers and directors filed a motion to dismiss the Consolidated Complaint. The underwriter defendants filed a separate motion to dismiss. The motions are currently being briefed by the parties. On June 21, 2000, we and our directors and others (Ajit Balakrishnan, Arun Nanda, Abhay Havaldar, Sunil Phatarphekar, Charles Robert Kaye and Tony Janz) were named as accused in a criminal complaint (RCC Complaint Number 76 of 2000, the "Complaint"), filed by Mr. Abinav Bhatt, a 22 year old student, before the Judicial Magistrate, First Class, Pune, India, alleging commission of an offense under Section 292 of the Indian Penal Code, 1860, as amended, or IPC, for distributing, publicly exhibiting and putting into circulation obscene, pornographic and objectionable material. The Complaint alleged that we, through our website "www.rediff.com", provided a search facility that enabled Internet users to view pornographic, objectionable and obscene material. On November 27, 2000, the Judicial Magistrate passed an order in the Complaint holding that a prima facie case under Section 292 of the IPC had been made out against us and directed commencement of criminal proceedings against all the defendants. A criminal writ petition, or Writ Petition, was filed in the High Court of Mumbai (Criminal Writ Petition Number 1754 of 2000) seeking, among other things, relief setting aside of the order of the Judicial Magistrate. The High Court of Mumbai in its order dated December 20, 2000, while granting ad-interim relief to the petitioners in the Writ Petition, stayed the order of the Judicial Magistrate pending final disposal of the Writ Petition. The Writ Petition has been admitted by the High Court of Mumbai. While we believe that the lawsuit is without merit, and that we and our directors have a valid defense to the Complaint, in the event that we are unsuccessful in our defense, we and our directors may face both criminal penalties and monetary fines. A complaint was filed by the Indian Music Industry ("IMI"), a society representing various music companies in Magistrate's Court India against three of our directors. The complaint alleges that by providing links to MP3 sites through its directory we have been guilty of violating Section 51 of the Copyright Act 1957. The complaint alleges that the MP3 sites to which links were provided permitted downloading of music, which had not been authorized to be so downloaded by copyright owners who are members of IMI. Our directors are named as parties to the lawsuit because, according to the complaint, the directors are in charge of our affairs and are hence deemed to be guilty of committing the offense. Our directors have presently been exempted from personal appearance. Our directors have filed an application for discharge of the complaint before the Magistrate. Although our directors believe they have valid defenses to the action, if they are unsuccessful after exhausting all legal remedies, our directors could face both criminal penalties and monetary fines. All of the foregoing actions require management time and cost. In addition, we can give no assurances that we will be successful in our defense of such actions. If any of our directors are subject to criminal penalties, we may be deprived of their services as a director. We are also subject to other legal proceedings and claims, which have arisen in the ordinary course of its business. Those actions, when ultimately concluded and determined, will not, in the opinion of management, have a material effect on our results of operations or financial position. For additional information regarding pending litigation filed against us, please see the section of this annual report entitled "Business--Legal Proceedings". A slowdown in the Indian and the U.S. economies and in certain sectors could adversely affect our business, operating results and financial condition. We are dependent on the health of the Indian and the U.S. economies. A slowdown in the United States and Indian economies or sectors in which our clients are based, including the Internet and technology-based sectors, or an overall reduction in consumer and business spending, could have a materially adverse impact on our business and our prospects. A significant portion of our revenues are derived from retail customers and from companies that operate in various sectors, including the Internet and technology-based sectors as well as insurance, financial services, banking and consumer goods sectors. Many of these sectors could experience slowdown in growth. As a result, advertisers may reduce advertising expenditures or may not spend as much money on online and offline advertising as anticipated. A prolonged or material decline in Internet advertising expenditure will have a material adverse effect on our operating results. Further, a slowdown in the Indian and U.S. economies may make it difficult for us to raise money in the equity and debt markets on terms favorable to us or at all, which may have an adverse effect on our financial condition and operating results. We may not benefit from our acquisitions and investments and our acquired businesses could increase our net losses. We have made several strategic acquisitions and investments in order to penetrate new markets, generate additional revenue streams and provide value-added services to our users. We may, if an opportunity arises, acquire or invest in products, technologies or companies in the future. However, there can be no assurance that our acquisition and investment strategy will be successful or that we will realize the anticipated benefits from such acquisitions or investments. Such transactions are accompanied by a number of risks, including: o the failure to identify operating weaknesses of the acquired business during the course of due diligence and negotiations of these transactions; o the difficulty of assimilating the operations, third-party relationships and personnel of the acquired companies with our operations; o the potential disruption of our ongoing business and distraction of management during the acquisition; o the difficulty of incorporating acquired technology, software or content into our products, and unanticipated expenses related to such integration; o the impairment of relationships with employees and customers as a result of any integration of new management personnel; o the potential unknown liabilities associated with acquired businesses; and o unfavorable changes in accounting rules and guidelines relating to our acquisitions. Any or all of our future acquisitions may face similar risks and we may not be successful in addressing these risks or any other problems encountered in connection with such acquisitions. We have a history of losses. We expect to continue to incur losses and we may not achieve or maintain profitability. We have incurred significant net losses and negative cash flows from operations since our inception in January 1996, including a net loss of approximately US$5.7 million for the fiscal year ended March 31, 2004. As of March 31, 2004, we had an accumulated deficit of approximately US$54.4 million. We expect to continue to have net losses and negative operating cash flows for the foreseeable future. We expect to increase our spending as we continue to expand our services, advertise and promote our brand, and invest in the expansion of our infrastructure and sales and marketing staff. We have incurred and in the future will incur expenses in connection with acquisitions and investments. Accordingly, we will need to generate significant additional revenues, while controlling our expenses, to achieve profitability. We may not be able to do so. Our business model is not yet proven in India or the United States, and we cannot assure you that we will ever achieve or sustain profitability or that our history of operating losses will not continue in the future. If we are unable to achieve or maintain profitability, we will be unable to build a sustainable business. In this event, the price of our ADSs and the value of your investment would likely decline. Intense competition in our businesses could prevent us from achieving or sustaining profitability. Our businesses compete in various sectors including Indian and foreign online content and services providers, and traditional print and television media companies. Many of our competitors have a longer operating history, greater name recognition and customer base, and greater management, financial, technical, marketing, sales, brand, and other resources than we do. They can use their superior experience and resources in a variety of competitive ways, including by investing more aggressively in research and development, creating superior content, making acquisitions, and competing more aggressively for advertisers. There has also been a trend toward industry consolidation so our smaller competitors today may become larger in the future. If our competitors are more successful than we are at generating visitors and website traffic due to superior content and other service offerings, our revenues may decline. In addition to Internet companies, we face competition from other companies that offer traditional media advertising opportunities, including print and television companies. Most large advertisers have set advertising budgets, a small portion of which is allocated to Internet advertising. For the near future, we expect that large advertisers will continue to focus their advertising efforts on traditional media. If we fail to convince these companies to spend a larger portion of their advertising budgets with us, or if our existing advertisers reduce the amount they spend on Internet advertising, our operating results may decline. Competition for visitors, customers, subscribers, advertisers and e-commerce partners is intense and is expected to increase significantly in the future because there are no substantial barriers to entry in our market. Furthermore, it is difficult to predict which online advertising pricing model, if any, will emerge as the industry standard. This makes it difficult to predict our future advertising rates and revenues. Our revenues could be adversely affected if we are unable to adapt to new forms of pricing for the services and products we offer. Increased competition may result in: o loss of visitors and website traffic; o loss of advertisers; o reduced operating margins; o loss of market share; and o diminished value in our services. Any one of these factors could materially and adversely affect our business, financial condition and operating results. Our quarterly operating results may fluctuate significantly and may fail to meet the expectations of securities analysts and investors, which may cause the price of our ADSs to decline. Our quarterly results may fluctuate significantly in the future based on a variety of factors. These factors could affect our long-term performance. Some of these factors include: o increased competition; o changes in pricing policies or our product and service offerings; o increase in personnel, marketing and other operating expenses to support our anticipated growth; o our ability to attract new users and retain existing users at reasonable costs; o our ability to adequately maintain, upgrade and develop our portal, our computer network and the systems that we use to process customer orders and payments; o the timing of our expansion plans in India and other geographic markets; o seasonality in retail sales; o technical difficulties, system or website downtime or Internet service disruptions ; and o entry into new businesses requiring substantial investments. Our operating results could be volatile and difficult to predict. As a result, quarter-to-quarter comparisons of our operating results may not be good indicators of our future performance. In addition, it is possible that our operating results in any future quarter could be below the expectations of investors generally and any published reports or analyses of our Company. In that event, the market price of our ADSs may decline, perhaps substantially. The loss of one or more significant advertisers could adversely affect our revenues. We derive a considerable portion of our revenues from certain key advertisers. Our top ten advertisers accounted for 58% of our India Online advertising revenues. Any failure to meet advertiser expectations could result in cancellation or non-renewal of contracts. The loss of, or a significant reduction in the volume of business from, one or more of our large advertisers could have a material adverse effect on our operating results and financial condition. Our operations could be disrupted by unexpected network interruptions caused by system failures, natural disasters or unauthorized tampering of our systems. Our online businesses rely heavily 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 telephone lines leased from service providers. The continual accessibility of our websites and the performance and reliability of our network infrastructure are critical to our reputation, and our ability to attract and retain users, advertisers and merchants. Any system failure or performance inadequacy that causes interruptions in the availability of our services or increases the response time of our services could reduce our appeal to advertisers and consumers. Factors that could significantly disrupt our operations include: o system failures and outages caused by fire, floods, earthquakes, power loss, telecommunications failures and similar events; o software errors; computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems; o security breaches related to the storage and transmission of proprietary information, such as credit card numbers or other personal information; and o terrorist acts. We have limited backup systems and redundancy. The failure of these backup systems could lead to the disruption of our services and the loss of important data. We have suffered temporary service outages in the past from time to time that have resulted in a disruption of our services. Future disruptions or the occurrence of any of the foregoing factors may result in users being temporarily unable to access our content, community and e-commerce offerings. Any sustained disruption will reduce the number of visitors to our website and have a material adverse impact on the revenues from e-commerce transactions handled through our website. Such disruptions could also reduce the number of advertisers on our site and materially affect our operating results, which may lead to a decline in the market price of our ADSs. We seek to protect our computer systems and network infrastructure from physical break-ins, as well as security breaches and other disruptive problems. We employ security systems, including firewalls and password encryption, designed to minimize the risk of security breaches. There can be no assurance that these security measures will be successful. If someone penetrates our network security or otherwise misappropriates sensitive data about our users, we could be subject to liability. These liabilities could include fraud claims and other claims for misuses of personal information, such as unauthorized marketing purposes. These claims could result in litigation and could have a material adverse effect on our business, results of operations and financial condition. We do not carry material 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 adversely affect our business. Our business and growth will be impaired if we are unable to retain our existing key personnel and hire additional skilled employees. We are dependent on certain key members of our management team. In particular, our success depends upon the continued efforts of our Chairman and Managing Director, Ajit Balakrishnan. We do not carry any key employee insurance. All of our employees are located in India and the United States, and each may voluntarily terminate his or her employment with us. Our planned activities will require additional expertise in sales and marketing, technology and other areas. The labor market for skilled employees 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 existing personnel or identify, hire and successfully integrate additional qualified 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 or replacement qualified personnel, could impair the growth of our business. We are highly dependent on our agreements with cellular service providers for service delivery and fee collection. Our mobile services, including wireless short messaging services, depend mainly on the cooperation of a large number of private and government mobile phone operators who have the necessary licenses to provide cellular services to consumers across various states/cities in India. We rely on all of these mobile phone operators to provide network and gateway for our wireless short messaging services. We also utilize their billing systems to collect service fees from customers. If any or all of these cellular service providers encounter technical problems, or if they refuse to cooperate with us, our ability to provide mobile services may cease or be severely disrupted, which may have a significant and adverse impact on our future operating results. We rely on increased sales of, and high renewal rates for, our subscription and fee based products and services. A substantial part of our online revenue growth for the fiscal year ended March 31, 2004 was from our fee-based Internet services consisting primarily of paid e-mail service, subscription service and wireless short messaging service in India. We are deriving an increased portion of our revenues from these services. If not enough users adopt and use our fee-based Internet services, our growth may be adversely affected. Potential liability for information we publish may require us to defend against legal claims, which may cause significant operational expenditures. We may be subject to claims for defamation, libel, copyright or trademark infringement or other legal actions relating to the information we publish. These types of claims have been brought, sometimes successfully, against news and opinion publishing businesses in the past. We could also be subject to claims based upon the content that is accessible from our website through links to other websites. Our insurance coverage may not adequately protect us against these claims. Liability claims could require us to spend significant time and money in litigation and to pay significant damages. As a result, liability claims, whether or not successful, could seriously damage our reputation and business. Privacy concerns may prevent us from selling demographically targeted advertising in the future and make us less attractive to advertisers. We collect personal data from our user base in order to understand better our users and their needs and to help our advertisers target specific demographic groups. If privacy concerns or regulatory restrictions prevent us from selling demographically targeted advertising, we may become less attractive to advertisers. For example, as part of our future advertisement delivery system, we may integrate user information such as advertisement response rate, name, address, age or e-mail address, with third-party databases to generate comprehensive demographic profiles for individual users. However, if we are unable to construct demographic profiles for Internet users because users refuse to give consent, we will be less attractive to advertisers and our business may suffer. We may not be able to grow our business if online advertising in our markets does not expand. Our business strategy depends on the anticipated growth of online advertising in our markets and the growth of our revenues depends on increased revenues generated by advertising. We anticipate that a high portion of our future revenues will be derived from hosting advertising space on our website. Online advertising is an unproven business and our ability to generate and maintain significant advertising revenues will depend on: o our ability to attract advertisers at profitable rates in light of intense competition; o our ability to generate and continue to grow a large community of users with demographics attractive to advertisers; o advertisers' acceptance of the Internet as an effective and sustainable medium; o our ability to contract with a diverse group of advertisers that will generate attractive traffic patterns and user demographics; o the effectiveness of our advertising delivery, tracking and reporting systems; and o our ability to adapt to new forms of Internet advertising. Different pricing models are used to sell online advertising, and it is difficult to predict which, if any, of the models will emerge as the industry standard. This makes it difficult to project our future advertising rates and revenues. A reduction in traffic on our website may cause new advertisers not to enter into contracts with us and could cause existing advertisers not to renew their contractual arrangements with us, each of which, in turn, would reduce our potential advertising revenues. Additionally, any development of Internet software that blocks advertisements before they appear on a user's screen may hinder the growth of online advertising and could materially and adversely affect our ability to grow our online advertising and our business. Also, a slowdown in economic growth, and in particular a slowdown in the growth of companies that advertise on the Internet, may result in a reduction in our advertising revenues. Our contracts with advertising customers do not commit them to continue to provide us with a specific volume of business and can typically be terminated by them with or without cause, with little or no advance notice and without penalty. Additionally, our contracts with advertising customers often are limited to a specific project and not any future work. There are also a number of factors other than our performance, and not within our control, that could cause the loss of advertising customers. Early termination of material contracts or non-renewal of an expired material contract could have a material adverse effect on our business and on our future financial performance. We may not be able to manage our operations effectively if we grow, which could harm our business. We anticipate expansion of our business in India as we address growth in our customer base and market opportunities. In order to manage the expected growth of our operations and personnel, we will be required to improve existing and implement new operational and financial systems, procedures and controls, and to expand, train and manage our employee base. Further, our management will be required to maintain and expand our relationships with various other partners, mobile phone operators, Internet and other online service providers and other third parties necessary to our business. We cannot assure you that our current and planned personnel, systems, procedures and controls will be adequate to support our future operations. Currency exchange rate fluctuations may adversely impact our operating results and financial condition. The exchange rate between the Indian Rupee and the U.S. dollar has changed substantially in recent years and may fluctuate substantially in the future. During the period from the fiscal year ended March 31, 1997 to the fiscal year ended March 31, 2004, the value of the Indian Rupee against the U.S. dollar declined by approximately 21% from Rs.35.9 to Rs.43.4 per U.S. dollar. Because a substantial portion of our cash and cash equivalents is currently held in Indian Rupees, devaluation or further depreciation of the value of the Indian Rupee will adversely affect the value of our cash reserves in foreign currency terms. In addition, our market valuation could be materially adversely affected by the devaluation of the Indian Rupee if U.S. investors analyze our value based on the U.S. dollar equivalent of our financial condition and operating results. We expect that a substantial portion of our revenues will continue to be generated in U.S. dollars from our U.S.-based operations for the foreseeable future and that a significant portion of our expenses, including personnel costs, will continue to be denominated in Indian Rupees. Consequently, the results of our operations may be adversely affected by currency fluctuations. If we are unable to adapt to the rapid technological changes, our business could suffer. Our success will depend, in part, on our ability to respond to technological advances and practices on a cost-effective and timely basis. The development and implementation of such technology entails significant technical and business risks. There can be no assurance that we will successfully implement new technologies effectively. If we are unable, for technical, legal, financial or other reasons, to adapt in a timely manner to changing market conditions or customer requirements, our business and our future financial performance could be materially adversely affected. If we are unable to successfully seize upon new business opportunities, our growth may be adversely affected. New technologies are giving rise to new business opportunities, such as in gaming and paid search. We believe that much of our future growth will depend on our ability to seize upon these opportunities and successfully launch new products and services. If we are unable to do so, our future growth and financial performance could be adversely affected. A small group of our existing shareholders control our company and may have interests which conflict with those of our other shareholders or owners of our ADSs. As of March 31, 2004, our seven largest shareholders beneficially owned an aggregate of approximately 76.6% of our equity shares. As a result, such shareholders acting collectively are able to exercise control over most matters requiring approval by our shareholders, including the election of directors and approval of significant corporate transactions. Under Indian law, a simple majority is sufficient to control all shareholder action except for those items which require approval by a special resolution. In case of a special resolution, approval of three-fourths of the shareholders present and voting is required. Examples of actions that require a special resolution include: o amending our Articles of Association; o issuing additional shares of capital stock, except for pro rata issuance to existing shareholders; o commencing any new line of business; and o commencing a liquidation. The interests of this group may differ from our other shareholders or owners of our ADSs and could result in a delay or prevention of a change in control of our Company even if a transaction of that sort would be beneficial to our other shareholders, including the owners of our ADSs, or in the best interest of our Company. For additional information regarding our principal shareholders, please see the section of this annual report entitled "Principal Shareholders". The laws of India do not protect intellectual property rights to the same extent as those of the United States, and we may be unsuccessful in protecting our intellectual property rights, which could lead to a reduction in our revenues and an increase in our expenses. 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 the laws of the United States, and the global nature of the Internet makes it difficult to control the ultimate destination of our products and services. 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. We may need to litigate 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 and may not ultimately prove successful. We could be subject to intellectual property infringement claims as the number of our competitors grows and the content and functionality of our website or other product or service offerings overlap with competitive offerings. Defending against these claims, even if not meritorious, could be expensive and divert our attention and resources 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. For additional information regarding our intellectual property rights, please see the section in this annual report entitled "Business--Intellectual Property". We do not plan to pay dividends in the foreseeable future. We do not anticipate paying cash dividends to the owners of our equity shares or ADSs in the foreseeable future. Accordingly, investors must rely on sales of their equity shares or ADSs, which may increase or decrease in value, as the only way to realize cash from their investment. Investors seeking cash dividends should not purchase our ADSs. We may be a passive foreign investment company for U.S. federal income tax purposes, which could increase the U.S. tax costs to U.S. holders of ADSs. It is uncertain whether or not we will be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for the current or future taxable years. PFIC status is a factual determination that is based on the composition of our income and the value of our assets during each year. Valuation of our assets, including goodwill, is based on the market price of the ADSs, which is subject to change from time to time. If we are a PFIC, U.S. holders of ADSs may incur significantly increased U.S. income tax costs on the sale or disposition of ADSs and on the receipt of distributions on ADSs to the extent such distributions are treated as "excess distributions" under the U.S. income tax rules. Please also see the section in this annual report entitled "Taxation--United States Federal Tax--Passive Foreign Investment Company Rules". The high cost of accessing the Internet in India limits our pool of potential customers and the growth of our business. Our growth is limited by the high cost of obtaining 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, much of India's population will not be able to afford to use our services. The failure of a significant number of additional Indians to obtain affordable access to the Internet would make it difficult to execute our business strategy. The limited installed personal computer base in India limits our pool of potential customers and restricts the growth of our business. The market penetration of, or access to, personal computers, or PCs, and the Internet in India is far lower than in the United States. According to Internet Service Providers' Association of India, in March 2004 India had approximately 4.5 million Internet connections compared to a total population in India of more than 1 billion. Alternate methods of obtaining access to the Internet, such as through cable television modems or set-top boxes for televisions, although available, are available in a limited manner in India. We cannot assure you that the market penetration 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. If these events do not occur we will not be able to expand our customer base, which will make it difficult for us to execute our business strategy. The success of technological infrastructure and consumer base for our products and services depends on the acceptance of the Internet in India, which may be slowed by high bandwidth cost, and other technical obstacles in India. The growth of our India Online business is highly dependent on the growth in the number of PCs in use, and the penetration rates of broadband and Internet use and mobile phones. The growth of the telecom and cellular industry in India will be a significant factor in facilitating our growth. As with many developing nations, the fixed line telecommunications infrastructure in India is not fully developed. Although this industry has been opened for private sector participation, service levels remains inferior to service levels in most developed countries. Further, telephone penetration rates, measured by the number of telephone lines per one thousand persons in India, is low when compared to most developed countries. 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. Prices for bandwidth capacity have remained high, as compared to the United States, due to, among other things, capacity constraints. Further, limitations in network architecture in India sometimes limit Internet connection speeds to 28 Kbps or less, which are less than the 56 Kbps connection speeds on conventional dial-up telephone lines, and significantly less than the up to 1.5 Mbps connection speed on direct satellite link, digital subscriber lines and cable modems in the United States. These speed and cost constraints may severely limit the quality and desirability of using the Internet in India, which consequently may limit our ability to expand our pool of customers and reduce our desirability to online advertisers. In other developing Asian markets such as South Korea and Malaysia, an increase in broadband penetration rates led to rapid growth in the number of online subscribers. Currently, the broadband penetration rates in India is very low compared to other developed countries. As per the Telecom Regulatory Authority of India (TRAI) Report, India currently has 0.4 internet connections and 0.02 broadband connections per 100 persons, while South Korea and the People's Republic of China have 26 and 2.5 internet connections, and 25 and 1.4 broadband connections per 100 persons, respectively. If the broadband and telecom industry in India fails to register significant growth as has been experienced by other developed countries, our growth may also be affected. The success of our e-commerce business depends on its acceptance and growth in India, which is uncertain. Many of our existing and proposed products and services are designed to facilitate e-commerce in India, although there is very little e-commerce currently being conducted in India. Demand and market acceptance for these products and services by consumers is highly uncertain. Critical issues concerning the commercial use of the Internet, such as legal recognition of electronic records, validity of contracts entered into through the Internet and the validity of digital signatures, are governed in India by the Information Technology Act, 2000 (the "IT Act"). In addition, many Indian businesses have deferred deploying e-commerce initiatives for a number of reasons, including the existence or perception of, among other things: o inconsistent quality of service; o lack of legal infrastructure relating to e-commerce in India; o lack of security of commercial data such as credit card numbers; and o low number of Internet users in India. If usage of the Internet and e-commerce in India does not substantially increase and the legal infrastructure and network infrastructure in India are not further developed, we are not likely to achieve significant growth of our e-commerce products and services. Also, a slowdown in economic growth in India may result in an overall reduction in consumer and business spending, which will adversely affect our e-commerce services revenues. We may be liable to third parties for information retrieved from our website. We could be exposed to liability for the selection of listings that may be accessible through our portal or through content and materials that we develop or that our users may post in message boards, chat rooms, or other interactive services. For example, we are a party to a criminal writ petition filed in the High Court of Mumbai, India, which alleged that we, through our website "www.rediff.com", provided a search facility that enabled Internet users to view pornographic, objectionable and obscene material. Please see the section in this annual report on "Business - Legal Proceedings" for more information on this litigation. We may also be subject to claims for defamation, negligence, copyright or trademark infringement, personal injury or other legal theories relating to the information we post on our website. We could also become liable if confidential information is disclosed inappropriately on or through our website. It is also possible that if any information provided through our services contains errors, third parties could make claims against us for losses incurred in reliance on the information. We offer Internet-based e-mail services, which expose us to potential liabilities or claims resulting from: o unsolicited e-mail; o lost or misdirected e-mail; o illegal or fraudulent use of e-mail; and o interruptions or delays in e-mail service. The laws in India and the United States relating to the liability of companies which provide online services, like ours, for activities of their users are currently unsettled. Investigating and defending these claims is expensive, even if they do not result in liability. We do not carry insurance to protect us against these types of claims, and there is no precedent on such liabilities under Indian law. Further, our business is based on establishing the rediff.com portal as a trustworthy and dependable provider of content 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. We may be liable to third parties for the products they purchase online. Consumers may sue us if any of the products or services that are offered on our website's marketplace are defective, fail to perform properly or injure the user. Although our agreements with manufacturers and distributors whose products are displayed on our website's marketplace typically contain provisions intended to limit our exposure to such liability claims, these provisions may not be sufficient to limit all of our liability from such claims. Product warranties are the responsibility of those who sell products on our website's marketplace, although our reputation can be adversely affected if a user is not satisfied with a purchase. Liability claims could require us to spend a considerable amount of resources, time and money in litigation and to pay significant damages. Allegations of impropriety, even if unfounded, or poor service provided by manufacturers and distributors on our website's marketplace, could damage our reputation, disrupt our ongoing business, distract our management and employees, reduce our revenues and increase our expenses. In addition, the laws relating to the online sale of goods is not fully developed. The various laws and regulations that cover online sales of products and their interpretation involve a significant degree of uncertainty. For example, we may have to register our business under various laws relating to the sale of goods. Our business, financial condition and operating results may be materially affected if we were required to obtain such registrations. Risks Related to Investments in Indian Companies We are incorporated in India, and a large part of our assets, business operations and employees are located in India. Consequently, our financial performance and the market price of our ADSs will be affected by social and economic developments in India and the policies of the Government of India, including taxation and foreign investment policies, as well as changes in exchange rates, interest rates and controls. Regional conflicts in South Asia could adversely affect the Indian economy and cause our business to suffer. South Asia has from time to time experienced instances of civil unrest and hostilities among neighboring countries, including between India and Pakistan. In recent years there have been military confrontations between India and Pakistan that have occurred in the region of Kashmir. Events of this nature in the future could influence the Indian economy and could have a material adverse effect on the market for securities of Indian companies, including our ADSs, and on the market for our services. Political instability related to the current multi-party coalition government could halt or delay the liberalization of the Indian economy and adversely affect economic conditions in India generally and our business in particular. Since 1991, successive Indian governments have pursued policies of economic liberalization, including significantly relaxing restrictions on the private sector. We cannot assure you that these liberalization policies will continue in the future. The recently elected Government of India may announce certain policies and take initiatives that may slow the economic liberalization policies that have been pursued by previous governments. The rate of economic liberalization could change, and specific laws and policies affecting technology companies, foreign investment, currency exchange rates and other matters affecting investment in our securities could change as well. A significant change in India's economic liberalization and deregulation policies could adversely affect business and economic conditions in India generally, including our business. Indian law limits our ability to raise capital and the ability of others to acquire us, which could prevent us from operating our business or entering into a transaction that is in the best interests of our shareholders. Indian law constrains our ability to raise capital through the issuance of equity or convertible debt securities. Foreign investment in an Indian company may require approval from relevant government authorities in India including the Reserve Bank of India. The Government of India has classified existing businesses into various categories for automatic approval of foreign direct investment up to certain prescribed percentages. Under the current guidelines, the Government of India provides for approval under the automatic route for foreign direct investment proposals relating to the information technology sector. We cannot assure you that equity or other forms of financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our infrastructure and services, or otherwise respond to competitive pressures would be significantly limited. Our business, operating results and financial condition could be materially adversely affected by any such limitation. Currently there is no public trading market for our equity shares in India or elsewhere which, together with existing Indian laws that restrict the conversion of outstanding equity shares into ADSs, reduce your ability to sell 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 or that we will be able to meet applicable listing guidelines or regulations to list our equity shares on a stock exchange in India or elsewhere. Our equity shares are only traded on the Nasdaq Small Cap Market, or Nasdaq, in the form of ADSs. Under current Indian laws and regulations, outstanding equity shares not listed in India may not be deposited into our depositary facility. Thus, 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. Further, you will be prohibited from re-depositing such unlisted outstanding equity shares with our Depositary. Under proposed regulations in India, our Depositary may be allowed to accept deposits of outstanding equity shares and issue American Depositary Receipts, or ADRs, evidencing ADSs representing such equity shares only to the extent, and limited to the number, of ADSs converted into underlying equity shares, if such equity shares are listed in recognized Indian stock exchanges. In the present case, since our outstanding equity shares are unlisted, you would be unable to deposit outstanding equity shares with our Depositary and receive ADRs. Under current Indian regulations and practice, the approval of the Reserve Bank of India, or RBI, 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 a renunciation of rights in favor of a resident of India unless the sale of the outstanding equity shares is made through a recognized stock exchange. Since our outstanding equity shares are unlisted, any such transfer would require the approval of the RBI. Under currency exchange controls that are in effect in India, any such approval granted by the Reserve Bank of India will specify the price at which the equity shares may be transferred based on a specified formula, and a higher price per share may not be permitted. Additionally, shareholders 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 on any particular terms or at all. If in the future a market for our equity shares is established in India, our equity shares may trade at a discount or premium to the ADSs, in part because of such restrictions. Our ability to acquire companies organized outside India may depend on the approval of the Government of India. Our failure to obtain approval from the Government of India for acquisitions of companies organized outside India may restrict our growth, which could negatively affect our revenues. As part of our business strategy, we may plan to acquire complementary businesses, including businesses based outside of India. For the acquisition of a business based outside India we may be required to obtain approval of the Reserve Bank of India and/or the Government of India. The Government of India has recently issued guidelines permitting acquisitions without approval of companies organized outside India with a transaction value: o in cash, up to 100% of the proceeds from an ADS offering or balances in the Exchange Earners Foreign Currency ("EEFC") Account; o if in cash (not through balances in an EEFC account or utilization of ADR issues) subject to a cap of 100% of the Indian party's net worth; and o if in stock in the form of listed ADRs, the greater of $100 million or 10 times the acquiring company's export earnings in the previous fiscal year and such issue of ADRs is backed by a new issuance of equity shares. We cannot assure you that we will be able to obtain any required approval from the Reserve Bank of India and/or the Government of India. Our failure to obtain approval from the Government of India for acquisitions of companies organized outside India may restrict our growth, which could negatively impact our revenues. It may be difficult for you to enforce any judgment obtained in the United States against us or our affiliates. We are incorporated under the laws of the Republic of India and many of our directors and executive officers reside outside of the United States. In addition, a large part of our assets and the assets of many of these persons are located outside of the United States. As a result, you may be unable to: o effect service of process upon us outside India or these persons outside the jurisdiction of their residence; or o enforce against us in courts outside of India or these persons outside the jurisdiction of their residence, judgments obtained in U.S. courts, including judgments predicated solely upon the federal securities laws of the United States. We have been advised by our Indian counsel that the United States and India do not currently have a treaty providing for reciprocal recognition and enforcement of judgments of courts in the United States in civil and commercial matters. Therefore, a final judgment for the payment of money rendered by any federal or state court in the United States on civil liability, whether or not predicated solely upon the federal securities laws of the United States, would not be enforceable in India. However, the party in whose favor such final judgment is rendered may bring a new suit in a competent court in India based on a final judgment which has been obtained in the United States. A judgment of the courts in the United States shall be conclusive as to any matter directly adjudicated between the parties to the suit except if Indian courts were of the opinion that such judgment: o was not rendered by a court of competent jurisdiction; o was not rendered on the merits of the case; o appears on the face of the proceedings to be founded on an incorrect view of international law or a refusal to recognize the law of India in cases in which such law is applicable; o was obtained in proceedings which are opposed to "natural justice"; or o sustains a claim founded on a breach of any law in force in India. Risks Related to the ADSs and Our Trading Market An active or liquid market for our ADSs is not assured. 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 shares that are publicly held by unrelated parties. Although holders of our ADSs are entitled to withdraw the equity shares underlying the ADSs from our depositary facility at any time, subject to certain legal restrictions, there is no public market for our equity shares in India or elsewhere. Under current Indian law, equity shares may be deposited into our depositary facility in exchange for ADS, under certain circumstances. Current Indian regulations allow our Depositary to accept deposits of outstanding equity shares and issue ADRs, evidencing ADSs representing such equity shares only to the extent, and limited to the number, of ADSs converted into underlying equity shares and so long as such equity shares were purchased through SEBI registered stock brokers which would require our shares be listed in a recognized Indian stock exchange. Therefore, if you elect to surrender your ADSs and receive equity shares, you would be unable to deposit outstanding equity shares with our Depositary and receive ADRs because the number of ADRs that can be issued cannot, at any time, exceed the number of ADRs converted into underlying equity shares. Therefore, unless the law is changed, the number of outstanding ADSs and trading volumes will decrease to the extent that equity shares are withdrawn from our depositary facility and not deposited for the re-issuance of ADSs, which may adversely affect the market price and the liquidity of the market for the ADSs. Our management has broad discretion in using the proceeds from our equity offerings and therefore investors will be relying on the judgment of our management to invest those funds effectively. Our management has broad discretion with respect to the expenditure of the net proceeds from our equity offerings. As of March 31, 2004, approximately US$11.6 million of the net proceeds from our ADS offering completed in June 2000 remain as cash and cash equivalents and short term deposits with banks on which we are earning interest. We intend to use these proceeds primarily to develop content for our Internet portal, to advertise and promote our brand and for general corporate purposes, including capital expenditures and strategic investments, partnerships and acquisitions. However, there is a possibility that we may be unable to make potential strategic investments, partnerships or acquisitions in the near future and a risk that our management may use the net proceeds from our equity offerings in an inefficient or ineffective manner. Our ADS market price may be highly volatile and could drop unexpectedly in the future. The stock markets in the United States have from time to time experienced significant price and volume fluctuations that have affected the market prices for the securities of technology companies, particularly Internet companies. 