<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
__________________________________
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission File No. 0-20943
Intelligroup, Inc.
_________________________________________________________
(Exact Name of Small Business Issuer as Specified in Its Charter)
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<S> <C>
New Jersey 11-2880025
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
517 Route One South, Iselin, New Jersey 08830
_____________________________________________________________________________________
(Address of Principal Executive Offices) (Zip Code)
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(908) 750-1600
______________________________
(Issuer's Telephone Number,
Including Area Code)
Check whether the Issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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: No: X*
____ ____
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of October 31, 1996:
<TABLE>
<CAPTION>
Class Number of Shares
----- ----------------
<S> <C>
Common Stock, $.01 par value 10,735,600
</TABLE>
*Registrant became subject to the filing requirements of the Securities Exchange
Act of 1934 on September 26, 1996, when its Registration Statements on Forms
SB-2 and 8-A were declared effective by the Commission.
Transitional Small Business Disclosure Format:
Yes: No: X
_____ _____
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INTELLIGROUP, INC. and SUBSIDIARIES
TABLE OF CONTENTS
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Page
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Financial Statements .................... 1
Consolidated Balance Sheets
as of December 31, 1995
and September 30, 1996 (unaudited) ................... 2
Consolidated Statements of Operations
for the Three Months and Nine Months Ended
September 30, 1995 and 1996 (unaudited) .............. 3
Consolidated Statements of Shareholders'
Equity (Deficit) for the Nine Months Ended
September 30, 1996 (unaudited) ....................... 4
Consolidated Statements of Cash Flows
for the Nine Months Ended
September 30, 1995 and 1996 (unaudited) .............. 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition ........ 8
Results of Operations ................................ 10
Liquidity and Capital Resources ...................... 12
PART II. OTHER INFORMATION .............................................. 14
Item 1. Legal Proceedings .................................... 14
Item 5. Other Information .................................... 14
Item 6. Exhibits and Reports on Form 8-K ..................... 15
SIGNATURES ............................................................... 16
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
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INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 71,000 $ 169,000
Restricted cash held in escrow 100,000 --
Accounts receivable, less allowance for doubtful accounts of $531,000
at December 31, 1995 and $566,000 at September 30, 1996 4,729,000 9,561,000
Unbilled services 1,569,000 3,459,000
Subscriptions receivable -- 19,065,000
Other current assets 3,000 151,000
------------ ------------
Total current assets 6,472,000 32,405,000
Property and equipment, less accumulated depreciation of $99,000 at
December 31, 1995 and $189,000 at September 30, 1996 282,000 716,000
Other assets 30,000 209,000
------------ ------------
$ 6,784,000 $ 33,330,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Cash overdraft $ 83,000 $ 1,086,000
Line of credit 45,000 40,000
Loans from factor 3,343,000 4,319,000
Accounts payable 1,480,000 1,871,000
Accrued payroll and related taxes 2,568,000 1,874,000
Accrued expenses and other liabilities 532,000 1,750,000
Current portion of obligations under capital leases 18,000 18,000
Subordinated debt, including accrued loss on
early extinguishment of long term debt -- 6,000,000
------------ ------------
Total current liabilities 8,069,000 16,958,000
------------ ------------
Obligations under capital leases, less current portion 81,000 65,000
------------ ------------
Commitments and contingencies
Shareholders' equity (deficit)
Preferred stock -- --
Common stock, $.01 par value, 25,000,000 shares authorized,
12,202,666 and 10,735,600 issued and outstanding at
December 31, 1995 and September 30, 1996, respectively 122,000 107,000
Additional paid in capital -- 19,244,000
Accumulated deficit (1,488,000) (3,044,000)
------------ ------------
Total shareholders' equity (deficit) (1,366,000) 16,307,000
------------ ------------
$ 6,784,000 $ 33,330,000
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
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INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(UNAUDITED)
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<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1995 1996 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 7,272,000 $ 13,845,000 $ 16,745,000 $ 33,471,000
Cost of sales 5,791,000 9,825,000 14,102,000 23,972,000
------------ ------------ ------------ ------------
Gross profit 1,481,000 4,020,000 2,643,000 9,499,000
Selling, general and administrative
expenses 1,179,000 2,831,000 2,716,000 6,896,000
------------ ------------ ------------ ------------
Operating income (loss) 302,000 1,189,000 (73,000) 2,603,000
