<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 March 31, 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
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(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)
(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: X No:
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Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of April 30, 1997:
Class Number of Shares
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Common Stock, $.01 par value 10,750,267
Transitional Small Business Disclosure Format:
Yes: No: X
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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 March 31, 1997 (unaudited)
and December 31, 1996 .......................................... 2
Consolidated Statements of Income
for the Three Months Ended
March 31, 1997 and 1996 (unaudited)............................. 3
Consolidated Statements of Cash Flows
for the Three Months Ended
March 31, 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............................................... 13
Item 5. Other Information............................................... 13
Item 6. Exhibits and Reports on Form 8-K................................ 14
SIGNATURES.......................................................................... 15
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
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INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
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March 31, December 31,
1997 1996
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(unaudited)
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ASSETS
Current Assets:
Cash and cash equivalents $ 5,330,000 $ 7,479,000
Accounts receivable, less allowance for doubtful accounts of $523,000
at March 31, 1997 and $546,000 at December 31, 1996 6,891,000 8,538,000
Unbilled services 6,029,000 2,916,000
Deferred income taxes 331,000 331,000
Other current assets 629,000 492,000
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Total current assets 19,210,000 19,756,000
Property and equipment, less accumulated depreciation of $299,000
at March 31, 1997 and $243,000 at December 31, 1996 2,272,000 1,281,000
Other assets 374,000 225,000
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$ 21,856,000 $ 21,262,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 653,000 $ 406,000
Accrued payroll and related taxes 2,079,000 1,814,000
Accrued expenses and other liabilities 548,000 1,268,000
Income taxes payable 504,000 535,000
Current portion of obligations under capital leases 20,000 20,000
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Total current liabilities 3,804,000 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, $.01 par value, 25,000,000 shares authorized;
10,735,600 shares issued and outstanding at March 31, 1997
and December 31, 1996 107,000 107,000
Additional paid-in capital 19,201,000 19,201,000
Accumulated deficit (1,309,000) (2,146,000)
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Total shareholders' equity 17,999,000 17,162,000
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$ 21,856,000 $ 21,262,000
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</TABLE>
See accompanying notes to consolidated financial statements.
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INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
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Three Months Ended March 31,
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1997 1996
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Revenue $ 15,738,000 $ 8,710,000
Cost of sales 11,336,000 6,423,000
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Gross profit 4,402,000 2,287,000
Selling, general and administrative
expenses 3,086,000 1,644,000
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Operating income 1,316,000 643,000
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Other expenses (income):
Interest expense (income), net (79,000) 7,000
Factor charges -- 308,000
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(79,000) 315,000
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Income before provision for income taxes 1,395,000 328,000
Provision for income taxes 558,000 101,000
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Net income $ 837,000 $ 227,000
============ ===========
Earnings per share:
Net income per share $ 0.08 $ 0.02
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Shares used in per share calculation 10,889,000 13,737,000
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</TABLE>
See accompanying notes to consolidated financial statements.
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INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND
MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, March 31,
1997 1996
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Cash flows from operating activities:
Net income $ 837,000 $ 227,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 56,000 24,000
Provision for doubtful accounts -- 205,000
Changes in assets and liabilities:
Accounts receivable 1,647,000 (436,000)
Unbilled services (3,113,000) 134,000
Other current assets (137,000) (28,000)
Other assets (149,000) (84,000)
Cash overdraft -- 8,000
Accounts payable 247,000 (436,000)
Accrued payroll and related taxes 265,000 199,000
Income taxes payable (31,000) 100,000
Accrued expenses and other liabilities (720,000) 219,000
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Net cash provided by (used in) operating activities (1,098,000) 132,000
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Cash flows from investing activities:
Purchase of property and equipment (1,047,000) (27,000)
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Cash flows from financing activities:
Loans from factors, net -- (289,000)
Proceeds from lines of credit, net -- 198,000
Principal payments under capital leases (4,000) (6,000)
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Net cash used in financing activities (4,000) (97,000)
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Net increase (decrease) in cash and cash equivalents (2,149,000) 8,000
Cash and cash equivalents at beginning of period 7,479,000 71,000
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Cash and cash equivalents at end of period $ 5,330,000 $ 79,000
=========== =========
Supplemental disclosures of cash flow information:
Cash paid for interest $ -- $ 7,000
=========== =========
Cash paid for income taxes $ 586,000 $ --
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
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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 March 31, 1997 and for the three months ended March 31, 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 March 31, 1997, there would have been no
effect on earnings per share, on either the basic or diluted basis.
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(3) 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 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.
