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 June 30, 1997
Commission File No. 0-20943
Intelligroup, Inc.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
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
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(Address of Principal Executive Offices) (Zip Code)
(908) 750-1600
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(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: X No:
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Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of July 31, 1997:
Class Number of Shares
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Common Stock, $.01 par value 11,928,367
Transitional Small Business Disclosure Format:
Yes: No: X
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<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements........................ 1
Consolidated Balance Sheets
as of June 30, 1997 (unaudited)
and December 31, 1996 ................................... 2
Consolidated Statements of Income
for the Three Months and Six Months Ended
June 30, 1997 and 1996 (unaudited)....................... 3
Consolidated Statements of Cash Flows
for the Six Months Ended
June 30, 1997 and 1996 (unaudited)....................... 4
Notes to Consolidated Financial Statements (unaudited)... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............ 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 14
Item 2. Changes in Securities.................................... 14
Item 4. Submission of Matters to a Vote of Security Holders...... 15
Item 5. Other Information........................................ 15
Item 6. Exhibits and Reports on Form 8-K......................... 16
SIGNATURES................................................................ 17
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
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<PAGE>
<TABLE>
<CAPTION>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and December 31, 1996
June 30, December 31,
1997 1996
----------- ------------
(unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ...................................... $ 2,638,000 $ 7,479,000
Accounts receivable, less allowance for doubtful accounts of
$661,000 at June 30, 1997 and $546,000 at December 31, 1996. 11,747,000 8,538,000
Unbilled services .............................................. 5,449,000 2,916,000
Deferred income taxes .......................................... 331,000 331,000
Subscriptions receivable ....................................... 9,025,000 --
Other current assets ........................................... 646,000 492,000
------------ ------------
Total current assets ....................................... 29,836,000 19,756,000
Property and equipment, less accumulated depreciation of $425,000
at June 30, 1997 and $243,000 at December 31, 1996 ............. 2,661,000 1,281,000
Other assets ..................................................... 261,000 225,000
------------ ------------
$ 32,758,000 $ 21,262,000
============ ============
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable ............................................... $ 887,000 $ 406,000
Accrued payroll and related taxes .............................. 2,563,000 1,814,000
Accrued expenses and other liabilities ......................... 1,181,000 1,268,000
Income taxes payable ........................................... -- 535,000
Current portion of obligations under capital leases ............ 20,000 20,000
------------ ------------
Total current liabilities .................................. 4,651,000 4,043,000
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Obligations under capital leases, less current portion ........... 53,000 57,000
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Commitments and contingencies
Shareholders' Equity
Preferred stock, $.01 par value, 5,000,000 shares authorized,
none outstanding............................................ -- --
Common stock, $.01 par value, 25,000,000 shares authorized;
11,778,367 and 10,735,600 shares issued and outstanding
at June 30, 1997 and December 31, 1996, respectively ....... 118,000 107,000
Additional paid-in capital ..................................... 28,078,000 19,201,000
Accumulated deficit ............................................ (142,000) (2,146,000)
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Total shareholders' equity 28,054,000 17,162,000
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$ 32,758,000 $ 21,262,000
============= =============
See accompanying notes to consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months and Six Months Ended June 30, 1997 and 1996
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue ..................................... $ 19,155,000 $ 10,916,000 $ 34,893,000 $ 19,626,000
Cost of sales ............................... 12,956,000 7,723,000 24,292,000 14,146,000
------------ ------------ ------------ ------------
Gross profit ....................... 6,199,000 3,193,000 10,601,000 5,480,000
Selling, general and administrative
expenses ............................... 4,389,000 2,421,000 7,474,000 4,065,000
------------ ------------ ------------ ------------
Operating income ................... 1,810,000 772,000 3,127,000 1,415,000
------------ ------------ ------------ ------------
Other expenses (income):
Interest expense (income), net ......... (44,000) 122,000 (122,000) 129,000
Factor charges ......................... -- 265,000 -- 573,000
------------ ------------ ------------ ------------
(44,000) 387,000 (122,000) 702,000
------------ ------------ ------------ ------------
Income before provision for income taxes .... 1,854,000 385,000 3,249,000 713,000
Provision for income taxes .................. 686,000 117,000 1,245,000 218,000
------------ ------------ ------------ ------------