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. The securities class action litigation has been instituted against us in the United States. Such litigation brought against us, even if unsuccessful, could damage our reputation and result in substantial costs and a diversion of our management's attention and resources. Owners of our ADSs may be restricted in their ability to exercise preemptive rights and thereby may suffer future dilution of their ownership position. Under the Indian Companies Act, 1956, as amended (the "Companies Act"), a company incorporated in India must offer its holders of equity shares preemptive rights to subscribe and pay for a proportionate number of shares to maintain their existing ownership percentages prior to the issuance of any new equity shares, unless the preemptive rights have been waived by adopting a special resolution by holders of three-fourths of the company's equity shares which are voted on the resolution. U.S. owners of ADSs may not be able to exercise preemptive rights for equity shares underlying ADSs unless a registration statement under the Securities Act 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 owners of our ADSs to exercise their preemptive rights and any other factors that we deem appropriate to consider at the time the decision must be made. We may elect not to file a registration statement related to preemptive rights otherwise available by law to our shareholders. In the case of such future issuance, the new securities may be issued to our Depositary, which may sell the securities for the benefit of the owners of our ADSs. The value, if any, our Depositary would receive upon the sale of such securities cannot be predicted. To the extent that owners 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. Owners of our ADSs may be restricted in their ability to exercise voting rights because of the practical and legal limitations associated with instructing our Depositary to vote on your behalf. Holders of ADSs may exercise voting rights only through a depositary, unlike an owner of equity shares, who can exercise voting rights directly. An owner of ADSs generally will have the right under the deposit agreement to instruct our Depositary to exercise the voting rights for the equity shares represented by the ADSs. Owners of ADSs have no rights pursuant to the Companies Act, under which we are incorporated, and are limited to those rights granted to them pursuant to the deposit agreement. If our Depositary timely receives voting instructions from an owner of ADSs, it will endeavor to vote the securities represented by those ADSs in accordance with such voting instructions. In the event that voting takes place by a show of hands, our Depositary will cause the custodian to vote all deposited securities in accordance with the instructions received from owners of a majority of the ADSs for which our Depositary receives voting instructions. However, the ability of our Depositary to carry out voting instructions may be limited by practical and legal limitations and the terms of the securities on deposit. We cannot assure that holders of ADSs will receive voting materials in time to enable them to return voting instructions to our Depositary in a timely manner. Sales of substantial amounts of securities in the public market could depress the price of our ADSs and could impair our ability to raise capital through the sale of additional equity securities. The market price of our ADSs could decline as a result of sales of a large number of equity securities on a U.S. stock exchange or elsewhere, or the perception that such sales could occur. Such sales also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. As of March 31, 2004, we had an aggregate of 12,827,425 equity shares outstanding. Of the outstanding equity shares, 5,354,450 ADSs, representing 2,677,225 equity shares, are freely tradable. The remaining equity shares may be sold in the United States only pursuant to a registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act. BUSINESS Overview Our legal name is Rediff.com India Limited. We were incorporated on January 9, 1996 as Rediff Communication Private Limited under the Indian Companies Act. We converted to a public company on May 29, 1998. On February 15, 2000 we changed our name to Rediff.com India Limited. Our principal office is located at Mahalaxmi Engineering Estate, 1 st Floor, L.J. First Cross Road, Mahim (West), Mumbai 400 016, India, and our telephone number is +91-22-2444-9144. Our Internet address is www.rediff.com. We are a leading Internet destination in India, focusing on India and the global Indian community. Our websites in India and the U.S. consist of communication services, such as e-mail and instant messaging, news and information channels, community features, sophisticated search engines, and mobile and online marketplace services. We also publish two weekly newspapers aimed at the Indian-American community based in the United States and Canada: "India Abroad" and "India in New York". During the fiscal year ended March 31, 2003, our management reclassified our business segments and reviewed our performance on a new basis. Revenues during the fiscal year were segmented under India Online business (formerly "media services and merchandising services"), U.S. Publishing business, which include `Rediff U.S.A.' and `India Abroad' (formerly "media services"), and phone card business (formerly known as "communication services"). In April of 2004, we sold our phone card business and in accordance with SFAS 144, Accounting for the impairment or disposal of long-lived assets, the operations of this business have been classified under discontinued operations. Currently we operate in two business segments, the India Online business and the U.S. Publishing business. On June 14, 2000, we issued 4.6 million ADSs, representing 2.3 million equity shares at a price of US$12.00 per ADS, raising net proceeds of US$49.8 million, after underwriting discounts and expenses, and we listed our ADSs on the Nasdaq National Market. On June 20, 2000, the underwriters of our offering exercised their over-allotment option and we issued an additional 690,000 ADSs, representing 345,000 equity shares at a price of US$12.00 per ADS for net proceeds of US$7.5 million. The net proceeds of the ADS offering have been used by us, and in future, are intended to be used by us, to develop content for our Internet portal, to advertise and promote our brand, and for general corporate purposes, including capital expenditures, strategic investments, partnerships and acquisitions. During the years 2001 and 2002, while we waited for the Indian Internet user base to grow, we made a number of acquisitions in the United States to strengthen our offerings to people of Indian origin living in North America. First, we acquired "thinkindia.com", an Internet portal servicing people of Indian origin in the United States, for $3.4 million. Next, in March 2001, we acquired ValuCom, a provider of online phone cards, for US$3.7 million plus deferred consideration payable over a period of 2 years. Subsequently, in July 2002, we concluded the acquisition of ValuCom by paying the deferred consideration of approximately US$3.1 million. In April 2001, we acquired India Abroad and India in New York, two weekly community newspapers based in New York, for approximately US$10.7 million. We periodically evaluate the fair value of goodwill arising from these acquisitions by applying the guidelines of SFAS No. 142, "Goodwill and Other Intangible Assets", and wrote off US$3.3 million, US$8.3 million and US$1.7 million for the fiscal years ended March 31, 2002, 2003 and 2004, respectively. In accordance with SFAS 144, Accounting for the impairment or disposal of long-lived assets, the goodwill write-off relating to our Valucom acquisition has been disclosed as results from discontinued operations. The residual value of goodwill at March 31, 2004 relates to our India Abroad business and amounts to US$7.3 million. During the fiscal year ended March 31, 2002, we reviewed the values of our investments in Apnaloan.com, Traveljini.com and Billjunction.com, three Indian Internet businesses in which we had purchased minority stakes during 2001, and concluded that these investments had suffered permanent impairment due to the downturn in valuations of dot.com companies, together with the generally adverse conditions affecting the technology industry. Accordingly, we wrote down the value of our investments in these companies and recorded the appropriate impairment expense. During the fiscal year ended March 31, 2004, we evaluated the prospects of the Valucom business and decided that, because of a number of factors, including the downward trend of telecom rates for US-India telephone calls, the emergence of low cost- low quality competitors and our lack of sufficient scale, it was more prudent to exit the Valucom business. In April 2004, we exited this business. Our Markets We believe that the growth of our revenues and profits from the India Online business is dependent on the growth of the Indian Internet and mobile phone user bases, the evolution of adequate payment mechanisms and our ability to capture a sizeable share of the increase in revenues resulting from such growth. The growth of the user bases for internet and mobile phones, in turn, is dependant on government policies which facilitate a competitive and financially healthy telecom industry. During the last few years, the Government of India has taken a number of steps in this direction- opening most sectors of the telecom industry to private sector and foreign capital, establishing independent regulatory authorities and reducing taxes on personal computers and mobile phones. We believe these steps are starting to show results: - According to the Indian Internet and Online Association, the number of Internet users in India was 24 million as of March 31, 2004,a growth of 41% compared to March 31, 2003. The number of mobile users in India was 38 million as of March 31, 2004, a growth of nearly 90% as compared to March 31, 2003. The number of personal computers as a percentage of number of households, or personal computer penetration rate, in India as of March 31, 2004 was 7% as compared to 6% as of March 31, 2003. The growth of our US businesses is dependant on our ability to launch new services that appeal to the approximately 2 million affluent Asian Indians living in the United States. Our Opportunity Internet and mobile phone usage is at an early stage in India and after a period of slow growth in the 2000-2003 period, is currently starting to accelerate. We believe our opportunities are driven by the following five factors: 1. Early mover in the Indian market; brand is recognized and valued by Indian Internet users Our free e-mail service, RediffMail, is used by large numbers of Indians living in over 3,000 towns in India. Our news service has acquired a reputation for reliable, dispassionate and fast reporting of breaking news. Our online shopping services pioneered e-commerce in India. 2. Few Portals in India We are one of the few Internet companies in India offering complete portal services, such as e-mail, search, chat, instant messaging, blogs, news and online shopping. 3. Early stage of online shopping in India The low credit and debit card penetration rates in India means that many potential e-commence customers are not able to make payments online. Moreover, distribution and fulfillment facilities are not integrated nationally. Anticipated improvement in infrastructure, an increase in credit and debit card penetration rates, and the development of alternative payment mechanisms for online purchases, such as cash on delivery (C.O.D.), is expected to fuel the growth of e-commerce in India. 4. Early stage of online advertising in India The percentage of online advertising expenditure to total advertising expenditure is less than 1% in India, compared to 3-5% in countries such as the People's Republic of China and South Korea. As penetration and usage of the Internet grows in India, we believe advertisers will increasingly use this medium as an additional advertising channel. We believe that advertisers will see the benefits of Internet advertising in that the Internet allows advertisers to target desired demographic groups or consumers in specific geographic locations and allows them to interact more effectively with consumers and capture valuable information about buying patterns, preferences and demands. We believe that as Internet advertising grows in popularity in India, we are well positioned, as the leading portal, to benefit from the growth. 5. Early stage of mobile value-added revenues Portals worldwide have demonstrated in varying degrees their ability to capture sizeable portions of mobile value-added services revenue because the very active users of mobile value added services are often also intensive users of Internet services. Portals such as Rediff.com stand at the intersection of both of these industries. In India, mobile value-added services in the form of ringtones, games and chat services, are just getting under way as mobile phone operators complete installation of infrastructure for these services. We believe that as a portal with large numbers of users, we are well positioned to benefit from the revenues generated from these services. Our Strategy We believe our success is due to our focus on providing a full range of culturally relevant portal solutions to Indians living in India and other parts of the world, such as: - Communication services, including e-mail, chat and instant messaging, which were all developed using in-house technology. E-mail services are provided in a variety of Indian languages. - News and information services, including breaking news with message boards for users to post their opinions, a facility for users to personalize news to those that suit their interests and periodic newsletters they can receive in their e-mail boxes. Our news and information channels cover politics, business and entertainment news. - Consumer services, including matchmaking and astrology. Some of our consumer services are offered on a subscription basis. - Search services, including facilities to locate highly local information on people and businesses. - Online shopping services, including a sophisticated platform for merchants in India to create online shops, package tracking facilities, and a facility for consumers to rate merchants. Our arrangements with delivery service providers ensure that customers living in various cities can use our online shopping services. Our online shopping service also allows Indians living worldwide to send gift products to their friends and relatives living in India. We offer a wide range of payment options to our consumers, including dollar and Rupee denominated credit cards, charge cards, debit cards, local checks, demand drafts, direct debit to savings accounts and C.O.D. - Mobile services, including facilities for downloading ringtones, mobile games and wallpapers and chat. We provide these services for both 2G and 2.5G mobile services. - Online advertising services, including facilities for advertisers to target customers demographically and a pay-for-performance system which makes it easier for smaller advertisers to benefit from online advertising. We also provide tools that allow media planners and other advertising agency staff to monitor and plan online advertising campaigns. In the United States, our media properties, India Abroad, India in New York and the Rediff USA Website, offer a variety of advertising options for advertisers interested in reaching the affluent Indian-American community. Our quarterly page views in India have grown from approximately 3.2 billion for the quarter ended March 31, 2003 to approximately 3.5 billion for the quarter ended March 31, 2004. Our Product and Service Offerings India Online Business Our Rediff.com India website consists of information, communication and content services, free and paid community features and products, including e-commerce and mobile services. With 30.4 million online registered users worldwide as at March 31, 2004, we believe Rediff.com is one of the most recognized online brands in India and among the Indian community worldwide. For the fiscal year ended March 31, 2004, the India Online business segment generated US$3.6 million of revenues, accounting for 38.5% of our total revenues from continuing operations. Information and Content We deliver information and content to our users in an easy to use interface. The information and content channels currently available to our users include news, business, movies, cricket/sports, auto, health, food, books, gaming, astrology, contests, lifestyle, home decor, women and several other topics of interest. We currently offer this information and content without charge to our users. Because a significant percentage of our online users are between 18 and 34 years old, we place emphasis on reaching younger users through more focused information and content relevant to this audience. Our primary information and content channels are broadly classified into news content and interest specific subjects. News content includes: o Current affairs and breaking news. Our in-house editorial staff and contract journalists provide our users with up-to-date news focused on events of interest to Indians, including feature news stories, interviews and online chats with leading Indian personalities. We provide breaking news and in-depth coverage of significant news and other events, such as the recent Indian elections. We also aggregate news and photos from various news providers and websites, thereby giving our users access to news and information relevant to them from multiple sources and points of view. o Business. Our business channel offers business news from India and coverage of Indian stock markets. This channel also provides regular columns and feature stories, as well as personal finance information. We also offer Rediff.com Portfolio Tracker, which allows registered users to monitor stock quotes from the Bombay Stock Exchange and personalize a portfolio tracker to monitor performance of investments. o Movies. Our movie channel offers coverage of movie news from Bollywood and Hollywood with box office information, regular columns, feature stories, interviews with movie personalities, movie reviews and slide shows. o Cricket/Sports. Our cricket/sports channel provides coverage of Indian and global sporting news. We provide in-depth coverage of cricket news from India and around the globe, including statistics, scores and schedules, regular columns, feature stories and interviews. We also provide special coverage of major sporting events of specific interest to Indians, such as our recent coverage of the India-Pakistan Cricket Series. Interest specific channels include topic of interest such as Auto, Health, Home Decor, Personal Finance and Jobs. Content for these channels is managed through a combination of in house editorial staff, content syndication from newswires, such as Reuters, PTI and UNI, content aggregation from other publications and news providers, and by partnering with specialized content providers. We also provide analysis of our in-house and aggregated news content and an opportunity for users to participate in discussions and debates on a variety of subjects online in our discussion forums. Our registered users have the opportunity to receive updated news and information via e-mail by subscribing to a choice of daily newsletters such as our daily News flash and Money flash. Additionally, our website offers users the Rediff Personal Edition, enabling the creation of personalized home pages with specific topics of interest to individual users. Rediff Personal Edition is powered by our in-house developed content management system using XML technology, making it one of the first personalized websites in India. XML technology allows us to analyze user surfing patterns on the website and thereby understand that user's online preferences. Based on these surfing trends, the technology recommends news stories of specific interest to that user. We have launched the RSS (Really Simple Syndication/Rich site summary) feature. This is an XML-based format for distributing and aggregating Web content (such as breaking news, cricket scores, information updates). RSS/XML feeds can gather information related to a user's area of interest such as (breaking) news, elections (seats tally), cricket (scores), and update these headlines onto a downloadable desktop software on the user's computer. Our website also allows users to search the Rediff.com archives, which contain over seven years of news and information, using our own search technology. We also allow users to search the World Wide Web, with technology licensed from an OEM partner. Community Features and Products Through a single login facility, we provide a combination of free and paid community features and products to consumers and businesses. Our offerings include e-mail, instant messaging, chat, e-cards, Matchmaker, astrology services, blogs, message board and mobile services. Some of these features and products are offered without charge, while others are offered on a subscription or fee basis. E-mail, Instant Messaging, Chat and E-cards We offer our users a variety of e-mail solutions tailored to their needs. All of our e-mail services offer advanced Spam control and support eleven Indian languages. Rediffmail, our flagship e-mail service, is provided free of charge to our users. Our free e-mail service has limited features but additional features, such as additional storage, may be individually purchased as add-on supplements. Additionally, we have created branded e-mail products, such as Rediffmail Plus, Rediffmail Mobile, Rediffmail Pro and Rediffmail Pro Enterprise by packaging various groups of features together to match the preferences of specific users. We have priced each of these branded products competitively. Our e-mail offerings are described below. o Rediffmail is a free service that provides users with a full featured e-mail service with a powerful Spam shield and 1GB of free storage space. We operate one of the largest free e-mail systems in India. As of March 31, 2004, we had approximately 30 million registered Rediffmail users. o Rediffmail Plus is a subscription service that offers a variety of premium features. Rediffmail Plus subscribers receive 2GB of storage space, the ability to send large attachments and accounts which do not automatically expire when not used. Subscribers can also send up to 100 SMS messages and access their e-mail accounts with other client applications, free of charge. Rediffmail Plus comes with a 30 MB Briefcase. A one year subscription to Rediffmail Plus is currently priced at Rs.449 (or approximately US $10). o Rediffmail Mobile is a subscription service with a variety of premium features similar to Rediffmail Plus but with the added functionality of receiving e-mail alerts on the user's selected mobile phone. This service is currently priced at Rs.399 (or approximately US $9) for a one year subscription. o Rediffmail Pro is a subscription service targeted at business users. Rediffmail Pro offers small businesses, as well as large corporations, the ability to select, subject to availability, their own domain name for e-mail addresses. Subscribers are given five e-mail addresses and 1GB of storage space, which can be allocated among employees and increased without limitation at an additional charge. Rediffmail Pro also offers enhanced address book features and virus protection. Users may also access their other e-mail accounts at other POP accounts through their Rediffmail Pro accounts. A one year subscription to Rediffmail Pro is currently priced at Rs.1,499 (or approximately US $33). o Rediffmail Enterprise Pro is a web based e-mail service for corporates having a large field force of agents/sales associates/dealers. Rediff Bol instant messenger is a free service that enables instant communication across the Internet with other Rediff Bol users. With Rediff Bol, registered users can identify the users that they are chatting with and can also find out instantly if someone on their contact list is online. Additionally, users can chat in any one of eleven Indian languages and can use the people search feature to make new friends by searching for other users who meet age, gender and location criteria. We offer our registered users the ability to communicate with others who share their interests through various chat rooms organized by areas of interest and geographic locations in India and around the world. Our chat services are available free of charge. Rediff E-cards is a free service that allows registered users to send personalized electronic greeting cards to anyone on the Internet. We provide e-cards for a wide variety of occasions, including those of importance to Indians. Matchmaker Rediff Matchmaker is a matrimonial service targeted at the global Indian community. This service offers users the ability to post profiles of themselves or others for free on the Rediff Matchmaker member database. Users may also search the Rediff Matchmaker member database for free and those with profiles can initiate contact with and be contacted by other users. With a subscription to the Rediff Matchmaker service, users can also send e-mails to and chat with potential matches. A three month subscription to Rediff Matchmaker is currently priced at Rs.1,000 (or US$20 for payments made in U.S. dollars). Matchmaker was established in the fiscal year ended March 31, 2003. Astrology Our astrology channel provides various astrology services, including daily zodiac predictions free of charge. Depending on the service selected, users can also purchase enhanced personalized astrological predictions about their life, career, finances, business and relationships. Users can also ask specific questions which are answered by a panel of astrologers. Our personalized astrology predictions are currently priced between Rs.599 and Rs.2,399 each (or US$12.50 to US$50 each for payments made in U.S. dollars). The Ask a Question product is currently priced at Rs.299 (or US$6 for payments made in U.S. dollars) Payment for any of the above fee-based services can be made by credit cards and within India by cheque/demand draft or through direct debit of the user's Internet banking account. Blogs RediffBlogs is a free online interactive community where users can set up their own blog, or personal online diary, publish their thoughts and ideas directly and instantly to the Web and visit other blogs and comment on them. Users can also post pictures and create multiple blogs under a single username and password. We believe that we are the first Indian website to allow its users to create and post blogs. Mobile Services Rediff Mobile offers mobile phone users a variety of value added services. Users order our value added services from their mobile phones by sending a requesting SMS to 7333 (seven triple-three), which is our designated number for such services, or by browsing our content on general packet radio service (GPRS) or wireless application protocol (WAP) enabled mobile phones. For certain value added services, users can also place orders through our website, including downloads, contests, services, and news and information. Our mobile offerings are described below: o Downloads. Users can download ringtones, polyphonic ringtones, logos, picture messages, wallpapers and games from our website. We have introduced search of ring tones on mobile phones. Downloads include popular Indian content, such as Indi-pop ringtones, Indian cricket team logos and wallpapers featuring Bollywood movie stars. Our ringtones, logos, picture messages and wallpapers are currently priced between Rs.3 and Rs.10 each (including the cost of the outgoing SMS which requests the download), and our games are currently priced between Rs.20 and Rs.50 each. o Contests. Users can participate in contests in which they can win prizes by correctly answering questions sent to them by SMS (Short Messaging Service, or text messaging). Some of our recent contests include Rediff 11,Filmi 10, a Bollywood quiz contest. Users are charged only for the cost of each outgoing SMS message which responds to a question. o Services. We offer users a variety of mobile phone related services by SMS, such as the ability to search, seek and flirt with other users, play interactive games, and receive jokes and astrological predictions. Users are charged only for the cost of each outgoing SMS message which requests the service. o News and Information. Users can stay updated on current events by receiving cricket scores, news and stock quotes by an SMS message. Users are charged only for the cost of each outgoing SMS message which requests the news and information. o E-mail and Instant Messaging. Rediffmail and Rediff Bol subscribers can receive, read and reply to e-mails and instant messages by SMS. Users are charged only for the cost of each outgoing SMS which contains the e-mail or instant message. Rediff Mobile was established in the fiscal year ended March 31, 2003. E-Commerce Rediff Shopping is an online marketplace which allows users to purchase products and services from various merchants. We offer products and services in more than 50 categories, the most popular of which currently include apparel, personal accessories, footwear, electronics, flowers and jewelry. Approximately half of the purchases are from users located in Mumbai, New Delhi, Bangalore, Kolkata, Chennai, and Pune. Revenue Sources India Online business primarily includes revenues from Online advertising and fee based services. Online advertising includes advertisement and sponsorships and designing and managing customers' websites. Fee based services include e-commerce, subscription services and wireless short messaging services. Online Advertising Online advertising on our site includes sponsorships of editorial events. Sponsorships are sought for event led features like the 2003 Cricket World Cup, the 2004 Indo-Pakistan Friendship Cricket Series, Budget 2003 and Election 2004. Other forms of advertising include banner, e-mail and text link campaigns. Our advertisers enter into agreements pursuant to which they either pay a fixed fee for a given time-period, usually ranging from one month to one year, or a combination of fixed and variable fees depending upon the leads provided to them through our website. Some of our advertisers also enter into agreements pursuant to which they pay a fixed fee for a guaranteed number of impressions on our site. Our standard rate per thousand impressions, commonly referred to as CPMs, for banner advertisements varies, depending on location of the advertisements on our site, the targeted country and the extent to which the advertisements are targeted to a particular audience. Discounts from standard CPM rates may be provided for higher volume and longer-term advertising contracts. We have introduced new formats for advertisers to broaden the appeal of the advertisements to our users, such as text ads and dynamic hypertext markup language We had over 146 advertisers on our Rediff.com India website during the fiscal year ended March 31, 2004. Our top five advertisers accounted for approximately 42% of our India advertising revenues for the fiscal year ended March 31, 2004. Advertisements by interest specific online verticals, financial institutions and consumer goods accounted for 93.5% of our India advertising revenues for the fiscal year ended March 31, 2004. A partial list of our advertising clients includes Apnaloan, Citibank, Coca-Cola, Colgate, Google, Hewlett Packard, Hero Honda Motors, the ICICI Group, Johnson & Johnson, Levers, Makemytrip, Monster India and Pepsi. Fee based services Revenues from fee based services primarily include income from various paid e-mail and other service products, such as e-commerce marketplace and mobile services. Subscription service revenues primarily include income from various paid e-mail service products that cater to a cross section of our registered user base and revenues from subscriptions to Matchmaker. The revenue for subscription based service products is recognized ratably over the period of subscription. Subscription revenues are also derived from providing value added short messaging services such as e-mail and other related products to mobile phone users. We have contracts with third-party mobile phone operators for sharing revenues from these services. SMS based revenues are recognized when the service is performed. E-commerce revenue primarily consists of commission earned on sale of books, music, apparel, confectionery, gifts and other items to customers who shop at our online store. Revenues from E-commerce services also include fees charged to vendors for creating, designing and hosting the vendors' product information on our website. Such fees are amortized over the hosting contract period. Infrastructure Online Advertising Our sales and marketing professionals are responsible for seeking additional advertisers and e-commerce merchants, creating advertisements, as well as obtaining and analyzing customer feedback. Sales team members are based in Mumbai, New Delhi, New York, Chicago and Toronto. The sales team coordinates regularly regarding advertising across all of our businesses. Our sales team includes designers, copywriters, programmers, campaign managers and technology personnel. As of March 31, 2004, our sales team consisted of 65 sales and marketing professionals. During the year, many of the leading advertising agencies expanded their operations with the establishment of an interactive division. These divisions now promote the Internet as an advertising medium among leading marketers in the country. We closely interact and support these advertising agencies in garnering larger online advertising budgets from their clients. Our sales teams are based in Mumbai and New Delhi and sell advertising space on our websites. They focus their sales efforts on the top 200 advertisers in India and on key consumer categories. Our sales team consults regularly with advertisers on design and placement of their web-based advertising, provides advertisers with advertising measurement analysis and focuses on providing a high level of customer service satisfaction. E-commerce Our shopping platform has a host of user-friendly features such as product search and detailed product category listing. The "tracking order", "view account" and "shopping bag details" features make online shopping more convenient for users. Users can pay for purchases by credit card, local check, C.O.D. or direct debit to an Internet banking account if they have an account with designated Indian banks. Our customer service officers address customer inquiries mainly through e-mail as well as over voice, including through a toll-free number, and solicit feedback from users to continuously improve our offerings. Once a user places an order on our website, we process and collect payment (except where the method of payment is C.O.D.) and notify the merchant who then packages the product and arranges for delivery through one of our designated couriers. We make payment to the merchant once we receive proof that the merchant has dispatched the product. Most products purchased through our website are delivered within 10 business days. In the event of failure of delivery or payment or in the event of a return, we return the product to the merchant and receive a full refund, although we bear the cost of the additional courier charges incurred. Product warranties are the responsibility of those who sell products on our website's marketplace, although our reputation can be adversely affected if a user is not satisfied with a purchase. Pursuant to the terms of our agreements with merchants, we receive a small one-time entry fee and a separate commission on the sale of each product posted on our website. Our commissions range from 5% to 50% of the sale price depending on the type and quantity of products sold. During the fiscal year ended March 31, 2004, we processed approximately 225,000 online purchases. Rediff Shopping currently has over 700,000 registered users. Our sales force targets manufacturers and vendors of the leading products in India for them to offer their products through the Rediff Shopping platform. We also target manufacturers and vendors that supply products in categories that are fast moving over the Internet. Electronic Payments We were among the first Internet companies in India to accept credit cards for online payments. Users can use all leading U.S. dollar and Rupee credit cards, debit cards, Paypal and online money transfers for online payments. All online transactions are secured by Secure Socket Layer (SSL) technology. We have entered into agreements with Citibank, N.A. and ICICI Bank Limited to automate Visa and MasterCard credit card payments through our website. We also have arrangements with a number of major banks in India to facilitate online money transfers. Mobile services We have entered into agreements with major Indian mobile phone operators permitting their mobile phone users to access our offerings. Our agreements with these operators currently allow us to reach all Global Systems for Mobile Communications (GSM)-based cellular providers, covering 90% of the cellular footprint in India. Mobile phone users that subscribe for service from mobile phone operators which have not entered into agreements with us cannot access our value added services. Pursuant to the terms of our agreements with Indian mobile phone operators, we receive a portion of the amounts charged to mobile phone users (including the amounts mobile phone users are charged for an outgoing SMS which requests the service), which mobile phone operators bill and collect. We aggregate and purchase the ringtones, polyphonic ringtones, logos, picture messages, wallpapers and games available on our website from a third party provider. Pursuant to the terms of our agreement, we pay them an agreed amount per downloaded ringtone and share with them a percentage of the revenues we receive from mobile phone operators in respect of the content obtained from such provider which we provide to mobile phone users. United States Publishing Business Our United States publishing business primarily consists of our India Abroad newspaper, India in New York newspaper and Rediff.com U.S.A. website. For the fiscal year ended March 31, 2004, the United States publishing business generated US$5.8 million of revenues, accounting for 61.5% of our total revenues. India Abroad India Abroad, which we acquired in April 2001, was established over 34 years ago and is one of the oldest weekly newspapers focused on the Indian community in the United States. The newspaper has five North America editions - - New York, Tristate, Chicago/Dallas, Los Angeles and Canadian. The paper is divided into five sections: News, Community, Business and Sports, Classifieds, and a magazine. India Abroad's content is targeted at Indians living in North America. In determining content, India Abroad places emphasis on reaching Indians in North America who are not likely to be regular visitors to our websites. During the past three years, we have consolidated most of the editorial and production functions of India Abroad in Mumbai, India to achieve cost savings and greater efficiencies. Once the paper is produced by the editorial staff in Mumbai, it is transmitted electronically to printers in New York and Toronto for publishing every Friday. The paper is available for home delivery primarily in the United States and Canada. The annual subscription rate is US$32 in the United States, US$26 in Canada, US$90 in other countries and Rs.850 in India. Subscriptions for six months, two years and life-time are also available. India Abroad is also available at leading newsstands and Indian grocery stores across North America, generally at US$1 per copy. Subscriptions comprise approximately 80% of our circulation. India Abroad offers classified advertising, which includes advertisements listed together in sequence by the nature of the advertisement, such as matrimonial, business/finance, employment, medical and real estate. The paper also has a Bulletin Board on the back cover which offers enhanced classified advertising. Prices for our standard classified advertisement packages range from US$20 for 10 words in regular liner with no border to US$240 for 100 words (1colX4") with large text and a border. There is a 50% surcharge for running advertisements in all of the editions. India Abroad also has an associated website, www.indiaabroad.com, which allows users to start and renew subscriptions, make payments and change their delivery addresses. Users can also order classified advertisements through this website. India in New York India in New York, a guide to events and entertainment from India Abroad, was started in 1997 as a sister publication of India Abroad. India in New York features news, events, sports and entertainment and a wide array of classifieds. The India in New York newspaper is distributed free in the Tristate area of New York, New Jersey and Connecticut. India in New York is available at restaurants, temples, Indian associations, community events and Indian grocery stores in the Tristate area. Rediff.com U.S.A. Rediff.com U.S.A. is our website targeted at the Indian-American community in North America. Rediff.com U.S.A. includes information and content which are the same as, or similar to, that on our Rediff.com India website, along with certain additional offerings including those described below. o Rediff SMS2India. Rediff SMS2India allows subscribers to send text messages (SMS) from a personal computer to a mobile phone in India or the U.S. The mobile user can reply by SMS back to the subscriber's personal computer. A three month subscription that permits a maximum of 400 messages is currently priced at US$9.99. Rediff SMS2India was established in the fiscal year ended March 31, 2003. o Rediff Radio. This service allows subscribers access to two channels of radio with Indian music (sorted by categories such as artist, composer, decades, lyricist and mood), Bollywood and other entertainment news, interviews with Indian personalities and programs such as Bollywood Rewind, Dance Bar and Chart Masala, which are hosted by Indian radio jockeys. A one month subscription to Rediff Radio is currently priced at US$4.95 per month, and a three month subscription is currently priced at US$11.95. Revenue sources Our U.S. Publishing business, primarily includes revenues from subscription and advertising services from the publication of India Abroad, India in New York and Rediff.com U.S.A. Offline Advertising Through India Abroad, we offer an attractive platform to advertisers seeking an online-offline solution as well as a means for advertisers to tap the Indian community in the United States. India Abroad sells retail, brand, services, event and other advertising. Generally, there are different rates for advertisements depending on the size, placement and category of advertisement as well as the number of issues in respect of which advertising is purchased. Customers have a choice to run the advertisement in different and/or combined editions. Infrastructure Our sales team members based in the USA and Canada focus their sales efforts on advertisers in the United States that are seeking to advertise in India Abroad and on our Rediff.com U.S.A. website. All of our sales team members undertake to leverage newspaper and website advertising sales opportunities. Competition Online There are a number of companies that provide websites focusing on India and the global Indian community. These companies compete with our websites for visitors, online advertising, e-commerce and subscription revenues. Competition for visitors and e-commerce is intense and is expected to increase in the future as there are no substantial barriers to entry in our market. Our ability to compete successfully depends on many factors including: o the quality of our content; o the user friendliness of our services; o our sales and marketing efforts; o the performance of our technology; and o ability to fund our operations. We compete with providers of Indian content over the Internet, including web directories, search engines, content sites, portals, horizontal sites and Internet service providers. Our current and anticipated competitors include: o IndiaTimes.com (Bennett, Coleman & Co. Ltd.); o MSNBC.co.in and MSN.com (Microsoft Corporation); o Yahoo.co.in and Yahoo.com (Yahoo Inc.); o Google; and o Sify (Sify Ltd.). We also compete with other forms of media, such as print media, radio and television, for advertisers and advertising revenue. Many of our competitors have a longer operating history, greater name recognition and customer base, and greater management, financial, technical, marketing, sales, brand, and other resources than we do. They can use their superior experience and resources in a variety of competitive ways, including by investing more aggressively in research and development, creating superior content, making acquisitions, and competing more aggressively for advertisers. There has also been a trend toward industry consolidation so our smaller competitors today may become larger in the future. If our competitors are more successful than we are at generating visitors and website traffic due to superior content and other service offerings, our revenues may decline. Offline There are a limited number of companies that provide newspapers focusing on India and the global Indian community. These newspapers compete with India Abroad for advertising revenues. Our current competitors include: o India West; o Indian Express; and o News India Times. Intellectual Property Intellectual property rights are important to our business. We rely on a combination of copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions to protect our intellectual property. We require employees, independent contractors and, when practicable, vendors to enter into confidentiality agreements upon the commencement of their relationships with us. These agreements generally provide that confidential information developed or made known during the course of a relationship with us must be kept confidential. 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, including our domain name. For example, there are some parties who have registered domain names similar to or slightly different from our domain name, Rediff.com, and we have filed lawsuits in India to protect our rights in respect of our domain name. We do not believe that the outcome of these lawsuits will have a material adverse effect on our business. However, the laws of India do not protect proprietary rights to the same extent as the laws of the United States. Further, the global nature of the Internet makes it difficult to control the ultimate destination of our products and services. In the future, further 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 website or other product or service offerings overlap with competitive offerings. Defending against these claims, even if not meritorious, could be expensive and divert our attention from our operations. If we become liable to third parties for infringing their intellectual property rights, we could be required to pay a substantial damage award and be forced to try to obtain or develop non-infringing technology, obtain a license or cease selling the applications that contain the infringing technology. If this were to occur, we may be unable to develop non-infringing technology or obtain a license on commercially reasonable terms, or at all. We also rely on a variety of technologies that are licensed from third parties. The software developed by these third parties is used in our website to perform key functions. These and other third-party licenses may not be available to us on commercially reasonable terms in the future. The loss or inability to obtain or retain any of these licenses could delay the introduction of software enhancements, interactive tools and other features until equivalent technology could be licensed or developed. Any such delays could materially adversely affect our business, operating results and financial condition. We have filed trademark applications for "www.rediff.com" and "Rediff On The Net" in India and for "Rediff" and "Rediff.com" in the United States, which are pending. Certificate of Registration of "Rediff On The Net" and Design (Square) bearing no. 2511409 for the mark being registered on November 27, 2001 under International classes 35, 36, 38, 41 and 42, has been received by us from the United States Patent and Trademark Office. Facilities India Our corporate headquarters are located in Mumbai, India, where we lease approximately 14,000 square feet, located in two buildings. In one facility we lease approximately 11,000 square feet and in the other, we lease approximately 3,000 square feet. The lease for the 11,000 square feet facility expires on April 25, 2005. The lease for the 3000 square feet facility expired on January 31, 2004 and we are in the process of entering into the agreement for renewal of the facility. We also lease approximately 2,500 square feet of office space in New Delhi, India, which serves as a branch office. This lease expires on December 31, 2006. United States Our India Abroad subsidiary leases approximately 6,250 square feet of office space in New York, the lease for which expires on October 31, 2007. India Abroad leases an additional 3,100 square feet of office space in the same building, the lease for which expires on November 30, 2004. Additionally India Abroad leases approximately 1,500 square feet for office space in Chicago, Illinois, the lease for which expires on March 31, 2008. Legal Proceedings Securities Actions Khanna v. Rediff.com India Limited, et al., United States District Court of the Southern District of New York, Case No. SDNY 01CV 3814. On April 16, 2001, Rediff, four of its officers and directors, including Ajit Balakrishnan, and a group of investment banks that had acted as underwriters in our June 2000 initial public offering, or IPO, were named as defendants in a class action lawsuit. The lawsuit alleges that our registration statement filed with the SEC contained misleading statements and omissions in violation of the Securities Act, the Exchange Act and Rule 10b-5 thereof. The plaintiff class in this lawsuit has been defined as all persons who purchased ADSs from the time of the IPO through April 14, 2001 and seeks unspecified damages. - Several other class action lawsuits have been filed against us and other defendants stating substantially the same allegations as set forth in the Khanna Action. As of the date of this annual report, we are aware of the following related lawsuits pending in the U.S. courts: o David & Chaile Steinberg v. Rediff.com India Limited, et al., United States District Court of the Southern District of New York, Case No. SDNY 01CV 3471; o Thomas Karakunnel and Roger Steward v. Rediff.com India Limited, et al., United States District Court of the Southern District of New York, Case No. SDNY 01CV 3814; and o Anup Kumar Bhasin v. Rediff.com India Limited, et al., United States District Court of the Southern District of New York, Case No. SDNY 01CV 3593. All the cases have been consolidated before a single judge in the United States District Court for the Southern District of New York. On May 11, 2001, we received from our underwriters in our IPO a demand for indemnification of the underwriters' legal fees and liabilities. Our board of directors resolved to indemnify our officers and directors named as defendants against their legal fees and liabilities, to the extent permitted under Indian law. At the time of the IPO, we purchased Directors and Officers Liability insurance (the "D&O Policy"), providing coverage against federal securities law claims. The D&O Policy includes coverage for our cost of defending the class action lawsuits, our indemnification liabilities to our officers and directors, and our indemnification liabilities to our underwriters. The coverage of the D&O Policy is denominated in Indian Rupees, but the policy proceeds are payable in U.S. dollars. Based on the noon buying rate on March 31, 2004, the face amount of the D&O Policy is approximately US$20.6 million. The proceeds of the D&O Policy available to satisfy any judgment against us, or any judgment against persons whom we are is obligated to indemnify, will be reduced by the amount of the legal fees and associated expenses incurred in the course of our defense and the defense of the individual defendants and the underwriters which are paid from the D&O Policy. The D&O Policy includes a deductible of approximately US$259,000 (based on the noon buying rate at March 31, 2004), which must be paid by us before the D&O Policy proceeds would be available. The D&O Policy contains various exclusions, which, if met, may result in the denial of insurance coverage. We have been advised by the insurance carriers who wrote the D&O Policy that they are not aware of any facts or circumstances that would cause any of the exclusions to apply, but that the carriers have reserved their rights to claim that the exclusions do apply if any such facts or circumstances come to their attention. On June 5, 2001, twenty-four companies, including Rediff, who had issued securities to the public, together with the investment banks who acted as underwriters in these initial public offerings, were named as defendants in the action of Shives et al. v. Bank of America Securities, LLC et al., a class action lawsuit filed in the United States District Court for the Southern District of New York. Also named as defendants in this lawsuit were four of our officers and directors, including Ajit Balakrishnan. Plaintiffs in this lawsuit allege that the underwriter defendants combined and conspired to inflate the underwriting compensation they received in connection with the initial public offerings of the defendant companies, to manipulate and inflate the prices paid by plaintiffs for securities issued in the initial public offerings and to restrain and suppress competitive pricing for underwriting compensation. Plaintiffs alleged claims pursuant to the U.S. Sherman Antitrust Act, 1890, as amended, the U.S. Clayton Antitrust Act, 1914, as amended and the Securities Act against the underwriter defendants. The plaintiffs further allege that the defendants, including Rediff and certain of its officers and directors, made material misstatements and omissions in violation of the Securities Act and the Exchange Act by concealing or failing to disclose the compensation earned by the underwriters in the initial public offerings. As against us and our officers and directors, the Complaint defines a "Rediff.com Sub-Class" consisting of all persons who purchased securities of Rediff.com India Limited from the time of the IPO through April 4, 2001 and seeks unspecified damages. This case has been consolidated with several hundred other class action complaints filed against other issuers who had IPOs in 2000 and 2001. On November 24, 2003, plaintiffs' counsel in the Khanna action and Shives action filed a Consolidated Amended Securities Class Action Complaint ("Consolidated Complaint") which incorporates the material allegations from Khanna action and Shives action. On January 30, 2004, we and our officers and directors filed a motion to dismiss the Consolidated Complaint. The Underwriter Defendants filed a separate motion to dismiss. The motions are currently being briefed by the parties. Action Relating to Access to Pornographic Material Sunil N. Phatarphekar & Ors. v. Abhinav Bhatt and Ors., Mumbai High Court, Criminal Writ Petition No. 1754 of 2000. On June 21, 2000, Rediff, its directors and others (Ajit Balakrishnan, Arun Nanda, Abhay Havaldar, Sunil Phatarphekar, Charles Robert Kaye and Tony Janz) were named as accused in a criminal complaint (RCC Complaint Number 76 of 2000) filed by Mr. Abinav Bhatt, a 22 year old student, before the Judicial Magistrate, First Class, Pune, India, alleging commission of an offence, under Section 292 of the Indian Penal Code ("IPC") for distributing, publicly exhibiting and putting into circulation obscene, pornographic and objectionable material. The Complaint alleged that we, through our website "www.rediff.com", provided a search facility that enabled Internet users to view pornographic, objectionable and obscene material. On November 27, 2000, the Judicial Magistrate passed an order in the Complaint holding that a prima facie case under Section 292 of the IPC had been made out against us and directed commencement of criminal proceedings against all the defendants. A criminal writ petition was filed in the High Court of Mumbai (Criminal Writ Petition Number 1754 of 2000), seeking among other relief the setting aside of the order of the Judicial Magistrate. The High Court of Mumbai in its order dated December 20, 2000, while granting ad-interim relief to the petitioners in the Writ Petition, stayed the order of Judicial Magistrate pending final disposal of the Writ Petition. The Writ Petition has been admitted by the High Court of Mumbai. While we believe that the lawsuit is without merit, and that we and our directors have a valid defense to the Complaint, in the event that we are unsuccessful in our defense, we and our directors may face both criminal penalties and monetary fines. Current Indian laws provide that if any person publishes or transmits or causes to be published in the electronic form, any material which is lascivious or appeals to the prurient interest or if its effect is such as to tend to deprave and corrupt persons who are likely, having regard to all relevant circumstances, to read, see or hear the matter contained or embodied in it, shall be punished (i) for the first conviction, with imprisonment of up to five years and with a fine of up to Rs.100,000 approximately (US$2,000); and (ii) in the event of a second conviction, with imprisonment of up to ten years and with a fine of up to Rs.200,000 approximately (US$4,000). Action Relating to Copyright Violation A complaint was filed by the IMI, a society representing various music companies in Magistrate's Court India against three of our directors. The complaint alleges that by providing links to MP3 sites through its directory we have been guilty of violating Section 51 of the Copyright Act 1957. The complaint alleges that the MP3 sites to which links were provided permitted downloading of music which had not been authorized to be so downloaded by copyright owners who are members of IMI. Our directors are named as parties to the lawsuit because, according to the complaint, the directors are in charge of our affairs and are hence deemed to be guilty of committing the offense. Our directors have presently been exempted from personal appearance. Our directors have filed an application for discharge of the complaint before the Magistrate. Although our directors believe they have valid defenses to the action, if they are unsuccessful after exhausting all legal remedies, our directors could face both criminal penalties and monetary fines. We are also subject to other legal proceedings and claims, which have arisen in the ordinary course of its business. Those actions, when ultimately concluded and determined, will not, in the opinion of management, have a material effect on our results of operations or financial position. Subsidiaries Rediff Holdings, Inc., or Rediff Holdings, is our wholly owned subsidiary and is incorporated in the State of Delaware. Rediff Holdings holds all of the outstanding and voting shares of Rediff.com Inc. (formerly, thinkindia.com) and substantially all of the outstanding and voting shares of India Abroad. We also own a total of 19.9% of the outstanding and voting shares of Apnaloan.com, 10% of the outstanding and voting shares of Traveljini.com and 5% of the outstanding and voting shares of Bill Junction. Rediff.com Inc., which runs our U.S.