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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. To achieve SAP National Implementation Partner status, the Company
was required to demonstrate: (1) customer satisfaction with the Company's
SAP-related services; (2) its capabilities and expertise with SAP software; and
(3) that its employee base included an appropriate number of SAP-experienced
consultants. 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, 1997. Contract renewal is within SAP's discretion and is expected
to be based on, among other things, the following subjective criteria set forth
in the Company's contract: (1) customer satisfaction with the Company's
performance and ability to deliver services in a timely and cost-effective
manner; (2) the quality of the Company's personnel performing SAP-related
services; (3) the number and scope, without assigning any dollar amounts in the
contract, of SAP R/3 projects; (4) the thoroughness of the Company's training
programs for its employees; (5) achievement of mutually agreed upon goals; and
(6) the level of effective communication between the Company and SAP. The
contract may be terminated at any time, upon a determination by SAP that the
Company is offering potential customers of SAP R/3 products other products that
are in competition with such SAP R/3 products. Such termination provision,
however, does not preclude the Company from implementing competing or
potentially competing products that have been purchased by the Company's
customers from other suppliers. The contract contains no minimum revenue
requirements or cost sharing arrangements and does not provide for commissions
or royalties to either party. In February 1997, the Company achieved a National
Logo Partner relationship with SAP, SAP's highest consulting alliance
partnership status, and will begin operating under the terms of such partnership
agreement pending partnership agreement negotiations.
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 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.
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The Company provides 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. Recently, however, the Company has bid on
certain projects in which it, at the request of the potential clients, offered a
fixed price for its services. The Company believes that as turnkey project
management becomes 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 and
believes that there are certain risks related thereto. 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.
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 three months ended March 31, 1997 and the year ended December
31, 1996, the Company's ten largest customers accounted for approximately 67%
and 66% of its revenue, respectively. During the three months ended March 31,
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 three
months ended March 31, 1997 and the year ended December 31, 1996, 38% 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 three months ended March 31, 1997 and the year ended December
31, 1996, 69% and 74%, 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 personnel 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 ADC, and in
1995, established a sales office in California. In addition, from 1994 to date,
the Company has incurred significant expenses to develop
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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 59 such personnel as of March 31, 1997 as compared to eight
such personnel as of January 1, 1995.
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 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
Implementation Partner and its status as a SAP National Logo Partner, pending
partnership agreement negotiations; (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) uncertainties
resulting from pending litigation matters and from certain pending and potential
administrative and regulatory immigration and tax law matters; 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
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THREE MONTHS ENDED MARCH 31,
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1997 1996
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Revenue ....................................... 100.0% 100.0%
Cost of sales ................................. 72.0 73.7
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Gross profit .............................. 28.0 26.3
Selling, general and administrative expenses .. 19.6 18.9
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Operating income .......................... 8.4 7.4
Factor fees / Interest expense (income) ....... (0.5) 3.6
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Income before provision for income taxes ...... 8.9 3.8
Provision for income taxes .................... 3.6 1.2
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Net income .................................... 5.3% 2.6%
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</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Revenue. Revenue increased by 80.7%, or $7.0 million, from $8.7 million
during the three months ended March 31, 1996 to $15.7 million during the three
months ended March 31, 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 76.5%, or $4.9 million, from $6.4 million
during the three months ended March 31, 1996 to $11.3 million during the three
months ended March 31, 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
92.5%, or $2.1 million, from $2.3 million during the three months ended March
31, 1996 to $4.4 million during the three months ended March 31, 1997. Gross
profit margin increased from 26.3% of revenue during the three months ended
March 31, 1996 to 28.0% of revenue during the three months ended March 31, 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 87.7%, or $1.4 million, from $1.7 million
during the three months ended March 31, 1996 to $3.1 million during the three
months ended March 31, 1997, and increased as a percentage of revenue from 18.9%
to 19.6% of revenue. The increase in such expenses in absolute dollars and as a
percentage of revenue was due primarily to the expansion of the Company's sales
and marketing activities, and increased
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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. 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.
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 such operations, and to a lesser extent, from cash balances generated from
the Company's initial public offering. 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. Cash used in operating activities was
$1.1 million during the three months ended March 31, 1997, resulting primarily
from the growth in unbilled services and the payment during the period of
accrued expenses and other liabilities, offset in part by a decline in accounts
receivable. Cash provided by operating activities for the three months ended
March 31, 1996 was $132,000.
The Company had working capital of $15.4 million at March 31, 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.
The Company invested $1.0 million and $27,000 in computer equipment and
furniture during the three months ended March 31, 1997 and 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
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approximately $4.4 million, consisting of all amounts outstanding under the
agreement with the Factor and terminated the Factor agreement.