------------ ------------ ------------ ------------
Other expenses:
Interest expense 1,000 181,000 3,000 310,000
Factor charges 343,000 381,000 978,000 954,000
------------ ------------ ------------ ------------
344,000 562,000 981,000 1,264,000
------------ ------------ ------------ ------------
Income (loss) before provision for income
taxes and extraordinary item (42,000) 627,000 (1,054,000) 1,339,000
Provision for income taxes -- 193,000 -- 410,000
------------ ------------ ------------ ------------
Income (loss) before extraordinary item (42,000) 434,000 (1,054,000) 929,000
Extraordinary charge-Loss on early
extinguishment of long term debt, net
of income tax benefit of $410,000 -- 1,034,000 -- 1,034,000
------------ ------------ ------------ ------------
Net loss $ (42,000) $ (600,000) $ (1,054,000) $ (105,000)
============ ============ ============ ============
Earnings (loss) per share:
Income (loss) before extraordinary charge $ 0.00 $ 0.05 $ (0.08) $ 0.09
Extraordinary charge, net of income tax
benefit 0.00 (0.12) 0.00 (0.10)
------------ ------------ ------------ ------------
Net loss per share $ 0.00 $ (0.07) $ (0.08) $ (0.01)
============ ============ ============ ============
Shares used in per share calculation 13,737,000 8,877,000 13,737,000 10,825,000
============ ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
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INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Total
Common Stock Additional Shareholders'
-------------------------- Paid in Accumulated Equity
Shares Amount Capital Deficit (Deficit)
----------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 12,202,666 $ 122,000 $ -- $(1,488,000) $ (1,366,000)
Net loss -- -- -- (105,000) (105,000)
Repurchase of Common Stock (4,881,066) (49,000) -- (1,451,000) (1,500,000)
Issuance of Common Stock,
net of related costs 2,050,000 20,000 17,858,000 -- 17,878,000
Exercise of warrants 1,364,000 14,000 1,386,000 -- 1,400,000
----------- --------- ----------- ----------- ------------
Balance at September 30, 1996 10,735,600 $ 107,000 $19,244,000 $(3,044,000) $ 16,307,000
=========== ========= =========== =========== ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
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INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND
SEPTEMBER 30, 1996
(UNAUDITED)
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<CAPTION>
September 30, September 30,
1995 1996
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,054,000) $ (105,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 38,000 160,000
Provision for doubtful accounts 47,000 515,000
Extraordinary charge -- 1,444,000
Changes in assets and liabilities:
Restricted cash deposited in escrow -- 100,000
Accounts receivable (1,574,000) (5,347,000)
Unbilled services (1,151,000) (1,890,000)
Other current assets (33,000) (148,000)
Other assets -- (179,000)
Cash overdraft -- 1,003,000
Accounts payable -- 391,000
Accrued payroll and related taxes 1,331,000 (694,000)
Accrued expenses and other liabilities 415,000 29,000
----------- ------------
Net cash used in operating activities (1,981,000) (4,721,000)
----------- ------------
Cash flows from investing activities:
Purchase of property and equipment (25,000) (524,000)
----------- ------------
Cash flows from financing activities:
Proceeds from subordinated debt and warrants, net of
issuance costs -- 5,888,000
Repurchase of common stock -- (1,500,000)
Loans from factors, net 1,848,000 976,000
Proceeds from (repayments of) lines of credit, net 15,000 (5,000)
Principal payments under capital leases -- (16,000)
----------- ------------
Net cash provided by financing activities 1,863,000 5,343,000
----------- ------------
Net increase (decrease) in cash and cash equivalents (143,000) 98,000
Cash and cash equivalents at beginning of period 209,000 71,000
----------- ------------
Cash and cash equivalents at end of period $ 66,000 $ 169,000
=========== ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 3,000 $ 15,000
=========== ============
Noncash transactions:
Subscriptions receivable $ -- $ 19,065,000
=========== ============
Capital lease obligations $ 102,000 $ --
=========== ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
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<PAGE> 8
INTELLIGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The consolidated financial statements and accompanying financial
information as of September 30, 1996 and for the nine months ended September 30,
1995 and 1996 are unaudited and, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the financial position of the
Company at such dates and the operating results and cash flows for those
periods. The financial statements included herein have been prepared in
accordance with generally accepted accounting principles and the instructions of
Form 10-QSB and Rule 10-01 of Regulation S-X. Accordingly, certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. These financial statements should be read in conjunction with the
Company's audited financial statements for the year ended December 31, 1995,
which were included as part of the Company's Registration Statement on Form SB-2
(Registration No. 333-5981), as declared effective by the Securities and
Exchange Commission on September 26, 1996.