-based Internet portal, is incorporated in Delaware. India Abroad is a New York corporation, which publishes a weekly newspaper targeted primarily at the Indian community in North America. Value Communication Corporation (or Valucom), an Illinois corporation incorporated in 1996, is another subsidiary of Rediff.com India Limited. In April 2004, we sold Valucom's business to Worldquest Networks Inc. Apnaloan.com is a private company registered under the Indian Companies Act. It is a web-enabled loan marketplace and offers a wide spectrum of personal financial products, including credit cards, car loans, personal loans and housing loans. Bill Junction and Traveljini.com are companies registered under the Indian Companies Act and are indirect subsidiaries of ICICI Limited. Bill Junction provides easy online bill payment solutions and Traveljini.com provides travel related information. Government Regulation General Our online business is primarily subject to regulation by the Ministry of Information Technology, which was formed in October 1999 and is a part of the Government of India. We may also be subject to regulation by the Ministry of Communications of the Government of India and the TRAI. On June 9, 2000, the Indian IT Act was enacted and was made effective as of October 17, 2000. The IT Act has been enacted to: o give legal validity to online contracts; o give legal validity to digital signatures; o make electronic records admissible in court in evidentiary proceedings; o set default rules for time and place of dispatch and receipt of electronic records; o allow for filing of documents with the Government of India in electronic form; o allow for retention of documents, information or records in electronic form; o set up certifying authorities to issue and supervise digital signatures; o set up a controller of certifying authorities to monitor and supervise the certifying authorities; o set up Cyber Regulations Appellate Tribunals to act as quasi-judicial bodies with respect to disputes relating to online transactions; and o penalize computer crimes. Although the IT Act has been enacted, clarity on various issues including legal recognition of electronic records, validity of contracts entered into through the Internet, validity of digital signatures needs to be established. New Telecom Policy, 1999 The New Telecom Policy, 1999, or the New Telecom Policy, deals with restructuring of the Indian telecommunications sector. The New Telecom Policy states that Internet Service Providers, or ISPs, who wish to provide applications such as tele-banking, tele-medicine, tele-education, tele-trading and e-commerce, will be allowed to operate using infrastructure provided by various Internet access providers. The New Telecom Policy also provides that no license fees will be charged for providing the specific services, but registration with the Government of India will be required. The New Telecom Policy prohibits such service providers to provide switched telephony. If the New Telecom Policy is enforced in its current form, we may have to register our services with the Government of India and we may also be governed by the regulations issued by the TRAI. The TRAI was established in January 1997 by the Government of India under the provisions of the Telecom Regulatory Authority of India Act, 1997, as an autonomous body to regulate the telecommunications industry. On January 24, 2000, the President of India passed an ordinance to recast the TRAI. The ordinance set up a Telecom Disputes Settlement and Appellate Tribunal to adjudicate any dispute between a licensor and licensee, between service providers, appeals of telecom service providers and between service providers and groups of consumers. This ordinance has been replaced by the Telecom Regulatory Authority of India (Amendment) Act, 2000. The TRAI under the amended Act has powers to decide on new licenses and their terms and conditions, the levy of fees and charges on services, interconnectivity between the telecom service providers and perform administrative and financial functions entrusted to it by the Government of India. The new TRAI has no adjudicatory powers, as these powers now vest in a Telecom Disputes Settlement and Appellate Authority. Telecom service providers can approach this appellate authority and the orders of this authority can be challenged only in the Supreme Court of India. Privacy At present India does not have any specific legislation to prevent invasion of privacy by private parties. The Constitution of India protects the privacy of private parties against any invasion by the state or government, but it may not be possible to invoke this protection against violation by private parties. There is no pending or proposed legislation that seeks to penalize or regulate violation of privacy by private parties. Encryption Telecommunications in India are governed by the Indian Telegraph Act, 1885, as amended (the "Telegraph Act"), and the Indian Wireless Telegraphy Act, 1933, as amended (the "Wireless Act"). Pursuant to the Telegraph Act, the provision of any telecommunications services in India requires a license from the Government of India obtained through the Department of Telecommunications. While the Telegraph Act sets the legal framework for regulation of the telecommunications industry, the Wireless Act regulates the possession of wireless telegraphy equipment. Encryption hardware may be considered as an instrument capable of being used for the transmission and reception of telecommunications signals. Any person intending to use encryption hardware may be required to obtain prior permission from the Department of Telecommunications of the Government of India. The guidelines for ISPs permit the use of encryption equipment for providing secrecy in transmission up to a level of encryption specified by the Government of India. However, if the encryption equipment of levels higher than specified is to be deployed, ISPs have to obtain the clearance of the Government of India and should deposit one set of keys with the Department of Telecommunications. These guidelines are applicable to ISPs and it is uncertain whether they will apply to us. For using encryption hardware, we may have to obtain prior approval from the Department of Telecommunications. However, it is uncertain whether we are required to obtain any approval from the Department of Telecommunications or any other department for using encryption software. Furthermore, there may be certain restrictions in relation to the import of encrypted software into India. Imports We may be required to import into India computer hardware and Internet related software purchased from foreign manufacturers for our business. These imports will be subject to the Export and Import Policy issued by the Ministry of Commerce of the Government of India. At the time of import, we may be required to pay a customs duty pursuant to the Customs Tariff Act, 1975, as amended. We will also be subject to the Foreign Exchange Management Act, 1999, and the rules thereunder, ("FEMA"), in connection with payments in foreign currency to the manufacturers of these products. We may require the approval of the Reserve Bank of India if the payment in respect of such import is made beyond a period of 6 months from the date of shipment. Ownership of Foreign Securities We may wish to invest in the securities of foreign companies. The FEMA may require that we obtain permission from the Reserve Bank of India prior to making any such investment. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and operating results should be read in conjunction with the financial statements and the related notes included elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this annual report particularly in the "Risk Factors" section of this annual report. Overview We are a leading Internet destination in India focusing on India and the global Indian community. Our websites in India and the United States include information and content channels relevant to Indians, such as news, business, movies and cricket/sports, community features, such as e-mail, chat, messenger, e-commerce, Matchmaker, astrology, blogs and mobile services. Many of these services are provided free of charge, while others are subscription based. We also provide wireless short messaging services from PCs to cellular phone subscribers. With 30.4 million online registered users worldwide as at March 31, 2004, we believe Rediff.com is the most recognized online brand in India and among the Indian community worldwide. Additionally, we publish a weekly newspaper, India Abroad, in the United States and Canada. In February 1996, we initiated our online content offerings with rediff.co.in and rediffindia.com. We later combined the sites into rediff.com, our online portal in India. With the acquisition of thinkindia.com Inc. (later renamed Rediff.com Inc.) in February 2001, we launched Rediff U.S.A., an online portal providing content, community and e-commerce for our users in the United States. During the fiscal year ended March 31, 2004, our reportable business segments were India Online business, U.S. Publishing business and phone card business. On April 8, 2004, we sold our phone card business to Worldquest Networks, Inc. In accordance with SFAS 144, Accounting for the impairment or disposal of long-lived assets, the results of the operations of the phone card business, are disclosed as discontinued operations in our consolidated statement of operations. Accordingly, the segmented results of operations for the phone card business for the fiscal year ended March 31, 2004 and for prior fiscal years have not been presented and the reportable business segments presented herein are: (i) India Online business, which primarily includes revenues from online advertising and fee based services. Online advertising includes advertisements and sponsorships and designing and managing customers' websites. Fee based services include e-commerce, subscription services and wireless short messaging services. (ii) U.S. Publishing business, which primarily includes revenues from subscription and advertising services from the publication of India Abroad, India in New York and Rediff.com U.S.A. In earlier years, our reportable business segments were: (i) for the fiscal year ended March 31, 2003, India Online business, U.S.Publishing business and phone card business. (ii) for the fiscal year ended March 31, 2002, Media services, Merchandizing services and Communication services. Revenues from our reportable business segments were as follows:
For the Fiscal Years Ended March 31, -------------------------------------------------------- 2002(1) 2003 2004 ----------------- ----------------- ---------------- India Online business........... US$2,575,918 US$2,767,244 US$3,636,183 U.S. Publishing business........ 5,283,037 5,804,598 5,810,420 ------------ ------------ ------------ Total revenues............. US$7,858,955 US$8,571,842 US$9,446,603 ============ ============ ============ - ------------------------------- (1) Revenues for the year ended March 31, 2002 have been reclassified to conform to the above classification.
During the year ended March 31, 2004, we discontinued our earlier practice of allocating our operating expenses to our business segments, as our management focuses primarily on the segment's gross profits to measure the performance of each operating segment. We have incurred significant net losses and negative cash flows from operations since our inception in January 1996, including a net loss of approximately US$5.7 million for the fiscal year ended March 31, 2004. As of March 31, 2004, we had an accumulated deficit of approximately US$54.4 million. We will need to generate additional revenues, while controlling our expenses, to achieve profitability. During June 2000, we issued a total of 5.3 million ADSs, representing 2.6 million equity shares, in an underwritten initial public offering at a price of US$12.00 per ADS, for aggregate net proceeds of US$57.3 million. The net proceeds of the ADS offering have been used by us, and in the future are intended to be used by us, to develop content for our Internet portals, to advertise and promote our brand and for general corporate purposes, including strategic investments, partnerships and acquisitions. Significant Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including but not limited to allowances for doubtful accounts, the valuation of investments, income taxes, restructuring costs, contingencies, goodwill impairment and litigation. We base our estimates on historical experience and on other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The following are the significant accounting policies used in the preparation of our financial statements. Revenue Recognition India Online business India Online business includes revenues from online advertising and fee based services. Online advertising includes advertisement and sponsorships and designing and managing customers' websites. Fee based services include e-commerce, subscription services and wireless short messaging services. E-commerce revenue primarily consists of commission earned on sale of items to customers who shop on our online marketplace, while subscription services consist of subscriptions received for using our paid e-mail services, Matchmaker, astrology and other services. Wireless short messaging services include revenues derived from mobile phone operators based on ringtones, picture messages, logos, wallpapers and value added text messages received and sent by mobile subscribers over the mobile phone. Advertisement and sponsorship income is derived from customers who advertise on our website or to whom direct links from our website to their own websites are provided and income earned from designing and managing customers' websites. Revenues from advertisement and sponsorships are recognized ratably over the contractual period of the advertisement, commencing from the time the advertisement is placed on the website. Revenues are also derived from sponsor buttons placed in specific areas of our website, which generally provide users with direct links to sponsor websites. Such revenues are recognized ratably over the period in which the advertisement is displayed, provided that no significant obligations remain and collection of the resulting receivable is probable. Our obligations typically include guarantee of a minimum number of impressions or number of times that an advertisement appears in pages viewed by users of our portal. To the extent that minimum guaranteed impressions are not met, we defer recognition of corresponding revenues until the guaranteed impression levels are achieved. We also earn revenues on sponsorship contracts, which include fees relating to the design, coordination and integration of the customers' content, which are recognized ratably over the term of the contract. Website development services principally consist of services relating to the designing of graphics, layout, artwork and content of the customers' website. Revenue from such services on large contracts that relatively take longer periods of time to complete are recognized upon completion of milestones specified in the contract. At each such milestone, the services are either billed or billable, and as they relate to completed work, are earned. Revenue from such services on contracts that take relatively shorter periods of time is recognized on completion of the entire contract. During fiscal 2002, 2003 and 2004, short-term contracts constituted substantially all of these services. Fee based services include e-commerce, subscription services and wireless short messaging services. E-commerce marketplace revenues primarily consist of commission from the sale of books, music, apparel, confectionery, gifts and other items to retail customers who shop online at our website. Customers directly place orders with vendors through our website. When an order is placed, we inform the vendor through an intranet and also confirm whether payment has already been collected by us through credit card/debit card or checks, or whether the payment is to be made by the customer on a C.O.D. basis. The vendor then dispatches the products to the customers. The vendor sends a monthly summary of transactions executed during the month for which we collected payments on its behalf. We make payment to the vendor after deduction of our share of commission and costs. We recognize as revenues commissions earned on these transactions. Revenues from e-commerce services also include fees charged to vendors for creating, designing and hosting the vendors' product information on our website. Such fees are amortized over the hosting contract period. Subscription revenues primarily include income from various subscription based products, such as paid e-mail, match maker, SMS based services, astrology and other services that cater to a cross section of our registered user base. Revenues for subscription based service products are recognized ratably over the period of subscription. We also derive revenues from providing value added short messaging services such as ringtones, picture messages, logos, wallpapers, e-mail and other related products to mobile phone users. Our contracts are with third-party mobile phone operators for sharing revenues from these services. SMS based revenues are recognized when the service is performed. U.S. Publishing business U.S. Publishing business primarily includes revenues from subscription and advertising services from the publication of India Abroad, India in New York and Rediff.com U.S.A. We recognize advertising revenues at the time of publication of the related advertisement. Subscription income is deferred and recognized pro rata over the term of the subscription. Revenues from banners and sponsorships on our Rediff.com U.S.A. portal are recognized over the contractual period of the advertisement, commencing from the date the advertisement is placed on the website, provided that no significant obligations remain and collection of the resulting receivable is probable. Obligations may include guarantee of a minimum number of impressions, or times that an advertisement appears in pages viewed by users of our portal. To the extent that minimum guaranteed impressions are not met, we defer recognition of the corresponding revenues until the guaranteed impression levels are achieved. Allowances for doubtful accounts receivable and other recoverables We maintain allowances for doubtful accounts receivable and for other recoverables for estimated losses resulting from the inability of our customers to make contractually agreed payments. All receivables which are outstanding for 180 days or more are provided for. We also make allowances for a specific account receivable or other recoverable if the facts and circumstances indicate that such account receivable or other recoverable is unlikely to be collected. For example, if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Depreciation and amortization We depreciate our tangible assets on a straight-line basis over the useful life of the assets, which range from three to ten years. Costs incurred for website development are accounted for in accordance with EITF 00-02 - Accounting for Website Development Costs. Eligible costs are capitalized and amortized over the estimated useful life of three years. Maintenance expenses or costs that do not result in new features or functions are expensed as product development costs. Goodwill and intangible assets We capitalize the cost of purchased goodwill and other intangibles. Until March 31, 2001, we amortized the cost of such goodwill and intangibles using the straight line method over their estimated useful lives, ranging from three to seven years for goodwill and generally not exceeding three years for intangibles. With effect from April 1, 2001, we adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets", and ceased to amortize the remaining cost at March 31, 2001 of goodwill and intangibles that do not have a finite life. Instead, in accordance with the two-step methodology required by SFAS No. 142, we test unamortized balances of goodwill and intangible assets that do not have a finite life for impairment annually, or earlier upon the occurrence of a triggering event. Acquisitions and Divestments Value Communications Corporation On March 23, 2001, we acquired the entire outstanding common stock of Value Communications Corporation, a company engaged in selling prepaid long-distance calling cards primarily to the Indian community in the United States and Canada. The purchase consideration consisted of US$3.0 million, which was paid by us on March 23, 2001, plus a deferred consideration (called earn-out payments) payable over a period of two years which was contingent upon Value Communications achieving specified earnings levels in those years. The transaction was accounted for by the purchase method in accordance with APB Opinion No. 16, which resulted in creation of an initial goodwill of US$3.7 million at March 23, 2001. Such goodwill increased to US$6.82 million at March 31, 2002 as a result of provisions for earn-out payments to ValuCom's former shareholders and cash-out of ValuCom options. Such goodwill further increased to US$7.13 million at March 31, 2003 as a result of final earn-out payments made to ValuCom's option holders. On April 8, 2004, we sold our phone card business, consisting primarily of the "Valucom" brand, trademarks, websites, internally built software, customer lists and certain hardware for US$500,000 to Worldquest Networks Inc ("WQN"). WQN paid US$200,000 of the total consideration at closing with the remaining US$300,000 to be paid in twelve monthly installments of US$25,000 commencing May 2004. In addition, we also sold its inventory of prepaid identification numbers ("PINS") to WQN at its carrying value on April 8, 2004, resulting in additional consideration of US$102,424. Separately, in April 2004, WQN entered into an advertising agreement with Rediff.com, Inc. entitling WQN to exclusive rights to prominent online advertising space on the Rediff.com U.S.A website. Under the terms of the advertising agreement, WQN will pay Rediff US$50,000 for twelve consecutive months commencing in May 2004 for the advertising services. WQN provided both Valucom and Rediff irrevocable letters of credit to secure WQN's remaining obligations under these agreements. In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the disposal of the phone card business qualifies as discontinued operations at March 31, 2004. India Abroad Publications Inc. On April 27, 2001, we acquired substantially all the outstanding voting shares of India Abroad Publications Inc., a New York corporation primarily engaged in the publication of a weekly newspaper, India Abroad. Pursuant to a stock purchase agreement, at the closing of the acquisition, we paid approximately US$11.4 million to the selling shareholders of India Abroad. Simultaneously with this acquisition, the former principal shareholder repurchased certain assets for approximately US$1.1 million resulting in an estimated gain of approximately US$314,000, which has been recorded as reduction of goodwill. Of the amount to be paid to the former principal shareholder, we had placed US$2.0 million in an escrow account. At March 31, 2004, US$1 million remained in the escrow account. We accounted for this acquisition by the purchase method, in accordance with APB Opinion No. 16, which resulted in the initial creation of goodwill of approximately US$10.5 million. Goodwill Impairment Fiscal year ended March 31, 2004 During the fiscal year ended March 31, 2004, we recorded a further impairment charge of US$1.7 million for the Valucom goodwill. In April 2004, we sold our phone card business for a consideration of US$500,000. The impairment charge was computed based on the sale value of the phone card business. The remainder of the Valucom goodwill of US$371,588 has been classified as "Assets held for sale" in the balance sheet at March 31, 2004. Our annual assessment of goodwill of India Abroad for impairment during the fiscal year ended March 31, 2004, with the assistance of an independent valuation specialist, concluded that there was no impairment of goodwill during the fiscal year ended March 31, 2004. Fiscal year ended March 31, 2003 During the fiscal year ended March 31 2003, we identified the following three triggering events to warrant testing of goodwill on the ValuCom acquisition for impairment: 1. On July 30, 2002, we entered into a settlement agreement with ValuCom's former founder shareholders, who were managing ValuCom subsequent to our acquisition, to finally settle in full all of our obligations, including payment of earn-out amounts, and to discharge them of their duties to the Company, which resulted in the loss of key management personnel. 2. Deregulation of the Indian long distance telecommunications market and commencement of VOIP (Voice over Internet Protocol) having resulted in increased competition, with a significant drop in international long distance rates, shifting of calls originating from the U.S. to calls originating in India and pricing pressures due to significantly lower rates offered by providers of Internet telephony. We believed that it was unlikely that these trends would reverse in the near future. 3. A significant drop in the number of Indian software professionals in the U.S., as a result of the events of September 11, 2001 and the subsequent downturn in the technology market. As a result, a key target customer group had shrunk and sales volumes were adversely affected. We believed that this trend was also unlikely to reverse in the near future. Following these triggering events, we re-evaluated goodwill that arose on ValuCom's acquisition. During the fiscal year ended March 31, 2003, we assessed the goodwill that arose on India Abroad's acquisition. Based on the application of SFAS No. 142, we concluded that goodwill relating to India Abroad was impaired. We determined the fair value of ValuCom and India Abroad with the assistance of an independent valuation specialist and recorded an impairment charge of US$5.1 million and US$3.2 million for ValuCom and India Abroad, respectively, during the year. Consequently, goodwill of ValuCom and India Abroad as on March 31, 2003 were US$2.0 million and US$7.3 million, respectively. Fiscal year ended March 31, 2002 Following the acquisition of India Abroad on April 27, 2001, we initiated a process of integrating the operations of Rediff.com Inc. (formerly thinkindia.com, Inc.) with those of India Abroad, including relocating the operations of Rediff.com Inc. from California to New York. Based upon this restructuring, we re-evaluated the goodwill that arose on the Rediff.com Inc. acquisition for impairment. After applying SFAS No. 142, we concluded that goodwill relating to Rediff.com Inc. was impaired and, accordingly, wrote off the unamortized balance of US$3.3 million as an expense in the fiscal year ended March 31, 2002. Investment Impairment The market environment, including general conditions affecting the technology industry together with the downturn in valuations of dot.com companies caused us to re-examine whether the values of our Internet investments were appropriate. After reviewing key financial indicators for such investments, which were unlisted and illiquid, we concluded that such investments had suffered permanent impairment. Accordingly, during the fiscal year ended March 31, 2002, we wrote off the value of these investments and recorded an impairment expense of US$3.3 million. We may continue to invest in various companies for business and strategic purposes. While we will seek to preserve capital while maximizing yields, we will remain exposed to market risk to the extent the value of these investments is adversely affected. Market volatility may materially and adversely affect the value of any investments that we may make and thus have a material and adverse impact on our operating results. Current Trading and Business Outlook We believe that the India Online market will be entering a phase of accelerated growth as revealed by macro indicators such as the rapid increase in mobile subscribers, higher PC sales and the impending penetration of broadband as recognized by TRAI. During the fiscal year ended March 2004, we maintained our market leadership in the Indian Online space as demonstrated by the growth of our registered user base and paid subscribers. We believe that there continues to be an opportunity and a challenge to significantly grow our fee-paying subscribers which currently account for less than 1% of our registered user base. We believe the online advertising industry is in a promising stage of development with more marketers experimenting with the medium with significantly larger budgets. Growth in this business segment is largely dependent on the advertising industry collaborating with online providers like us to cohesively promote the medium to leading marketers across the country. Our U.S. Publishing business, comprised of India Abroad, India in New York and Rediff.com U.S.A., maintained its leadership position within the Indian-American community during the fiscal year ended March 31, 2004. Our U.S. Publishing business segment is mainly dependent on our ability to attract advertisers in a growing market, especially in the New York area, while effectively managing costs through greater operational efficiencies across our businesses. The outlook for our India Online business during the fiscal year ending March 31, 2005 will be dependent on whether Indian mobile and Internet users, who are largely in the early stage of use, quickly adopt the advanced services we provide such as ring tone downloads, e-commerce, online matchmaking and paid e-mail services. Actual results may differ materially from those suggested by our forward-looking statements due to certain risks or uncertainties associated with our expectations with respect to, but not limited to the impact on our business of a continued economic slowdown or a downturn in the sectors in which our clients operate, our ability to successfully implement our strategy, our ability to successfully integrate the business we have acquired with our business, demand for our online and offline service offerings, changes in the Internet marketplace, technological changes, investment income, cash flow projections and our exposure to market risks. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occur in the future. As a result, actual future gains, losses or impact on net interest income could materially differ from those that have been estimated. For further discussion on forward-looking statements, see the discussion under the "Forward-Looking Statements" section of this annual report. Operating Results We sold our phone card business in April 2004. In accordance with SFAS 144, Accounting for the impairment or disposal of long-lived assets, the disposal of our phone card business qualifies as discontinued operations at March 31, 2004. The results of operations of the phone card business are disclosed as discontinued operations in our consolidated statements of operations. The comparative analysis presented below relates to our continuing operations. Fiscal Year Ended March 31, 2004 Compared to Fiscal Year Ended March 31, 2003 Revenues. Total revenues for the fiscal year ended March 31, 2004 increased 10.2% to US$9.5 million from US$8.6 million for the fiscal year ended March 31, 2003. This increase was principally attributable to the increase in revenues from our India Online business. India Online business. We recognized US$3.6 million as revenues for the India Online business for the fiscal year ended March 31, 2004 as compared to US$2.8 million for the fiscal year ended March 31, 2003, representing an increase of US$0.9 million, or 31.4%, over the previous fiscal year. The increase in revenue was mainly due to increases in: o advertising revenues by US$0.3 million, primarily as a result of an increase in Internet advertising in India. o fee based services by US$0.6 million due to an increase in revenues from our subscription services, mobile SMS services and our e-commerce marketplace. This resulted from a greater number of users and greater usage of these services. U.S. Publishing business. We recognized US$5.8 million in revenues for the U.S. Publishing business for the fiscal year ended March 31, 2004. The revenues during the year were largely flat as compared to the previous year. Cost of revenues. Cost of revenues primarily includes cost of content for the Rediff websites, editorial costs, printing and circulation costs for the India Abroad newspaper, e-commerce marketplace related costs and related salaries. For the fiscal year ended March 31, 2004, cost of revenues was US$4.7 million or 50.2% of total revenues compared to US$5.6 million or 64.9% of revenues for the previous fiscal year. This represents a decrease of US$0.8 million, or 14.8%, over the previous fiscal year due to the decrease in the cost of revenue for our U.S. publishing business by US$0.9 million, which was partially offset by an increase in cost of revenues of our India Online business by US$52,000. The decline in cost of revenues for the U.S. Publishing business resulted from benefits arising from tighter integration between our US and Indian operations, including shifting of some high cost U.S. operations to India, favorable negotiations with key vendors and other cost control initiatives. We anticipate that our cost of revenues in absolute dollar terms for our India Online business will increase during the fiscal year ended March 31, 2005 as compared to the fiscal year ended March 31, 2004, as we expect to incur additional costs to develop new products and services, and enhance the content that we currently offer on Rediff.com. Sales and marketing expenses. Sales and marketing expenses primarily include employee compensation for sales and marketing personnel, advertising and promotion expenses and market research costs. For the fiscal year ended March 31, 2004, sales and marketing expenses were US$1.0 million compared to US$2.6 million for the fiscal year ended March 31, 2003, representing a decrease of US$1.6 million, or 63.3%, over the previous fiscal year. This decrease was primarily due to a decrease in advertising expenditures by approximately US$0.7 million, writeback of allowances no longer required, amounting to approximately US$0.7 million and reduction of personnel expenses by approximately US$79,000. We expect our sales and marketing expenses in absolute dollar terms will increase for the fiscal year ended March 31, 2005, as compared to the fiscal year ended March 31, 2004, as we launch more products and services and expand the range of offerings on our websites. Product development expenses. Product development costs primarily include internet communication costs, software usage fees, software development expenses and compensation to product development personnel. For the fiscal year ended March 31, 2004, product development expenses were US$1.6 million compared to US$1.8 million for the fiscal year ended March 31, 2003, representing a decrease of US$0.2 million, or 12.2%. The decrease was primarily due to lower software development expenses, internet communication costs and personnel costs. We expect to continue to invest in product development to maintain our position as a leading Internet destination for the global Indian community. Therefore, we expect our product development expenses in absolute dollar terms to increase in the future. General and administrative expenses. General and administrative costs primarily consist of compensation for administrative personnel, fees for legal and professional services, allowances for doubtful accounts, insurance premia, depreciation and sundry administrative costs. For the fiscal year ended March 31, 2004, general and administrative expenses were US$5.4 million compared to US$7.3 million for the fiscal year ended March 31, 2003, representing a decrease of US$1.9 million, or 26.2%. This decrease was primarily due to a decrease of US$0.7 million in deprecation expense primarily as a result of certain assets being fully depreciated, decrease in personnel expenses of US$0.6 million, a decrease of US$0.4 million in legal and professional services expense and a write back of allowances no longer required, amounting to US$0.1 million. We expect that as we continue to grow, our general and administrative expenses will increase in the future. Other income (loss), net. Other income (loss), net primarily consists of interest income and foreign exchange gain or loss. During the fiscal year ended March 31, 2004, other expense (net) was US$0.1 million compared to an income (net) of US$18,000 for the fiscal year ended March 31, 2003, representing a decrease of US$0.1 million, or 791.7%. Interest income for the fiscal year ended March 31, 2004 was US$0.3 million compared to US$0.4 million for the fiscal year ended March 31, 2003, representing a decline of US$0.1 million, or 16.0%. The decrease in interest income was due to lower applicable interest rates and lower average balance of cash and cash equivalents during the fiscal year ended March 31, 2004 as compared to the fiscal year ended March 31, 2003. Foreign exchange loss for the fiscal year ended March 31, 2004 was US$0.5 million as compared to a loss of US$0.4 million for the previous fiscal year. The net foreign exchange loss was as a result of appreciation of the Indian Rupee by 8.6% to Rs.43.4 per U.S. dollar as of March 31, 2004 from Rs.47.50 per U.S. dollar as of March 31, 2003, which lowered the value in Rupee terms of our U.S. dollar denominated revenues. Net loss. Our net loss was US$5.7 million for the fiscal year ended March 31, 2004 compared to a net loss of US$19.0 million for the fiscal year ended March 31, 2003. Fiscal Year Ended March 31, 2003 Compared to Fiscal Year Ended March 31, 2002 Revenues. Total revenues for the fiscal year ended March 31, 2003 was US$8.6 million as compared to US$7.9 million for the fiscal year ended March 31, 2002. This represents an increase of US$0.7 million or 9.1% over previous year. Of the increase in revenue, US$0.2 million arose in the India Online business and US$0.5 million in the U.S. Publishing business. India Online business. We recognized US$2.8 million as revenues for the India Online business for the fiscal year ended March 31, 2003 as compared to US$2.6 million for the fiscal year ended March 31, 2002, representing an increase of US$0.2 million, or 7.4%, over the previous fiscal year. The increase in fee based revenue included an increase of US$0.3 million in fee based revenues as a result of higher sales of our various services such as Rediffmail mobile, Rediffmail Pro, a paid e-mail service, SMS based value added services such as games, contest, dating services and e-commerce services. This increase was partially offset by a decline of US$0.3 million in advertising revenue. U.S. Publishing business. We recognized US$5.8 million in revenues for the U.S. publishing business for the fiscal year ended March 31, 2003 as compared to US$5.3 million for the fiscal year ended March 31, 2002, representing an increase of US$0.5 million or 9.9% over the previous fiscal year. The increase in revenue primarily resulted from an increase in advertising revenue. During the fiscal year ended March 31, 2003, we launched a number of special interest supplements in the India Abroad newspaper which were well received by advertisers in the United States and India. Cost of revenues. Cost of revenues primarily include the cost of content for the Rediff websites, editorial cost, printing and circulation cost for the India Abroad newspaper, e-commerce marketplace related cost and related salaries. For the fiscal year ended March 31, 2003, cost of revenues was US$5.6 million or 64.9% of revenues compared to US$5.1 million or 64.9% of revenues for the fiscal year ended March 31, 2002. This represents an increase of US$0.5 million, or 9.1%, over the previous fiscal year. The increase was principally attributable to an increase of US$0.5 million in U.S. publishing editorial costs, an increase of US$0.2 million in U.S. publishing circulation costs and an increase of US$0.2 million in India online e-commerce costs. The above increase was partially offset by a decrease of US$0.4 million in India online cost of revenues. Sales and marketing expenses. Sales and marketing expenses primarily include employee compensation for sales and marketing personnel, advertising, promotion and market research costs. Sales and marketing expenses were flat at US$2.6 million for the years ended March 31, 2003 and 2002. Product development expenses. Product development costs primarily include internet communication costs, software usage fees, software development expenses and compensation to product development personnel. For the fiscal year ended March 31, 2003 product development expenses were US$1.8 million compared to US$3.1 million for the fiscal year ended March 31, 2002, representing a decrease of US$1.3 million, or 41.1%, over the previous fiscal year. The decrease in product development expenses included US$0.7 million decrease in internet communication costs and US$0.3 million decrease on account of lower amortization expenses as a result of certain website development costs being fully amortized. General and administrative expenses. General and administrative costs primarily consist of compensation for administrative personnel, fees for legal and professional services, allowances for doubtful accounts, insurance premia, depreciation and sundry administrative costs. For the fiscal year ended March 31, 2003, general and administrative expenses were US$7.3 million compared to US$7.9 million for the fiscal year ended March 31, 2002, representing a decrease of US$0.6 million, or 7.1%, over the previous fiscal year. This decrease was largely on account of lower legal and professional fees and a lower allowance for doubtful accounts receivable. Restructuring costs and legal fees. During the fiscal year ended March 31, 2003, restructuring costs and legal fees were nil as compared to US$0.8 million for the fiscal year ended March 31, 2002. Restructuring costs and legal fees for the fiscal year ended March 31, 2002 of US$0.8 million include US$0.6 million for restructuring expenses in accordance with SAB 100 and EITF 94-3 primarily consisting of lease termination costs, expenses for relocation of equipment and staff and severance payments. These costs related to restructuring and relocating Rediff.com Inc's operations from California to New York and its integration with India Abroad. The balance of US$0.2 million represented our retention under our directors and officers liability insurance for legal fees relating to the class action suit described under "Business--Legal Proceedings". Other income, net. Other income, net primarily consists of interest income and foreign exchange gain or loss. During the fiscal year ended March 31, 2003, other income (net) was US$18,090 compared to US$2.0 million for the fiscal year ended March 31, 2002. Interest income for the fiscal year was US$0.4 million compared to US$0.9 million for the fiscal year ended March 31, 2002. The decrease in interest income was due to lower interest rates and lower average balance of cash and cash equivalents. Foreign exchange loss for the fiscal year was US$0.4 million as compared to a gain of US$1.1 million for the fiscal year ended March 31, 2002. The net foreign exchange loss was as a result of appreciation of the Indian Rupee against the U.S. dollar during the year, which lowered the value in Rupee terms of our U.S. dollar denominated revenues. Net loss. Our net loss was US$19.0 million for the fiscal year ended March 31, 2003 compared to a net loss of US$14.8 million for the fiscal year ended March 31, 2002. Seasonality Given the early stage of the development of the Internet in India, the rapidly evolving nature of our business and our limited operating history, we cannot accurately predict to what extent, if at all, our operations will prove to be seasonal. However, we do experience peaks in our business because of the festival seasons in the Indian winter months of November through February and because of extended vacation in the Indian summer months of April through June. India Abroad experiences its peak season during the Christmas holiday season in the United States. Liquidity and Capital Expenditures Our primary liquidity needs have been to finance our losses from operations, acquisition of India Abroad and loss from the acquisition and sale of Value Communications and capital expenditures. We have funded these costs primarily from the private sales of equity securities, sale of ADSs and from cash received from our operations. For the fiscal years ended March 31, 2002, 2003 and 2004, we incurred net losses of US$14.8 million, US$19.0 million and US$5.7 million, respectively. Although our net losses have decreased as a result of, among other reasons, realized cost efficiencies and increased revenues, we expect to continue to incur net losses and negative cash flows from operations, which will require us to continue to use the proceeds from the sale of our equity securities and ADSs. As of March 31, 2004, our accounts receivable balance was US$1.9 million compared to US$1.4 million as of March 31, 2003, net of allowances of US$1.2 million and US$1.0 million as of March 31, 2004 and 2003, respectively. This increase was principally due to the increase in our revenues. During the years ended March 31, 2002, 2003 and 2004, we had write-offs or provided allowances of US$0.4 million, US$0.2 million and US$0.2 million for delinquent trade receivables, respectively. These write-offs and allowances constituted 5.1%, 2.3% and 2.2% of total revenues, respectively in those years. Cash Flows
For the Fiscal Year Ended March 31, -------------------------------------------------------------- 2002 2003 2004 ----------------- ----------------- ---------------- Net cash used in (provided by) operating activities.............. - from continuing operations US$(7,916,592) US$(6,720,388) US$(2,886,563) -from discontinued operations US$721,075 US$(2,128,786) US$(373,744) -------------- -------------- -------------- Total............................. US$(7,195,517) US$(8,849,174) US$(3,260,307) ============== ============== ============== Net cash used in investing activities........................ US$(11,620,422) US$(3,753,778) US$(561,783) --------------- -------------- ------------ Net cash provided by (used in) financing activities.............. US$(861,929) - US$73,473 ------------ -------------- --------- Effect of exchange rate changes on cash............................ US$(1,456,041) US$466,891 US$1,004,004 =============== ============== ============= Net decrease in cash and cash equivalents....................... US$(21,133,909) US$(12,136,061) US$(2,744,613) =============== =============== ==============
Fiscal Year Ended March 31, 2004 Net cash from continuing operations used in operating activities of US$2.9 million during the fiscal year ended March 31, 2004 was primarily attributable to a net loss of US$5.7 million which included non-cash items of depreciation and amortization of US$1.3 million. Other cash flows included decreases in accounts payable and accrued liabilities of US$0.9 million and increase in accounts receivable of US$0.5 million. This was offset by a reduction in prepaid and other current assets of US$0.2 million, an increase in unearned revenues of US$0.1 million due principally to higher collections during the year and a decrease in recoverable income taxes of US$0.2 million due principally to refund of taxes from Indian Tax authorities. Net cash used in investing activities during the fiscal year ended March 31, 2004 was US$0.6 million, comprising principally purchases of computers and other capital equipment in connection with the expansion of our network. Net cash provided by financing activities during the fiscal year ended March 31, 2004 was US$73,000 representing cash received for employee stock options exercised during the year. As of March 31, 2004, we had aggregate commitments for capital expenditures of approximately US$4,896. Fiscal Year Ended March 31, 2003 Net cash from continuing operations used in operating activities of US$6.7 million during the fiscal year ended March 31, 2003 was primarily attributable to a net loss of US$19.0 million which included non-cash items of depreciation and amortization of US$2.0 million and goodwill impairment of US$3.2 million. Other cash outflows included an increase in accounts receivable of US$0.4 million and decreases in accounts payable and accrued liabilities of US$64,000. This was offset by a reduction in prepaid expenses of US$0.4 million, an increase in unearned revenue of US$0.1 million and a decrease in recoverable income taxes of US$0.2 million. Net cash used in investing activities during the fiscal year ended March 31, 2003 was US$3.8 million, principally for the full and final settlement with Valucom's former shareholders for US$3.4 million and purchases of computers and other capital equipment in connection with the expansion of our network and our offices aggregating US$0.4 million. No cash was used or provided by financing activities during the fiscal year ended March 31, 2003. Fiscal Year Ended March 31, 2002 Net cash from continuing operations used in operating activities of US$7.9 million during the fiscal year ended March 31, 2002 was primarily attributable to a net loss of US$14.8 million which included non-cash items of depreciation and amortization of US$2.9 million, goodwill impairment of US$3.3 million and other than temporary diminution in the value of investments of US$3.3 million. Other cash outflows include decreases in accounts payable and accrued liabilities of US$1.2 million, an increase in recoverable income taxes of US$0.3 million and an increase in other current assets and prepaid expenses of US$0.7 million. This was offset by a reduction in accounts receivable of US$0.2 million and a decrease in other assets of US$0.7 million. Net cash used in investing activities during the fiscal year ended March 31, 2002 was US$11.6 million, principally for the acquisition of India Abroad for US$10.9 million and purchases of computers and other capital equipment in connection with the expansion of our network and our offices aggregating US$1.5 million. Net cash used by financing activities during the fiscal year ended March 31, 2002 was US$0.9 million due to repayment of long-term debt of India Abroad in connection with its acquisition. Contractual Obligations Our contractual obligations relates to operating leases, payments for which are to be made as per the table below: Years ended March 31, --------------------- 2005................................................... US$485,767 2006................................................... 171,203 2007................................................... 75,677 2008................................................... 23,400 2009 and thereafter.................................... - ----------- Total payments........................................ US$756,047 ----------- Capital Expenditures Our principal capital expenditures are for purchases of computer equipment, such as servers for our websites and leasehold improvements. In fiscal 2004, 2003 and 2002, we had capital expenditures of US$0.6 million, US$0.4 million and US$1.5 million, respectively. Dividends We have not declared or paid any cash dividends on our equity shares since our inception and do not expect to pay any cash dividends for the foreseeable future. We currently intend to retain future earnings, if any, to finance the expansion of our business. For additional information, please see the sections of this annual report entitled "Risk Factors--Risks Related to our Business" and "Taxation". We believe our cash balances and liquid assets, cash generated from future operations and our existing credit facilities will be adequate to satisfy anticipated working capital requirements, capital expenditures and investment commitments for the next twelve months. As business and market conditions permit, we may from time to time, invest in or acquire complementary businesses, products or technologies. These activities may require us to seek additional equity or debt to fund financing such activities, which could result in ownership dilution to existing shareholders, including holders of our ADSs. Income Tax Matters As of March 31, 2004, we had net operating loss carry forwards for our Indian operations aggregating approximately US$19.2 million, which expire between April 1, 2004 and March 31, 2012. If we do not have sufficient taxable business income or if the applicable period expires, we will lose the potential tax benefit of the relevant losses carried forward. As of March 31, 2004, Rediff Holdings Inc., our U.S. subsidiary and the holding company of our Rediff.com Inc. and India Abroad investments, had net operating loss carryforward of approximately US$7.4 million for federal income tax purposes. These net operating loss carryforwards expire in years 2020 through 2024. Whether Rediff Holdings is able to realize the future tax benefits related to its deferred income tax asset is dependent on many factors, including its ability to generate taxable income within the net operating loss carry forward period. Management considered these factors and believed that a full valuation allowance of the deferred tax asset was required for the period presented. For the years ended March 31, 2003 and 2004, the provision for current income taxes was US$304,000 and US$5,000, respectively. As of March 31, 2004, Value Communications Corporation had a net operating loss carryforward of approximately US$2.8 million. In April 2004, Valucom sold its business to Worldquest Networks Inc. This sale has resulted in a capital gain of approximately US$395,000 accruing to Value Communications Corporation. This capital gain will be offset against the available net operating losses of US$2.8 million, which will consequently be reduced to approximately US$2.4 million. For U.S. federal income tax purposes, this loss will expire in years 2021 through 2024. Following the sale of its business, Valucom currently does not engage in any business activity. Unless Valucom is able to generate taxable income within the aforesaid net operating loss carry forward period, it will not be able to realize any future tax benefit. Management considered these factors and believed that a full valuation allowance of the deferred tax asset was required for the period presented. Market Risks Foreign Currency Exchange Rate Risk The functional currency for our Indian operations is the Indian Rupee.We are exposed to foreign exchange rate fluctuations, principally relating to the fluctuation of the U.S. dollar to Indian Rupee exchange rate. We face foreign exchange risk with respect to funds held in foreign currencies and in particular will have foreign exchange losses with respect to these funds if there is an appreciation in the value of the Indian Rupee compared to such foreign currency. We also face foreign exchange risk from accounts payable to overseas vendors, which we partially mitigate with receipts in foreign currency from overseas customers and balances in foreign currency with overseas banks. Prior to October 2003, we held most of the proceeds from our ADS offering in U.S. dollar denominated accounts. We now hold most of our cash and cash equivalents in Indian Rupee denominated bank accounts in response to the appreciation in the value of the Indian Rupee compared to the U.S. dollar. The following table sets forth information about our net foreign exchange (US dollars) exposure as of March 31, 2004: As of March 31, 2004 (in thousands) Accounts payable in U.S. dollars........ 137 Accounts receivable in U.S. dollars, net of allowance............................ 90 Cash balances held in U.S. dollars...... 1,069 -------------------- Net foreign exchange exposure........... 1,022 -------------------- We do not currently try to reduce our exposure to exchange rate fluctuations by using hedging transactions. However, we may choose to do so in the future. We may not be able to do this successfully. Accordingly, we may experience economic losses and negative impacts on earnings and equity as a result of foreign exchange rate fluctuations. If the Indian Rupee appreciates against the US dollars by one Rupee, the net foreign exchange loss as of March 31, 2004 would be approximately US$24,000. Interest Rate Risk We hold interest-bearing accounts in India as well as outside India and fluctuations in interest rates impacted our interest earnings for the fiscal year ended March 31, 2004. These interest rates are linked to the interest rates prevailing in India and the United States which declined during the fiscal year ended March 31, 2004. We expect that our interest earnings will continue to be affected in the future by fluctuations in interest rates. MANAGEMENT The following table sets forth, as of September 1, 2004, the name, age and position of each of our directors and executive officers.