Net income .................................. $ 1,168,000 $ 268,000 $ 2,004,000 $ 495,000
============ ============ ============ ============
Earnings per share:
Net income per share ............... $ 0.11 $ 0.02 $ 0.18 $ 0.04
============ ============ ============ =============
Shares used in per share calculation 10,884,000 11,913,000 10,859,000 11,913,000
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1997 and
June 30, 1996
(unaudited)
June 30, June 30,
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net income ................................................. $ 2,004,000 $ 495,000
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization ............................ 182,000 76,000
Provision for doubtful accounts .......................... 75,000 440,000
Changes in assets and liabilities:
Restricted cash deposited in escrow ...................... -- 100,000
Accounts receivable ...................................... (3,284,000) (1,455,000)
Unbilled services ........................................ (2,533,000) (1,624,000)
Other current assets ..................................... (154,000) (78,000)
Other assets ............................................. (217,000) (530,000)
Cash overdraft ........................................... -- (83,000)
Accounts payable ......................................... 481,000 (82,000)
Accrued payroll and related taxes ........................ 749,000 (360,000)
Income taxes payable ..................................... (535,000) 218,000
Accrued expenses and other liabilities ................... (385,000) 227,000
Interest payable ......................................... -- 105,000
----------- ------------
Net cash used in operating activities ................ (3,617,000) (2,551,000)
----------- ------------
Cash flows from investing activities:
Purchase of property and equipment ......................... (1,562,000) (230,000)
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Cash flows from financing activities:
Proceeds from subordinated debt and warrants ............... -- 6,000,000
Repurchase of common stock ................................. -- (1,500,000)
Proceeds from the exercise of stock options ................ 342,000 --
Repayments to factor, net .................................. -- (1,521,000)
Repayments of lines of credit, net ......................... -- (5,000)
Principal payments under capital leases .................... (4,000) (14,000)
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Net cash provided by financing activities ............ 338,000 2,960,000
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Net increase (decrease) in cash and cash equivalents.. (4,841,000) 179,000
Cash and cash equivalents at beginning of period .............. 7,479,000 71,000
----------- ------------
Cash and cash equivalents at end of period .................... $ 2,638,000 $ 250,000
=========== ============
Supplemental disclosures of cash flow information:
Cash paid for interest ..................................... $ -- $ 10,000
=========== ============
Cash paid for income taxes ................................. $ 1,780,000 $ --
=========== ============
Noncash transactions:
Subscriptions receivable ................................... $ 9,025,000 $ --
=========== ============
See accompanying notes to consolidated financial statements.
</TABLE>
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INTELLIGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
The consolidated financial statements and accompanying financial
information as of June 30, 1997 and for the three and six months ended June 30,
1997 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, 1996,
which were included as part of the Company's Form 10-KSB.
Results for interim periods are not necessarily indicative of results for
the entire year.
(2) Earnings Per Share
Net income 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 an 81,351.1111-for-1 stock split effected in July
1996. 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 Company's initial public offering consummated in
October 1996 have been included in computing net income per share as if they
were outstanding for all periods prior to the initial public offering using the
treasury stock method.
On March 31, 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share" ("Statement 128"). Statement 128 is effective for
fiscal years ending after December 15, 1997, and, when adopted, it will require
restatement of prior years' earnings per share. If the Company had adopted
Statement 128 for the period ending June 30, 1997, there would have been no
effect on earnings per share, on either the basic or diluted basis, except basic
earnings per share would have been $0.19 for the six months ended June 30, 1997.
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(3) Follow-On Public Offering
On July 2, 1997, the Company consummated a follow-on public offering (the
"Offering") of 1,000,000 shares of its Common Stock at a price to the public of
$9.50 per share. On July 15, 1997 and as part of the Offering, an additional
150,000 shares were issued and sold by the Company at a price of $9.50 per share
to cover overallotments. The net proceeds to the Company from the Offering,
after underwriting discounts and commissions and other expenses, were
approximately $10.1 million. As the effective date of the Offering was June 27,
1997, and the proceeds from the 1,000,000 shares of Common Stock issued and sold
by the Company were received on July 2, 1997, the Company has recorded
subscriptions receivable of approximately $9.0 million as of June 30, 1997. The
balance of $1.1 million in net proceeds was collected on July 15, 1997, upon the
closing of the exercise of the underwriter's overallotment option.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The Company 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. In 1997, the Company achieved National Logo Partner status with SAP.