Results for interim periods are not necessarily indicative of results
for the entire year.
(2) LOSS PER SHARE
Net income (loss) per share is computed using the weighted average
number of common and dilutive common equivalent shares outstanding during the
period after giving retroactive effect to the stock split (see Note 3). Pursuant
to the requirements of the Securities and Exchange Commission, stock options and
warrants issued by the Company during the twelve months immediately preceding
the initial public offering (see Note 3) have been included in computing net
income (loss) per share as if they were outstanding for all periods using the
treasury stock method.
(3) INITIAL PUBLIC OFFERING, STOCK SPLIT AND PREFERRED STOCK AUTHORIZATION
In July 1996, the Company's Board of Directors recommended and
shareholders approved an amendment to the Company's Certificate of Incorporation
to effect an 81,351.1111-for-1 stock split. All common shares and per share
amounts in the accompanying financial statements have been adjusted
retroactively to give effect to the stock split.
In addition, the Company's Board of Directors authorized a change in
the Company's authorized capitalization to 25,000,000 shares of common stock,
$0.01 par value per share, and 5,000,000 shares of undesignated preferred stock,
$0.01 par value per share.
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On October 2, 1996, the Company consummated an initial public offering
(the "Offering") of 2,846,250 shares of its Common Stock (which includes 371,250
additional shares to cover over-allotments) at a price of $10.00 per share, of
which 2,050,000 shares were issued and sold by the Company and 796,250 shares,
including the additional shares to cover over-allotments, were sold by selling
shareholders of the Company. The net proceeds to the Company from the Offering,
after underwriting discounts and commissions and other expenses of the Offering,
were approximately $17.9 million. The Company did not receive any proceeds from
the sale of shares sold by the selling shareholders. As the effective date of
the Offering was September 26, 1996, and the proceeds were received on October
2, 1996, the Company has recorded subscriptions receivable of approximately
$19.1 million as of September 30, 1996.
The Company has used proceeds from the Offering of approximately $6.3
million to prepay its subordinated debt obligation, including accrued interest,
and approximately $4.4 million to repay its factor debt obligation.
The factor agreement was terminated by the Company on October 10, 1996.
(4) EXTRAORDINARY CHARGE
The extraordinary charge relates to the early extinguishment of the
subordinated debt, net of an income tax benefit.
(5) LEGAL PROCEEDINGS
On August 21, 1996, the Company was named as defendant in a complaint
filed in the Delaware Chancery Court, New Castle County, by plaintiff, Systems
America, Inc. ("Systems America"), a computer and technology consulting firm.
Systems America alleges that it subcontracted consultants of Pegasus Systems,
Inc. ("Pegasus") to perform SAP consulting services for two companies which are
also customers of the Company, and alleges that the Company has interfered with
Systems America's customer relationship, and as a result thereof, Systems
America has sustained damages. The Company had obtained a temporary restraining
order against Pegasus and in May 1996, obtained a preliminary injunction
prohibiting Pegasus from using or disclosing the Company's proprietary
information, prohibiting Pegasus from contacting or soliciting certain of the
Company's customers and prohibiting Pegasus from recruiting or attempting to
recruit the Company's employees, agents or contractors. The complaint by Systems
America, which seeks unspecified monetary damages, treble damages, attorney fees
and injunctive relief against the Company, alleges deceptive trade practices,
defamation and tortious interference with prospective business or contractual
relations by the Company. In September 1996, the case was removed to Federal
District Court. This action is in a very early stage, and accordingly, the
Company cannot currently assess the ultimate outcome. However, the Company
denies the allegations made and intends to defend the claim vigorously.