Name Age Position Ajit Balakrishnan(1)(2).................... 56 Chairman and Managing Director Joy Basu * ................................ 43 Chief Financial Officer Diwan Arun Nanda(1)(2)..................... 60 Director Sunil N. Phatarphekar(1)(2)(3)............. 40 Director Abhay Havaldar(1)(3)....................... 42 Director Pulak Prasad(1)(3)......................... 36 Director Ashok Narasimhan(1)(3)..................... 57 Director (1) Member of the Board of Directors (2) Member of the Compensation Committee (3) Member of the audit committee Note: Effective July 31, 2003, Nitin Gupta, formerly our President and Chief Operating Officer resigned. Effective September 5, 2003, Rick Filippelli, formerly our Chief Financial Officer resigned. * Employed only for part of the fiscal year ended March 31, 2004
Ajit Balakrishnan is founder, Chairman and Managing Director of the Company. Mr. Balakrishnan is also Managing Director of Rediffusion-Dentsu, Young & Rubicam Private Limited, where he has served since March 1993, and a director of Rediffusion Holdings Private Limited (earlier called Rediffusion Advertising Private Limited), Klaas Equipment Private Limited, India Abroad Publications Inc., India In New York Inc., Rediff.Com Inc., Rediff Holdings Inc, Value Communications Corporation, AB Technologies LLC. U.S.A, Ajit Balakrishnan Estates & Securities Private Limited and Quintrol Technologies Private Limited. Mr. Balakrishnan holds a Bachelors degree in Physics from Kerala University and a Post Graduate Diploma in Management from the Indian Institute of Management, Kolkata. Mr. Balakrishnan's initial term of appointment as Managing Director of the Company expired on August 24, 2003. The shareholders have re-appointed Mr. Balakrishnan for an additional five years term as Managing Director with effect from August 24, 2003, at the Annual General Meeting held on September 29, 2003. Joy Basu has been our Chief Financial Officer since September 6, 2003. From April 16, 2003 to September 5, 2003, he served as our Vice President-Finance. From October 2002 to April 2003, he served as Chief Financial Officer of Sahara India Media Communication Limited. From April 2000 to September 2002, he served with the Sterlite Group of Companies, as Chief Financial Officer of Sterlite Optical Technologies-Limited from April 2000 to April 2002 and as Vice President, Corporate Finance from April 2002 to September 2002. From 1993 to 2000 he served with the RPG Group of companies, where the last position he held was General Manager - Strategic Planning. From 1986 to 1993 he served with the Tata Group in various capacities. Mr. Basu hold a Bachelors degree in Commerce from St Xaviers College, Calcutta University. He is also a member of the Institute of Chartered Accountants of India and has completed the Senior Executive Course at the Manchester Business School, U.K. Diwan Arun Nanda has been a director of Rediff.com India Limited since its inception in December 1995. Mr. Nanda is also - Director of Rediffusion-Dentsu, Young & Rubicam Pvt. Ltd. Klaas Equipment Private Limited, Wunderman India Private Limited, Arion Horse Co. Pvt. Ltd., Rediffusion Holdings Private Limited (earlier called Rediffusion Advertising Private Limited), Dentsu, Young & Rubicam Tokyo, Japan, Royal Western India Turf Club, Ltd. Everest Integrated Communications Pvt. Ltd., Showdiff Worldwide Pvt. Ltd., , Dentsu, Young & Rubicam Sdn. Bhd, Malaysia and Clariant (India) Limited. Mr. Nanda holds a Bachelors degree in commerce from Loyola College, Chennai University, and a Post Graduate Diploma in Management from the Indian Institute of Management, Ahmedabad. Sunil N. Phatarphekar has been a director of the Company since February 1998. Mr. Phatarphekar is a director of Rediffusion-Dentsu Young, & Rubicam Private Limited. He is also a partner of Doijode, Phatarphekar & Associates, a Mumbai law firm. After obtaining his Bachelors degree in Commerce from Jai Hind College, Bombay University, and a Bachelors degree in Law from Government Law College, Bombay University he joined Crawford Bayley & Company, a Mumbai law firm. Thereafter he was a partner at two Mumbai law firms, Mahimtura & Co. and Shah Desai Doijode & Phatarphekar. Abhay Havaldar has been a director of the Company since August 1998. Mr. Havaldar has also been a Principal with General Atlantic Partners, LLC., a worldwide private equity firm, since 2002. Prior to joining General Atlantic in 2002, Mr. Havaldar has been involved in the private equity industry in India as a partner with ConnectCapital and Draper International for over 7 years. Prior to Draper, Mr. Havaldar spent twelve years in operations management in the Indian IT industry at Tata Infotech and HCL-Hewlett Packard. Mr. Havaldar holds a Bachelors degree in electrical engineering from the University of Bombay and a masters in management degree from the Sloan Fellow program of the London Business School. Pulak Prasad has been director of the Company since 1999. Since 2000, he is also a Managing Director of Warburg, Pincus & Co. Mr. Prasad holds a Bachelor's degree in Technology from the Indian Institute of Technology, Delhi and an Post Graduate Diploma in Management from the Indian Institute of Management, Ahmedabad. Ashok Narasimhan has been a director of the Company since June 25, 2002. He is currently Chairman, CEO and Co-Founder of July Systems Inc. He is also limited partner, advisor, and board member for a number of U.S. venture capital funds. He was earlier founder of Prio, Inc., where he served as Chairman and CEO from early 1996 until its merger with InfoSpace. He subsequently served on the board of Infospace. Prior to this, he served as Head of Worldwide Marketing and Business Development of VeriFone, a leader in automated electronic payment transactions. He holds a Bachelors Degree in Physics from Madras University and a Post Graduate Diploma in Management from the Indian Institute of Management, Kolkata. Board Composition On March 16, 2000, we amended our Articles of Association. Our Amended Articles of Association set the minimum number of directors at three and the maximum number of directors at seven. We currently have six directors. Our Articles of Association provide as follows: o Ajit Balakrishnan, Diwan Arun Nanda and Rediffusion Holdings Private Limited (earlier called Rediffusion Advertising Private Limited), are entitled to appoint and have appointed Mr. Balakrishnan as Director on the Board and Chairman of Rediff.com India Ltd. so long as they hold not less than 10.0% of the issued, subscribed and paid up capital of Rediff.com India Ltd. Mr. Balakrishnan serves an indefinite term and is not required to retire by rotation. o The remaining directors on the Board of Directors are non-permanent directors, and one-third of these non-permanent directors are liable to retire by rotation each year, the members of the Board having served the longest retiring first. These directors may be reappointed at the annual general meeting of the shareholders. Mr. Abhay Havaldar and Mr. Ashok Narasimhan retired by rotation and were re-elected by the shareholders for a further three year term at the annual general meeting of the Company held on August 9, 2004. Code of Ethics Effective February 15, 2004, we have adopted a code of ethics for all of our employees and for all of our directors. We will provide a copy of our code of ethics to any person without charge, upon request. Board Committees The audit committee of the Board of Directors reviews, acts on and reports to the Board of Directors with respect to various auditing and accounting matters, including the recommendation of our independent auditors, the scope of the annual audits, fees to be paid to the independent auditors, the performance of our independent auditors and our accounting practices. The members of the audit committee are Abhay Havaldar, Sunil N. Phatarphekar, Pulak Prasad and Ashok Narasimhan. The Compensation Committee of the Board of Directors determines the salaries, benefits and stock option grants for our employees, consultants, directors and other individuals compensated by us. The Compensation Committee also administers our compensation plans. The members of the Compensation Committee are Ajit Balakrishnan, Diwan Arun Nanda and Sunil N. Phatarphekar. Audit Committee Financial Expert As of March 31, 2004, no member of our audit committee met the requirements to be an independent audit committee financial expert under the SEC's definition. We intend to appoint to our board a director who will act as the independent audit committee financial expert prior to July 2005. Employees As of March 31, 2004, we had 222 employees and full-time consultants. Of such employees, 29 are administrative, 65 are in our sales and marketing teams, 87 are creative and editorial, 11 are dedicated to production and circulation, 12 are dedicated to e-commerce and 18 are dedicated to product development. We believe that our relationship with our employees is good. The table sets forth the distribution of our employees by geographic location of our facilities and by department: Department Mumbai Delhi New York Total Creative 22 5 - 27 Editorial 42 5 13 60 Production - - 6 6 Circulation - - 5 5 Sales and Marketing 30 10 25 65 Product Development 17 - 1 18 E-Commerce 12 - - 12 Administration 19 - 10 29 ------- -------------- -------------- ------------ Total 142 20 60 222 ------- -------------- -------------- ------------ Compensation Our Articles of Association provide that each of our directors may receive an attendance fee for every Board and Committee meeting, provided that no director shall be entitled to an attendance fee in excess of Rs.2,000 per meeting. In fiscal year 2003, we did not pay any fees to our non-employee directors. Mr. Ajit Balakrishnan, who is our Managing Director, does not receive any additional compensation for his service on our Board of Directors. Directors are reimbursed for travel and out-of-pocket expenses in connection with their attendance at Board and Committee meetings. The total remuneration received by our executive officers and directors for their services to us for the fiscal year ended March 31, 2004 was approximately US$362,666. The following table sets forth details regarding: (i) compensation paid to executive officers and directors of the Company during the fiscal year ended March 31, 2004; and (ii) equity shares arising out of warrants granted to such officers and directors under the Employee Stock Option Plan, or ESOP, since inception of such plan. The dollar amounts in the following table are based on the weighted average of the exchange rate used in our financial statements for such period.
Name Salary Equity Shares arising out of Grant Expiration date and other warrants granted during the price compensation year under the 1999 ESOP, 1999 (US$) ASOP and the 2002 ADR ESOP Ajit Balakrishnan US$120,192 - - - Joy Basu * 50,710 7,500 7.52 April 23, 2013 2,500 10.36 September 11, 2013 Sunil Phatarphekar - - - - Abhay Havaldar - - - - Ashok Narasimhan - - - - Rick J. Filippelli * 110,808 - - - Nitin Gupta * 80,956 - - - * Employed only for part of the fiscal year ended March 31, 2004
Employee Benefit Plans Employee Stock Option Plan 1999 Our 1999 Employee Stock Option Plan (the "1999 ESOP"), allows for the grant to our employees of warrants to purchase our equity shares. Each warrant granted gives the employee the right to purchase a specified number of our equity shares under the 1999 ESOP. The 1999 ESOP was approved by our Board of Directors in August 1998 and by our shareholders in February 1999. A total of 280,000 equity shares, after giving effect to our 2 for 5 reverse share split effective as of May 3, 2000, were reserved for issuance under the 1999 ESOP. As of March 31, 2000, we had granted, under the 1999 ESOP, warrants, equivalent to the right to purchase 222,300 equity shares, after giving effect to our 2 for 5 reverse share split effective as of May 3, 2000, at a weighted average exercise price of US$6.73 (Rs.293) per share. From April 1, 2001 to March 31, 2002, we had granted additional warrants equivalent to the right to purchase 19,000 equity shares at a weighted average exercise price of US$2.25 (Rs.108) per share under the 1999 ESOP. During the same period, there was a forfeiture of warrants, equivalent to 13,450 equity shares from the employees who had left the Company. During the fiscal year ended March 31, 2003, warrants equivalent to 12,900 equity shares were forfeited due to the resignation of employees. During the fiscal year ended March 31, 2004, we granted additional warrants equivalent to the right to purchase 7,500 equity shares and during the same period, warrants equivalent to 22,975 equity shares were forfeited due to resignation of employees. Unless otherwise determined by the Board of Directors, the warrants granted under the 1999 ESOP vest at a rate of 25% on each successive anniversary of the grant date, until fully vested. Equity shares acquired pursuant to the 1999 ESOP are subject to a 4-year lock-up period from the date of grant of the respective warrants. In the case of termination of the employee, the employee shall have the right to exercise only the warrants vested up to the time of termination, and the unvested warrants shall lapse. In the case of death, incapacitation, or retirement at the normal retirement age of an employee, all warrants granted to him or her shall vest in full either on the employee or his or her legal heirs, as appropriate. The period during which vested warrants may be exercised expires 5 years after the date of grant. Associate Stock Option Plan 1999 We have an Associate Stock Option Plan 1999 (the "1999 ASOP"), which allows for the grant to our associates, such as key vendors, software developers, retainers, consultants, and all other persons or legal entities not eligible to participate in the 1999 ESOP, of warrants to purchase our equity shares. Each warrant granted gives the associate the right to purchase a specified number of our equity shares under the 1999 ASOP. The 1999 ASOP was approved by our Board of Directors in April 1999 and by our shareholders in February 1999. A total of 198,000 equity shares, after giving effect to our 2 for 5 reverse share split effective as of May 3, 2000, were reserved for issuance under the 1999 ASOP. As of March 31, 2000, we had granted warrants under the 1999 ASOP, equivalent to the right to purchase 73,600 equity shares, after giving effect to our 2 for 5 reverse share split effective as of May 3, 2000, at a weighted average exercise price of US$11.73 (Rs.511) per share. From April 1, 2001 to March 31, 2002 there was a fresh issuance of warrants equivalent to 1000 equity shares to Associates at the rate of US$2.25 (Rs.108) under the 1999 ASOP. During the same period, there was a forfeiture of warrants, equivalent to 5,750 equity shares from the associates who had terminated their association with Rediff. Warrants equivalent to 28,000 equity shares were issued on January 1, 2003 at an exercise price of US$2.28 (Rs.109) to three Directors of the Company. The warrants granted under the 1999 ASOP vest at rates set forth on each warrant. Equity shares acquired pursuant to the 1999 ASOP are subject to a 4-year lock-up period from the date of grant of the respective warrants. In the case of termination of the relationship, the associate shall have the right to exercise only the warrants vested up to the time of termination, and the unvested warrants shall lapse. In the case of death of the associate, all warrants granted to him or her shall vest in full on his or her legal heirs, as appropriate. The period during which vested warrants may be exercised expires 5 years after the date of grant. ValuCom Stock Option Plans On April 1, 2000, ValuCom adopted the Value Communications Corporation 2000 Stock Incentive Compensation Plan as a means of encouraging stock ownership by its employees, officers, directors and advisors. Under terms of this plan, non-qualified options to purchase up to 300,000 shares of common stock of ValuCom were reserved for issuance, were generally granted at not less than fair market value, became exercisable as established by ValuCom (generally over four years) and generally expire seven years from the date of grant. On the date of ValuCom's acquisition, we contractually agreed to replace the existing employee stock options of ValuCom employees with our options once we obtained approvals necessary to establish a stock option plan in the U.S. As of March 31, 2002, under the terms of an agreement with the ValuCom employees holding options to purchase shares of ValuCom, we agreed to pay such employees the cash value of their vested options as of that date. The value of the options was calculated pursuant to a formula included in the stock purchase agreement. An amount of US$133,000 was recorded as of that date and included in goodwill. During the fiscal year ended March 31, 2003, an aggregate of US$176,299 was paid to employees and US$43,299 was recorded as a compensation expense. We no longer have any obligations under the ValuCom option plan. 2002 Stock Option plan In January 2002 our board of directors approved the 2002 Stock Option Plan ("2002 plan") which provides for the grant of stock options to our employees. All options under this plan are exercisable for our ADSs. Necessary approvals from the regulators in India have been obtained. During the fiscal year ended March 31, 2004, we made appropriate filings with the SEC prior to the first exercise date of the options granted under the 2002 plan. Unless terminated sooner, this plan will terminate automatically in January 2012. A total of 280,000 of our equity shares were reserved for issuance under the 2002 plan. As of March 31, 2003, we had granted under the 2002 stock option plan, warrants equivalent to the right to purchase 220,500 equity shares at an exercise price of Rs.109. During the fiscal year ended March 31, 2004, we granted warrants equivalent to the right to purchase 116,000 equity shares at a weighted average exercise price of US$7.75. During the same period, warrants equivalent to 32,225 equity shares were exercised and warrants equivalent to 69,250 equity shares were forfeited. The options granted under the 2002 ADR plan vest at the rates set forth in every award. Retirement Plans Gratuity. We provide for gratuity, an unfunded defined benefit retirement plan covering its eligible employees in India based on third-party actuarial valuations. This plan provides for a lump-sum payment to be made to vested employees at retirement or termination of employment in an amount equivalent to 15 days' salary, payable for each completed year of service. These gratuity benefits vest upon an employee's completion of five years of service. Net periodic pension cost for the years ended March 31, 2004 and the unfunded benefit liability as of March 31, 2004 are as follows:
Years ended March 31, --------------------- 2002 2003 2004 ------------ -------------- ----------- Change in benefit obligation Benefit obligation at the beginning of the year ..........US$35,650 US$53,729 US $66,439 Actuarial (gain) loss .................................... 520 (8,631) (3,042) Service cost ............................................. 15,651 14,328 14,875 Interest cost ............................................ 3,758 5,316 5,350 Benefits paid ............................................ - - (2,724) Effect of exchange rate changes .......................... (1,850) 1,697 7,123 ------------ ---------- ----------- Benefit obligation at the end of the year ............... US$53,729 US$66,439 US$88,021 Unrecognized net actuarial (loss) gain .................. (9,885) (773) 2,229 ------------ ---------- ---------- Accrued liability ....................................... US$43,844 US$ 65,666 US$ 90,250 ------------ ---------- ----------
The assumptions used in accounting for gratuity in the fiscal year ended March 31, 2004 were as follows: Fiscal Year Ended March 31, 2004 Rupee discount rate................................... 7% Rate of increase in Rupee compensation................ 8% Provident Fund. Employees based in India and we each contribute at the rate of 12% of salaries to a provident fund maintained by the Government of India for the benefit of such employees. The provident fund is a defined contribution plan. Accordingly, we expense such contributions to operations as incurred. The amount contributed by us to the provident fund, in the aggregate, was US$77,677 for the fiscal year ended March 31, 2004. RELATED PARTY TRANSACTIONS Lease Agreement In October 1998, we entered into an agreement with Rediffusion-Dentsu, Young & Rubicam Limited, a company in which Mr. Ajit Balakrishnan and Diwan Arun Nanda are shareholders and directors, whereby we occupied the offices in New Delhi formerly occupied by Rediffusion-Dentsu, Young & Rubicam Limited, and reimburse Rediffusion-Dentsu, Young & Rubicam Limited for the respective lease payments. This lease was terminated in December 2001. Total lease payments made during the years ended March 31, 2002 were US$7,000. There were no payments made during the fiscal years ended March 31, 2003 and March 31, 2004. Advertising Services Cost Agreement On December 28, 1998, we entered into an agreement with Rediffusion-Dentsu, Young & Rubicam Private Limited, a company in which Mr. Ajit Balakrishnan and Diwan Arun Nanda are shareholders and directors, for advertising services. Under the terms of the engagement letter, Rediffusion-Dentsu, Young & Rubicam Limited provide advertising services to us and we pay them ten percent commission on the amounts charged by third parties for the execution of such advertising. Aggregate commission payments made to Rediffusion-Dentsu, Young & Rubicam Limited for the fiscal ended March 31, 2002 were approximately US$113,808. There were no payments made during the fiscal years ended March 31, 2003 and March 31, 2004. Advertising Revenues During the fiscal years ended March 31, 2004 and 2003, we received US$11,537 and US$1,345 as advertising revenues from Rediffusion-Dentsu, Young & Rubicam Limited, a company in which Mr. Ajit Balakrishnan and Diwan Arun Nanda are shareholders and directors. We did not receive any such amounts during the fiscal year ended March 31, 2002. EXCHANGE CONTROLS Restrictions on Conversion of Rupees There are restrictions on the conversion of Indian Rupees into U.S. dollars. Before February 29, 1992, the Reserve Bank of India determined the official value of the Rupee in relation to a weighted basket of currencies of India's major trading partners. In the February 1992 budget, a new dual exchange rate mechanism was introduced by allowing conversion of 60% of the foreign exchange received on trade or current account at a market-determined rate and the remaining 40% at the official rate. All importers were, however, required to buy foreign exchange at the market rate except for certain specified priority imports. In March 1993, the exchange rate was unified and allowed to float. In February 1994 and again in August 1994, the Reserve Bank of India announced relaxation in payment restrictions in the case of a number of transactions. Since August 1994, the Government of India has substantially complied with its obligations owed to the IMF, under which India is committed to refrain from using exchange restrictions on current international transactions as an instrument in managing the balance of payments. Effective July 1995, the process of current account convertibility was advanced by relaxing restrictions on foreign exchange for various purposes, such as foreign travel and medical treatment. In December 1999, the Indian Parliament passed the Foreign Exchange Management Act, which became effective on June 1, 2000 ("FEMA"), replacing the earlier Foreign Exchange Regulation Act, 1973 ("FERA"). This new legislation indicates a major shift in the policy of the government with regard to foreign exchange management in India. While FERA was aimed at the conservation of foreign exchange and its utilization for the economic development of the country, the objective of FEMA is to facilitate external trade and promote the orderly development and maintenance of the foreign exchange market in India. FEMA permits most transactions involving foreign exchange except those prohibited or restricted by the Reserve Bank of India. FEMA has eased restrictions on current account transactions. However the Reserve Bank of India continues to exercise control over capital account transactions (i.e., those which alter the assets or liabilities, including contingent liabilities, of persons). The Reserve Bank of India has issued regulations under FEMA to regulate the various kinds of capital account transactions, including certain aspects of the purchase and issuance of shares of Indian companies. Restrictions on Sale of the Equity Shares Underlying the ADSs and for Repatriation of Sale Proceeds ADSs issued by Indian companies to non-residents have free transferability outside India. However, under Indian regulations and practice, the approval of the Reserve Bank of India is required for the sale of equity shares underlying the ADSs (other than a sale on a stock exchange) by a non-resident of India to a resident of India as well as for renunciation of rights to a resident of India. Further, under current Indian law the Depository cannot accept deposits of outstanding equity shares and issue ADRs evidencing ADSs representing such equity shares. Our depository will be allowed to accept deposits of outstanding equity shares and issue ADRs, evidencing ADSs representing such equity shares only to the extent, and limited to the number, of ADSs converted into underlying equity shares and sold in the domestic market and provided such outstanding equity shares which are to be deposited are purchased on a recognized stock exchange through SEBI registered stock brokers. Investors who seek to sell in India to resident Indians any equity shares (other than a sale on a stock exchange) withdrawn from the depository facility and to convert the Rupee proceeds from such sale into foreign currency and repatriate such foreign currency from India will, subject to the foregoing, have to obtain Reserve Bank of India approval for each such transaction. Since our equity shares are not listed on a recognized stock exchange, the prior approval of the RBI would be required for such sale of our equity shares to resident Indians. An Active or Liquid Market for Our ADSs Is Not Assured 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 shares that are publicly held by unrelated parties. Although ADS owners are entitled to withdraw the equity shares underlying the ADSs from the depository facility at any time, subject to certain legal restrictions, there is no public market for our equity shares in India or elsewhere. Under current Indian law, equity shares not listed in India may not be deposited into our depository facility in exchange for ADSs. Our depository will be allowed to accept deposits of outstanding equity shares and issue ADRs, evidencing ADSs representing such equity shares only to the extent, and limited to the number, of ADSs converted into underlying equity shares and sold in the domestic market. If you elect to surrender your ADSs and receive equity shares, you may still be unable to deposit outstanding equity shares with our depository and receive ADRs because the number of ADRs that can be issued cannot, at any time, exceed the number of ADRs converted into underlying equity shares and sold in the domestic market. Since our equity shares are unlisted, any such re-deposit of our equity shares would not be allowed on an automatic basis under existing laws. Sponsored ADR Schemes From November 2002, the RBI has permitted existing shareholders of Indian companies to sell their shares through the issuance of ADR's against the block of existing shares of the Indian company, subject to the following conditions: o The facility to sell the shares would be available pari passu to all categories of shareholders. o The sponsoring company whose shareholders propose to divest existing shares in the overseas market through issue of ADRs will give an option to all its shareholders indicating the number of shares to be divested and mechanism how the price will be determined under the ADR norms. If the shares offered for divestment are more than the pre-specified number to be divested, shares would be accepted from the existing shareholders in proportion to their existing shareholdings. o The proposal for divestment of the shares would have to be approved by a special resolution of the Indian company. o The proceeds of the ADR issue raised abroad shall be repatriated into India within a period of one month from the closure of the issue. However, the proceeds of the ADR issue can also be retained abroad to meet the future foreign exchange requirements of the company and by a recent notification this facility has been extended indefinitely till further notice. o The issue related expenses in relation to public issue of ADRs under this scheme would be subject to a ceiling of 4% in the case of GDRs and 7% in the case of ADRs of the issue size in the case of public issues and 2% of the issue size in case of private placements. The issue related expenses would include underwriting commissions, lead manager charges, legal expenses and reimbursable expenses. The issue expenses shall be passed onto the shareholders participating in the sponsored issue on a pro rata basis. TRADING MARKET General There is no public market for our equity shares in India, the United States or any other market. Our ADSs evidenced by ADRs have been traded in the United States on the Nasdaq National Market under the ticker symbol "REDF" since June 14, 2000, when they were issued by our depositary, Citibank, N.A., pursuant to a Deposit Agreement. On June 24, 2002, our ADSs began trading on the NASDAQ Small Cap Market under the same ticker symbol. Each ADS represents one-half of one equity share. The number of outstanding equity shares as of March 31, 2004, was 12,827,425. We have been informed by our depository that as of March 31, 2004, there were approximately 30 record holders of ADRs evidencing 5,354,450 ADSs (representing 2677,225 equity shares) in the United States. The tables below set forth high and low trading prices for our ADSs on the NASDAQ National Market until June 24, 2002, and thereafter on the NASDAQ Small Cap Market: Annual and Quarterly high-low price history:
Price Per American Depositary Share (in U.S. dollars) High Low ---- --- Fiscal year ended March 31, 2002..................................... 4.95 0.45 Fiscal year ended March 31, 2003..................................... 4.78 0.21 First Quarter (April 2002 to June 2002)............................... 1.28 0.35 Second Quarter (July 2002 to September 2002).......................... 0.48 0.32 Third Quarter (October 2002 to December 2002)......................... 1.15 0.21 Fourth Quarter (January 2003 to March 2003)........................... 4.78 1.06 First Quarter (April 2003 to June 2003)............................... 7.92 2.76 Second Quarter (July 2003 to September 2003).......................... 10.55 4.11 Third Quarter (October 2003 to December 2003)......................... 7.25 4.65 Fourth Quarter (January 2004 to March 2004)........................... 13.87 5.27 First Quarter (April 2004 to June 2004)............................... 15.47 6.35 Monthly high-low price history for previous six months: - ------------------------------------------------------ Price per American Depositary Share (in U.S. dollars) Previous six months High Low - ------------------- ---- --- March 2004........................................................... 13.87 7.24 April 2004........................................................... 15.47 8.62 May 2004............................................................. 9.49 6.35 June 2004............................................................ 9.60 7.55 July 2004............................................................ 8.40 5.25 August 2004.......................................................... 7.71 5.30 September 2004 (through September 23, 2004).......................... 8.43 7.1
RESTRICTION ON FOREIGN OWNERSHIP OF INDIAN SECURITIES Prior to June 1, 2000, foreign investment in Indian securities, including the acquisition, sale and transfer of securities in Indian companies, was regulated by the FERA. As of June 1, 2000, foreign investment in and divestment from Indian securities have been regulated by the provisions of FEMA, the notifications and regulations issued by the Reserve Bank of India thereunder, and the rules made by the Ministry of Finance of the Government of India. A summary of the regulatory environment for foreign investment in India is provided below. ADR Guidelines Subject to the fulfillment of certain conditions, Indian companies issuing ADSs are no longer required to obtain approval of the Ministry of Finance or the Reserve Bank of India under the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993, as amended from time to time, or the 1993 Scheme. Although we will not require approval of either the Ministry of Finance or the Reserve Bank of India, we are required to furnish a quarterly return to the Reserve Bank of India and the Ministry of Finance within 15 days of the close of each calendar quarter. The 1993 Scheme is distinct from other policies described below relating to investments in Indian companies by foreign investors. The issuance of ADSs pursuant to the 1993 Scheme also affords to holders of ADSs the benefits of Sections 115AC and 115ACA of the Income-tax Act, 1961 for purposes of the application of Indian tax law. Foreign Direct Investment Currently, subject to certain exceptions, foreign direct investment and investment by individuals of Indian nationality or origin residing outside India, or non-resident Indians, does not require the prior approval of the Government of India, or the Reserve Bank of India. We applied for and obtained the approval of the Government of India for our ADS offering. The Government of India has indicated that in all cases the Reserve Bank of India would continue to be the primary agency for the purposes of monitoring and regulating foreign investment. In cases where Government of India approval is obtained, no prior approval of the Reserve Bank of India is required, although a declaration in the prescribed form, detailing the foreign investment must be filed with the Reserve Bank of India once the foreign investment is made in the Indian company. The foregoing description applies only to an issuance of shares by, and not to a transfer of shares of, Indian companies. Any transfer of shares of an Indian company by a non-resident Indian requires the prior approval of the Government of India and the Reserve Bank of India. Portfolio Investment by Non-Resident Indians A variety of methods for investing in shares of Indian companies are available to non-resident Indians. Subject to certain terms and conditions, these methods allow non-resident Indians to make portfolio investments in shares and other securities of Indian companies on a basis not generally available to other foreign investors. In addition to portfolio investments in Indian companies, non-resident Indians may also make foreign direct investments in Indian companies pursuant to the foreign direct investment route discussed above. Portfolio Investment by Foreign Institutional Investors In September 1992, the Government of India issued guidelines which enable foreign institutional investors, including institutions such as pension funds, investment trusts, asset management companies, nominee companies and incorporated/institutional portfolio managers, to make portfolio investments in all securities of listed and unlisted companies in India. Under the guidelines, foreign institutional investors must be registered with SEBI and obtain a general permission from the Reserve Bank of India to engage in transactions regulated under FEMA. Foreign institutional investors are required to comply with the provisions of the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995, or Foreign Institutional Investor Regulations. A registered foreign institutional investor may buy, subject to the ownership restrictions discussed below, and sell freely securities issued by any Indian company, realize capital gains on investments made through the initial amount invested in India, subscribe to or renounce rights offerings for shares, appoint a domestic custodian for custody of investments made and repatriate the capital, capital gains, dividends, income received by way of interest and any compensation received towards sale or renunciation of rights offerings of shares. Investment by foreign institutional investors in unlisted Indian companies would require the prior approval of the RBI. In addition to making portfolio investments in Indian companies, foreign institutional investors may make foreign direct investments in Indian companies pursuant to the foreign direct investment route discussed above. Ownership Restrictions SEBI and the Reserve Bank of India regulations restrict portfolio investments in Indian companies by foreign institutional investors and non-resident Indians, all of which we refer to as foreign portfolio investors. Foreign Institution Investors - Under current Indian law, foreign institutional investors in the aggregate may hold no more than 24% of the equity shares of an Indian company, and non-resident Indians in aggregate may hold no more than 10% of the shares of an Indian company through portfolio investments. The 24% limit referred to above may be increased up to the sectoral cap/statutory ceiling, as applicable if the shareholders of the company pass a special resolution to that effect. The 10% limit referred to above may be increased to 24% if the shareholders of the company pass a special resolution to that effect. No single foreign institutional investor may hold more than 10% of the shares of an Indian company if investing through proprietary funds, or 5% if investing through funds of a individual or corporate sub-account of the shares of an Indian Company and no single non-resident Indian may hold more than 5% of the shares of an Indian company. There is uncertainty under Indian law as to the tax regime applicable to foreign institutional investors that hold and trade ADSs. Foreign institutional investors are urged to consult with their Indian legal and tax advisors. More detailed provisions relating to investment by foreign institutional investors have been introduced by SEBI with the introduction of the Foreign Institutional Investors Regulations. These provisions relate to the registration of foreign institutional investors, their general obligations and responsibilities, and certain investment conditions and restrictions. One such restriction is that the total investment in equity and equity-related instruments should not be less than 70% of the aggregate of all investments of a foreign institutional investor in India. SEBI has also permitted private placements of shares by listed companies with foreign institutional investors, subject to the prior approval of the Reserve Bank of India under FEMA. Takeover Regulations Under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, as amended, or Takeover Code, upon the acquisition of more than 5% of the outstanding shares or voting rights of a listed public Indian company, a purchaser is required to notify the company, and the company and the purchaser are required to notify all the stock exchanges on which the shares of such company are listed. Upon the acquisition of 15% or more of such shares or voting rights or a change in control of the company, the purchaser is required to make an open offer to the other shareholders offering to purchase at least 20% of all the outstanding shares of the company at a minimum offer price as determined pursuant to the Takeover Code. Upon conversion of ADSs into equity shares, an ADS holder will be subject to the Takeover Code; provided the Indian company is listed in India. Similarly, appropriate disclosures would have to be made under the SEBI (Prohibition of Insider Trading), Regulations, 1992, or Insider Trading Regulations, if the equity shares of the Indian Company are listed on a recognized stock exchange in India. Please note that since our equity shares are unlisted in India, the provisions of the Takeover Code and the Insider Trading Regulations will not be applicable. Restrictions on Conversion of Rupees There are restrictions on the conversion of Rupees into dollars. Before February 29, 1992, the Reserve Bank of India determined the official value of the Rupee in relation to a weighted basket of currencies of India's major trading partners. In the February 1992 budget, a new dual exchange rate mechanism was introduced by allowing conversion of 60% of the foreign exchange received on trade or current account at a market-determined rate and the remaining 40% at the official rate. All importers were, however, required to buy foreign exchange at the market rate except for certain specified priority imports. In March 1993, the exchange rate was unified and allowed to float. In February 1994 and again in August 1994, the Reserve Bank of India announced relaxation in payment restrictions in the case of a number of transactions. Since August 1994, the Government of India has substantially complied with its obligations owed to the IMF, under which India is committed to refrain from using exchange restrictions on current international transactions as an instrument in managing the balance of payments. Effective July 1995, the process of current account convertibility was advanced by relaxing restrictions on foreign exchange for various purposes, such as foreign travel and medical treatment. In December 1999, the Indian parliament passed the Foreign Exchange Management Act, which became effective on June 1, 2000, replacing the earlier Foreign Exchange Regulation Act, 1973, or FERA. This new legislation indicates a major shift in the policy of the government with regard to foreign exchange management in India. While FERA was aimed at the conservation of foreign exchange and its utilization for the economic development of the country, the objective of FEMA is to facilitate external trade and promote the orderly development and maintenance of the foreign exchange market in India. FEMA permits most transactions involving foreign exchange except those prohibited or restricted by the Reserve Bank of India. FEMA has eased restrictions on current account transactions. However the Reserve Bank of India continues to exercise control over capital account transactions (i.e., those which alter the assets or liabilities, including contingent liabilities, of persons). The Reserve Bank of India has issued regulations under FEMA to regulate the various kinds of capital account transactions, including certain aspects of the purchase and issuance of shares of Indian companies. PRINCIPAL SHAREHOLDERS The following table provides information relating to the beneficial ownership of our equity shares for: o each of the executive officers named in the summary compensation table and each of our directors; o all of our directors and executive officers as a group; and o each person or group of affiliated persons who is known by us to beneficially own 5.0% or more of our equity shares
Shares Beneficially Owned Shares Beneficially Owned As Shares Beneficially Owned As As of May 6, 2004 of June 30, 2003 of March 31, 2002 --------------------------- ---------------------------- ----------------------------- Percent of Percent of Percent of Number of total equity Number of total equity Number of total equity Name and Address of equity shares equity shares equity shares Beneficial Owner shares held outstanding shares held outstanding shares held outstanding ----------------------- ----------- ------------- ------------ ------------- ------------- --------------- Officers and Directors Ajit Balakrishnan (1)(1A) (1B) (IC) 3,463,982 27% 3,463,982 27.07% 3,300,192 25.8% Diwan Arun Nanda (1) 3,444,742 27% 3,444,742 26.92% 3,300,202 25.8% Sunil N. Phatarphekar * - - - - - - Abhay Havaldar (2) * 2,200,000 17% 2,200,000 17.2% 2,200,000 17.2% Pulak Prasad (3) c/o Warburg, Pincus & Co.466 Lexington Avenue, New York, NY 10017 2,008,000 16% 2,132,804 16.7% 2,445,499 19.1% All Directors and Officers as a Group (5 persons) 8,916,722 70% 9,041,526 70.66% 9,045,891 70.70% 5% Shareholders Rediffusion Holdings Private Limited(1)Ready Money Terrace, 167, Dr. Annie Besant RoadWorli, Mumbai, 400 018, India 2,200,002 17% 2,200,002 17.2% 2,200,002 17.2% Draper-India International c/o Multiconsult Ltd. Les Jamalacs, Vieux Conseil Street, Port Louis, Mauritius 2,200,000 17% 2,200,000 17.2% 2,200,000 17.2% Queenswood Investments Ltd C/O Multiconsult Limited, Les Jamalacs, Vieux Conseil StreetPort Louis, Mauritius 2,008,000 16% 2,132,804 16.7% 2,445,499 19.1% (1) Includes 2,200,002 equity shares held by Rediffusion Holdings Private Limited earlier called Rediffusion Advertising Private Limited, of which Ajit Balakrishnan is a 50.0% shareholder and Director and Diwan Arun Nanda is a 50.0% shareholder and Director. (1A) Includes 144,540 equity shares held by Quintrol Technologies Private Limited of which Ajit Balakrishnan is a director as well as a 99.9% stockholder. (1B) Includes 5,300 ADSs of the Company held by Mr. Ajit Balakrishnan. (1C) Includes 33,200 ADSs of the Company held by A B Technologies, LLC a New York limited liability company, with respect to which Mr. Balakrishnan holds a position as the Managing Member as well as 99.9% stockholder. (2) Includes 2,200,000 equity shares held by Draper-India International Limited. Mr. Havaldar is a limited partner of Draper India Management L.P., which is the general partner of Draper India L.P., which holds 99.0% of the outstanding equity of Draper-India International Limited. Mr. Havaldar is a director of Rediff.com India Limited and disclaims beneficial ownership of shares held by Draper-India International Limited, except to the extent of his proportional interest arising from his partnership interest in Draper-India International Limited. (3) Includes 2,008,000 equity shares held by Queenswood Investments Limited. Pulak Prasad is a Managing Director and member of Warburg Pincus LLC. Fifty percent (50%) of the outstanding equity of Queenswood Investments Limited is held by Warburg, Pincus Equity Partners, L.P. (including three affiliated partnerships) ("WPEP") and fifty percent (50%) of the outstanding equity of Queenswood Investments Limited is held by Warburg, Pincus Ventures International, L.P. ("WPVI"). Warburg Pincus & Co. ("WP") is the sole general partner of WPEP and WPVI. WPEP and WPVI are managed by Warburg Pincus LLC ("WP LLC"). All shares indicated as held by Mr. Prasad are included because of his affiliation with the Warburg Pincus entities. Mr. Prasad disclaims beneficial ownership of all shares held by the Warburg Pincus entities. Our ADSs are listed on the Nasdaq and each ADS is represented by one-half of one equity share of par value of Rs.5 per share. Our ADSs are registered pursuant to Section 12(g) of the Securities Act. We have been informed by our depository that as of March 31, 2004 5,354,450 ADSs were held by approximately 32 record holders of ADRs in the United States. * In addition to the above, the following directors have also been granted stock options under the ASOP Plan 1999: Abhay Havaldar - 16,000 equity shares granted on January 1, 2003 at an exercise price of Rs.109.42 per share Sunil N. Phatarphekar - 6,000 equity shares granted on January 1, 2003 at an exercise price of Rs.109.42 per share Ashok Narasimhan - 6,000 equity shares granted on January 1, 2003 at an exercise price of Rs.109.42 per share None of the directors have exercised their options till date. The period during which these options may be exercised expires 5 years after the date of grant.