The Company's current contract with SAP expires on December 31, 1997 and
provides for an automatic one-year renewal period unless either party provides
at least six weeks prior written notice of its intention not to renew. This
agreement contains no minimum revenue requirements or cost sharing arrangements
and does not provide for commissions or royalties to either party. Also, in
1997, the Company began to provide implementation services to PeopleSoft and
Baan licensees to further diversify its service offerings. The Company recently
expanded its Oracle applications implementation services practice and added
upgrade services to meet market demand of mid-size to large companies that are
implementing or upgrading Oracle applications. In July 1997, the Company was
awarded an implementation partnership status by PeopleSoft.
The Company generates revenue from professional services rendered to
customers. 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 a consulting team assembled by another information technology consulting firm
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
contracted rates. Where contractual provisions permit, customers also are billed
for reimbursement of expenses incurred by the Company on the customers' behalf.
The Company recently has bid on certain projects in which it, at the
request of the potential clients, offered a fixed price for its services,
however, none of these projects are significant. The Company believes that, as
it pursues its strategy of making turnkey project management a larger portion of
its business, it will likely be required to offer fixed price projects to a
greater degree. The Company has had limited prior experience in pricing and
performing under fixed price arrangements. There can be no assurance that the
Company will be able to complete such projects within fixed price timeframes.
The failure to perform within such fixed price contracts, if entered into, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
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<PAGE>
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 six months ended June 30, 1997 and the year ended December 31,
1996, the Company's ten largest customers accounted for approximately 63% and
66% of its revenue, respectively. During the six months ended June 30, 1997, two
customers each accounted for more than 10% of revenue. During 1996, three
customers each accounted for more than 10% of revenue. For the six months ended
June 30, 1997 and the year ended December 31, 1996, 35% and 44% respectively, of
the Company's revenue was generated by serving as a member of consulting teams
assembled by other information technology consulting firms. There can be no
assurance that such information technology consulting firms will continue to
engage the Company in the future at current levels of retention, if at all.
During the six months ended June 30, 1997 and the year ended December 31, 1996,
71% and 74%, respectively, of the Company's total revenue was derived from
projects in which the Company implemented software developed by SAP. During the
six months ended June 30, 1997, approximately 28% of the Company's revenue was
derived from engagements at which the Company had project management
responsibilities, compared to 16% during the year ended December 31, 1996.
The Company's most significant cost is project personnel expenses, which
consists 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 both new and existing 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 (the "ADC"), and in 1995, established a sales office in
California. In addition, from 1994 to date, the Company has incurred expenses to
develop proprietary development tools and 4SIGHT and 4SIGHT Plus, its
proprietary accelerated implementation methodology and toolset. Commencing in
1995, the Company has been increasing its sales force and its marketing,
finance, accounting and administrative staff. The Company employed 71 such
personnel as of June 30, 1997 as compared to 41 such personnel as of June 30,
1996.
This Form 10-QSB contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, including,
without limitation, statements regarding the Company's intention to shift to
higher margin turnkey management assignments and more complex projects and to
utilize its proprietary implementation methodology in an increasing number of
projects. Such forward-looking statements include risks
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and uncertainties, including, but not limited to: (i) the substantial
variability of the Company's quarterly operating results caused by a variety of
factors, many of which are not within the Company's control, including (a)
seasonal patterns of hardware and software capital spending by customers, (b)
information technology outsourcing trends, (c) the timing, size and stage of
projects, (d) new service introductions by the Company or its competitors, (e)
levels of market acceptance for the Company's services or (f) the hiring of
additional staff; (ii) changes in the Company's billing and employee utilization
rates; (iii) the Company's ability to manage its growth effectively which will
require the Company (a) to continue developing and improving its operational,
financial and other internal systems, as well as its business development
capabilities, (b) to attract, train, retain, motivate and manage its employees,
(c) to continue to maintain high rates of employee utilization at profitable
billing rates and, (d) to maintain project quality, particularly if the size and
scope of the Company's projects increase; (iv) the Company's ability to maintain
an effective internal control structure; (v) the Company's limited operating
history within its current line of business; (vi) the Company's reliance on a
continued relationship with SAP America and the Company's present status as a
SAP National Logo Partner; (vii) the Company's substantial reliance on key
customers and large projects; (viii) the highly competitive nature of the
markets for the Company's services; (ix) the Company's ability to successfully
address the continuing changes in information technology, evolving industry
standards and changing customer objectives and preferences; (x) the Company's
reliance on the continued services of its key executive officers and leading
technical personnel; (xi) the Company's ability to attract and retain a
sufficient number of highly skilled employees in the future; (xii) the progress
the Company may have at continuing to diversify its offerings, including growth
in its Oracle and PeopleSoft services; and (xiii) the Company's ability to
protect its intellectual property rights. The Company's actual results may
differ materially from the results disclosed in such forward-looking statements.