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<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
Overview
The Company was formed in 1987 to provide systems integration and
custom software development. In March 1994, the Company acquired Oxford Systems
Inc. ("Oxford") in a pooling-of-interests transaction, in exchange for an
aggregate two-thirds equity interest in the Company. The Company currently
provides a wide range of information technology services, including
enterprise-wide business process solutions, systems integration and custom
software development based on leading technologies. The Company has grown
rapidly since 1994, when it made a strategic decision to diversify its customer
base by expanding the scope of its integration and development services and to
utilize SAP software as a primary tool to implement enterprise-wide business
process solutions. In 1995, the Company became a SAP National Implementation
Partner and also began to utilize Oracle products to diversify its service
offerings. SAP National Implementation Partner status is awarded by SAP on an
annual basis pursuant to contract. The Company's current contract expires on
December 31, 1996. Contract renewal is within SAP's discretion and is expected
to be based on, among other things, subjective criteria set forth in the
Company's contract. The Agreement contains no minimum revenue requirements or
cost sharing arrangements and does not provide for commissions or royalties to
either party.
The Company generates revenue from professional services rendered to
customers and revenue is recognized as services are performed. The Company's
services range from providing customers with a single consultant to
multi-personnel full-scale projects. The Company provides these services to its
customers primarily on a time and materials basis and pursuant to written
contracts which can be terminated with limited advance notice, typically not
more than 30 days, and without significant penalty, generally limited to fees
earned and expenses incurred by the Company through the date of termination. The
Company provides its services directly to end-user organizations or as a member
of consulting teams assembled by other information technology consulting firms
to Fortune 1000 and other large and mid-sized companies. The Company generally
bills its customers semi-monthly for the services provided by its consultants at
contract rates. Where contractual provisions permit, customers also are billed
for reimbursement of expenses incurred by the Company on the customers' behalf.
The Company has derived and believes that it will continue to derive a
significant portion of its revenue from a limited number of customers and
projects. For the year ended December 31, 1995 and for the nine months ended
September 30, 1996, the Company's ten largest customers accounted for
approximately 56% and 64% of its revenue, respectively. In 1995, two customers
each accounted for more than 10% of revenue. During the nine months ended
September 30, 1996, three customers each accounted for more than 10% of revenue.
During the three months ended September 30, 1996, two customers each accounted
for more than 10% of revenue. For the year ended December 31, 1995 and for the
nine months ended September 30, 1996, 50% and 45%, respectively, of the
Company's revenue was generated by serving as a member of consulting teams
assembled by other information technology consulting firms. During the year
ended December 31, 1995 and the nine months ended September 30, 1996, 69%
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and 75%, respectively, of the Company's total revenue was derived from projects
in which the Company implemented software developed by SAP.
The Company's most significant cost is project expenses, which consist
of consultant salaries, benefits and payroll-related expenses. Thus, the
Company's financial performance is based primarily upon billing margin (billable
hourly rate less the cost to the Company of a consultant on an hourly basis) and
personnel utilization rates (billable hours divided by paid hours). The Company
believes that turnkey project management assignments typically carry higher
margins. The Company intends to accelerate a shift to such higher-margin turnkey
management assignments and more complex projects by leveraging its reputation,
existing capabilities, proprietary implementation methodology, development tools
and offshore development capabilities with expanded sales and marketing efforts
and new service offerings to develop turnkey project sales opportunities with
existing customers and to expand its market to new customers. The Company's
inability to accelerate a shift to higher-margin turnkey management assignments
and more complex projects may adversely impact the Company's future growth.
Although the Company expects that it will utilize its proprietary implementation
methodology in an increasing number of projects, there can be no assurance that
the Company will be engaged to do so.