TAXATION Indian Tax The following discussion of Indian tax consequences for investors in ADSs and equity shares received upon redemption of ADSs who are not resident in India, whether of Indian origin or not, is based on the current provisions of the Indian Income Tax Act, 1961, including the special tax regime for ADSs contained in Section 115AC, as amended, and certain regulations implementing the Section 115AC regime. The Indian Income Tax Act is amended every year by the Finance Act of the relevant year. Some or all of the tax consequences of the Section 115AC and other relevant provisions may be amended or modified by future amendments to the Indian Income Tax Act. Furthermore, please note that the tax rates described herein are only those set forth in the Indian Income Tax Act read together with the Finance Act, 2004 to the extent such provisions are effective. In the event there is any double taxation avoidance agreement between two states and an investor is a resident of either of the states, then to the extent the provisions of the double taxation avoidance agreement are more favorable to the investor, under the Indian Income Tax Act, the provisions of the double taxation avoidance agreement would prevail. The summary is not intended to constitute a complete analysis of the tax consequences under Indian law of the acquisition, ownership and sale of ADSs and equity shares by non-resident investors. Potential investors should, therefore, consult their own tax advisers on the tax consequences of such acquisition, ownership and sale, including specifically the tax consequences under Indian law, the law of the jurisdiction of their residence, any tax treaty between India and their country of residence, and in particular the application of the regulations implementing the Section 115 AC regime. Residence For the purpose of the Income Tax Act, an individual is a resident of India during any fiscal year, if he (i) is in India in that year for 182 days or more or (ii) having within the four years preceding that year been in India for a period or periods amounting in all to 365 days or more, is in India for period or periods amounting in all to 60 days or more in that year. The period of 60 days is substituted by 182 days in case of Indian citizen or person of Indian origin who being resident outside India comes on a visit to India during the financial year or an Indian citizen who leaves India for the purposes of his employment during the financial year. A company is resident in India in any fiscal year if it is incorporated in India or the control and management of its affairs is situated wholly in India in that year. A firm or other association of persons is resident in India except where the control and the management of its affairs are situated wholly outside India. Taxation of Distributions Dividend distributed by a domestic company to shareholders will not be subject to tax in the hands of the shareholders. Consequently, withholding tax on dividends paid to shareholders does not apply. However, if dividends are declared, the Company is required to pay as tax 13.07%, including applicable surcharge and Education Cess, of the total dividend declared. Taxation on Sale of ADSs Any transfer of ADSs outside India by a non-resident investor to another non-resident investor does not give rise to Indian capital gains tax. Taxation on Redemption of ADSs Though there is no specific provision exempting the redemption of ADSs, it can be inferred from the provisions of section 47(viia) of the Indian Income Tax Act that the acquisition of underlying equity shares upon a redemption of ADSs by a non-resident investor should not give rise to a taxable event for Indian tax purposes. In terms of Article 8(3) of the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993, (Scheme) issued by the Central Government, conversion of FCCBs (including ADS) into shares will not give rise to any capital gains liable to tax in India. Since the exemption is provided under the Scheme and not under the Income Tax Act, 1961, it cannot be guaranteed that the tax authorities would grant such exemption. Moreover Article 7(3) of the Scheme clarifies that the cost of acquisition of the underlying shares acquired through the redemption of ADRs/GDRs, shall be reckoned as the price of ordinary shares of the issuing company prevailing on the Stock Exchange on the date of the advice or redemption. Therefore the tax authorities may argue that since the Scheme does not provide the methodology for calculating the capital gains on sale of underlying shares in the case of unlisted companies, the benefit under the Scheme would not be available to companies not listed in India. In such a case there may be a risk of taxability of gains on acquisition of underlying equity shares upon redemption of ADSs. Taxation on Sale of Equity Shares Subject to any relief under any relevant double taxation treaty, a gain arising on the sale of an equity share by a non-resident investor will generally give rise to a liability for Indian capital gains tax and tax is required to be withheld at source. Capital gains on sale of equity shares, which have been held for more than 12 months (measured from the date of advice of redemption of the ADS by our Depositary in the case of non resident sellers) are considered as long-term capital gains and generally taxable at the rate of 20%. Surcharge on this tax would be applicable at the rate of 2.5% in the case of corporations whereas for individuals and association of persons, the rate of surcharge would be 10% if their Indian taxable income exceeds Rs.850,000. In all the above cases the amount of tax and surcharge would be increased by an Education Cess of 2%. Though section 115AC provides for lower rate of tax (i.e. 10% plus surcharge where applicable and Education Cess of 2%) on long term capital gains arising from transfer of ADS (other than between two non-residents), it is unclear whether the lower rate of tax would also extend to such gains arising from transfer of shares converted from ADS under the amended provisions of Section 115AC. However, it may be noted that certain other provisions of the Indian Income Tax Act also provide for lower rate of tax (i.e. 10% plus surcharge where applicable and Education Cess of 2%) for specific class of taxpayers e.g. Foreign Institutional Investors registered with the Securities and Exchange Board of India. If section 115AC and the Issue of Foreign Currency Convertible Bonds and Ordinary Shares Scheme are not applicable to a non-resident holder, long-term capital gains realized on the sale of such equity shares which are listed in India will still be subject to tax at the rate of 10% plus surcharge wherever applicable (as mentioned above) and Education Cess. In the case of non-residents, the option of taxation of capital gains on sale of listed securities at 10% may be litigative since the tax department may contend that the option is available only to residents. The non-resident holders will also be able to avail of the benefits of exchange rate fluctuations for the computation of capital gains tax, which are not available to a non-resident holder under section 115AC and the Issue of Foreign Currency Convertible Bonds and Ordinary Shares Scheme. Where the equity shares have been held for 12 months or less, the rate of tax varies and will be subject to tax at normal rates of income-tax applicable to non-residents under the provisions of the Indian Income Tax Act, subject to a maximum of 40% (plus applicable surcharge and Education Cess as mentioned above.) The actual rate of tax on short-term gains depends on a number of factors, including the legal status of the non-resident holder and the type of income chargeable in India. During the period the underlying equity shares are held by non-resident investors on a transfer from our Depositary upon redemption of ADSs, the provisions of the Avoidance of Double Taxation Agreement entered into by the Government of India with the country of residence of the non-resident investors will be applicable in the matter of taxation of any capital gain arising on a transfer of the equity shares. The double taxation treaty between the United States and India does not provide U.S. residents with any relief from Indian tax on capital gains. Under the regulations, the purchase price of equity shares received in exchange for ADSs will be the price of the underlying shares on the date that the depositary gives notice to the custodian of the delivery of the equity shares in exchange for the corresponding ADSs. In the case of companies listed in India, the purchase price of the equity shares would be the price of the equity shares prevailing on the BSE or the NSE on the date the depositary gives notice to the custodian of the delivery of the equity shares in exchange for the corresponding ADSs. This deemed method of determining the purchase price of the equity shares is not provided for under the Income Tax Act. In the event that the tax department denies this benefit, the original purchase price of ADSs would be considered the purchase price for computing the capital gains tax. However, the regulations and Section 115AC do not provide a basis for determining the cost of acquisition for the purposes of computing capital gains tax where the shares of the Indian company are not listed on the BSE or the NSE. Therefore, in the case of our company, which is not listed on either the BSE or the NSE, the determination of the purchase price of equity shares is unclear. Rights Distribution to non-resident holders of additional ADSs or equity shares or rights to subscribe for equity shares made with respect to ADSs or equity shares are not subject to tax in the hands of the non-resident holder. It is unclear as to whether capital gain derived from the sale of rights by a non-resident holder, not entitled to exemption under a tax treaty, to another non-resident holder outside India will be subject to Indian capital gains tax. If rights are deemed by the Indian tax authorities to be situated within India, as our situs is in India, the gains realized on the sale of rights will be subject to Indian taxation. Such rights would generally be in the nature of short-term capital assets. Stamp Duty Upon the issuance of the equity shares underlying the ADSs, we are required to pay a stamp duty of 0.1% per share of the issue price. A transfer of ADSs is not subject to Indian stamp duty. Normally, upon the acquisition of equity shares from the depositary in exchange for ADSs representing such equity shares in physical form, an investor would be liable for Indian stamp duty at the rate of 0.25% of the market value of the equity shares at the date of registration. Similarly, a sale of equity shares by an investor would also be subject to Indian stamp duty at the rate of 0.25% of the market value of the equity shares on the trade date, although customarily such tax is borne by the transferee, that is, the purchaser. In case the equity shares of the company are held in a dematerialized form, no stamp duty would be payable on the acquisition or transfer of such equity shares. Other Taxes At present, there are no Indian taxes on wealth, gifts and inheritance, which may apply to the ADSs and underlying equity shares. Service Tax Brokerage or commissions paid to stockbrokers in connection with the sale or purchase of shares traded in India is subject to a service tax of 10% The stockbroker is responsible for collecting the service tax and paying it to the relevant authority. Payments received in India in convertible foreign exchange are currently exempted from the levy of service tax. General Our business is primarily subject to regulation by the Ministry of Information Technology, which was formed in October 1999 and is a part of the Government of India. We may also be subject to regulation by the Ministry of Communications of the Government of India and the Telecom Regulatory Authority of India, or the TRAI. On June 9, 2000, the Information Technology, Act was enacted and was made effective as of October 17, 2000. The IT Act has been enacted to: o give legal validity to online contracts; o give legal validity to digital signatures; o make electronic records admissible in court in evidentiary proceedings; o set default rules for time and place of dispatch and receipt of electronic records; o allow for filing of documents with the Government of India in electronic form; o allow for retention of documents, information or records in electronic form; o set up certifying authorities to issue and supervise digital signatures; o set up a controller of certifying authorities to monitor and supervise the certifying authorities; o set up Cyber Regulations Appellate Tribunals to act as quasi-judicial bodies with respect to disputes relating to online transactions; and o Penalize computer crimes. Since the IT Act is a recently enacted legislation, it is uncertain how issues such as legal recognition of electronic records, validity of contracts entered into through the Internet and validity of digital signatures will be resolved under this legislation. United States Federal Tax The following discussion describes certain U.S. federal income tax consequences of the acquisition, ownership and sale of ADSs that are generally applicable to U.S. investors. For these purposes, you are a U.S. investor if you are: o a citizen or resident of the United States under U.S. federal income tax laws; o a corporation organized under the laws of the United States or of any political subdivision of the United States; or o an estate or trust the income of which is subject to U.S. federal income tax regardless of its source. This discussion only applies to ADSs that you own as capital assets. Please note that this discussion does not discuss all of the tax consequences that may be relevant in light of your particular circumstances. In particular, it does not address investors subject to special tax rules, including: o insurance companies; o tax-exempt entities; o dealers in securities; o financial institutions; o persons who own the ADSs as part of an integrated investment (including a straddle, hedging or conversion transaction) consisted of the ADS and one or more other positions for tax purposes; o persons whose functional currency is not the U.S. dollar; or o persons who own, actually or constructively, 10% or more of our voting stock. This discussion is based on the tax laws of the United States currently in effect (including the Internal Revenue Code of 1986, as amended, referred to as "the Code"), Treasury Regulations, Revenue Rulings and judicial decisions. These laws may change, possibly with retroactive effect. For U.S. federal income tax purposes, if you own an ADS, you will generally be treated as the owner of the equity shares underlying the ADS. Please consult your own tax advisor with regard to the application of the U.S. federal income tax laws to the ADSs in your particular circumstances, including the passive foreign investment company rules described below, as well as any tax consequences arising under the laws of any state, local or other taxing jurisdiction. Taxation of Dividends Subject to the passive foreign investment company rules described below, dividends you receive on the ADSs, other than certain pro rata distributions of common shares or rights to acquire common shares or ADSs, will generally constitute taxable dividend income (as determined for U.S. federal income tax purposes) and foreign source "passive income" or "financial services income" for U.S. foreign tax credit purposes. The amount of the dividend you will be required to include in income will equal the U.S. dollar value of the Rupees constituting such taxable dividend, calculated by reference to the spot exchange rate in effect on the date the payment is received by the depositary, regardless of whether the payment is converted into U.S. dollars. If you realize gain or loss on a sale or other disposition of Rupees, it will generally be U.S. source ordinary income or loss. Taxation of Capital Gains You will generally recognize gain or loss on the sale or exchange of ADSs equal to the difference between the amount realized on such sale or exchange and your U.S. tax basis in the ADSs. Subject to the passive foreign investment company rules described below, such gain or loss will be capital gain or loss, and will generally be long-term capital gain or loss if the ADSs were held for more than one year. Gain or loss, if any, recognized by a U.S. investor generally will be treated as U.S. source gain or loss for U.S. foreign tax credit purposes. The deductibility of capital losses may be subject to limitation. Estate Taxes An individual shareholder who is a citizen or resident of the United States as determined for U.S. federal estate tax purposes will have the value of the equity shares or ADSs owned by such holder included in his or her gross estate for U.S. federal estate tax purposes. An individual holder who actually pays Indian estate tax with respect to the equity shares will, however, be entitled to credit the amount of such tax against his or her U.S. federal estate tax liability, subject to certain conditions and limitations. Passive Foreign Investment Company Rules A foreign corporation is a PFIC for any taxable year in which (i) 75.0% or more of its gross income consists of passive income (such as dividends, interest, rents and royalties) or (ii) 50.0% or more of the average quarterly value of its assets consists of assets that produce, or are held for the production of, passive income (including cash). If a foreign corporation owns at least 25% by value of the stock of another corporation, the foreign corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation and as receiving directly its proportionate share of the other corporation's income. It is uncertain whether or not we will be a PFIC for U.S. federal income tax purposes for the current or future taxable years. PFIC status is a factual determination that is based on the composition of our income and the value of our assets during each year. Valuation of our assets, including goodwill, is based on the market price of the ADSs, which is subject to change from time to time. As described below, if we are treated as a PFIC, U.S. investors in ADSs may incur significantly increased U.S. federal income tax costs on the sale or disposition of ADSs and on the receipt of distributions on ADSs to the extent such distributions are treated as "excess distributions" under the U.S. federal income tax rules. If we are treated as a PFIC, and you are a U.S. investor in ADSs that did not make a mark-to-market election, as described below, you will be subject to special rules with respect to: o any gain you realize on the sale or other disposition of your shares; and o any excess distribution that we make to you (generally, any distributions to you during a single taxable year that are greater than 125% of the average annual distributions received by you in respect of the shares during the three preceding taxable years or, if shorter, your holding period for the shares). Under these rules: o the gain or excess distribution will be allocated ratably over your holding period for the shares, o the amount allocated to the taxable year in which you realized the gain or excess distribution will be taxed as ordinary income, o the amount allocated to each prior year, with certain exceptions, will be taxed at the highest tax rate in effect for that year, and o the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such year. Special rules apply for calculating the amount of the foreign tax credit with respect to excess distributions by a PFIC. If you own shares in a PFIC that are treated as marketable stock, you may make a mark-to-market election. So long as our ADSs are traded on the NASDAQ Small Cap Market, our shares should be treated as marketable stock for this purpose. If you make this election, you will not be subject to the PFIC rules described above. Instead, in general, you will include as ordinary income each year the excess, if any, of the fair market value of your shares at the end of the taxable year over your adjusted basis in your shares. You will also be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of your shares over their fair market value at the end of the taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). Your basis in the shares will be adjusted to reflect any such income or loss amounts. Upon request, we will furnish you with the information that you would need in order to make a qualifying electing fund election to include your share of income on current basis." If you own shares during any year that we are a PFIC, you must file Internal Revenue Service Form 8621 that describes the distributions received on the shares and the gain realized on the disposition of the shares. Please consult your own tax advisor about the possibility that we will be a PFIC and the rules that would apply to you if we were. Backup Withholding and Information Reporting. If you are a non-corporate U.S. investor, information reporting requirements, on Internal Revenue Service Form 1099, generally will apply to: o dividend payments or other taxable distributions made to you within the United States; and o the payment of proceeds to you from the sale of shares effected at a United States office of a broker. Additionally, backup withholding may apply to such payments if you are a non-corporate U.S. investor that: o fails to provide an accurate taxpayer identification number, o is notified by the Internal Revenue Service that you have failed to report all interest and dividends required to be shown on your federal income tax returns; or o in certain circumstances, fails to comply with applicable certification requirements. Payment of the proceeds from the sale of shares effected at a foreign office of a broker generally will not be subject to information reporting or backup withholding. However, a sale of shares that is effected at a foreign office of a broker will be subject to information reporting and backup withholding if: o the proceeds are transferred to an account maintained by you in the United States, o the payment of proceeds or the confirmation of the sale is mailed to you at a United States address; or o the sale has some other specified connection with the United States as provided in U.S. Treasury regulations, unless the broker does not have actual knowledge or reason to know that you are a United States person and the documentation requirements described above are met or you otherwise establish an exemption. In addition, a sale of shares effected at a foreign office of a broker will be subject to information reporting if the broker is: o a United States person, o a controlled foreign corporation for United States tax purposes, o a foreign person 50% or more of whose gross income is effectively connected with the conduct of a United States trade or business for a specified three-year period, or o a foreign partnership, if at any time during its tax year: o one or more of its partners are "U.S. persons", as defined in U.S. Treasury regulations, who in the aggregate hold more than 50% of the income or capital interest in the partnership, or o such foreign partnership is engaged in the conduct of a United States trade or business, unless the broker does not have actual knowledge or reason to know that you are a United States person and the documentation requirements described above are met or you otherwise establish an exemption. Backup withholding will apply if the sale is subject to information reporting and the broker has actual knowledge that you are a United States person. You generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed your income tax liability by filing a refund claim with the United States Internal Revenue Service. USE OF PROCEEDS In our initial offering of our ADSs, completed in June 2000, we sold a total of 5,290,000 ADSs, representing 2,645,000 equity shares, to an underwriting syndicate (including the underwriters' over-allotment option of 690,000 ADSs representing 345,000 equity shares) at an initial offering price of US$12.00 per ADS. The managing underwriters were Goldman, Sachs & Co., Credit Suisse First Boston, and Robert Fleming Inc. We received US$57.3 million in net proceeds from the offering. The gross proceeds from our ADS offering were US$63.48 million, out of which US$4.4 million was paid as underwriting and management consulting fees and US$1.7 million was paid for other expenses. As of March 31, 2004, the net proceeds of our ADS offering, together with our existing cash balances as of the date of the ADS offering, were utilized as follows: o approximately US$24.4 million for strategic acquisitions and investments, including costs of acquisitions (US$Nil was used during the fiscal 2004); o approximately US$16.5 million to enhance our content and service offerings and promote our brands (approximately US$1 million was utilized during the fiscal 2004); and o approximately US$6.05 million in capital expenditures. (approximately US$0.6 million was used during the fiscal 2004) As of March 31, 2004, US$11.6 million of the net proceeds of our ADS offering remain as cash and cash equivalents and short term deposits with banks. We are able to withdraw these deposits on demand. The Reserve Bank of India has the authority to compel us to bring the proceeds to India and have them invested in Indian Rupee denominated bank accounts in India. None of the net proceeds from the IPO were paid, directly or indirectly, to any of our directors, officers or general partners or any of their associates, or to any persons owning ten per cent or more of any class of our equity securities, or any affiliates. CONTROLS AND PROCEDURES Our Chairman, who serves as our principal executive officer and our Chief Financial Officer, after evaluating the effectiveness of our "disclosure controls and procedures" (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this annual report, has concluded that our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities. There were no significant changes in our internal controls over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the objectives of the control system. As such, disclosure controls and procedures or internal control systems may not prevent all error and all fraud. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, at our Company have been detected. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table summarizes the fees billed to us by our principal accountant, Deloitte Haskins and Sells, Mumbai, India and its affiliates (collectively "Deloitte") for various services rendered to us during the fiscal years ended March 31, 2003 and 2004. Fiscal year ended March 31, 2003 2004 ---- ---- Audit Fees......................... US$ 98,783 US$ 126,262 Audit-Related Fees............. 2,793 7,401 Tax Fees.......................... 17,694 12,483 All other Fees.................... 87,989 - Audit fees represents the aggregate fees billed by Deloitte in connection with the audits of our annual consolidated financial statements, the reviews of our quarterly financial statements and statutory audits. We appointed Deloitte as auditors of our subsidiary, Rediff Holdings, Inc, for the first time for the fiscal year ended March 31, 2004. Audit related fees represents payments for statutory certification work for the fiscal years ended March 31, 2003 and 2004 and for obtaining auditors' consent on our Form S-8 filing during the fiscal year ended March 31, 2004. Tax fees primarily comprise fees for tax audit, tax returns, tax processing, tax filing and advisory services. Tax fees also include other corporate tax services such as assistance with foreign income tax and service tax. All other fees comprise of payments made to a Deloitte affiliated entity for providing certain financial information software implementation services. In accordance with the Sarbanes-Oxley Act of 2002 and the Securities and Exchange Commission's Rule relating to "Strengthening the Commission's requirements regarding auditor independence" which prohibits such services subsequent to the effective date of May 6, 2003, all contracted software maintenance for periods after that date was terminated. Our audit committee charter requires us to obtain the prior approval of our audit committee on every occasion we engage our principal accountants or their associated entities to provide us any audit or non-audit services. We disclose to our Audit Committee the nature of services that are provided. All of the services provided by our principal accountants or their associated entities in the previous two fiscal years (since the emergence of the pre-approval rules), have been pre-approved by our Audit Committee. PRESENTATION OF FINANCIAL INFORMATION The financial information in this annual report has been prepared in accordance with U.S. GAAP, unless indicated otherwise. Our fiscal year ends on March 31 of each year so all references to a particular fiscal year are to the year ended March 31 of that year. The financial statements, including the notes to these financial statements, audited by Deloitte Haskins and Sells, independent accountants, are set forth at the end of this annual report. Although we have translated in this annual report certain Indian Rupee amounts into U.S. dollars, this does not mean that the Indian Rupee amounts referred to could have been, or could be, converted into U.S. dollars at any particular rate, the rates stated earlier in this annual report, or at all. The Federal Reserve Bank of New York certifies the exchange rate for customs purposes on each date the rate is given. The noon buying rate on March 31, 2004 was Rs.43.40 per US$1.00. ADDITIONAL INFORMATION Memorandum and Articles of Association Objects and Purposes The main object as stated in our Memorandum of Association is to carry on and undertake the business of providing online information services in various languages via electronic and other forms of communications for local and other subscribers in India and abroad and to deal in all the materials connected therewith. For purposes of carrying out this main object, we are also authorized under our Memorandum of Association to carry on and undertake the business of publishers of dailies, weeklies, fortnightly, newspapers, periodicals, journals, magazines, directories, souvenirs, year-books and other literary works in the electronic and other forms in any language and on any subject and marketing including export markets, sell/distribute such published items to subscribers in India and abroad. Description of Equity Shares The following description of equity shares does not purport to be complete and is subject to and qualified in its entirety by our Articles of Association and Memorandum of Association, as amended, the provisions of the Companies Act, as currently in effect, and other applicable provisions of Indian law. Share Capital Our authorized share capital is 20,000,000 equity shares, par value Rs.5 per share (after giving effect to our 2 for 5 reverse share split effective May 3, 2000). As of March 31, 2004, 12,827,425 equity shares were issued and outstanding. The equity shares are our only class of share capital. However, our Amended and Restated Articles of Association and the Companies Act permit us to issue classes of securities in addition to the equity shares. For the purposes of this annual report, "shareholder" means a shareholder who is registered as a member in the register of members of our company. Prior Shareholder Rights Agreements In connection with our sales of equity shares to our investors from April 1998 through December 1999, we entered into nine separate shareholders rights agreements with our shareholders which provide for, among other things, certain preemptive, registration, co-sale and information rights, as well as the right of some shareholders to appoint members or observers of our Board of Directors. Some of the agreements also provide the shareholders with protective provisions that require us to obtain our shareholders' consent to take certain actions that would otherwise only require our Board's approval. Amended and Restated Shareholders' Rights Agreement On February 24, 2000 we entered into an Amended and Restated Shareholders' Rights Agreement with all of our shareholders to amend, restate, supersede and replace all nine previous shareholder agreements we entered into with our shareholders. The Amended and Restated Shareholders' Rights Agreement, which became effective on the completion of our ADR offering, provides for the following shareholder rights: 1. Registration Rights Holders of at least 30% of our equity shares can require us, subject to limitations, to effect a registration or qualification of the securities either with the NASDAQ National Market, the National Stock Exchange of India or The Stock Exchange, Mumbai. We are not required to effect: o more than two such registrations or qualifications pursuant to such demand registration rights; o a registration or qualification prior to the earlier of December 31, 2002, or six months after the effective date of any Indian law, regulation or other governmental order which allows our equity shares to be offered to the public on an Indian stock exchange; or o a registration for a period not to exceed 120 days, if our Board of Directors has made a good faith determination that such registration would be detrimental to us or our shareholders. At any time after we become eligible to file a registration statement on Form F-3, holders of our equity shares may require us to file registration statements on Form F-3 with respect to their equity shares. We are not required to effect this registration: o more than once in a twelve month period; o unless the registration relates to securities that are valued in excess of US$1,000,000; or o if our Board of Directors has made a good faith determination that such registration would be detrimental to us or our shareholders. Each of the foregoing registration rights is subject to conditions and limitations, including the right of the underwriters in any underwritten offering to limit the number of equity shares to be included in such registration. We are required to bear all the expenses of all such registrations, except underwriting discounts and commissions. The registration rights with respect to any holder thereof terminate upon the earlier of when the holder may sell the equity shares within a three month period pursuant to Rule 144 of the Securities Act, or the time when the holder is able to convert the registrable securities into ADSs which, beginning on June 24, 2002, are traded on the NASDAQ Small Cap Market. 2. Other Rights The Amended and Restated Shareholders' Rights Agreement also provides certain preemptive, information and co-sale rights to our shareholders. Dividends Under the Companies Act, unless our Board of Directors recommends the payment of a dividend, we may not declare a dividend. Similarly, under our Amended and Restated Articles of Association, although the shareholders may, at the annual general meeting, approve a dividend in an amount less than that recommended by the Board of Directors, they cannot increase the amount of the dividend. In India, dividends generally are declared as a percentage of the par value of a company's equity shares. Any dividend recommended by the Board of Directors subject to the limitations described above, will be distributed and paid to shareholders in proportion to the paid up value of their shares within 30 days of the approval by the shareholders at the annual general meeting. The Board of Directors may also declare interim dividend and the amount of dividend, including interim dividend, is required to be deposited in a separate bank account within five days from the date of declaration of such dividend. If such dividend, including interim dividend, has not been paid or claimed within 30 days of declaration of such dividend, we are required to transfer the total amount of dividend which remains unpaid or unclaimed within 7 days of the expiry of the 30 day period, to a special bank account. Under the Companies Act if a dividend has been declared by a company but has not been paid within 30 days from the date of declaration to any shareholder entitled to the payment of the dividend, each director of the company, if he is knowingly a party to the default, will be punishable with imprisonment and also liable to a fine. Pursuant to our Amended and Restated Articles of Association, our Board of Directors has discretion to declare and pay interim dividends without shareholders' approval. With respect to equity shares issued during a particular fiscal year (including any equity shares underlying ADSs issued to our Depositary in connection with the offering or in the future), cash dividends declared and paid for such fiscal year generally will be prorated from the date of issuance to the end of such fiscal year. Under the Companies Act, dividends can only be paid in cash to the registered shareholder at a record date fixed on or prior to the annual general meeting or to his order or his banker's order. Under the Companies Act, dividends and interim dividends may be paid out of profits of a company in the year in which the dividend is declared or out of the undistributed profits of previous fiscal years. Before declaring a dividend the Companies Act requires that we provide for depreciation in accordance with the Companies Act and also transfer to its reserves a minimum percentage of its profits for that year, ranging between 2.5% to 10.0% depending upon the dividend percentage to be declared in such year. The Companies Act further provides that, in the event of an inadequacy or absence of profits in any year, a dividend may be declared for such year out of the company's accumulated profits, subject to the following conditions: o the rate of dividend to be declared may not exceed 10.0% of its paid up capital or the average of the rate at which dividends were declared by the company in the prior five years, whichever is less; o the total amount to be drawn from the accumulated profits earned in the previous years and transferred to the reserves may not exceed an amount equivalent to 10.0% of its paid up capital and free reserves, and the amount so drawn is to be used first to set off the losses incurred in the fiscal year before any dividends in respect of preference or equity shares are declared; and o the balance of reserves after withdrawals shall not fall below 15.0% of its paid up capital. Bonus Shares In addition to permitting dividends to be paid out of current or retained earnings as described above, the Companies Act permits us to distribute an amount transferred from the general reserve or surplus in our profit and loss account to our shareholders in the form of bonus shares, which are similar to a stock dividend. The Companies Act also permits the issuance of bonus shares from a securities premium account. These bonus shares must be distributed to shareholders in proportion to the number of equity shares owned by them. Bonus shares are distributed to shareholders in the proportion recommended by the Board of Directors. Shareholders of record on a fixed record date are entitled to receive such bonus shares. Preemptive Rights and Issue of Additional Shares The Companies Act gives shareholders the right to subscribe for new shares in proportion to their respective existing shareholdings unless otherwise determined by a special resolution passed by a general meeting of the shareholders. For approval, this special resolution must be approved by a number of votes which is not less than three times the number of votes against the special resolution. If the special resolution is not approved, the new shares must first be offered to the existing shareholders as of a fixed record date. The offer must include: (1) the right, exercisable by the shareholders of record, to renounce the shares offered in favor of any other person; and (2) the number of shares offered and the period of the offer, which may not be less than 15 days from the date of offer. If the offer is not accepted it is deemed to have been declined. Our Board of Directors is authorized under the Companies Act to distribute any new shares not purchased by the preemptive rights holders in the manner that it deems most beneficial to the Company. Annual General Meetings of Shareholders We must convene an annual general meeting of shareholders within 15 months of the previous annual general meeting or within six months after the end of each fiscal year and may convene an extraordinary general meeting of shareholders when necessary or at the request of a shareholder or shareholders holding at least 10.0% of our paid up capital carrying voting rights. The annual general meeting of the shareholders is generally convened by our Secretary pursuant to a resolution of the Board. Written notice setting out the agenda of the meeting must be given at least 21 days (excluding the days of mailing and receipt) prior to the date of the general meeting to the shareholders of record. Shareholders who are registered as shareholders on the date of the general meeting are entitled to attend or vote at such meeting. The annual general meeting of shareholders must be held at our registered office or at such other place within the city in which the registered office is located; meetings other than the annual general meeting may be held at any other place if so determined by the Board of Directors. Our registered office is located at 1st floor, Mahalaxmi Engineering Estate, L. J. Road No.1, Mahim (West), Mumbai 400 016. Our Articles of Association provide that a quorum for a general meeting is the presence of at least five shareholders in person. Voting Rights At any general meeting, voting is by show of hands unless a poll is demanded by a shareholder or shareholders present in person or by proxy holding at least 10.0% of the total shares entitled to vote on the resolution or by those holding shares with an aggregate paid up capital of at least Rs.50,000. Upon a show of hands, every shareholder entitled to vote and present in person has one vote and, on a poll, every shareholder entitled to vote and present in person or by proxy has voting rights in proportion to the paid up capital held by such shareholders. Any shareholder may appoint a proxy. The instrument appointing a proxy must be delivered to us at least 48 hours prior to the meeting. A proxy may not vote except on a poll. A corporate shareholder may appoint an authorized representative who can vote on behalf of the shareholder, both upon a show of hands and upon a poll. Ordinary resolutions may be passed by simple majority of those present and voting at any general meeting for which the required period of notice has been given. However, specified resolutions such as amendments to our Amended and Restated Articles of Association and the Memorandum of Association, commencement of a new line of business, the waiver of preemptive rights for the issuance of any new shares and a reduction of share capital, require that votes cast in favor of the resolution (whether by show of hands or poll) are not less than three times the number of votes, if any, cast against the resolution. Pursuant to the Companies (Issue of Share Capital with Differential Voting Rights) Rules, 2001, issued on March 9, 2001, by the Department of Company Affairs, Government of India, a company limited by shares is authorized to issue shares with differential voting rights if the articles of association of the company so authorizes. Our Amended and Restated Articles of Association do not authorize issue of shares with differential voting rights. Pursuant to Section 192A of the Companies Act, a listed public company has an option to pass any resolution relating to such businesses as notified by the Central Government through a postal ballot. Since as of the date of this annual report, the Company is not a "listed public company", the provisions of Section 192A of the Companies Act do not currently apply to us. Holders of our ADSs may exercise voting rights only through a depositary, unlike an owner of equity shares, who can exercise voting rights directly. An owner of ADSs generally will have the right under the deposit agreement to instruct our Depositary to exercise the voting rights for the equity shares represented by the ADSs. Owners of ADSs have no rights pursuant to the Companies Act, under which we were incorporated, and are limited to those rights granted to them pursuant to the Deposit Agreement. It is our expectation that our Depositary will mail to the owners of ADSs any notice of shareholders' meeting timely received from us together with information explaining how to instruct our Depositary to exercise the voting rights of the equity shares represented by ADSs. If our Depositary timely receives voting instructions from an owner of ADSs, it will endeavor to vote the securities represented by those ADSs in accordance with such voting instructions. In the event that voting takes place by a show of hands, our Depositary will cause the custodian to vote all deposited securities in accordance with the instructions received from owners of a majority of the ADSs for which our Depositary receives voting instructions. However, the ability of our Depositary to carry out voting instructions may be limited by practical and legal limitations and the terms of the securities on deposit. We cannot assure that holders of ADSs will receive voting materials in time to enable them to return voting instructions to our Depositary in a timely manner. Register of Shareholders; Record Dates; Transfer of Shares We maintain a register of shareholders. For the purpose of determining the shares entitled to annual dividends, the register is closed for a specified period prior to the annual general meeting. The date on which this period begins is the record date. To determine which shareholders are entitled to specified shareholder rights, we may close the register of shareholders. The Companies Act requires us to give at least seven days' prior notice to the public before such closure. We may not close the register of shareholders for more than thirty consecutive days, and in no event for more than forty-five days in a year. Following the introduction of the Depositories Act, 1996, as amended, and the repeal of Section 22A of the Securities Contracts (Regulation) Act, 1956, as amended, which enabled companies to refuse to register transfers of shares in some circumstances, the equity shares of a public company are freely transferable, subject only to the provisions of Section 111A of the Companies Act. Since we are a public limited company, the provisions of Section 111A will apply to us. Our Articles currently contain provisions, which give our directors discretion to refuse to register a transfer of shares in some circumstances. Furthermore, in accordance with the provisions of Section 111A(2) of the Companies Act, our directors may refuse to register a transfer of shares if they have sufficient cause to do so. If our directors refuse to register a transfer of shares, the shareholder wishing to transfer his, her or its shares may file a civil suit or an appeal with the Company Law Board constituted under Section 10E of the Companies Act. Pursuant to Section 111A(3) of the Companies Act, if a transfer of shares contravenes any of the provisions of the Indian Securities and Exchange Board of India Act, 1992 or the regulations issued there under or the Indian Sick Industrial Companies (Special Provisions) Act, 1985 or any other Indian laws, the Company Law Board may, on application made by the company, a depository incorporated in India, an investor, the Securities and Exchange Board of India or other parties, direct the rectification of the register of records. The Company Law Board may, in its discretion, issue an interim order suspending the voting rights attached to the relevant shares before making or completing its investigation into the alleged contravention. Notwithstanding such investigation, the rights of a shareholder to transfer the shares will not be restricted. Under the Companies Act, unless the shares of a company are held in a dematerialized form, a transfer of shares is effected by an instrument of transfer in the form prescribed by the Companies Act and the rules thereunder together with delivery of the share certificates. Disclosure of Ownership Interest Section 187C of the Companies Act requires beneficial owners of shares of Indian companies who are not holders of record to declare to us details of the holder of record and the holder of record to declare details of the beneficial owner. Any person who fails to make the required declaration within 30 days may be liable for a fine of up to Rs.1,000 for each day the declaration is not made. Any lien, promissory note or other collateral agreement created, executed or entered into with respect to any equity share by its registered owner, or any hypothecation by the registered owner of any equity share, shall not be enforceable by the beneficial owner or any person claiming through the beneficial owner if such declaration is not made. Failure to comply with Section 187C will not affect our obligation to register a transfer of shares or to pay any dividends to the registered holder of any shares pursuant to which the declaration has not been made. While it is unclear under Indian law whether Section 187C applies to holders of ADSs, investors who exchange ADSs for the underlying equity shares will be subject to the restrictions of Section 187C. The provisions of Section 187C of the Companies Act do not, however, apply to a trustee holding shares of a company for the benefit of the beneficiaries of a trust. Audit and Annual Report At least 21 days before the annual general meeting of shareholders excluding the days of mailing and receipt, we must distribute to our shareholders a detailed version of our audited balance sheet and profit and loss account and the related reports of the Board and the auditors, together with a notice convening the annual general meeting. Under the Companies Act, we must file the balance sheet and annual profit and loss account presented to the shareholders within 30 days of the conclusion of the annual general meeting with the Registrar of Companies in Mumbai, which is in the State of Maharashtra, India. Our registered office is located in Mumbai. We must also file an annual return containing a list of our shareholders and other information, within 60 days of the conclusion of the meeting. Company Acquisition of Equity Shares Under the Companies Act, approval of at least 75.0% of a company's shareholders voting on the matter and approval of the High Court of the State in which the registered office of the company is situated is required to reduce a company's share capital. A company may, under some circumstances, acquire its own equity shares without seeking the approval of the High Court. However, a company would have to extinguish the shares it has so acquired within the prescribed time period. A company is not permitted to acquire its own shares for treasury operations. An acquisition by a company of its own shares (without having to obtain the approval of the High Court) must comply with prescribed rules, regulations and conditions as laid down in the Companies Act. In addition, private and unlisted public companies. such as ours, would have to comply with the Private Limited Company and Unlisted Public Limited Company (Buy-back of Securities) Rules, 1999, notified by the Ministry of Law, Justice and Company Affairs of the Government of India on July 6, 1999 and public companies which are listed on a recognized stock exchange in India would have to comply with the provisions of the Securities and Exchange Board of India (Buy-back of Securities) Regulations, 1998, or Buy-back Regulations. Since we are not listed on any recognized stock exchange in India, we would have to comply with the relevant provisions of the Companies Act and the Private Limited Company and Unlisted Public Limited Company (Buy-back of Securities) Rules, 1999. Liquidation Rights Subject to the rights of creditors, workmen and the holders of any shares entitled by their terms to preferential repayment over the equity shares, if any, in the event of our winding-up the holders of the equity shares are entitled to be repaid the amounts of paid up capital or credited as paid upon those equity shares. Further, in the event of a winding up, the shareholders of the Company would be liable for an amount not exceeding the aggregate unpaid amount of the face value of shares of the Company held by such shareholders. All surplus assets after payments to the holders of any preference shares and other creditors shall be paid to holders of equity shares in proportion to their shareholdings at the commencement of the winding-up. Documents on Display This annual report and other information filed or to be filed by the Company can be inspected and copied at the public reference facilities maintained by the SEC at: Judiciary Plaza 450 Fifth Street, N.W. Room 1024 Washington, D.C. 20529 Copies of these materials can also be obtained from the Public Reference Section of the SEC, 450th Street, N.W., Washington, D.C. 20549, at prescribed rates. The SEC maintains a website at www.sec.gov that contains reports and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. With effect from November 4, 2002, the SEC has issued a Rule mandating use of EDGAR system of filing for all international filers. The Company has accordingly been following the Rule. Additionally, documents referred to in this Form 20-F may be inspected at our Registered office, which are located at Mahalaxmi Engineering Estate, 1st Floor, L.J. First Cross Road, Mahim (West), Mumbai 400 016, India. EXHIBIT INDEX Exhibit No. Description of Document - ----------- ----------------------- *1.1 Articles of Association, as amended. *1.2 Memorandum of Association, as amended. *1.3 Certificate of Incorporation, as amended. *2.1 Form of Deposit Agreement among Rediff.com, Citibank, N.A., and holders from time to time of American Depository Receipts issued thereunder (including as an exhibit, the form of American Depository Receipt). *2.2 Rediff.com's specimen certificate for equity shares. *2.3 Amended and Restated Shareholder Rights Agreement dated February 24, 2000 between Rediff.com and the shareholders of Rediff.com. *4.1 1999 Employee Stock Option Plan. *4.2 1999 Associate Stock Option Plan. ***4.3 2002 Stock Option Plan. *4.4 Form of Indemnification Agreement. *4.5 Sublease dated July 5, 1999 between Shreenathji Balaji Computech Private Limited and Rediff.com. *4.6 Letter Agreement dated December 28, 1998 between Rediffusion-Dentsu, Young & Rubicam Limited and Rediff.com. *4.7 Promoters Agreement dated January 9, 1996 between Ajit Balakrishnan and Diwan Arun Nanda **4.8 Stock Purchase Agreement among Rediff.com, ValuCom and shareholders of ValuCom dated March 21, 2001. **4.9 Stock Purchase Agreement among Rediff.com, India Abroad and shareholders of India Abroad dated March 21, 2001, as amended on April 27, 2001. **4.10 Amended and Restated Agreement and Plan of Reorganization among Rediff.com, Thinkindia.com, Inc., Rediff Holdings, Inc., the principal stock holders of Think India and certain other parties thereto dated February 27, 2001. 4.11 Agreement for sale of assets of Value Communications Corporation dated April 8, 2004. 12.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 12.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 13.1 Certification of Principal Executive Officer pursuant to 18. U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 13.2 Certification of Principal Financial Officer pursuant to 18. U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - ------------------ * Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form F-1 (File No. 333-37376) ** Incorporated by reference to exhibits filed with the Registrant's Form 20-F for the fiscal year ended March 31, 2001. *** Incorporated by reference to exhibits filed with the Registrant's Form 20-F for the fiscal year ended March 31, 2003. INDEX TO FINANCIAL STATEMENTS