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Results of Operations
The following table sets forth for the periods indicated certain financial
data as a percentage of revenue:
<TABLE>
<CAPTION>
Percentage of Revenue
--------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue .................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales .............................. 67.6 70.7 69.6 72.1
----- ----- ----- -----
Gross profit ........................... 32.4 29.3 30.4 27.9
Selling, general and administrative expenses 22.9 22.2 21.4 20.7
----- ----- ----- -----
Operating income ....................... 9.5 7.1 9.0 7.2
Factor fees / Interest expense (income) .... (0.2) 3.5 (0.3) 3.6
----- ----- ----- -----
Income before provision for income taxes ... 9.7 3.6 9.3 3.6
Provision for income taxes ................. 3.6 1.1 3.6 1.1
----- ----- ----- -----
Net income ................................. 6.1% 2.5% 5.7% 2.5%
===== ===== ===== =====
</TABLE>
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
Revenue. Revenue increased by 75.5%, or $8.3 million, from $10.9 million
during the three months ended June 30, 1996 to $19.2 million during the three
months ended June 30, 1997. 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 67.8%, or $5.3 million, from $7.7 million
during the three months ended June 30, 1996 to $13.0 million during the three
months ended June 30, 1997. The increase was due to increased personnel costs
resulting from the hiring of additional consultants to support the increase in
demand for the Company's services. The Company's gross profit increased by
94.1%, or $3.0 million, from $3.2 million during the three months ended June 30,
1996 to $6.2 million during the three months ended June 30, 1997. Gross profit
margin increased from 29.3% of revenue during the three months ended June 30,
1996 to 32.4% of revenue during the three months ended June 30, 1997. 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 ADC
and related development costs and professional fees. Selling, general and
administrative expenses increased by 81.3%, or $2.0 million, from $2.4 million
during the three months ended June 30, 1996 to $4.4 million during the three
months ended June 30, 1997, and increased as a percentage of revenue from 22.2%
to 22.9% of revenue. The increase in such expenses was due primarily to the
expansion of the Company's
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sales and marketing activities, and increased travel and entertainment expenses.
These expenses were incurred to support the continued revenue growth of the
Company.
Factor fees/Interest expense (income), net. Factor fees in the 1996 period
were the charges incurred by the Company to finance its accounts receivable. On
October 10, 1996, the Company repaid the factor with a portion of the proceeds
from the Company's initial public offering, approximately $4.4 million,
consisting of all amounts outstanding under the agreement with its factor and
terminated its factor agreement.
Provision for income taxes. The Company's effective income tax rate was 37%
and 30.4% for the three months ended June 30, 1997 and 1996, respectively. Such
tax rates were favorably impacted in 1997 by the Company's Indian affiliate
where the Company is not obligated to pay tax for the next five years and plans
to permanently reinvest such funds and a reduction of the Company's valuation
allowance in 1997 and 1996.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Revenue. Revenue increased by 77.8%, or $15.3 million, from $19.6 million
during the six months ended June 30, 1996 to $34.9 million during the six months
ended June 30, 1997. 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 71.7%, or $10.2
million, from $14.1 million during the six months ended June 30, 1996 to $24.3
million during the six months ended June 30, 1997. The increase was due to
increased personnel costs resulting from the hiring of additional consultants to
support the increase in demand for the Company's services. The Company's gross
profit increased by 93.4%, or $5.1 million, from $5.5 million during the six
months ended June 30, 1996 to $10.6 million during the six months ended June 30,
1997. Gross profit margin increased from 27.9% of revenue during the six months
ended June 30, 1996 to 30.4% of revenue during the six months ended June 30,
1997. 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 83.9%, or $3.4 million, from $4.1 million
during the six months ended June 30, 1996 to $7.5 million during the six months
ended June 30, 1997, and increased as a percentage of revenue from 20.7% to
21.4% of revenue. The increase in such expenses was due primarily to the
expansion of the Company's sales and marketing activities, and increased travel
and entertainment expenses due to the growth of the business and the employee
base. These expenses were incurred to support the continued revenue growth of
the Company.