Since late 1994, the Company has made substantial investments in its
infrastructure in order to support its rapid growth. For example, in 1994, the
Company established and funded an affiliated operation in India, the Advanced
Development Center, and established a sales office in California. The Company
also has established offices in New Zealand and the United Kingdom. In addition,
from 1994 to date, the Company has incurred significant expenses to develop
proprietary development tools and 4SIGHT, its proprietary accelerated
implementation methodology. Commencing in 1995, the Company has been increasing
its sales force and its marketing, finance, accounting and administrative staff.
The Company employed 41 such personnel as of September 30, 1996, as compared to
eight such personnel as of January 1, 1995.
This Form 10-QSB contains forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ materially from the
results discussed in such forward-looking statements. The factors which may
cause such a difference are set forth in the Risk Factors section of the
Company's Prospectus dated September 27, 1996, included in the Company's
Registration Statement on Form SB-2 (Registration #333-5981) as declared
effective by the Securities & Exchange Commission on September 26, 1996 and this
Form 10-QSB should be read in conjunction with such Registration Statement.
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RESULTS OF OPERATIONS
Three Months Ended September 30, 1996 Compared to Three Months Ended September
30, 1995
Revenue. Revenue increased by 90.4% or $ 6.6 million, from $7.2 million during
the three months ended September 30, 1995 to $13.8 million during the three
months ended September 30, 1996. This increase was attributable primarily to
increased demand for the Company's SAP-related consulting services and, to a
lesser extent, to increased demand for the Company's systems integration and
custom software development services.
Gross profit. The Company's cost of sales includes primarily the cost of
salaries to consultants and related employee benefits and payroll taxes. The
Company's cost of sales increased by 69.7%, or $4.0 million, from $5.8 million
during the three months ended September 30, 1995 to $9.8 million during the
three months ended September 30, 1996. The increase was due to increased
personnel costs resulting from the hiring of additional consultants to support
the significant increase in demand for the Company's services. The Company's
gross profit increased by $2.5 million, from $1.5 million during the three
months ended September 30, 1995 to $4.0 million during the three months ended
September 30, 1996. Gross profit margin increased from 20.4% of revenue during
the three months ended September 30, 1995 to 29.0% of revenue in the three
months ended September 30, 1996. The increase in such gross profit margin was
attributable primarily to the fact that revenue increased at a faster rate than
cost of sales which resulted from a combination of improved billing margins and
greater consultant utilization.
Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of administrative salaries, sales
person compensation, travel and entertainment, the costs associated with the
Advanced Development Center and related development costs and professional fees.
Selling, general and administrative expenses increased by 140.1%, or $1.6
million, from $1.2 million during the three months ended September 30, 1995 to
$2.8 million, during the three months ended September 30, 1996, and increased as
a percentage of revenue from 16.2% to 20.4% respectively. The increases in such
expenses were due primarily to the expansion of the Company's sales and
marketing force in 1995 and 1996, the additional accounting and financial
personnel added in the first nine months of 1996 and increased travel and
entertainment expenses due to the growth of the business and the employee base.
Factor charges/Interest expense. Factor fees are the charges incurred by the
Company to finance its accounts receivable. The rapid increase in the Company's
business and revenue resulted in increased working capital requirements and the
Company utilized its increasing accounts receivable base as a source of security
to obtain financing because the Company was unable to attain more traditional
financing. See "Liquidity and Capital Resources." The Company also incurred
interest expense for bank borrowings and capital lease transactions and,
beginning in April 1996, for the subordinated debentures. Such expenses
increased by 63.4%, or $218,000, from $344,000 during the three months ended
September 30, 1995 to $562,000 during the three months ended September 30, 1996,
but decreased as a percentage of revenue from 4.7% to 4.1%, respectively. The
Company changed factors in October 1995, resulting in lower factor rates. The
effect of the decrease in factor rates in conjunction with a partial replacement
of the factor debt with a portion of the proceeds from the issuance of
subordinated debentures was
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offset by an increase in the volume of accounts receivable financed. The
Company utilized a portion of the net proceeds from the Offering to repay all
amounts outstanding and has terminated such factor agreement on October 10,
1996.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30,
1995
Revenue. Revenue increased by 99.9%, or $16.8 million from $16.7 million during
the nine months ended September 30, 1995 to $33.5 million during the nine months
ended September 30, 1996. This increase was attributable primarily to increased
demand for the Company's SAP-related consulting services and, to a lesser
extent, to increased demand for the Company's systems integration and custom
software development services.