Page Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements...........................................F-2 Report of Independent Registered Public Accounting Firm on the financial statements of Rediff Holdings, Inc, a subsidiary Company. .....F-3 Consolidated Balance Sheets at March 31, 2003 and 2004..........................F-4 Consolidated Statements of Operations for the years ended March 31, 2002, 2003 and 2004...................................................F-5 Statements of Shareholders' Equity for the years ended March 31, 2002, 2003 and 2004...................................................F-6 Consolidated Statements of Cash Flows for the years ended March 31, 2002, 2003 and 2004...................................................F-7 Notes to Consolidated Financial Statements......................................F-8 Report of Independent Registered Public Accounting Firm on Financial Statement Schedule of Valuation and Qualifying Accounts.............................................................F-30 Schedule of Valuation and Qualifying Accounts...................................F-31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors Rediff.com India Limited We have audited the accompanying consolidated balance sheets of Rediff.com India Limited and subsidiaries ("the Company") as of March 31, 2003 and 2004, and the related consolidated statements of operations, cash flows and shareholders' equity for each of the years in the three year period ended March 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of a consolidated subsidiary of the Company, (Rediff Holdings Inc. and its subsidiaries, Rediff.com Inc. and India Abroad Publications Inc.) for the years ended March 31, 2002 and March 31, 2003, which statements reflect total assets constituting 31% of the related consolidated total assets at March 31, 2003 and total revenues constituting 21% and 34%, respectively, of the related consolidated total revenues for the years ended March 31, 2002 and 2003. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for the Company for the years ended March 31, 2002 and March 31, 2003 is based solely on the report of such other auditors. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2003 and 2004 and the results of its operations and its cash flows for each of the years in the three year period ended March 31, 2004 in conformity with accounting principles generally accepted in the United States of America. As described in Note 2(b), these consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which differ in certain material respects from accounting principles generally accepted in India, which form the basis of the Company's general purpose financial statements. As discussed in Note 2(i) to the consolidated financial statements, on April 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible assets." Deloitte Haskins & Sells Mumbai, India Dated: April 29, 2004. Report of Independent Registered Accounting Firm The Board of Directors Rediff Holdings, Inc. We have audited the accompanying consolidated balance sheet of Rediff Holdings, Inc. and Subsidiaries (the "Company") as of March 31, 2003, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for the years ended March 31, 2003 and 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Rediff Holdings, Inc. and Subsidiaries at March 31, 2003, and the consolidated results of their operations and their cash flows for the years ended March 31, 2003 and 2002 in conformity with U.S. generally accepted accounting principles. Ernst & Young LLP New York, New York, April 21, 2003 REDIFF.COM INDIA LIMITED CONSOLIDATED BALANCE SHEETS As of March 31, 2003 and 2004
March 31, --------------------------------- 2003 2004 --------------------------------- Assets Current Assets Cash and cash equivalents ....................................................... US$14,383,786 US$11,639,173 Trade accounts receivable, (net of allowances of US$1,034,360 and US$1,229,677 at March 31, 2003 and 2004, respectively) ..................................... 1,476,773 1,884,193 Inventories ..................................................................... 275,321 - Prepaid expenses and other current assets ....................................... 1,338,047 1,111,784 Assets held for sale (See Note 5) ............................................... - 523,322 Recoverable income taxes ........................................................ 540,856 134,633 ------------ ------------ Total current assets ............................................................ 18,014,783 15,293,105 Property, plant and equipment - net ............................................. 2,257,016 1,491,240 Goodwill - net .................................................................. 9,347,278 7,314,468 Other assets .................................................................... 712,549 768,962 ------------- ------------- Total assets .................................................................... US$30,331,626 US$24,867,775 ============= ============= Liabilities and shareholders' equity Current liabilities Accounts payable and accrued liabilities ........................................ US$ 4,155,545 US$ 3,127,894 Customer deposits ............................................................... 221,600 208,391 Unearned revenues ............................................................... 356,410 488,743 Bank balance overdrawn .......................................................... 43,208 -- ------------ ------------ Total current liabilities ....................................................... 4,776,763 3,825,028 Other liabilities ............................................................... 13,941 15,384 ------------ ------------ Total liabilities ............................................................... 4,790,704 3,840,412 ------------ ------------ Commitments and contingencies (See note 20) ..................................... -- -- ------------ ------------ Shareholders' equity Equity shares: par value -- Rs.5, Authorized: 20,000,000 shares; Issued and outstanding: 12,795,200 shares and 12,827,425 shares at March 31, 2003 and 2004, respectively (See note 12) ................................. 1,534,308 1,537,865 Additional paid in capital ...................................................... 76,903,671 76,973,587 Other comprehensive loss ........................................................ (4,221,694) (3,089,310) Deferred compensation expense (See note 18) ..................................... (1,136) (710) Accumulated deficit ............................................................. (48,674,227) (54,394,069) ------------ ------------- Total shareholders' equity ...................................................... 25,540,922 21,027,363 ------------- ------------- Total liabilities and shareholders' equity ...................................... US$30,331,626 US$24,867,775 ============= ============== See accompanying notes to consolidated financial statements
REDIFF.COM INDIA LIMITED CONSOLIDATED STATEMENTS OF OPERATIONS For each of the years ended March 31, 2002, 2003 and 2004 Years ended March 31, -------------------------------------------------------------------- 2002 2003 2004 --------------------- ------------------- -------------------- Operating revenues India Online.......................................... US$ 2,575,918 US$ 2,767,244 US$ 3,636,183 U.S. Publishing....................................... 5,283,037 5,804,598 5,810,420 --------------------- ------------------- -------------------- Total revenues.......................................... 7,858,955 8,571,842 9,446,603 --------------------- ------------------- -------------------- Cost of revenues India Online.......................................... 1,337,183 1,078,472 1,130,373 U.S. Publishing....................................... 3,760,841 4,481,618 3,608,029 --------------------- ------------------- -------------------- Total cost of revenues.................................. 5,098,024 5,560,090 4,738,402 --------------------- ------------------- -------------------- Gross profit............................................ 2,760,931 3,011,752 4,708,201 --------------------- ------------------- -------------------- Operating expenses Sales and marketing................................... 2,568,461 2,591,017 950,268 Product development................................... 3,092,183 1,820,372 1,598,199 General and administrative............................ 7,851,628 7,291,276 5,378,600 Restructuring costs (See note 8) and legal fees......... 848,398 -- -- Goodwill written off (See note 9)....................... 3,316,508 3,200,700 -- Investments written off (See note 3).................... 3,261,248 -- -- --------------------- ------------------- -------------------- Total operating expenses................................ 20,938,426 14,903,365 7,927,067 --------------------- ------------------- -------------------- Operating loss ......................................... (18,177,495) (11,891,613) (3,218,866) --------------------- ------------------- -------------------- Other income (expense), net: Interest income....................................... 902,095 395,003 331,806 Foreign exchange gain (loss), net..................... 1,079,260 (400,387) (459,075) Miscellaneous income.................................. 17,337 23,474 2,137 --------------------- ------------------- -------------------- 1,998,692 18,090 (125,132) --------------------- ------------------- -------------------- Loss from continuing operations before income taxes..... (16,178,803) (11,873,523) (3,343,998) Income tax benefit (expense) ........................... 77,809 (303,932) (4,862) --------------------- ------------------- -------------------- Loss from continuing operations......................... US$(16,100,994) US$(12,177,455) US$(3,348,860) Income (loss) from discontinued operations (See Note 5). US$1,335,988 US$(6,803,695) US$(2,370,982) --------------------- ------------------- -------------------- Net loss................................................ US$(14,765,006) US$(18,981,150) US$(5,719,842) ===================== =================== ==================== Weighted average number of equity shares -- basic and diluted.......................... 12,795,200 12,795,200 12,799,997 ===================== =================== ==================== Loss per share -- basic and diluted: continuing operations............................... US$ (1.25) US$ (0.95) US$ (0.26) discontinued operations............................. 0.10 (0.53) (0.19) --------------------- ------------------- -------------------- Loss per share - basic and diluted...................... US$(1.15) US$(1.48) US$(0.45) ===================== =================== ==================== Loss per ADS -- (where 2 ADSs are equal to 1 equity share) -- basic and diluted: continuing operations.............................. US$(0.63) US$(0.48) US$(0.13) discontinued operations............................ 0.05 (0.26) (0.09) --------------------- ------------------- -------------------- Loss per ADS -- (where 2 ADSs are equal to 1 equity share) -- basic and diluted............................... US$ (0.58) US$ (0.74) US$ (0.22) ===================== =================== ==================== See accompanying notes to consolidated financial statements
REDIFF.COM INDIA LIMITED STATEMENTS OF SHAREHOLDERS' EQUITY For each of the years ended March 31, 2002, 2003 and 2004
Equity Shares ---------------------------- (See note 12) Additional Other Deferred Number Paid in Comprehensive Compensation Accumulated of Shares Amount Capital Income (Loss) Expense Deficit Total ----------------------------------------------------------------------------------------------------- Balance, as of April 1, 2001........ 12,795,200 US$1,534,308 US$76,902,065 US$(3,259,356) US$-- US$(14,928,071) US$60,248,946 Compensation related to stock option grants........ -- 1,606 -- (1,606) -- -- Amortization of compensation related to stock option grants......... -- -- -- -- 67 -- 67 Net loss................ -- -- -- -- -- (14,765,006) (14,765,006) Other comprehensive income translation adjustment... ........ -- -- -- (1,479,709) -- -- ( 1,479,709) ----------- ---------- ------------ ------------ ---------- ------------- ------------- Balance, as of March 31, 2002........ 12,795,200 1,534,308 76,903,671 (4,739,065) (1,539) (29,693,077) 44,004,298 Amortization of compensation related to stock option grants......... -- -- -- -- 403 -- 403 Net loss................ -- -- -- -- -- (18,981,150) (18,981,150) Other comprehensive income-translation adjustment............ -- -- -- 517,371 -- -- 517,371 ----------- ---------- ------------ ------------ ---------- ------------- ------------- Balance, as of March 31, 2003........ 12,795,200 1,534,308 76,903,671 (4,221,694) (1,136) (48,674,227) 25,540,922 Amortization of compensation related to stock option grants........ 426 426 Stock options exercised............ 32,225 3,557 69,916 73,473 Net loss............... (5,719,842) (5,719,842) Other comprehensive income-translation adjustment........... 1,132,384 1,132,384 ----------- -------------- ------------- --------------- --------- --------------- -------------- Balance, as of March 31, 2004....... 12,827,425 US$1,537,865 US$76,973,587 US$ (3,089,310) US$(710) US$(54,394,069) US$21,027,363 ----------- -------------- ------------- --------------- -------- ---------------- ------------- See accompanying notes to consolidated financial statements
REDIFF.COM INDIA LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS For each of the years ended March 31, 2002, 2003 and 2004 Years ended March 31, ------------------------------------------------------------ 2002 2003 2004 ------------------------------------------------------------ Cash flows from operating activities Net loss ................................................... US$(14,765,006) US$(18,981,150) US$(5,719,842) (Profit) loss from discontinued operations .................. (1,335,988) 6,803,695 2,370,982 Adjustments relating to continuing operations to reconcile net loss to net cash used in continuing operations: Depreciation and amortization ............................... 2,860,755 1,959,768 1,306,518 Amortization of intangibles ................................. 35,848 40,132 -- Allowance for impairment of goodwill ........................ 3,316,508 3,200,700 -- Other than temporary diminution in the value of investments . 3,261,248 -- -- Loss on sale of property, plant and equipment ............... 44,306 7,975 29,509 Stock based compensation expense ............................ 67 403 426 Changes in assets and liabilities: Trade accounts receivable ................................. 245,153 (360,305) (451,212) Prepaid expenses and other current assets ................. (737,149) 407,612 187,655 Accounts payable and accrued liabilities .................. (1,230,772) (63,771) (896,592) Unearned revenues ......................................... (278,917) 102,919 144,359 Customer deposits ......................................... (28,160) 7,257 (13,209) Recoverable income taxes .................................. (313,124) 237,466 205,223 Unexpired subscription revenues ........................... 119,750 (3,760) (12,026) Deferred income taxes ..................................... 174,000 -- -- Other assets .............................................. 714,889 (79,329) (38,354) -------------- ---------------- --------------- Net cash used in continuing operations ...................... (7,916,592) (6,720,388) (2,886,563) -------------- ---------------- --------------- Net cash provided by (used in) discontinued operations ...... 721,075 (2,128,786) (373,744) -------------- ---------------- --------------- Net cash used in operating activities ....................... (7,195,517) (8,849,174) (3,260,307) -------------- ---------------- --------------- Cash flows from investing activities Payments to acquire property, plant and equipment ......... (1,535,885) (377,629) (596,763) Purchase consideration for acquisitions ................... (10,953,875) (3,411,720) -- Refund from stockholder ................................... 741,248 -- -- Cash acquired on acquisitions ............................. 116,048 -- -- Purchases of investments .................................. -- -- -- Short term bank deposits Sale of investments ....................................... -- -- -- Proceeds from sales of property, plant and equipment ...... 12,042 35,571 34,980 -------------- ---------------- --------------- Net cash used in investing activities ................... (11,620,422) (3,753,778) (561,783) -------------- ---------------- --------------- Cash flows from financing activities Repayment of long term debt ............................... (861,929) -- -- Net proceeds from issue of equity shares .................. -- -- 73,473 -------------- ---------------- --------------- Net cash (used in) provided by financing activities ..... (861,929) -- 73,473 -------------- ---------------- --------------- Effect of exchange rate changes on cash ..................... (1,456,041) 466,891 1,004,004 Net decrease in cash and cash equivalents ................... (21,133,909) (12,136,061) (2,744,613) Cash and cash equivalents at the beginning of the year ...... 47,653,756 26,519,847 14,383,786 -------------- ---------------- --------------- Cash and cash equivalents at the end of the year ............ US$ 26,519,847 US$ 14,383,786 US$ 11,639,173 -------------- ---------------- --------------- Supplemental disclosure of cash flow information: U.S. Federal income taxes paid .......................... US$12,208 US$ -- US$ -- Bank interest paid ...................................... US$19,773 US$ 4,105 US$ 942 See accompanying notes to consolidated financial statements
REDIFF.COM INDIA LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Business Rediff.com India Limited (the "Company") was incorporated in India on January 9, 1996 under the Indian Companies Act, 1956. It was converted to a public limited Company on May 29, 1998. On June 14, 2000, the Company listed its ADSs on the NASDAQ National Market through an initial public offering. On June 24, 2002, the Company's ADSs ceased to be listed on the NASDAQ National Market and were listed instead on the NASDAQ Small Cap Market. In February 2001, the Company established Rediff Holdings, Inc ("RHI"), a Delaware Corporation, as a wholly-owned subsidiary to be a holding company for certain of its investments in the United States of America. On February 27, 2001, RHI acquired thinkindia.com Inc ("thinkindia"), later renamed Rediff.com Inc. On April 27, 2001, RHI acquired India Abroad Publications, Inc ("India Abroad"), an offline and online news company. For further information, see note 4. In March 2001, the Company acquired Value Communications Corporation ("ValuCom"), an Illinois Corporation that provides internet-based marketing of prepaid long distance service in the United States. On April 8, 2004, the Company sold its phone card business to Worldquest Networks Inc. (See Note 5). The Company is one of the leading Internet destinations, or portals, focusing on India and the global Indian community. Its websites consists of interest specific channels relevant to Indian interests such as cricket, astrology, Matchmaker and movies, content on various matters like news and finance, search facilities, a range of community features such as e-mail, chat, messenger, e-commerce, broadband wireless content and wireless short messaging services to cellular phone subscribers in India. Additionally, the Company publishes a weekly newspaper, India Abroad, in the United States and Canada. 2. Significant accounting policies (a) Principles of consolidation The consolidated financial statements include the accounts of the Company and its directly and indirectly held subsidiaries RHI, India Abroad, Rediff.com Inc and ValuCom, which have been consolidated from their respective dates of acquisition. All material inter-company accounts and transactions are eliminated on consolidation. (b) Basis of preparation of financial statements The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). All amounts have been stated in U.S. dollars. U.S. GAAP differs in certain material respects from accounting principles generally accepted in India, which form the basis of the Company's general-purpose financial statements. Principal differences insofar as they relate to the Company include consolidation of subsidiaries, accounting for business combinations, valuation of investments, accounting for deferred income taxes, stock based compensation and website development costs, and the presentation and format of the financial statements and related notes. (c) Use of estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities on the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to uncollectible receivables and goodwill. Actual results could differ from those estimates. (d) Revenue recognition India Online business India Online business includes revenues from online advertising and fee based services. Online advertising includes advertisement and sponsorships and designing and managing customers' websites. Fee based services include e-commerce, subscription services and wireless short messaging services. E-commerce revenues primarily consist of commission earned on sale of items to customers who shop online while subscription services consist of subscriptions received for using e-mail, Matchmaker, astrology and other subscriber services. Wireless short messaging services include revenues derived from mobile phone operators based on value added text messages received and sent by mobile subscribers over their mobile phones. Advertisement and sponsorship income is derived from customers who advertise on the Company's website or to whom direct links from the Company's website to their own websites are provided and, income earned from designing and managing customers' websites. Revenue from advertisement and sponsorships is recognized ratably over the contractual period of the advertisement, commencing when the advertisement is placed on the website. Revenues are also derived from sponsor buttons placed in specific areas of the Company's website, which generally provide users with direct links to sponsor websites. These revenues are recognized ratably over the period in which the advertisement is displayed, provided that no significant Company obligations remain and collection of the resulting receivable is probable. Company obligations may include guarantees of a minimum number of impressions, or times, that an advertisement appears in pages viewed by users of the Company's portal. To the extent that minimum guaranteed impressions are not met, the Company defers recognition of the corresponding revenues until the guaranteed impression levels are achieved. The Company also earns revenues on sponsorship contracts for fees relating to the design, coordination, and integration of the customers' content. Sponsorship contract revenues are recognized ratably over the term of the contract. Website development services principally consist of services relating to the designing of graphics, layout, artwork and content of the client's website. Revenue from such services on large contracts that take relatively longer periods of time to complete are recognized upon completion of milestones specified in the contract. At each such milestone, the services are either billed or billable, and as they relate to completed work, are earned. Revenue from such services on contracts that take relatively shorter periods of time are recognized on completion of the entire contract. During fiscal years 2002, 2003 and 2004, such short-term contracts constituted substantially all of these services. E-commerce revenue primarily consists of commission from the sale of books, music, apparel, confectionery, gifts and other items to retail customers who shop at the Company's online store. Customers directly place orders with vendors through the Company's website. When an order is placed, the Company informs the vendor through an intranet and also confirms whether payment has already been collected by the Company through credit card/debit card or checks, or whether the payment is to be made by the customer on C.O.D. basis. The vendor then dispatches the products to the customers. The vendor sends a monthly summary of the transactions executed during the month for which the Company has collected payments on its behalf. The Company makes payment to the vendor after deduction of its share of margin and costs. The Company recognizes as revenues the commission earned on these transactions. Revenues from E-commerce services also include fees charged to vendors for creating, designing and hosting the vendors' product information on the Company's website. Such fees are amortized over the hosting contract period. Subscription service revenues primarily include income from various paid e-mail and other service products that cater to a cross section of the Company's registered user base. The revenue for subscription based services is recognized ratably over the period of subscription. Subscription revenues are also derived from providing value added short messaging services such as e-mail and other related products to mobile phone users. The Company contracts with third-party mobile phone operators for sharing revenues from these services. SMS based revenues are recognized when the service is performed. U.S. Publishing business U.S. Publishing business primarily includes advertising and sponsorship revenues and consumer subscription revenues earned from the publication of India Abroad, a weekly newspaper distributed primarily in the United States and Canada. It also includes the advertising revenues of Rediff.com Inc, the website catering to the Indian community in the U.S. Advertising revenues are recognized at the time of publication of the related advertisement. Subscription income is deferred and recognized pro rata as fulfilled over the terms of such subscription. Revenues from lifetime subscriptions are recognized over an estimated period of ten years. Revenues from banners and sponsorships are recognized over the contractual period of the advertisement, commencing when the advertisement is placed on the website, provided that no significant obligations remain and collection of the resulting receivable is probable. Obligations may include guarantee of a minimum number of impressions, or times that an advertisement appears in pages viewed by users of the Company's portal. To the extent that minimum guaranteed impressions are not met, the Company defers recognition of the corresponding revenues until the guaranteed impression levels are achieved. (e) Costs and expenses Costs and expenses have been classified according to their primary functions within the enterprise in the following categories: Cost of revenues These costs primarily include employee compensation of staff that are directly involved or related to the production of services, fees paid to third-party content providers, outward freight on e-commerce sales and direct cost associated with subscription services which are spread over the period of subscription. During the fiscal year ended March 31, 2004, the Company wrote back certain old accruals, which are no longer payable and which were earlier charged to costs of revenues amounting to US$41,000. Sales and marketing These costs primarily include employee compensation to sales and marketing personnel, advertising, business promotion expenses and market research costs. During the fiscal year ended March 31, 2004, the Company wrote back certain old accounts payable and accruals amounting to U.S. $ 663,000, which are no longer payable and which were earlier charged to sales and marketing expenses. Product development These costs primarily include employee compensation, Internet communications costs, and amortization of website development costs incurred to enhance the features and functionality of the Company's website (See note 2(h)). Product development expenses include bandwidth costs of US$1,368,281, US$730,607 and US$660,166 for the years ended March 31, 2002, 2003 and 2004 respectively. General and administrative These costs primarily include employee compensation of administrative, operations and supervisory staff whose time is mainly devoted to strategic and managerial functions, depreciation, rent, insurance premiums, electricity, telecommunication costs, legal and professional fees, valuation allowances and other general expenses. During the fiscal year ended March 31, 2004, the Company wrote back certain old accruals amounting to US$234,000, which are no longer payable and which were earlier charged to general and administrative costs. (f) Cash and cash equivalents The Company considers all highly liquid investments with a remaining maturity at the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on hand and cash on deposit with banks. Cash and cash equivalents include short term bank deposits at March 31, 2004, of US$8,433,180, which have a remaining maturity of less than one year, but which are redeemable without penalty on demand. (g) Property, plant and equipment Property, plant and equipment are stated at cost. The Company computes depreciation for all property, plant and equipment using the straight-line method over the estimated useful lives of assets. The estimated useful lives of assets are as follows: Furniture and fixtures..................... 5 to 10 years Computer equipment and software............ 3 to 5 years Office equipment........................... 5 to 10 years Vehicles................................... 8 years Leasehold improvements..................... 6 years Website development costs.................. 3 years (h) Website development costs Costs incurred in the operations stage that provides additional functions or features to the Company's website are capitalized and amortized over their estimated useful life of three years. Maintenance expenses or costs that do not result in new features or functions are expensed as product development costs as incurred. (i) Goodwill and intangible assets The Company capitalizes the cost of purchased goodwill and other intangibles. Until March 31, 2001, the Company amortized the cost of such goodwill and intangibles using the straight line method over their estimated useful lives, ranging from three to seven years for goodwill and generally not exceeding three years for intangibles. Effective April 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets", and ceased to amortize the remaining cost at March 31, 2001 of goodwill and intangibles that do not have a finite life. Instead, in accordance with the two-step methodology required by SFAS No. 142, the Company tests unamortized balances for goodwill and intangible assets that do not have a finite life for impairment annually or earlier upon the occurrence of a triggering event. (j) Foreign currency translation The accompanying financial statements are reported in U.S. dollars. The functional currency of the parent is the Indian Rupee ("Rs." or "Rupee") while that of its subsidiaries is the U.S. Dollar. For the purposes of presenting the consolidated financial statements, Rupees have been converted into U.S. dollars for balance sheet accounts using the exchange rate in effect at the balance sheet date, and for revenue and expense accounts using a weighted-average exchange rate for the respective periods. The gains or losses resulting from such translation are reported as other comprehensive income or loss, which is a separate component of shareholders' equity. Such translation should not be construed as representation that the Rupee amounts have been or could be translated into U.S. dollars at any particular rate, or at all. Transactions in foreign currency are recorded at the original rates of exchange in force at the time the transactions are effected. Monetary items denominated in a foreign currency are restated using the exchange rates prevailing at the date of the balance sheet. Exchange differences arising on settlement of transactions and restatement of assets and liabilities at the balance sheet date are recognized in operations. (k) Loss per share The Company reports basic and diluted loss per share in accordance with SFAS No. 128, Earnings Per Share. Basic loss per share for loss from continuing operations and net loss has been computed by dividing the loss from continuing operations and net loss, respectively for the year by the weighted average number of equity shares outstanding during the period, including equity share equivalents for ADSs issued. Diluted loss per share is computed using the weighted average number of equity shares including equity share equivalents for ADSs issued and dilutive potential equity shares outstanding during the period, using the treasury stock method for options and warrants, except where the results would be anti-dilutive. The determination as to whether a potential equity share is anti-dilutive is based on the loss per share from continuing operations. The Company also reports loss per ADS, where two ADSs are equal to one equity share. (l) Income taxes Income taxes consist of current income taxes and the change in the deferred tax balances during the year. Deferred income taxes are accounted for using the liability method. Deferred tax assets and liabilities are recognized for each entity and taxing jurisdiction for future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities and their respective tax bases and operating loss carry-forwards, measured using the enacted tax rates expected to apply in the years in which such temporary differences are expected to be recovered or settled. The effect of changes in tax rates is recognized in income in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefits for which future realization is uncertain. (m) Fair value of financial instruments The carrying amounts for cash, cash equivalents, short term bank deposits, accounts receivable, accounts payable and bank overdrafts approximate their fair values due to the short maturity of these instruments. (n) Investments The Company classifies investments into held to maturity, trading or available for sale based on management's intent at the time of purchase. Available for sale equity securities with readily determinable market values and all debt securities are carried at fair value. Available for sale equity securities for which there are no readily determinable market values are carried at cost, less an allowance for impairments that are other than temporary. Unrealized gains or losses on available for sale securities are treated as other comprehensive income or loss, a separate component of shareholders' equity. (o) Impairment or disposal of long-lived assets Effective April 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment and disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of long-lived Assets and for Long-Lived Assets to be disposed of, it retains the fundamental provisions of SFAS No. 121. Whenever events or changes in circumstances indicate that the carrying amount of tangible long lived assets may not be recoverable, the Company subjects such long lived assets to a test of recoverability, based on the undiscounted cash flows expected from use or disposition of such assets. Such events or circumstances would include changes in the market, technological obsolescence, adverse changes in profitability or regulation. If the asset is impaired, the Company recognizes an impairment loss based on the estimated fair values using discounted cash flows and the carrying value of the asset. Assets to be disposed of are reported at the lower of the carrying value or the fair value less the cost to sell. (p) Stock based compensation The Company uses the intrinsic value method specified under APB Opinion No. 25 to account for the compensation cost of stock options and awards granted to officers, employees and retainers in full time service of the Company and non-employee directors for their services as directors and the fair value method specified in SFAS 123 to account for the compensation cost of stock options and awards granted to associates of the Company. The Company also applies FASB Interpretation No. 44 "Accounting for Certain Transactions involving Stock Compensation - an interpretation of APB Opinion No. 25" to account for its stock option plans. Pro forma disclosures, as applicable, required under SFAS No. 123 and SFAS No. 148 have been provided in note 18. (q) Classification Certain prior years' balances have been reclassified to conform to the current year's presentation. These have no effect on previously reported results of operations or shareholders' equity. 3. Write-off of Investments The market environment and general conditions affecting the technology industry together with the downturn in valuations of dotcom companies, during the fiscal year ended March 31, 2002, caused the Company to re-examine whether the values of its Internet investments were appropriate. After reviewing key financial indicators for such investments, which were unlisted and illiquid, the Company concluded that such investments had suffered permanent impairment. Accordingly, during the fiscal year ended March 31, 2002, the Company wrote off the value of these investments and recorded an impairment expense of US$3,261,248. 4. Business Combinations and Acquisitions India Abroad Publications Inc ("India Abroad") On April 27, 2001, the Company acquired substantially all of the outstanding voting shares of India Abroad Publications Inc, a New York corporation, for an aggregate net consideration of approximately US$10 million. Pursuant to the stock purchase agreement (as amended) entered into between the Company and certain of India Abroad's shareholders, at the closing of the acquisition, the Company paid approximately US$11.4 million to the selling shareholders of India Abroad. Simultaneously with the acquisition, the former principal shareholder repurchased certain assets for approximately US$1.1 million resulting in an estimated gain of approximately US$314,000, which has been recorded as reduction of goodwill. Of the amount to be paid to the former principal shareholder, the Company had placed US$2 million in an escrow account. At March 31, 2004, US$1 million remains in the escrow account. The Company has accounted for this acquisition by the purchase method, in accordance with APB Opinion No. 16, which resulted in the creation of goodwill of approximately US$10.5 million. The fair value of assets acquired and liabilities assumed on the India Abroad acquisition were as follows:
Cash and cash equivalents........................................ US$ 116,048 Accounts receivable.............................................. 435,512 Due from former shareholder...................................... 741,248 Prepaid expenses and other current assets........................ 66,273 Prepaid taxes.................................................... 24,782 Net assets held for sale......................................... 1,040,914 Deferred income taxes - current.................................. 36,000 Property, plant and equipment, net............................... 267,811 Deferred income taxes - non current.............................. 138,000 Other assets..................................................... 42,516 Goodwill, net (See below)........................................ 10,515,168 Borrowings....................................................... (861,929) Accounts payable and accrued liabilities......................... (530,535) Customer deposits................................................ (242,503) Unexpired subscription revenues.................................. (354,447) ----------------- Total purchase consideration, including direct costs of acquisition US$11,434,858 =================
On June 29, 2001 the Company repaid the borrowing amounting to US$861,929 assumed in the India Abroad acquisition. Goodwill related to this acquisition at March 31, 2003 and 2004 is as follows: 2003 2004 ---- ---- Goodwill.............................. US$10,515,168 US$7,314,468 Goodwill impairment................... (3,200,700) - --------------- ------------ US$ 7,314,468 US$7,314,468 --------------- ------------ The operating results of India Abroad have been consolidated from April 27, 2001, the date of its acquisition. 5. Discontinued Operations and assets held for sale On April 8, 2004, Valucom sold its phone-card business, consisting primarily of the "Valucom" brand, trademarks, websites, internally built software, customer lists and certain hardware for US$500,000 to Worldquest Networks Inc ("WQN"). WQN paid U.S. $ 200,000 of the total consideration at closing with the remaining U.S. $ 300,000 to be paid in twelve monthly installments of US$25,000 commencing May 2004. In addition, the Company also sold its inventory of prepaid identification numbers ("PINS") to WQN at its carrying value on April 8, 2004, for an additional consideration of US$102,424. Separately, in April 2004, WQN entered into an advertising agreement with Rediff.com, Inc. entitling WQN to exclusive rights to prominent online advertising space on Rediff.com U.S. website. Under the terms of the advertising agreement, WQN will pay Rediff US$50,000 for twelve consecutive months commencing in May 2004 for the advertising services. WQN provided both Valucom and Rediff irrevocable letters of credit for WQN's remaining obligation under the agreements. In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the disposal of the phone-card business qualifies as discontinued operations at March 31, 2004. Hence, the results of operations of the phone card business, as detailed below, are disclosed as discontinued operations in the Company's Consolidated Statements of Operations.