Factor fees/Interest expense (income), net. Factor fees in the 1996 period
were the charges incurred by the Company to finance its accounts receivable. On
October 10, 1996, the Company repaid the factor with a portion of the proceeds
from the Company's initial public offering, approximately $4.4 million,
consisting of all amounts outstanding under the agreement with its factor and
terminated its factor agreement.
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<PAGE>
Provision for income taxes. The Company's effective income tax rate was
38.3% and 30.6% for the six months ended June 30, 1997 and 1996 respectively.
Such tax rates were favorably impacted in 1997 by the Company's Indian affiliate
where the Company is not obligated to pay tax for the next five years and plans
to permanently reinvest such funds and a reduction of the Company's valuation
allowance in 1997 and 1996.
Backlog
The Company generally enters into written contracts with its customers at
the time it commences work on a project. These written contracts contain varying
terms and conditions and the Company does not generally believe it is
appropriate to characterize such written contracts as creating backlog. In
addition, because these written contracts often provide that the arrangement can
be terminated with limited advance notice and without significant penalty, the
Company does not believe that projects in process at any one time are a reliable
indicator or measure of expected future revenue. In the event that a customer
terminates a project, the customer remains obligated to pay the Company for
services performed by it through the date of termination.
Liquidity and Capital Resources
The Company funds its operations primarily from cash flow generated from
operations, and to a lesser extent, from cash balances generated from the
Company's initial and follow-on public offerings. In October 1996, the Company
consummated its initial public offering of its common stock resulting in net
proceeds to the Company of approximately $17.8 million. On July 2, 1997, the
Company received the proceeds from a follow-on public offering (the "Offering")
of 1,000,000 shares of its Common Stock at a price of $9.50 per share. On July
15, 1997 and as part of the Offering, an additional 150,000 shares at a price of
$9.50 per share were issued to cover overallotments. The net proceeds to the
Company from the Offering, after underwriting discounts and commissions and
other expenses of the Offering, were approximately $10.1 million. Of this
amount, approximately $9.0 million constituted subscriptions receivable at June
30, 1997. Such subscriptions receivable were collected on July 2, 1997. The
balance was collected on July 15, 1997 upon the closing of the exercise of the
underwriter's overallotment option.
Cash used in operating activities was $3.6 million during the six months
ended June 30, 1997, resulting primarily from the growth in accounts receivable
and unbilled services and the payment during the period of income taxes. Cash
used in operating activities for the six months ended June 30, 1996 was $2.6
million.
The Company had working capital of $25.2 million at June 30, 1997 and $15.7
million at December 31, 1996.
In accordance with investment guidelines approved by the Company's Board of
Directors, cash balances in excess of those required to fund operations have
been invested in short-term U.S. Treasury securities and commercial paper with a
credit rating no lower than A1/P1.
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<PAGE>
The Company invested $1.6 million and $230,000 in computer equipment and
furniture during the six months ended June 30, 1997 and 1996, respectively.
There are no material commitments for capital expenditures currently
outstanding.