Gross profit. The Company's cost of sales increased by 70.0%, or $9.9 million,
from $14.1 million during the nine months ended September 30, 1995 to $24.0
million during the nine months ended September 30, 1996. This increase was due
to increased personnel costs resulting from the hiring of additional
consultants to support the Company's significant increase in demand for the
Company's services. The Company's gross profit increased by 259.4%, or $6.9
million, from $2.6 during the nine months ended September 30, 1995 to $9.5
million during the nine months ended September 30, 1996. Gross profit margin
increased from 15.8% of revenue during the nine months ended September 30, 1995
to 28.4% of revenue during the nine months ended September 30, 1996. The
increase in such gross profit margin was attributable primarily to the fact
that revenue increased at a faster rate than cost of sales which resulted from
a combination of improved billing margins and greater consultant utilization.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 153.9%, or $4.2 million, from $2.7 million
during the nine months ended September 30, 1995 to $6.9 million during the nine
months ended September 30, 1996, and increased as a percentage of revenue from
16.2% to 20.6% of revenue, respectively. The increases in such expenses were
due primarily to the expansion of the Company's sales and marketing force in
1995 and 1996, the additional accounting and financial personnel added in the
first nine months of 1996 and increased travel and entertainment expenses due
to the growth of the business and the employee base.
Factor charges/Interest expense. Factors fees and interest expense increased by
28.8%, or $283,000, from $981,000 during the nine months ended September 30,
1995 to $1.3 million during the nine months ended September 30, 1996 as a result
of increased volume of accounts receivable financed resulting from revenue
increases. The Company changed factors in October 1995, resulting in lower
factor rates. The effect of the decrease in factor rates in conjunction with a
partial replacement of the factor debt with a portion of the proceeds from the
issuance of subordinated debentures was offset by an increase in the volume of
accounts receivable financed. Factor fees and interest expense decreased as a
percentage of revenue from 5.9% to 3.8% of revenue during the nine months ended
September 30, 1995 and 1996 respectively, as a result of increased revenue.
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LIQUIDITY AND CAPITAL RESOURCES
On October 2, 1996, the Company consummated an initial public offering
of 2,846,250 shares of its Common Stock (which includes 371,250 additional
shares to cover over-allotments) at a price of $10.00 per share, of which
2,050,000 shares were issued and sold by the Company and 796,250 shares,
including the additional shares to cover over-allotments, were sold by selling
shareholders of the Company. The net proceeds to the Company from the Offering,
after underwriting discounts and commissions and other expenses of the Offering,
were approximately $17.9 million. The Company did not receive any proceeds from
the sale of shares sold by the selling shareholders.
Since its inception, the Company has funded its operations primarily from
factoring of accounts receivable and equipment leases. Cash used in
operating activities was $2.0 million and $4.7 million during the nine months
ended September 30, 1995 and 1996, respectively, and resulted primarily from
the growth in accounts receivable and unbilled services.
The Company's working capital was $15.4 million as of September 30,
1996.
The Company's subscriptions receivable of approximately $19.1 million
at September 30, 1996 were collected on October 2, 1996. In accordance with
investment guidelines approved by the Company's Board of Directors, cash
balances in excess of those required to prepay the subordinated debt, including
accrued interest, repay its factor debt obligation and fund operations have been
invested in short-term U.S. Treasury securities and commercial paper with a
credit rating no lower than A1/P1.
The Company invested $89,000, $142,000 and $524,000 in capital
equipment and furniture in 1994, 1995 and the first nine months of 1996,
respectively. There are no material commitments for capital expenditures
currently outstanding.