Years ended March 31, --------------------------------------------------------------------- 2002 2003 2004 ---------------------- -------------------- ----------------- Operating revenues.................................. US$16,902,610 US$8,680,031 US$4,487,598 ---------------------- -------------------- ----------------- Income (loss) from operations before taxes (after eliminating inter-company transactions) (Including loss on disposal of US$1,866,380 for the fiscal year ended March 31, 2004)............. 1,386,461 (6,915,776) (2,370,982) ---------------------- -------------------- ----------------- Income tax benefit (provision).................... 66,000 (66,000) -- ---------------------- -------------------- ----------------- Income (loss) from discontinued operations....... US$1,335,988 US$(6,803,695) US$(2,370,982) ---------------------- -------------------- -----------------
Upon approval of the plan of disposal in March 31, 2004, the related long-lived assets of the phone card business which have been subsequently disposed of are reported as held-for-sale and measured at their fair value less cost to sell. The loss of US$1,866,380 resulting from the write-down of goodwill and other assets have been reported as a loss on disposal. Assets held for sale at March 31, 2004, relating to the phone card business comprised of the following assets written down to their net realizable values: Inventory............................................ US$ 86,686 Plant and equipment.................................. 65,048 Goodwill............................................. 371,588 -------------- Assets held for sale................................ US$ 523,322 ============== Inventory comprising prepaid long distance service PINs and acquired by Worldquest at an additional consideration are reported at the lower of average cost and market at March 31, 2004. Impairment loss on plant and equipment and goodwill has been computed by reducing the direct costs of sale from the sale consideration. 6. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of:
As of March 31, --------------- 2003 2004 ---- ---- Prepaid expenses and deferred costs..................... US$ 585,034 US$ 467,072 Other deposits and advances............................. 153,812 183,398 Rent deposits........................................... 534,168 221,164 Loans to employees...................................... 49,834 38,736 Accrued interest........................................ 15,199 201,414 ------------- -------------- US$1,338,047 US$ 1,111,784 ============= ==============
7. Property, Plant and Equipment Property, plant and equipment consist of:
As of March 31, --------------- 2003 2004 ---- ---- Furniture and fixtures................................. US$ 429,881 US$456,926 Computer equipment and software........................ 6,263,075 6,919,479 Office equipment....................................... 308,796 312,095 Vehicles............................................... 298,101 286,166 Leasehold improvements................................. 305,095 322,053 Deferred website development costs..................... 526,582 628,633 Capital work in progress............................... - 35,945 -------------- ------------- Property, plant and equipment, cost.................... 8,131,530 8,961,297 Accumulated depreciation and amortization.............. (5,874,514) (7,470,057) -------------- ------------- Property, plant and equipment, net..................... US$ 2,257,016 US$1,491,240 ============== =============
8. Restructuring Following the acquisition of India Abroad on April 27, 2001, the Company integrated the operations of Rediff.com Inc., with those of India Abroad, including relocating Rediff.com Inc.'s operations from California to New York. During the fiscal year ended March 31, 2002, the Company provided US$598,398 for restructuring expenses in accordance with Staff Accounting Bulletin ("SAB") 100 and EITF 94-3, primarily consisting of lease termination costs, expenses for relocation of equipment and staff, and severance payments. 9. Goodwill Rediff.com Inc (formerly "thinkindia.com Inc") Following the triggering event of the restructuring during the fiscal year ended March 31, 2002, as described in Note No. 8 above, the Company re-evaluated the goodwill that arose on Rediff.com Inc's acquisition for impairment. Based on the application of SFAS No. 142, during the fiscal year ended March 31, 2002, management concluded goodwill relating to Rediff.com Inc was impaired and accordingly wrote off the unamortized balance of US$3,316,508 as an expense. Value Communications Corporation (Valucom) During the year ended March 31 2003, management identified the following three triggering events to warrant testing of goodwill on the Valucom acquisition for impairment: 1. On July 30, 2002, the Company entered into a settlement agreement with ValuCom's former founder shareholders for full and final settlement of all obligations and earn-out payments and terminated their service, resulting in the loss of key management personnel. 2. Deregulation of the Indian long distance telecom market and commencement of VOIP (Voice over Internet Protocol) has resulted in increased competition with a significant drop in international long distance rates, shifting of calls originating from the U.S. to calls originating in India and pricing pressures due to significantly lower rates offered by providers of internet telephony. It is unlikely that these trends will reverse in near future. 3. A significant drop in the number of Indian software professionals in the U.S. as a result of 9/11 and the subsequent downturn in the technology market. As a result, a key target customer group has shrunk and volumes are adversely affected. This trend is also unlikely to reverse in the near future. Following the triggering events, the Company re-evaluated goodwill that arose on ValuCom's acquisition. Based on the application of SFAS No. 142, management concluded that the goodwill relating to Valucom was impaired and recorded an impairment charge of US$5,100,000 in the fiscal year ended March 31, 2003. During the fiscal year ended March 31, 2004, the Company recorded a further impairment charge of US$1,661,222 for the Valucom goodwill. As described in note 5 above, the Company sold the phone card business for a consideration of US$500,000. The impairment charge was computed based on the sale value of the phone card business. In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the impairment charge for Valucom goodwill for the fiscal year ended March 31, 2004 and for prior years has been included in "Profit (Loss) from discontinued operations". The remainder of the Valucom goodwill of US$371,588 has been classified as "Assets held for sale" in the balance sheet at March 31, 2004. India Abroad During the fiscal year ended March 31, 2003, the Company annually assessed the goodwill that arose on India Abroad's acquisition. Based on the application of SFAS No. 142, management concluded that goodwill relating to India Abroad was impaired. Management determined the fair value of the India Abroad business with the assistance of an independent valuation specialist and recorded an impairment charge of US$3,200,700 for the fiscal year ended March 31, 2003. During the fiscal year ended March 31, 2004, the Company performed its annual assessment of goodwill on India Abroad. The Company carried out a fair valuation of the India Abroad business with the assistance of an independent valuer and concluded that there was no further impairment to be recorded during the fiscal year ended March 31, 2004. Goodwill at March 31, 2003 and 2004 are as follows:
As of March 31, ---------------- 2003 2004 --------------- ---- Goodwill, on acquisition (including adjustments to purchase price)........................................ US$ 21,070,842 US$21,070,842 Accumulated amortization.................................. (106,356) (106,356) Accumulated impairment.................................... (11,617,208) (13,278,430) Valucom goodwill reclassified as "Assets held for sale"..................................................... -- (371,588) --------------- ---------------- Goodwill, net............................................. US$ 9,347,278 US$ 7,314,468 =============== ================
10. Other Assets Other assets mainly consist of rental deposits which at the balance sheet date are due after more than one year and the non current portion of loans to employees. Other assets also include an amount of US$67,955 representing a recoverable from the insurance carrier of the Company's D&O policy (See Note 20). 11. Related Party Transactions The Company's principal related parties are its founder shareholders and companies that the founder shareholders control. The Company enters into transactions with such related parties in the normal course of business. Included in the determination of net loss are the following significant transactions with related parties:
Years ended March 31, --------------------- 2002 2003 2004 ---- ---- ---- Operating lease rent expense....................... US$ 7,010 US$ -- US$ -- Advertising expense................................ US$ 113,808 US$ -- US$ -- Advertising revenues............................... US$ 13,369 US$1345 US$ 11,537
Balances with related parties include: As of March 31, --------------- 2003 2004 ---- ---- Receivable for advertising income............... US$-- US$ 8,756 Loans to officers............................... US$84,941 US$ 33,741 The Company grants unsecured loans to employees for acquiring assets such as housing property and vehicles and also for other personal purposes. These are recovered from the employee's salaries. The rates at which the loans are made to employees vary between 0% to 2%. The required repayments of loans by employees are as follows: Years ended March 31, 2005.................................................. US$ 41,736 2006.................................................. 10,565 2007.................................................. 8,055 2008.................................................. 8,048 2009 and thereafter................................... 15,870 ------------------ Total payments........................................ US$84,274 ================== 12. Shareholders' Equity During the fiscal year ended March 31, 2004, the Company issued 64,450 ADSs, representing 32,225 equity shares on account of the exercise of stock options pertaining to the 2002 Stock Option Plan at the grant price of US$1.14 per ADS for aggregate proceeds of US$ 73,473. 13. Retirement Benefits Gratuity The Company provides for gratuity, an unfunded defined benefit retirement plan covering eligible employees in India based on third-party actuarial valuations. This plan provides for a lump-sum payment to be made to vested employees at retirement, death or termination of employment in an amount equivalent to 15 days salary, payable for each completed year of service. These gratuity benefits vest upon an employee's completion of five years of service. The following tables set out the funded status of the gratuity plans and the amounts recognized in the Company's financial statements in for the fiscal year ended March 31, 2002, 2003 and 2004. The measurement date used is March 31 of the relevant fiscal year.
Years ended March 31, --------------------- 2002 2003 2004 ---------- ------------ --------- Change in benefit obligation Benefit obligation at the beginning of the year ........... US$35,650 US$53,729 US $66,439 Actuarial (gain) loss ..................................... 520 (8,631) (3,042) Service cost .............................................. 15,651 14,328 14,875 Interest cost ............................................. 3,758 5,316 5,350 Benefits paid ............................................. -- -- (2,724) Effect of exchange rate changes ........................... (1,850) 1,697 7,123 -------- -------- -------- Benefit obligation at the end of the year ................. US$53,729 US$66,439 US$88,021 Unrecognized net actuarial (loss) gain .................... (9,885) (773) 2,229 --------- ---------- ---------- Accrued liability ......................................... US$43,844 US$ 65,666 US$ 90,250 --------- ---------- ----------
Net gratuity cost for the years ended March 31, 2002, 2003 and 2004 comprise of the following:
Years ended March 31, --------------------- 2002 2003 2004 -------------- ----------------- -------------- Service cost........................................... US$15,651 US$14,328 US$14,875 Interest cost.......................................... 3,758 5,316 5,351 Recognized net actuarial loss.......................... -- 381 -- -------------- ----------------- -------------- Net gratuity cost...................................... US$19,409 US$20,025 US$20,226 -------------- ----------------- --------------
The assumptions used in accounting for gratuity in the years ended March 31, 2002, 2003 and 2004 were as follows: Years ended March 31, --------------------- 2002 2003 2004 ---- ---- ---- Rupee discount rate.............................. 10% 8% 7% Rate of increase in Rupee compensation........... 12% 8% 8% The company assesses these assumptions with its projected long-term plans of growth and prevalent industry standards. Unrecognized actuarial loss is amortized over the average remaining service period of the active employees expected to receive benefits under the Plan. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid. Years ending March 31, 2005..................................... US$8,894 2006..................................... 10,046 2007..................................... 10,944 2008..................................... 11,659 2009..................................... 13,134 2010-14................................. 67,211 The expected benefits are based on the same assumptions used to measure the Company's benefit obligations as of March 31, 2004. Provident Fund Employees based in India and the Company each contribute at the rate of 12% of salaries to a provident fund maintained by the Government of India for the benefit of such employees. The provident fund is a defined contribution plan. Accordingly, the Company expenses such contributions as incurred. Amounts contributed by the Company to the provident fund, in the aggregate, were US$84,487, US$76,727 and US$77,677 for the years ended March 31, 2002, 2003 and 2004 respectively. 14. Operating Leases The Company leases office space, computer equipment, high-speed telephone lines and residential apartments for employees under various operating leases. Operating lease expense that has been included in the determination of the net loss is as follows:
Years ended March 31, --------------------- 2002 2003 2004 ---- ---- ---- Office space US$ 358,329 US$ 423,658 US$ 452,077 Computers -- 36,287 29,214 Telecom leased lines 886,829 576,211 504,450 Residential apartments for employees 176,656 121,008 113,549 ------------- -------------- -------------- Total operating lease expense US$ 1,421,814 US$ 1,157,164 US$ 1,099,290 ============== ============== ==============
The minimum annual rental commitments under non-cancelable operating leases that have initial or remaining terms in excess of one year are as follows: Years ended March 31, 2005........................................... US$485,767 2006........................................... 171,203 2007........................................... 75,677 2008........................................... 23,400 2009 and thereafter............................ - ---------- Total payments................................. US$756,047 ---------- 15. Income Taxes The income tax expense (benefit) consists of:
Years ended March 31, --------------------- 2002 2003 2004 ---- ---- ---- Current taxes -- all foreign...................... US$ (185,809) US$ 237,932 US$4,862 Deferred taxes, net of allowance................. 174,000 -- -- ----------------- ---------------- ----------- Net income tax expense (benefit)................. US$ (11,809) US$ 237,932 US$4,862 ================= ================ ===========
The tax effects of significant temporary differences that resulted in deferred tax assets and liabilities are as follows:
As of March 31, ------------------------------------- 2003 2004 ---- ---- Depreciation ....................................... US$ 1,994,831 US$ 2,746,660 Bad debt allowance ................................. 381,297 447,605 Net operating loss carry forwards .................. 10,428,326 11,465,320 Retirement benefits -- Gratuity .................... 58,784 51,131 Website development costs .......................... (8,573) (1,955) Other .............................................. 186,993 37,578 -------------- -------------- 13,041,658 14,746,339 Less: Valuation allowance .......................... (13,041,658) (14,746,339) -------------- -------------- Net deferred tax asset ............................. US$ -- US$ -- ============== ==============
The Company increased the valuation allowance by US$1,247,892, US$4,677,381 and US$1,704,681 for the years ended March 31, 2002, 2003 and 2004 respectively. The Company has not generated any taxable income in India to date, and therefore has not had to pay any Indian income tax since its inception. The Company has provided a full valuation allowance against the deferred tax asset since it is more likely than not that the asset will not be recovered. The Company's net operating loss carry forwards for its Indian operations aggregating approximately US$19.2 million will expire between April 1, 2004 and March 31, 2012. Recoverable income taxes mainly consist of tax deducted at source on income from advertising services and interest income, which the Company will claim as refund. As of March 31, 2004, ValuCom has net operating loss carryforwards available to offset future federal taxable income of US$2,805,000, which expire in years 2021 through 2024. As of March 31, 2004, Rediff Holdings, Inc., has net operating loss carryforwards of approximately US$7,350,000, for federal income tax purposes, which expire in years 2020 through 2024. Realization of the future tax benefits related to the deferred income asset is dependent on many factors, including the Company's ability to generate taxable income within the net operating loss carryforward period. Management has considered these factors and believes that a full valuation allowance is required for each of the periods presented. 16. Segments During the fiscal year ended March 31, 2002, the Company's reportable segments were Media services, Merchandizing services and Communication services. Included in media services, were the results of operations of India abroad, which was acquired during the year. The Communication services segment related to the operations of Valucom which was acquired during the fiscal year ended March 31, 2001. During the fiscal year ended March 31, 2003, the Chairman and Managing Director of the Company, who is its chief operating decision maker, reclassified the Company's business segments and assessed the Company's performance on a new basis. The reportable segments for the fiscal year ended March 31, 2003 were: (i) India Online business, which primarily includes revenues from online advertising and fee based services. Online advertising includes advertisements and sponsorships and designing and managing customers' websites. Fee based services include e-commerce, subscription services and wireless short messaging services. (ii) U.S. Publishing business, which primarily includes subscription and advertising revenues from the publication of India Abroad, a weekly newspaper published in the United States and Canada. It also includes the advertising revenues of Rediff.com Inc., the website catering to the Indian community in the U.S.A. (iii) Phone card business, which primarily includes internet based marketing of prepaid long distance call services. As discussed in Note 5, on April 8, 2004, the Company sold the phone card business and has reported the results of the phone card business as discontinued operations. Accordingly, segmental information for the phone card business is no longer presented as the Company currently operates in two business segments viz. India Online business and U.S.Publishing business. During the year ended March 31, 2004, the Company has discontinued its earlier practice of allocating the operating expenses to its segments as management does not use this information to measure the performance of these operating segments. The Company believes that allocating these expenses is no longer meaningful in evaluating segment performances since the Chief Operating Decision Maker's measure for segment results is the gross profit of the segment. Following are the segment results and segment assets for the years ended March 31, 2002, 2003 and 2004.
Years ended March 31, ---------------------- 2002 2003 2004 U.S. U.S. India U.S. India Online Publishing India Online Publishing Online Publishing Business Business Total Business Business Total Business Business Total --------------------------------------------------------------------------------------------------------------- Revenues from external customers: Advert- ising US$2,239,386 US$4,395,590 US$6,634,976 US$1,905,516 US$4,940,803 US$6,846,319 US$2,184,411 US$5,129,229 US$7,313,640 Fee based services 336,532 887,447 1,223,979 861,728 863,795 1,725,523 1,451,772 681,191 2,132,963 ---------------------------------------------------------------------------------------------------------------------- 2,575,918 5,283,037 7,858,955 2,767,244 5,804,598 8,571,842 3,636,183 5,810,420 9,446,603 ---------------------------------------------------------------------------------------------------------------------- Inter segment revenues: Advertising 1,265,037 1,407,553 2,672,590 87,930 286,184 374,114 31,611 34,000 65,611 ---------------------------------------------------------------------------------------------------------------------- Total revenues 3,840,955 6,690,590 10,531,545 2,855,174 6,090,782 8,945,956 3,667,794 5,844,420 9,512,214 ---------------------------------------------------------------------------------------------------------------------- Cost of revenues - -Third- party 1,337,183 3,760,841 5,098,024 1,078,472 4,481,618 5,560,090 1,130,373 3,608,029 4,738,402 - -Inter segment 123,937 -- 123,937 13,554 -- 13,554 -- -- -- ---------------------------------------------------------------------------------------------------------------------- Total cost of revenues 1,461,120 3,760,841 5,221,961 1,092,026 4,481,618 5,573,644 1,130,373 3,608,029 4,738,402 ---------------------------------------------------------------------------------------------------------------------- Segment Gross Profit US$2,379,835 US$2,929,749 US$5,309,584 US$1,763,148 US$1,609,164 US$3,372,312 US$2,537,421 US$2,236,391 US$4,773,812 ======================================================================================================================= Segment Assets US$30,419,528 US$12,890,171 US$43,309,699 US$18,055,607 US$9,334,043 US$27,389,650 US$13,935,845US$10,220,059US$24,155,904 ==========================================================================================================================
The following is a reconciliation of the segment gross profits to the loss from continuing operations before income taxes of the Company for the years ended March 31, 2002, 2003 and 2004.