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 April 1997, the Company
reached an agreement with the Bank to change several terms of the agreement.
Under the new terms, the borrowing base limitation was eliminated and the
interest rate was reduced to the Bank's prime rate per annum on the revolving
line of credit and to the Bank's prime rate plus 1/4 of 1% per annum 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
greater than three to one.
As of March 31, 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
December 31, 1998.
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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 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 5. OTHER INFORMATION.
In February 1997, Paul Coombs was promoted to Vice President - Business
Solutions. Also in February 1997, the Company and Paul Coombs executed an
amendment to Mr. Coombs' employment agreement to create an "at will" employment
relationship.
In February 1997, Anthony Knight was promoted to Vice President - Sales
and Marketing.
Concurrently with the signing of the above, the Company and each of Mr.
Coombs and Mr. Knight executed indemnification agreements commensurate to those
of the other officers of the Company.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.1 Employment Agreement dated December 6, 1996
between the Company and Anthony Knight, as
amended on February 18, 1997.
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.
- 14 -
<PAGE> 17
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: May 13, 1997 By: /s/ Ashok Pandey
----------------------
Ashok Pandey,
President and Chief Executive Officer
(Principal Executive Officer)
DATE: May 13, 1997 By: /s/ Robert Olanoff
------------------------
Robert Olanoff,
Chief Financial Officer, Secretary
and Treasurer
(Principal Financial and Accounting Officer)
- 15 -
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement is effective on December 6, 1996 between
Intelligroup, Inc., a New Jersey Corporation with offices at 517 Highway 1
South, Fifth Floor, Iselin, New Jersey 08830 (the "Company"); and Tony Knight
(the "Employee").
STATEMENTS
----------
A. The Company is engaged in the business of the development
and/or implementation of computer software and other technology products for its
customers.
B. The Employee has education and experience which would be useful
to the Company in its business.
C. It is in the Company's best interest to secure the services of
the Employee in a senior position, and the Employee's specialized knowledge and
unique capabilities with respect to the business of the Company.
D. The Company and the Employee wish to set forth in writing the
terms and conditions of the employment of the Employee.
NOW, THEREFORE, the parties agree as follows:
ARTICLES OF AGREEMENT
---------------------
ARTICLE 1. EMPLOYMENT
- ---------------------
1.1 The Company agrees to employ the Employee as a Sales Director
and the Employee accepts such employment by the Company on the terms and
conditions set forth in this Agreement. The Employee agrees to serve the
Company faithfully in this capacity and to perform such duties and
responsibilities as may be established by the Company from time to time.
1.2 Recognizing this employment involves a senior level position,
the Employee agrees to devote the Employee's entire energy and full and
undivided time and attention exclusively to the business of the Company.
1.3 The Employee agrees and represents to the Company that the
Employee is not subject to any existing contract which would affect or impede
the Employee's ability to perform in accordance with the terms of this
Agreement.
2 12/06/96
<PAGE> 2
ARTICLE 2. BASE COMPENSATION
- ----------------------------
Unless otherwise agreed, the Employee's Base Compensation is payable
twice a month as per the normal policies of the Company.
ARTICLE 3. INCENTIVE COMPENSATION
- ---------------------------------
As a senior level employee the Employee may be entitled to receive
compensation beyond the Base Compensation (such additional compensation is
referred to as the "Incentive Compensation"). Whether Incentive Compensation
will be provided, and the amount to be provided, shall be within the sole
discretion of the Board of Directors. Among the factors which the Board of
Directors may consider are the length of time the Employee has been with the
Company; the quality of the Employee's performance; and the financial health of
the Company.
ARTICLE 4. FRINGE BENEFITS
- --------------------------
The Employee has the right to participate in such fringe benefit plan
of any nature (including medical or health insurance, pension plans or
profit-sharing plans) as the Board of Directors shall determine is available
for senior employees.
ARTICLE 5. VACATIONS
- --------------------
The Employee is entitled to such paid vacation as the Board of
Directors shall determine is available for senior employees.
ARTICLE 6. REIMBURSEMENT OF EXPENSES
- ------------------------------------
The Company recognizes the Employee may make certain expenditures for
travel, entertainment and other business related expenses necessary to carry
out the Employee's duties under this Agreement. If the Employee receives prior
written permission from the Company, the Company agrees to reimburse the
Employee promptly for all such expenses upon presentation of proper evidence of
payment.
ARTICLE 7. TERM
- ---------------
The term of this Agreement shall commence from the date on this
Agreement and shall terminate when either party to this Agreement sends to the
other party a written notice of termination at least thirty days in advance.