The Company's factoring agreement with Access Capital, Inc. (the
"Factor") required that the Company offer all of its trade accounts receivable
to the Factor for financing; however, the Factor was under no obligation to
accept any or all of such receivables. Due to a combination of factors,
including the rapid growth of the Company, the lack of available tangible
security to utilize as collateral and the absence of historical operating
profits prior to 1996, the Company was unable to obtain more traditional
financing. On October 10, 1996, the Company repaid approximately $4.4 million,
representing all amounts outstanding under the agreement with its Factor and
terminated the Factor agreement. The Company is seeking more traditional
financing, such as a bank line of credit. No assurance can be made that such
financing will be available on terms acceptable to the Company, if at all.
In April, 1996, the Company issued and sold five-year 9% subordinated
debentures in the aggregate principal amount of $6.0 million to Summit Ventures
IV, L.P. and Summit Investors III, L. P. The subordinated debentures were issued
to fund working capital and for general corporate purposes, to repurchase from
the Company's principal shareholders, Messrs. Pandey, Koneru and Valluripalli,
an aggregate of 4,881,066 shares of Common Stock for an aggregate of $1.5
million, to repay approximately $300,000 outstanding under a $750,000 credit
facility and to satisfy approximately $358,000 of cash overdrafts. Upon receipt
of the proceeds from the
- 12 -
<PAGE> 15
Offering, the Company prepaid approximately $6.3 million, representing all
amounts outstanding under its five-year 9% subordinated debentures, including
interest, and, as a result, incurred an extraordinary charge of $1,444,000, less
an income tax benefit of $410,000.
Subsequent to December 31, 1995, the Company determined that it had
unrecorded and unpaid federal and state payroll-related taxes for certain
employees. As a result of the Company's voluntary disclosure to the Internal
Revenue Service of certain unpaid tax liabilities, on June 5, 1996, the Company
received an audit assessment from the Internal Revenue Service for unpaid 1994
and 1995 federal income tax withholding, FICA and FUTA taxes in the aggregate of
$814,000, of which approximately $793,000 was paid in August, 1996. No interest
or penalties were assessed. Reserves, aggregating $1.0 million, including the
amount of the Internal Revenue Service audit assessment, have been recorded in
the 1994 and 1995 financial statements. No assurance may be given, however, that
interest, penalties or additional state or federal taxes will not be assessed in
the future. The Company's principal shareholders, Messrs. Pandey, Koneru and
Valluripalli, have agreed to indemnify the Company for any and all losses which
the Company may sustain, in excess of the $1.0 million reserve, net of any tax
benefits realized by the Company, arising from or relating to federal or state
tax, interest or penalty payment obligations resulting from the above subject
matter. The Company believes that its failure to record and pay 1994 and 1995
federal and state payroll-related taxes for certain employees resulted from a
combination of factors, including lack of internal controls, lack of financial
expertise and oversight, and the Company's reliance on outside professional
advice. The Company hired a Chief Financial Officer in January 1996 who has
implemented accounting and financial controls to ensure the Company's compliance
with payroll tax regulations.
The Company believes that the net proceeds of the Offering, together
with available funds, anticipated future credit arrangements and the cash flow
expected to be generated from operations, will be adequate to satisfy its
current and planned operations for at least the next 24 months. The Company is
seeking a bank line of credit. No assurance can be made that such financing will
be available on terms acceptable to the Company, if at all.
- 13 -
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On August 21, 1996, the Company was named as defendant in a complaint
filed in the Delaware Chancery Court, New Castle County, by plaintiff, Systems
America, Inc. ("Systems America"), a computer and technology consulting firm.
Systems America alleges that it subcontracted consultants of Pegasus Systems,
Inc. ("Pegasus") to perform SAP consulting services for two companies which are
also customers of the Company, and alleges that the Company has interfered with
Systems America's customer relationship, and as a result thereof, Systems
America has sustained damages. The Company had obtained a temporary restraining
order against Pegasus and in May 1996, obtained a preliminary injunction
prohibiting Pegasus from using or disclosing the Company's proprietary
information, prohibiting Pegasus from contacting or soliciting certain of the
Company's customers and prohibiting Pegasus from recruiting or attempting to
recruit the Company's employees, agents or contractors. The complaint by Systems
America, which seeks unspecified monetary damages, treble damages, attorney fees
and injunctive relief against the Company, alleges deceptive trade practices,
defamation and tortious interference with prospective business or contractual
relations by the Company. In September 1996, the case was removed to Federal
District Court. This action is in a very early stage, and accordingly, the
Company cannot currently assess the ultimate outcome. However, the Company
denies the allegations made and intends to defend the claim vigorously.