Years ended March 31, ---------------------- 2002 2003 2004 ---- ---- ---- Segment Gross Profit............ US$ 5,309,584 US$ 3,372,312 US$ 4,773,812 Inter segment expenses.......... 2,548,653 360,560 65,611 Operating expenses.............. 20,938,426 14,903,365 7,927,067 Other income (loss) ............ 1,998,692 18,090 (125,132) ----------------- --------------- --------------- Loss from continuing operations before income taxes............. US$ (16,178,803) US$ (11,873,523) US$ (3,343,998) ----------------- ---------------- ---------------
Revenues are derived from customers based as follows:
Years ended March 31, --------------------- 2002 2003 2004 ---- ---- ---- United States..................... US$ 5,370,367 US$ 5,573,161 US$5,377,198 India............................. 2,472,460 2,757,482 3,665,317 Rest of the world................. 16,128 241,199 404,088 ---------------- ----------------- --------------- Total revenues.........................US$ 7,858,955 US$ 8,571,842 US$9,446,603 ---------------- ----------------- ---------------
Net property, plant and equipment by location is as follows:
As of March 31, --------------- 2003 2004 ---- ---- United States............................... US$ 512,729 US$ 244,116 India....................................... 1,744,287 1,247,124 ---------------- ------------ Total....................................... US$ 2,257,016 US$1,491,240 ---------------- -------------
17. Concentrations of credit risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents and accounts receivable. The Company maintains the majority of its cash and cash equivalents in Indian Rupees with reputed banks in India. The Company's advertising revenues from the India Online business are primarily derived from large corporate clients in India. Advertising revenues from the U.S. Publishing business are primarily derived from corporate clients and retail customers in the United States and Canada. The Company's fee based revenues from the India Online business and U.S. Publishing business are primarily derived from retail customers in India, the United States and Canada. These do not expose the Company to any material concentrations of credit risk. Significant clients No single client accounted for more than 10% of the total revenues for the years ended March 31, 2002, 2003 and 2004. 18. Stock Based Compensation 1999 Stock Option Plans On February 22, 1999, the Company approved the Employee Stock Option Plan 1999 ("1999 ESOP") and the Associate Stock Option Plan 1999 ("1999 ASOP") (collectively "Option Plans") which cover present and future employees, retainers in full time service of the Company and certain associates of the Company. The 1999 ESOP and 1999 ASOP have similar terms. Under the terms of the 1999 ESOP, a committee of the board may award stock options to eligible employees in the form of warrants. Such options vest at the rate of 25% on each successive anniversary of the grant date, until fully vested. Under the terms of the 1999 ASOP, a committee of the board may award stock options to eligible associates in the form of warrants. Such warrants vest at the rates set forth in each warrant. Each allotted warrant carries with it the right to purchase a specified number of the Company's equity shares at the exercise price during the exercise period, which expires five years from the date of grant. The exercise price is determined by the awarding committee, and is intended to be at least the fair value of the Company's equity shares on the date of the grant. Under the Option Plans, the Company reserved 280,000 equity shares for the 1999 ESOP and 198,000 equity shares for the 1999 ASOP, respectively. The Option Plans also permit the board of directors to reserve additional warrants under either plan to be issued to eligible parties on such terms and conditions as may then be decided by the board at its absolute discretion. The Company has elected to use the intrinsic value method of APB Opinion No. 25 to account for its stock-based compensation plans regarding options awarded to officers, employees, retainers in full time service of the Company and non-employee directors for their services as directors, and the fair value method specified in SFAS No. 123 in respect of the options awarded to associates of the Company. For the years ended March 31, 2002, 2003 and 2004, the Company recognized a compensation cost of US$67, US$403 and US$426, in respect of stock options granted to associates of the Company in accordance with SFAS 123. Activity in the warrants available to be granted under the 1999 ESOP is as follows:
Shares available to be granted as options Years ended March 31, Employee Stock Option Plan 1999: 2002 2003 2004 ---- ---- ---- Warrants available to be granted, beginning of year.... 10,900 5,350 18,250 Forfeited.............................................. 13,450 12,900 22,975 Options granted........................................ (19,000) -- (7,500) ----------- ---------- --------- Warrants available to be granted, end of year.......... 5,350 18,250 33,725 =========== ========== ==========
Activity in the warrants of the 1999 ESOP for the years ended March 31, 2002, 2003 and 2004 is as follows:
Years ended March 31, --------------------------------------------------------------------------------------------------------- 2002 2003 2004 Shares Shares Shares arising out Weighted average arising out Weighted average arising out Weighted average of options exercise price of options exercise price of options exercise price ----------- ----------------- ----------- ---------------- ----------- ---------------- Outstanding at the beginning of the year..... 269,100 US$ 7.17 Rs 336 274,650 US$ 6.52 Rs 318 261,750 US$ 6.49 Rs 308 Granted......... 19,000 US$ 2.25 Rs 108 -- -- -- 7,500 US$ 10.32 Rs 474 Forfeited....... (13,450) US$ 7.75 Rs 371 (12,900) US$ 10.84 Rs 524 (22,975) US$ 9.67 Rs 444 --------- -------- ------- -------- --------- -------- -------- ----------- ------- Outstanding at the end of the year.......... 274,650 US$ 6.52 Rs 318 261,750 US$ 6.49 Rs 308 246,275 US$ 6.92 Rs 300 --------- -------- ------- -------- --------- -------- -------- ----------- -------
Activity in the warrants available to be granted under the 1999 ASOP is as follows:
Shares available to be granted as options -------------------------------------------------- Years ended March 31, -------------------------------------------------- Associate Stock Option Plan 1999: 2002 2003 2004 ---- ---- ---- Warrants available to be granted, beginning of year.. 132,900 137,650 109,650 Forfeited............................................ 5,750 -- -- Options granted...................................... (1,000) (28,000) -- ---------- ---------- --------- Warrants available to be granted, end of year........ 137,650 109,650 109,650 ========== ========== =========
Activity in the warrants of the 1999 ASOP for the years ended March 31, 2002, 2003 and 2004 is as follows:
Years ended March 31, ------------------------------------------------------------------------------------------------------ 2002 2003 2004 Shares Shares Shares arising out Weighted average arising out Weighted average arising out Weighted average of options exercise price of options exercise price of options exercise price ----------- ----------------- ----------- ---------------- ----------- ---------------- Outstanding at the beginning of the year...... 65,100 US$ 12.12 Rs 568 60,350 US$12.32 Rs 601 88,350 US$9.38 Rs 446 Granted......... 1,000 US$ 2.25 Rs. 108 28,000 US$ 2.26 Rs 109 -- -- -- Forfeited....... (5,750) US$ 2.78 Rs. 133 -- -- -- -- -- -- ---------- ----------- -------- ------- --------- -------- -------- --------- -------- Outstanding at the end of the year............ 60,350 US$ 12.32 Rs. 601 88,350 US$ 9.38 Rs 446 88,350 US$ 10.27 Rs 446 ---------- ----------- -------- ------- --------- -------- -------- --------- --------
2002 Stock Option Plan In January 2002 the Company's board of directors approved the 2002 Stock Option Plan ("2002 plan"), which provide for the grant of stock options to the Company's employees. All options under this plan are exercisable for the ADSs of the Company. The Company has elected to account for the 2002 plan using the intrinsic value method of APB Opinion No. 25. Unless terminated sooner, this plan will terminate automatically in January 2012. A total of 280,000 of the Company's equity shares are currently reserved for issuance pursuant to 2002 plan. Under the terms of the 2002 plan, the board or a committee or a sub-committee of the board will determine and authorize the grant of options to eligible employees. Such options vest at the rates set forth in each award. Each option grant carries with it the right to purchase a specified number of the Company's ADS's at the exercise price during the exercise period, which expires ten years from the date of grant. The exercise price is determined by the board (or a committee or a sub-committee of the board) and shall be no more than 110% of the fair market value and no less than 50% of the fair market value on the date of the grant. For the 2002 plan, the Company had, during the fiscal year ended March 31, 2003, obtained necessary approvals from regulators in India. During the fiscal year ended March 31, 2004, the Company made appropriate filings with the SEC prior to the first exercise date of the options granted under the 2002 plan. Activity in the warrants available to be granted under the 2002 plan is as follows:
Shares available to be granted as options Years ended March 31, --------------------- ADS linked Employee Stock Option Plan 2002: 2003 2004 ---- ---- Warrants available to be granted, beginning of year...... 280,000 59,500 Forfeited................................................ -- 69,250 Options granted.......................................... (220,500) (116,000) ---------- --------- Warrants available to be granted, end of year............ 59,500 12,750 ========== =========
Activity in the warrants of the 2002 plan for the fiscal year ended March 31, 2003 and 2004 is as follows:
Year ended March 31, 2003 Year ended March 31, 2004 Shares Shares arising out Weighted average arising out Weighted average of options exercise price of options exercise price ---------- ---------------- ----------- ----------------- Outstanding at the beginning of the year........... -- -- 220,500 US$ 2.26 Granted............................................ 220,500 US$ 2.26 116,000 US$ 7.75 Forfeited.......................................... -- -- (69,250) US$ 2.28 Exercised.......................................... -- -- (32,225) US$ 2.28 ----------- ---------- ---------- --------- Outstanding at the end of the year................. 220,500 US$ 2.26 235,025 US$ 4.64 ----------- ---------- ---------- ---------
The Company has adopted the pro forma disclosure provisions of SFAS No. 123 and SFAS No. 148 for the aforementioned plans. Had compensation cost for the Company's stock-based compensation plans been determined in a manner consistent with the fair value approach described in SFAS No. 123, the Company's net loss and basic loss per share as reported would have been reduced to the pro forma amounts indicated below:
Years ended March 31, ----------------------------------------------------------------- 2002 2003 2004 ---- ---- ---- Net Loss As reported............... US$(14,765,006) US$(18,981,150) US$(5,719,842) Less: Total stock-based employee compensation expense determined under fair value based method for all awards..................... (224,745) (257,166) (647,364) --------------------- --------------------- --------------------- Adjusted pro forma............... US$(14,989,751) US$(19,238,316) US$(6,367,206) --------------------- --------------------- --------------------- Loss per share - basic and diluted As reported.................. US$ (1.15) US$ (1.48) US$ (0.45) =========== ========== ========== Adjusted pro forma............ US$ (1.17) US$ (1.50) US$ (0.50) =========== ========== ==========
The fair value of each warrant is estimated on the date of grant using the Black-Scholes model with the following assumptions:
Years ended March 31, --------------------- 2002 2003 2004 ---- ---- ---- Dividend yield........................................ 0% 0% 0% Expected life......................................... 4 years 4 Years 4 Years Risk free interest rates.............................. 8% 5.75% 5% Volatility............................................ 99.32% 118.59% 112.6%
The following table summarizes information about stock options outstanding as at March 31, 2004:
Options Outstanding --------------------------------------------------------------------- Range of Exercise Price Number of Weighted shares average arising out remaining Weighted average of options contractual life Exercise price ----------- ---------------- ---------------- US$ 1.73 - 2.62 284,775 2.78 years US$ 2.20 Rs 96 US$ 6.05 - 9.38 106,500 8.59 years US$ 7.62 Rs. 331 US$ 9.86 - 13.65 118,875 2.55 years US$ 11.02 Rs. 478 US$15.53 - 20.53 56,500 0.86 years US$ 18.27 Rs. 793 US$23.46 - 25.05 3,000 1.10 years US$ 23.77 Rs.1,032
19. Loss per share A reconciliation of the numerators and denominators used in the computation of the basic and diluted per equity share has not been provided, since 61,114, 29,145 and 319,542 stock options outstanding as on March 31, 2002, 2003 and 2004 respectively, which can potentially dilute basic EPS in the future were anti dilutive in those years. 20. Commitments and contingencies Litigation On April 16, 2001, the Company, four of its officers and directors, and a group of investment banks that acted as underwriters (the "Underwriter defendants") in the Company's June 2000 initial public offering (the "IPO") and listing of ADSs were named as defendants in the legal action of Khanna v. Rediff.com India Ltd. et al., a class action lawsuit filed in the United States District Court for the Southern District of New York. Plaintiffs in Khanna allege that the Company's registration statement filed with the SEC contained misleading statements and omissions in violation of the U.S. Securities Act of 1933, as amended ("Securities Act"), the U.S. Securities Exchange Act of 1934, as amended ("Exchange Act") and SEC Rule 10b-5. The plaintiff class in this lawsuit has been defined as all persons who purchased ADSs from the time of the IPO through April 14, 2001 and seeks unspecified damages. Subsequent to the filing of the Khanna Action, several other actions have been filed against the Company and the other defendants propounding substantially the same allegations. All the cases have been consolidated before a single judge in the United States District Court for the Southern District of New York. On May 11, 2001, the Company received from the Underwriter defendants a demand for indemnification of the underwriters' legal fees and liabilities. The Company's board of directors also has resolved to indemnify its officers and directors named as defendants against their legal fees and liabilities, to the extent permitted under Indian law. At the time of the IPO, the Company purchased Directors & Officers Liability Insurance, ("the D&O Policy"), providing coverage against federal securities law claims. The D&O Policy includes coverages for the Company's cost of defending the class action lawsuit, indemnification liabilities to its officers and directors, and indemnification liabilities to the Underwriter defendants. The coverage of the D&O Policy is denominated in Indian Rupees, but the policy proceeds are payable in United States dollars. Based on the noon buying rate at March 31, 2004, the face amount of the D&O Policy is approximately US$20.6 million. The proceeds of the D&O Policy are available to satisfy any judgment against the Company, or any judgment against persons whom the Company is obligated to indemnify, will be reduced by the amount of the legal fees and associated expenses in the defense of the Company, the individual defendants and the underwriters which are paid from the D&O Policy. The coverage of the D&O Policy for the payment of legal fees, cost of defense and judgment, if any, is subject to a retention of approximately US$259,000 (based on the noon buying rate at March 31, 2004), which must be satisfied by the Company before the D&O Policy proceeds would be available to the Company. During the fiscal year ended March 31, 2002, the Company recorded a recoverable from the Insurance carrier of US$67,955 paid by the Company towards legal fees in excess of the self-insured retention for this case. The insurance carriers have informed the Company that this amount would be paid on the settlement of the cases. The D&O Policy contains various exclusions, which, if met, may result in the denial of insurance coverage. The Company has been advised by the insurance carriers who wrote the D&O Policy that they are not currently aware of any facts or circumstances that would cause any of the exclusions to apply, but that the carriers have reserved their rights to claim that the exclusions do apply if any such facts or circumstances come to their attention. On June 5, 2001, twenty-four companies, including the Company, who had issued securities to the public in their initial public offerings, together with the investment banks who acted as underwriters in these initial public offerings, were named as defendants in the lawsuit of Shives et al v. Bank of America Securities, LLC et al., a class action lawsuit filed in the United States District Court for the Southern District of New York. Also named as defendants in this lawsuit were four of the Company's officers and directors. The plaintiffs in Shives allege that the underwriter defendants combined and conspired to inflate the underwriting compensation they received in connection with the initial public offerings of the defendant companies, to manipulate and inflate the prices paid by plaintiffs for securities issued in the initial public offerings and to restrain and suppress competitive pricing for underwriting compensation. Plaintiffs allege claims pursuant to Section 1 of the U.S. Sherman Antitrust Act of 1890, as amended, Section 4 of the Clayton Antitrust Act of 1914, as amended, and Section 10(b) of the Securities Exchange Act of 1934 (and Rule 10(b)-5 promulgated thereunder) against the underwriter defendants. The plaintiffs further allege that the issuer defendants, including the Company and certain of its officers and directors, made material misstatements and omissions in violation of the Securities Act and the Exchange Act and Rule 10(b)-5 by concealing or failing to disclose the compensation earned by the underwriter defendants in the initial public offerings. As against the Company and its oficers and directors, the Complaint defines a "Rediff.com Sub-class" consisting of all persons who purchased common stock of Rediff.com India Limited from the time of the IPO through April 4, 2001 and seeks unspecified damages. This case has been consolidated with several hundred other similar cases filed against other issuers who had IPOs in 2000 and 2001. On November 24, 2003, plaintiffs' counsel in the Shives and Khanna cases filed a single Consolidated Amended Securities Class Action Complaint ("Consolidated Complaint") which incorporates the material allegations from the Shives and Khanna cases. On January 30, 2004, the Company and its officers and directors filed a motion to dismiss the Consolidated Complaint. The Underwriter Defendants filed a separate motion to dismiss. The motions are currently being briefed by the parties. The Company believes that the allegations in the Khanna Action and its related cases, and in the Shives Action are without merit and intends to defend the lawsuits vigorously. The Company is not able at this point to predict the course or the outcome of the litigation. In the event the class action law suits result in substantial judgments against the Company and the Company's Directors and Officers Liability insurance coverage proves inadequate, the said judgments could have a severe material effect on the Company's financial position and its results of operations. In connection with the Company's acquisition of India Abroad in April 2001, the Company has been advised by a holdout shareholder that he believes his shares in India Abroad are worth approximately US$1.2 million. The Company disputes this assertion and has offered the claimant approximately US$50,000 for his shares. The Company does not know if this offer will be acceptable to the shareholder or if the shareholder will file a legal action against the Company if the matter is not resolved. The Company believes that the outcome will have no impact on the Company's financial position, results of operations or cash flows. Indian Music Industry ("IMI"), an association claiming to represent 50 Indian companies, which purportedly owns copyrights to sound recordings, filed a complaint with the Mumbai Police Department in February, 2000, alleging that the Company was aiding and abetting violations of the Indian Copyright Act of 1957, as amended, because the Company, through its website, provided links to websites containing downloadable music files copyrighted by IMI members. In July 2001, the Mumbai Metropolitan Magistrate issued bailable warrants concerning the complaint against three of the Company's directors. The warrants as against two of the Company's directors were promptly cancelled and the warrant against one director was stayed. The Company is continuing to investigate the underlying facts of the complaint. The directors have presently been exempted from personal appearance and have filed an application for discharge of the complaint before the Magistrate. The Income Tax authorities in India have disallowed certain expenses claimed by the Company for certain years and have also levied penalties on some of those disallowances. The amounts of the penalties are not quantifiable at present and the Company has lodged appropriate appeal proceedings with the relevant income tax authorities. The Company expects to prevail in the appellate proceedings. The Company is also subject to other legal proceedings and claims, which have arisen in the ordinary course of its business. Those actions, when ultimately concluded and determined, will not, in the opinion of management, have a material effect on the results of operations, cash flows or the financial position of the Company. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS To the Board of Directors Rediff.com India Limited We have audited the consolidated financial statements of Rediff.com India Limited as of March 31, 2003 and 2004 and for each of the years in the three year period ended March 31, 2004 and have issued our report thereon dated April 29, 2004 (included elsewhere in the Annual report on Form 20-F), which report expresses an unqualified opinion. Our audits also included the accompanying Schedule of Valuation and Qualifying Accounts. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. Deloitte Haskins & Sells Mumbai, India Dated: April 29, 2004
Schedule of Valuation and Qualifying Accounts Allowance for trade accounts receivables Description Balance at Effect of Balance Beginning of Charged to cost exchange rate at end Period and expenses Write offs changes of period - ----------------- ----------------- ---------------------- --------------- ---------------- --------------------- Fiscal 2004 US$1,034,360 US$186,090 US$(90,000) US$99,227 US$1,229,677 - ----------------- ----------------- ---------------------- --------------- ---------------- --------------------- Fiscal 2003 US$841,160 US$189,385 US$(20,388) US$24,203 US$1,034,360
SIGNATURE The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf. REDIFF.COM INDIA LIMITED By: /s/ Ajit Balakrishnan -------------------------- Name: Ajit Balakrishnan Title: Chairman and Managing Director Place: Mumbai Date: September 29, 2004. SIGNATURE The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf. REDIFF.COM INDIA LIMITED By: /s/ Joy Basu ---------------------- Name: Joy Basu Title: Chief Financial Officer. Place: Mumbai Date: September 29, 2004 CERTIFICATIONS I, Ajit Balakrishnan, certify that: 1. I have reviewed this annual report on Form 20-F of Rediff.com India Limited; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; 4. The company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation, and; (c) Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and 5. The company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting. Date: September 29, 2004 /s/ Ajit Balakrishnan ------------------------------ Ajit Balakrishnan Chairman and Managing Director (Principal Executive Officer) CERTIFICATIONS I, Joy Basu, certify that: 1. I have reviewed this annual report on Form 20-F; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; 4. The company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation, and; (c) Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and 5. The company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting. Date: September 29, 2004 /s/ Joy Basu ---------------------------- Joy Basu Chief Financial Officer (Principal Financial Officer) CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying Annual Report on Form 20-F of Rediff.com India Limited for the fiscal year ended March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ajit Balakrishnan, the principal executive officer of Rediff.com India Limited, hereby certify pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly represents, in all material respects, the financial condition and results of operations of Rediff.com India Limited. Date: September 29, 2004 /s/ Ajit Balakrishnan --------------------- Ajit Balakrishnan Chairman and Managing Director A signed original of this written statement required by ss. 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying Annual Report on Form 20-F of Rediff.com India Limited for the fiscal year ended March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Joy Basu, Chief Financial Officer of Rediff.com India Limited, hereby certify pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly represents, in all material respects, the financial condition and results of operations of Rediff.com India Limited. Date September 29, 2004 /s/ Joy Basu ------------ Joy Basu Chief Financial Officer A signed original of this written statement required by ss. 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-4 2 hk114207.txt EXHIBIT 4.11 - ASSET PURCHASE AGREEMENT Exhibit 4.11 EXECUTION COPY ASSET PURCHASE AGREEMENT This Asset Purchase Agreement (this "AGREEMENT") is made as of April 8, 2004, by and among WorldQuest Networks, Inc., a Delaware corporation ("BUYER"), which expression shall mean and include its successors and permitted assigns, and Value Communications Corporation, an Illinois corporation ("SELLER"), which expression shall mean and include its successors and permitted assigns. WITNESSETH: WHEREAS, Seller desires to sell to Buyer and Buyer desires to purchase from Seller the Acquired Assets (as hereinafter defined) subject to the terms of this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, Buyer and Seller hereby agree as follows: ARTICLE I - TERMS OF THE TRANSACTION 1.1 Agreement to Sell and to Purchase Acquired Assets. On the terms and subject to the conditions set forth in this Agreement, Seller hereby sells, conveys, transfers, assigns and delivers (collectively, "TRANSFER") to Buyer, and Buyer hereby purchases from Seller, the assets set forth on Schedule 1.1 hereto (the "ACQUIRED Assets"). 1.2 Assumption of Liabilities. Buyer hereby assumes and agrees to pay, perform and discharge those liabilities of Seller (the "ASSUMED LIABILITIES") set forth on Schedule 1.2 hereto. 1.3 Purchase Price. Buyer agrees to pay to Seller as consideration for the Acquired Assets, the aggregate amount of $500,000.00, plus the Pin Consideration (as defined below) (collectively, the "PURCHASE PRICE"), payable as follows: (a) Buyer shall pay Seller $200,000.00 at Closing (the "CASH CONSIDERATION") by wire transfer in immediately available funds to an account designated by Seller; (b) Buyer shall pay Seller $25,000.00 per month by wire transfer in immediately available funds to an account designated by Seller, continuing for a total of twelve consecutive months, with the first payment to be received by Seller on or prior to May 8, 2004 and each payment thereafter to be received by Seller on or prior to the 8th of each month thereafter (each a "MONTHLY PAYMENT", and collectively the "MONTHLY PAYMENTS"). The Monthly Payments shall total an aggregate amount of $300,000.00; and (c) Buyer shall pay Seller $102,424 (the "PIN CONSIDERATION") at Closing by wire transfer in immediately available funds to an account designated by Seller for the prepaid identification numbers (the "PINS").Seller shall provide Buyer with a list of PINS transferred at Closing. (d) Notwithstanding the foregoing, Seller shall have the option at any time prior to the six-month anniversary of the Closing to prepay in full the Purchase Price (to the extent not already paid). ARTICLE II - CLOSING AND CLOSING DATE 2.1 Closing and Closing Date. The closing of the sale and purchase of the Acquired Assets (the "CLOSING") shall take place at a mutually agreed location concurrently with the execution of this Agreement (the "CLOSING DATE"). 2.2 Deliveries at Closing. At the Closing: (a) Seller shall deliver to Buyer (i) a Certificate of Good Standing; and (ii) a list of PINS transferred (b) Buyer shall deliver to Seller: (i) the Cash Consideration and the Pin Consideration; and (ii) the Letter of Credit (as defined in Section 4.5 below); and ARTICLE III - REPRESENTATIONS AND WARRANTIES OF SELLER Seller represents and warrants to Buyer as follows: 3.1 Organization and Good Standing. Seller is duly organized, validly existing, and in good standing under the laws of the state of Illinois and has all requisite corporate power and authority to own, operate, and lease its properties and to carry on its business as now being conducted. 3.2 Authorization, Execution and Binding Effect. Seller has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby, and no further corporate proceedings on the part of Seller or its shareholders are necessary to approve and authorize the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby. This Agreement has been duly executed and delivered by Seller and constitutes a valid and binding agreement, enforceable against Seller in accordance with its terms, except as the enforceability hereof may be subject to applicable bankruptcy, insolvency, reorganization, or other similar laws affecting creditors' rights generally and to general principles of equity. 3.3 Consents and Approvals. None of the execution and delivery by Seller of this Agreement, the consummation of the transactions contemplated hereby, or compliance with any of the provisions hereof, will (i) violate or conflict with any provision of the charter or bylaws of Seller, (ii) result in a violation of any order, writ, injunction, decree, judgment, ruling of any Governmental Entity or any law, rule, or regulation, applicable to Seller or the Acquired Assets, (iii) result in the breach of, or otherwise affect any of the terms, conditions, or provisions of, any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, contract, agreement, or other instrument or commitment or obligation of Seller or otherwise relating to the Acquired Assets, which breach would have a material adverse effect on the Acquired Assets or the Buyer's conduct of the business associated with the Acquired Assets or (iv) require any consent or approval of, or notice to, or filing or registration with, any Person, except for filings required by the Commission or pursuant to any listing agreement with any national securities exchange, and those consents, approvals, notices, filings or registrations which have been obtained, given or made, as the case may be, and which are unconditional and in full force and effect. 3.4 Compliance With Laws. Seller is not in violation of or in default, in each case in any material respect, under any applicable law, rule, regulation, code, governmental determination, order, governmental certification requirement or other public limitation (collectively, "APPLICABLE LAWS") relating to the ownership, maintenance or operation of the Acquired Assets, and no claim is pending or, to the knowledge of Seller, threatened with respect to any such matters. 3.5 Title to Acquired Assets. Seller has, and pursuant to this Agreement will Transfer to Buyer, good and marketable title to all of the Acquired Assets (other than the PINS as to which no representation or warranty is being made) free and clear of all Encumbrances. 3.6 No Brokers. Neither Seller nor any of its Affiliates have retained any financial advisor, broker, agent, or finder or paid or agreed to pay any financial advisor, broker, agent or finder on account of this Agreement or any transaction contemplated hereby. 3.7 Disclosure. To the knowledge of Seller, no representation or warranty made by Seller in this Agreement contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements contained therein, in light of the circumstances under which they are made, not misleading. 3.8 Intellectual Property. Schedule 1.1 lists all of the Intellectual Property (as defined below) used in or required for use in the conduct of the business associated with the Acquired Assets (the "Seller Intellectual Property"). Seller owns or has the right to use, sell, license, sublicense, transfer, assign and dispose of all of the Seller Intellectual Property, free from any Encumbrances. To the knowledge of Seller, Seller has not infringed, violated, misused or misappropriated any Intellectual Property owned or purported to be owned by any other Person. For purposes of this Agreement, "Intellectual Property" means all trademarks, service marks, patents, inventions, copyrights, trade secrets, confidential or proprietary information, know-how and similar rights, customer lists, goodwill, software, technical information, data, process technology, plans and drawings, specifications, invention disclosures, and all registrations, certificates, applications, licenses, options and any and all other rights with respect to any of the foregoing. ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Seller that: 4.1 Organization and Good Standing. Buyer is a corporation duly organized, validly existing, and in good standing under the laws of Delaware and has all requisite corporate power and authority to own, operate, and lease its properties and to carry on its business as now being conducted. 4.2 Authorization, Execution and Binding Effect. Buyer has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby, and no further corporate proceedings on the part of Buyer are necessary to approve and authorize the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby. This Agreement has been duly executed and delivered by Buyer and constitutes a valid and binding agreement, enforceable against Buyer in accordance with its terms, except as the enforceability hereof may be subject to applicable bankruptcy, insolvency, reorganization, or other similar laws affecting creditors' rights generally and to general principles of equity. 4.3 Consents and Approvals. Neither the execution and delivery by Buyer of this Agreement, nor the consummation of the transactions contemplated hereby, nor compliance with any of the provisions hereof, will (i) violate or conflict with any provision of the organizational documents of Buyer, (ii) result in a violation of any order, writ, injunction, decree, judgment, or ruling of any Governmental Entity, or any law, rule, or regulation, applicable to Buyer, (iii) result in the breach of or otherwise affect any of the terms, conditions, or provisions of, any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, contract, agreement, or other instrument or commitment or obligation of Buyer or (iv) require any consent or approval of, or notice to, or filing or registration with, any Person, except for those consents, approvals, notices, filings or registrations which have been obtained, given or made, as the case may be, and which are unconditional and in full force and effect. 4.4 Brokerage Fees. Neither Buyer nor any of its Affiliates has retained any financial advisor, broker, agent, or finder or paid or agreed to pay any financial advisor, broker, agent, or finder on account of this Agreement or any transaction contemplated hereby. 4.5 Letter of Credit. Buyer shall have obtained a suitable letter of credit extended by JP Morgan Chase Bank for the benefit of Seller on or before the Closing Date with an initial balance of $300,000.00, such amount to decline monthly for payments made by Buyer pursuant to this Agreement (the "LETTER OF CREDIT"). In the event that any Monthly Payment is not made within 15 days following its due date, Seller may draw upon such Letter of Credit in accordance with the terms thereof. 4.6 Third-Party Licenses. Buyer agrees and undertakes to procure requisite software licenses from third-party vendors, as may be necessary for the purpose of managing and migrating the business with the Acquired Assets, as its sole cost and expense. ARTICLE V - COVENANTS 5.1 Certain Expenses of Sale; Taxes. Seller shall pay all expenses incurred in connection with the transfer of the Acquired Assets contemplated hereby, including all recording fees and transfer taxes resulting from the transfer of the Acquired Assets to Buyer. Buyer and Seller shall cooperate to obtain all available exemptions from such fees and taxes. All Taxes, utility and other service charges and other fees and expenses relating to the Acquired Assets for all periods up to and including the Closing Date shall be the obligation of Seller and for all periods following the Closing Date shall be the mutual agreement obligation of Buyer. 5.2 Transition Assistance. For 45 days following the Closing, Seller shall provide to Buyer in connection with the transfer of the Acquired Assets to Buyer such reasonable transition assistance services as shall be mutually agreed to by Buyer and Seller. Any out-of-pocket expenses incurred by Seller in connection with the foregoing transition assistance shall be promptly reimbursed to Seller by Buyer upon presentation of supporting documentation. 5.3 Further Assurances. Seller hereby covenants and agrees with Buyer, its successors and assigns, that from time to time after the execution and delivery of this Agreement, at Buyer's reasonable request and without further consideration (provided, that any out-of-pocket expenses to be incurred by Seller shall be advanced and borne by Buyer), Seller will execute and deliver to Buyer such other and further instruments of transfer, assignment and conveyance and all such notices, releases, acquittances and other documents and will do or cause to be done all and every such further act as may be reasonably necessary to transfer, assign and convey to and vest in Buyer all and singular the Acquired Assets. ARTICLE VI - INDEMNIFICATION 6.1 Survival of Representations and Warranties. The representations and warranties contained in this Agreement shall survive the Closing for a period of 12 months, except for the representations and warranties contained in Section 3.5, which shall survive until the applicable statute of limitations, and shall not be deemed to be merged into and/or superseded by any provisions set forth in any assignment or other document delivered pursuant to this Agreement or in connection with the transactions contemplated hereby, notwithstanding any investigation made heretofore or hereafter by any party. After the expiration of the survival periods specified above, the applicable representations and warranties shall be of no further force and effect. 6.2 Indemnification of Buyer. Seller agrees to indemnify and hold Buyer, its Affiliates and their partners, officer and directors (collectively, the "BUYER INDEMNIFIED PARTIES"), harmless from and against, and pay or reimburse the Buyer Indemnified Parties for, any and all damages, claims, losses, liabilities or expenses, whether or not resulting from third party claims (including reasonable attorney's fees), incurred by such Person or entity (collectively referred to herein as "INDEMNIFIED LOSSES"), to the extent that such Indemnified Losses arise out of or are based upon any breach by Seller of any representation, warranty or covenant contained in this Agreement; provided, however, that Indemnified Losses shall be payable hereunder only to the extent in excess of an aggregate of $25,000; and provided, further, however, that the aggregate amount of Indemnified Losses for which Buyer Indemnified Parties shall be entitled to indemnification hereunder shall not exceed $500,000. 6.3 Indemnification of Seller. Buyer agrees to indemnify and hold Seller, its Affiliates and their partners, officer and directors (collectively, the "SELLER INDEMNIFIED PARTIES") harmless from and against, and pay or reimburse the Seller Indemnified Parties for, any and all Indemnified Losses to the extent that such Indemnified Losses (a) arise out of or are based upon any breach by Buyer of any representation, warranty or covenant contained in this Agreement or (b) arise out of or are based upon any Assumed Liabilities; provided, however, that Indemnified Losses pursuant to subsection (a) shall be payable only to the extent in excess of an aggregate of $25,000; and provided, further, however, that the aggregate amount of Indemnified Losses for which Seller Indemnified Parties shall be entitled to indemnification hereunder shall not exceed $500,000. 6.4 Indemnification Procedures. Any party entitled to indemnification hereunder shall give prompt notice of its intention to seek indemnification to the party or parties against whom indemnification is sought, but the failure to give such notice will not result in any waiver of the rights of such indemnified party except to the extent the indemnifying party (or parties) is prejudiced thereby. Each party hereto agrees that if a proper demand for indemnification is made upon an indemnifying party hereunder, such party will, unless written notice of objection to such demand is made within 15 days of receipt of such demand, within 45 days after such demand is made, pay the indemnification obligations owed to the indemnified party or make other arrangements acceptable to the indemnified party. In the event timely objection is made to a demand for indemnification and the parties hereto are unable to resolve such dispute with 30 days, the parties shall submit such dispute to binding arbitration pursuant to the rules of the American Arbitration Association. The place of arbitration shall be New York, New York and each party shall bear its own fees and expenses incurred in connection therewith. 6.5 Indemnification Despite Negligence, Strict Liability or Liability Without Fault. IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT EACH PARTY TO BE INDEMNIFIED PURSUANT TO THIS ARTICLE VI SHALL BE INDEMNIFIED AND HELD HARMLESS FROM AND AGAINST ALL INDEMNIFIED LOSSES AS TO WHICH INDEMNITY IS PROVIDED FOR UNDER THIS ARTICLE VI NOTWITHSTANDING THAT ANY SUCH INDEMNIFIED LOSSES ARISE OUT OF OR RESULT FROM THE (I) ORDINARY, STRICT, SOLE, OR CONTRIBUTORY NEGLIGENCE, OR (II) STRICT LIABILITY (OR OTHER LIABILITY WITHOUT FAULT) OF SUCH PARTY AND REGARDLESS OF WHETHER ANY OTHER PARTY (INCLUDING ANOTHER PARTY TO THIS AGREEMENT) IS OR IS NOT ALSO NEGLIGENT OR OTHERWISE LIABLE WITH RESPECT TO THE MATTER IN QUESTION. 6.6 Exclusive Remedy. After the Closing, to the extent permitted by law, the indemnities set forth in this Article VI shall be the exclusive contractual remedies of Buyer and Seller and their respective Affiliates for any misrepresentation, breach of representation or warranty or nonfulfillment or failure to be performed of any covenant or agreement contained in this Agreement, and the parties shall not be entitled to a rescission of this Agreement or to any further indemnification rights or claims of any nature whatsoever in respect thereof, all of which the parties hereto hereby waive. Notwithstanding the foregoing, this Section 6.6 shall not apply to any misrepresentation, breach of representation or warranty or nonfulfillment or failure to be performed of any covenant or agreement contained in this Agreement which results from the fraud of the other party. ARTICLE VII - MISCELLANEOUS 7.1 Confidentiality. Seller acknowledges and agrees that irreparable damage would occur in the event any confidential information regarding the Acquired Assets were disclosed to or utilized on behalf of any Person that is in competition with the Buyer. Accordingly, Seller covenants and agrees that it will not, directly or indirectly, without the prior written consent of Buyer, use or disclose any of such confidential information, except to authorized representatives of Buyer; provided, however, that confidential information shall not be deemed to include information that (i) was or becomes generally available to the public other than as a result of disclosure by Seller or any of its Affiliates or (ii) was or becomes available to Seller on a non-confidential basis from a source other than Buyer, provided that such source is not known by Seller to be bound by a confidentiality agreement with respect to such confidential information. Notwithstanding the foregoing provision of this Section 7.1, Seller, and any of its Affiliates may disclose any confidential information to the extent advised by counsel that such Person is legally compelled to do so, provided that prior to making such disclosure, such Person advises and consults with Buyer regarding such disclosure and provided further that such Person discloses only that portion of such confidential information as is legally required. 7.2 Expenses. Except as otherwise expressly provided for elsewhere in this Agreement, each of Buyer and Seller shall pay its own expenses and costs relating to the negotiation, execution and performance of this Agreement. 7.3 Public Announcements. Seller and Buyer will consult with each other before issuing, and will provide each other the opportunity to review and comment upon, any press release or other public statements (or relevant portions thereof), including filings to be made with the Commission, relating to the transactions contemplated by this Agreement and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by Applicable Law, court process or by obligations pursuant to any listing agreement with any national securities exchange. 7.4 Notices. Any notices or other communications required or permitted hereunder shall be given in writing and shall be sufficient if delivered personally or sent by certified or registered mail, postage prepaid, to the address of the principal place of business of the parties, or to such other address as shall be furnished in writing by such party, and any such notice or communication shall be effective and be deemed to have been given as of the date so mailed; provided that any notice or communications changing any of the addresses of the parties shall be effective and deemed given only upon its receipt. 7.5 Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective legal representatives, successors and permitted assigns, but except as expressly herein provided, neither this Agreement nor any of the rights, interests, or obligations hereunder shall be assigned by any party without the prior written consent of the other parties. 7.6 Complete Agreement. This Agreement contains the entire understanding of the parties with respect to the transactions contemplated hereby and supersedes all prior arrangements or understandings with respect thereto. There are no restrictions, agreements, promises, warranties, covenants, or undertakings other than those expressly set forth herein or therein. 7.7 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware. 7.8 Cure of Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term of this Agreement, such provision shall be fully severable, and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof, and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this Agreement; provided, however, that if such illegal, invalid or unenforceable provision may be made legal, valid and enforceable by limitation thereof, then the provision shall be revised and reformed to make it legal, valid and enforceable to the maximum extent permitted by law. 7.9 Assignment of Contracts, Rights, Etc. Anything contained in this Agreement to the contrary notwithstanding, this Agreement shall not constitute an agreement or attempted agreement to transfer, sublease or assign any contract, license, lease, sales order, purchase order or other agreement or any claim of or right to any benefit arising thereunder or resulting therefrom or any permit or operating authority if an attempted transfer, subleaseor assignment thereof, without the consent of any other party thereto, would constitute a breach thereof or in any way affect the rights of the Buyer or the Seller thereunder. The Seller shall use its reasonable commercial efforts, and the Buyer shall cooperate with the Seller, to obtain the consent of such third party to any of the foregoing to the assignment or transfer thereof to the Buyer in all cases in which such consent is required for assignment or transfer. ARTICLE VIII - DEFINITIONS The following terms shall have the meanings ascribed to them below: "AFFILIATE" shall mean any Person or entity which controls, is controlled by or is under common control with the Person in question, including any officer, director or shareholder thereof. "COMMISSION" means the U.S. Securities and Exchange Commission. "ENCUMBRANCES" shall mean title defects, charges, liens, mortgages, pledges, claims, security interests, options, restrictions, and other encumbrances of every type and description, whether imposed by law, agreement, understanding or otherwise, other than statutory liens which do not materially impair the value of the Acquired Assets. "GOVERNMENTAL ENTITY" shall mean any court or tribunal in any jurisdiction (domestic or foreign) or any federal, state, municipal, domestic, foreign or other administrative agency, department, commission, board, bureau or other governmental authority or instrumentality. "PERSON" means an individual, corporation, limited liability company, association, joint stock company, trust, partnership, joint venture, unincorporated organization, a government or any department or agency thereof, or any other legal entity. "TAXES" shall mean any federal, state or local income, gross receipts, license, payroll, employment, excise, occupation, premium, environmental (including taxes under Section 59A of the Internal Revenue Code of 1986, as amended), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not. * * * WITNESS WHEREOF, Seller and Buyer have executed this Agreement in multiple counterparts as of the date first set forth above. WORLDQUEST NETWORKS, INC. By: /s/ Victor Grijalva ---------------------------------- Name: Victor Grijalva Title: Vice President and Chief Financial Officer VALUE COMMUNICATIONS CORPORATION By: /s/ Joy Basu ---------------------------------- Name: Joy Basu Title: Vice President Schedule 1.1 ACQUIRED ASSETS 1. The website at www. valucomonline.com 2. The following common law trademarks used by Value Communications Corporation ("Valucom"): VALUCOM VALUMAX CARD2ASIA VC FREEDOM VC DIRECT 3. The following common law copyrights of Valucom: (1) the copyrightable content on the Website at www.valucomonline.com; (2) various printed materials for Valucom's internal use as well as distributed to Valucom customers; and (3) the copyrightable content of the software of Valucom identified in paragraph 8, below. 4. The following domain names registered by Valucom: Valucomonline.com Valuecomonline.com Cardtoasia.com Card2asia.com Valucorp.com Myvaluecom.com Myvaluecom.com Valucard.com Valucomuk.com Valucomcanada.com Valucomprepaid.com Valuecomprepaid.com Vcdirectindia.com Callbhrat.com Card2asia.net Card2asia.org Card2asia.us Card2asia.ws Card2asia.biz Card2asia.info Cardtwoasia.com 5. The following domain names registered by Rediff.com, India, Ltd. for Valucom:1 Kahoindia.com Instahello.com Valumaxonline.com Indiakaho.com Call01191.com Instavoice.com Valumaxindia.com 6. The following Hardware of Valucom:
- ------------------- ----------------------- ------------------------ ------------------------------------------------- Sys Model & Sys ID Sys Reference Alternate VC Name Configuration - ------------------- ----------------------- ------------------------ ------------------------------------------------- Desktop - 1 D-8NLWX11 C2A Machine Optiplex, P-4, 2 Ghz, 256 MB - ------------------- ----------------------- ------------------------ ------------------------------------------------- Desktop - 2 D-792ZX11 Shantel Optiplex, P-4, 2 Ghz, 256 MB - ------------------- ----------------------- ------------------------ ------------------------------------------------- Desktop - 3 D-5PWVX11 Onelinesales Optiplex, P-4, 2 Ghz, 256 MB - ------------------- ----------------------- ------------------------ ------------------------------------------------- Desktop - 10 D-5T8X201 Richa Optiplex, P-4, 2 Ghz, 256 MB - ------------------- ----------------------- ------------------------ ------------------------------------------------- Server - 2 D-CUZSF Valucom PDC PE 1300, P-3, 500 Mhz 512 MB, DDS3 - ------------------- ----------------------- ------------------------ ------------------------------------------------- Server - 3 D-BD8W9 Valucom Webstage PE 1300, p-3, 500 Mhz, 512 MB - ------------------- ----------------------- ------------------------ ------------------------------------------------- Server - 4 M-2358632-0001 Valuwebsrv2 NF3400, p-3, 650 Mhz 512 MB - ------------------- ----------------------- ------------------------ ------------------------------------------------- Server - 5 D-CTJSI Bulbul PE 6300, P-3, dual - 550 Mhz, IGB, 18GB (3) - ------------------- ----------------------- ------------------------ ------------------------------------------------- Router - 1 C-JAB04468AK0 Router - A Cisco 2620, Dual WIC card - ------------------- ----------------------- ------------------------ ------------------------------------------------- Router - 2 C-JMX0517K36X Router - B Cisco 2611, Dual WIC card - ------------------- ----------------------- ------------------------ ------------------------------------------------- Firewall - 1 4010116894 SonicWall Pro SonicWall Pro - ------------------- ----------------------- ------------------------ ------------------------------------------------- Firewall - 2 4010145984 SonicWall Pro - 300 SonicWall Pro - 300 - ------------------- ----------------------- ------------------------ -------------------------------------------------
(These details will be provided as per mutual agreement between both the parties) 7. The following Software of Procard: All software developed or built internally by Seller include source code for all applications developed in house including websites, applications and API's called the web applications to interface with external partners, CRM applications, data archiving and backup software, software development tools. 8. Other Customer lists, customer databases, all business books, records, files and papers, whether in hard copy or computer format of Seller used exclusively in the business and operation of the Acquired Assets, printed materials for internal use and distributed to cusomters, brochures, flyers, physical telephone cards, TV commercials, artwork, stock graphics, other graphics, stationery, signage, booths, other commercials. Schedule 1.2 Assumed Liabilities All liabilities and obligations relating to (i) Seller's refund policy (consisting of card exchanges, credit balances and cash reimbursement) with respect to prepaid calling cards purchased prior to the Closing Date, which will not exceed $7,500 in the aggregate and (ii) points under Seller's reward program that are outstanding as of the Closing Date, (consisting of approximately 91.65 million points with an approximate value of $54,900). -----END PRIVACY-ENHANCED MESSAGE-----