In January 1997, the Company entered into a two-year credit agreement with
PNC Bank, National Association (the "Bank"). The credit facility with the Bank
has two components comprised of (i) a revolving line of credit pursuant to which
the Company may borrow up to $7.5 million (at the Bank's prime rate plus 1/4 of
1% per annum) to finance the working capital needs of the Company and (ii)
equipment term loans pursuant to which the Company may borrow up to an aggregate
of $350,000 (at the Bank's prime rate plus 3/4 of 1% per annum) to purchase
equipment. The credit limit of the revolving line of credit is the lesser of
$7.5 million or the Company's borrowing base. Such borrowing base is 70% of the
net face amount of the Company's eligible accounts receivable at the time of any
loan under the revolving line of credit. The credit agreement contains covenants
which require the Company to (i) maintain its working capital during the year at
no less than 90% of the working capital at the end of the immediately preceding
fiscal year and at the end of each fiscal year at no less than 105% of its
working capital at the end of the immediately preceding fiscal year; and (ii)
maintain its tangible net worth during the year at no less than 95% of its
tangible net worth at the end of the immediately preceding fiscal year and at
the end of each fiscal year at no less than 108% of tangible net worth at the
end of the immediately preceding fiscal year. The Company's obligations under
the credit agreement are collateralized by substantially all of the Company's
assets, including its accounts receivable and intellectual property. The
Company's obligations under the credit facility are payable at the expiration of
such facility on January 22, 1999. In June 1997, the Company and the Bank
entered into a letter agreement, to modify several terms of the credit facility,
subject to the execution of a definitive modification agreement. Under the new
terms, the borrowing base limitation will be eliminated and the interest rate
will be reduced to, at the Company's option, either the Bank's prime rate per
annum or the EuroRate plus 2% on the revolving line of credit and to the Bank's
prime rate plus 0.25% on the equipment line of credit. These terms are subject
to the Company maintaining an unsubordinated debt to tangible net worth ratio of
no greater than one to one and an earnings before interest and taxes to interest
expense ratio of no less than three to one. The Bank also agreed to release the
collateral securing the revolving line of credit if the Company meets certain
financial criteria at December 31, 1997. Although the Company has no reason to
believe that the definitive modification agreement with the Bank reflecting
these terms will not be executed, there can be no assurance that such agreement
will be executed in the near term, if at all.
As of June 30, 1997, there were no amounts outstanding under the revolving
line of credit and no equipment term loans outstanding.
The Company believes that its available funds, together with current credit
arrangements and the cash flows expected to be generated from operations, will
be adequate to satisfy its current and planned operations through at least June
30, 1999.
- 13 -
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company was being investigated by the Immigration and Naturalization
Service (the "INS") and on April 2, 1997, the Company received two Notices of
Intent to Fine from the INS in relation to violations by the Company of the
Immigration Reform and Control Act of 1990. Specifically, the INS investigated
whether the Company improperly employed certain foreign national individuals
prior to their obtaining appropriate work authorization and failed to complete
proper employment eligibility verification forms for all employees. The Company
cooperated fully with the INS. Pursuant to settlement agreements signed April
28, 1997, fines totaling approximately $42,000 were assessed by the INS and paid
by the Company. Such amounts were accrued as of December 31, 1996. The Company
employs many foreign national individuals and has implemented procedures and
controls which it believes will ensure full compliance with the Immigration
Reform and Control Act of 1990 and related regulations. The Company now employs
in-house counsel to oversee this function.
Item 2. Changes in Securities.
The following information relates to all securities of the Company sold by
the Company within the quarter ended June 30, 1997 which were not registered
under the Securities Act of 1933, as amended (the "Securities Act"), at the time
of grant, issuance and/or sale:
The Company has issued shares of its Common Stock to employees of the
Company pursuant to the exercise of stock options that were granted
under the 1996 Stock Plan and which, at the time of exercise of such
options and issuance of the Common Stock, had not been registered
under the Securities Act. On April 16, 1997, the Company sold to Ms.
Eileen Clark 100 shares of its Common Stock, on May 1, 1997, the
Company sold to Mr. Uma Pandey 14,667 shares of its Common Stock and,
on June 3, 1997, the Company sold to Mr. Paul Coombs 28,000 shares of
its Common Stock, each such sale being made pursuant to the exercise
of stock options that were issued to each of Ms. Clark and Messrs.
Pandey and Coombs on July 12, 1996 at an exercise price of $8.00 per
share.
No underwriter was employed by the Company in connection with the issuance
and sale of the securities described above. The Company claims that the issuance
and sale of all of the foregoing securities were exempt from registration under
Section 4(2) of the Securities Act as transactions not involving any public
offering. Appropriate legends were affixed to the stock certificates issued in
such transactions. All recipients had adequate access to information about the
Company.
Subsequent to the end of the quarter, on July 22, 1997, the Company filed a
Registration Statement on Form S-8 to register an aggregate of 1,547,333 shares
of Common Stock issuable upon the exercise of stock options granted, or to be
granted, under the Company's 1996 Stock Plan and 1996 Non-Employee Director
Stock Option Plan.
- 14 -
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders of the Company was held on May 12, 1997.