ITEM 5. OTHER INFORMATION.
On October 2, 1996, the Company consummated an initial public offering
of 2,846,250 shares of its Common Stock (which includes 371,250 additional
shares to cover over-allotments) at a price of $10.00 per share, of which
2,050,000 shares were issued and sold by the Company and 796,250 shares,
including the additional shares to cover over-allotments, were sold by selling
shareholders of the Company. The net proceeds to the Company from the Offering,
after underwriting discounts and commissions and other expenses of the Offering,
were approximately $17.9 million. The Company did not receive any proceeds from
the sale of shares sold by the selling shareholders.
The Company has used proceeds from the Offering of approximately $6.3
million to prepay its subordinated debt obligation, including accrued interest,
and approximately $4.4 million to repay its factor debt obligation. The Factor
agreement was terminated by the Company on October 10, 1996. The remainder of
the proceeds will be utilized for other working capital purposes. In accordance
with investment guidelines approved by the Company's Board of Directors, cash
balances in excess of those required to prepay the subordinated debt, repay the
factor debt obligation and fund operations have been invested in short-term U.S.
Treasury securities and commercial paper with a credit rating no lower than
A1/P1.
- 14 -
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
11 Statement re: Computation of Per Share Earnings.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter
for which this report on Form 10-QSB is filed.
- 15 -
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Intelligroup, Inc.
DATE: November 8, 1996 By: /s/ Ashok Pandey
______________________________________
Ashok Pandey,
President and Chief Executive Officer
(Principal Executive Officer)
DATE: November 8, 1996 By: /s/ Robert Olanoff
______________________________________
Robert Olanoff,
Chief Financial Officer, Secretary
and Treasurer
(Principal Financial and Accounting Officer)
- 16 -
<PAGE> 1
EXHIBIT 11
INTELLIGROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1995 1996 1995 1996
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net loss $ (42,000) $ (600,000) $ (1,054,000) $ (105,000)
============ =========== ============ ============
Weighted average shares outstanding 12,203,000 7,322,000 12,203,000
9,331,000
Incremental shares
considered outstanding (1) 1,534,000 1,555,000 1,534,000 1,494,000
------------ ----------- ------------ ------------
Shares used in per share calculation 13,737,000 8,877,000 13,737,000 10,825,000
============ =========== ============ ============
Net loss per share $ 0.00 $ (0.07) $ (0.08) $ (0.01)
============ =========== ============ ============
</TABLE>
(1) Pursuant to the requirements of the Securities and Exchange Commission,
stock options and warrants issued by the Company during the twelve months
immediately preceding the initial public offering have been included in
computing net income (loss) per share as if they were outstanding for all
periods using the treasury stock method.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM INTELLIGROUP, INC. AND
SUBSIDIARIES FORM 10-QSB SEPTEMBER 30, 1996
</LEGEND>
<CIK> 0001016439
<NAME> INTELLIGROUP, INC
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 169
<SECURITIES> 0
<RECEIVABLES> 9,561
<ALLOWANCES> 566
<INVENTORY> 0
<CURRENT-ASSETS> 32,405
<PP&E> 0
<DEPRECIATION> 716
<TOTAL-ASSETS> 33,330
<CURRENT-LIABILITIES> 16,958
<BONDS> 0
0
0
<COMMON> 107
<OTHER-SE> 16,200
<TOTAL-LIABILITY-AND-EQUITY> 33,330
<SALES> 33,471
<TOTAL-REVENUES> 33,471
<CGS> 23,972
<TOTAL-COSTS> 23,972
<OTHER-EXPENSES> 6,896
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,264
<INCOME-PRETAX> 1,339
<INCOME-TAX> 410
<INCOME-CONTINUING> 929
<DISCONTINUED> 0
<EXTRAORDINARY> (1,034)
<CHANGES> 0
<NET-INCOME> (105)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