There were present at the meeting in person or by proxy shareholders
holding an aggregate of 9,961,112 shares of Common Stock. The results of the
vote taken at such meeting with respect to each nominee for director were as
follows:
Common Stock Nominees For Withheld
- --------------------- --- --------
Ashok Pandey 9,938,712 Shares 22,400 Shares
Rajkumar Koneru 9,938,712 Shares 22,400 Shares
Nagarjun Valluripalli 9,938,712 Shares 22,400 Shares
Klaus P. Besier 9,938,712 Shares 22,400 Shares
David A. Finley 9,938,712 Shares 22,400 Shares
Kevin P. Mohan 9,938,712 Shares 22,400 Shares
Thomas S. Roberts 9,938,712 Shares 22,400 Shares
In addition, a vote of the shareholders was taken at the meeting on the
proposal to ratify the appointment of Arthur Andersen LLP as the independent
auditors of the Company for the fiscal year ending December 31, 1997. Of the
shares present at the meeting in person or by proxy, 9,958,612 shares of Common
Stock were voted in favor of such proposal, 2,300 shares of Common Stock were
voted against such proposal and 200 shares of Common Stock abstained from
voting.
Item 5. Other Information.
Follow-on Public Offering
On July 2, 1997, the Company consummated a follow-on public offering (the
"Offering") of 1,000,000 shares of its Common Stock at a price to the public of
$9.50 per share. On July 15, 1997 and as part of the Offering, an additional
150,000 shares were issued and sold by the Company at a price of $9.50 per share
to cover overallotments. The net proceeds to the Company from the Offering,
after underwriting discounts and commissions and other expenses of the Offering,
were approximately $10.1 million. As the effective date of the Offering was June
27, 1997, and the proceeds from the 1,000,000 shares of Common Stock issued and
sold by the Company were received on July 2, 1997, the Company has recorded
subscriptions receivable of approximately $9.0 million as of June 30, 1997. The
balance of $1.1 million in net proceeds was collected on July 15, 1997, upon the
closing of the exercise of the underwriter's overallotment option.
The Company intends to utilize the net proceeds of this Offering for
general corporate purposes, including working capital and possible acquisitions.
- 15 -
<PAGE>
New Offices
During the quarter ended June 30, 1997, the Company opened sales and
operations offices in Atlanta, Boston, and Dallas.
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.
- 16 -
<PAGE>
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: August 6, 1997 By: /s/ Ashok Pandey
----------------------
Ashok Pandey,
President and Chief Executive Officer
(Principal Executive Officer)
DATE: August 6, 1997 By: /s/ Robert Olanoff
-----------------------
Robert Olanoff,
Chief Financial Officer, Secretary
and Treasurer
(Principal Financial and Accounting Officer)
- 17 -
<TABLE>
<CAPTION>
EXHIBIT 11
INTELLIGROUP, INC. AND SUBSIDIARIES
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income ......................... $ 1,168,000 $ 268,000 $ 2,004,000 $ 495,000
=========== =========== =========== ===========
Weighted average shares outstanding 10,787,000 10,379,000 10,762,000 10,379,000
Incremental shares
considered outstanding (1)(2) . 97,000 1,534,000 97,000 1,534,000
----------- ----------- ----------- -----------
Shares used in per share calculation 10,884,000 11,913,000 10,859,000 11,913,000
=========== =========== =========== ===========
Net income per share ............... $ 0.11 $ 0.02 $ 0.18 $ 0.04
=========== =========== =========== ===========
(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 per share as if they were
outstanding for all periods using the treasury stock method.
(2) Includes dilutive stock options, using the treasury method.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE
REGISTRANT'S FORM 10-QSB FOR THE PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB.
</LEGEND>
<CIK> 0001016439
<NAME> INTELLIGROUP, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 2,638
<SECURITIES> 0
<RECEIVABLES> 17,196
<ALLOWANCES> 661
<INVENTORY> 0
<CURRENT-ASSETS> 29,836
<PP&E> 3,086
<DEPRECIATION> 425
<TOTAL-ASSETS> 32,758
<CURRENT-LIABILITIES> 4,651
<BONDS> 0
0
0
<COMMON> 118
<OTHER-SE> 27,936
<TOTAL-LIABILITY-AND-EQUITY> 32,758
<SALES> 34,893
<TOTAL-REVENUES> 34,893
<CGS> 24,292
<TOTAL-COSTS> 24,292
<OTHER-EXPENSES> 7,474
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (122)
<INCOME-PRETAX> 3,249
<INCOME-TAX> 1,245
<INCOME-CONTINUING> 2,004
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,004
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