ARTICLE 8. CONFIDENTIALITY
- --------------------------
8.1 The Company has acquired and developed, and will continue to
acquire and develop, without limitation, technical information (including
functional and technical specifications, designs, drawings, analysis, research,
processes, systems and procedures, computer programs, methods, ideas, "know how"
and the like), business information (sales and marketing research, materials,
plans, accounting and financial information, credit information on customers,
lists containing the names, addresses and business habits of customers, sales
reports, price lines, personnel records and the like) and other information
designated as confidential expressly or by the circumstances in which it is
provided (all of the foregoing is referred to as the "Proprietary Information").
3 12/06/96
<PAGE> 3
8.2 The Proprietary Information is confidential, important, and
unique to the Company's business. The Company and the Employee acknowledge the
Proprietary Information represents trade secrets of the Company.
8.3 For the Company to properly protect the Proprietary
Information, the Employee recognizes it is essential that confidentiality be
maintained by the Employee and that certain restrictions be imposed upon the
Employee during the course of employment and for a reasonable period thereafter.
8.4 The Employee agrees to keep all Proprietary Information
confidential. The Employee agrees to refrain from communicating or divulging
any of the Proprietary Information to any person, firm or corporation or to use
the proprietary information for any purpose other than a Company purpose during
the term of employment and for a period of Two (2) years following the
termination of this Agreement for any reason whatsoever.
8.5 The Company has acquired, and during the Term the Employee will
acquire much similar information about the business of the Company's customers.
The Employee agrees to treat the information acquired about the Company's
customers in the same manner and under the same restrictions of this Article 8.
8.6 The provisions of this Article 8 shall survive the Termination
of this Agreement.
ARTICLE 9. RESTRICTIVE COVENANT
The Employee covenants and agrees that for a period of One (1) year
following the termination of his employment for any reason whatsoever, the
Employee shall not directly or indirectly do any of the following:
9.1 Solicit or accept any business from a person, firm or
corporation that is a customer of the Company with whom the Employee had any
dealings on the Company's behalf during the time the Employee is employed by
the Company; and
9.2 Solicit or accept any business from any person, firm or
corporation that is a prospective customer of the Company with whom the
Employee had any dealings on the Company's behalf during the term of employment.
9.3 Solicit, induce, entice or attempt to entice any employee or
contractor of the Company to terminate his or her employment or relationship
with the Company.
9.4 Accept employment by, become associated with or participate as
a director, officer, shareholder, consultant, partner or agent for any person,
firm or corporation that is in a business that competes with the business being
conducted by the Company at the time of the Employee's termination of
employment.
9.5 However, nothing contained in this Article 9 shall prevent the
Employee from accepting employment as a computer consultant with any company
anywhere in the world so long as such employment does not involve any
administrative or management duties, including but not limited to duties
involving sales, marketing, strategic planning, or budget development.
9.6 The restrictions of this Article 9 shall survive the
termination of this Agreement.
4
<PAGE> 4
ARTICLE 10. REMEDIES OF COMPANY
10.1 AS A SENIOR LEVEL EMPLOYEE, THE EMPLOYEE ACKNOWLEDGES THE RESTRICTIONS
IMPOSED BY THIS AGREEMENT ARE REASONABLE AND ARE NECESSARY TO PROTECT THE
LEGITIMATE BUSINESS INTERESTS OF THE COMPANY. THE EMPLOYEE ALSO ACKNOWLEDGES AND
AGREES THAT SUCH RESTRICTIONS DO NOT AND WILL NOT IMPOSE AN UNDUE HARDSHIP ON
THE EMPLOYEE.
10.2 If the Employee breaches any of the restrictions imposed by this
Agreement, the Employee agrees the Company has the right to obtain an injunction
to prevent any further violations and the additional right to recover court
costs and reasonable attorneys fees incurred by the Company.
10.3 The Employee also agrees that if the Employee breaches any of the
restrictions imposed by this Agreement, the Company can recover damages for
breach of this Agreement, court costs and reasonable attorneys fees incurred by
the Company.
ARTICLE 11. BINDING EFFECT
This Agreement is binding upon, inures to the benefit of an is enforceably
by the heirs, personal representatives, successors and assigns of the parties.
This Agreement is not assignable by the Employee's without the prior written
consent of the Company. The above notwithstanding, the Company may assign this
Agreement without the consent of the Employee to a subsidiary of the Company, to
an entity that acquires the Company, to an entity with which the Company merges
or to an entity which is acquired by the Company.
ARTICLE 12. INVENTIONS, TRADEMARKS, PATENTS AND OTHER WORK PRODUCTS
12.1 To the extent the Employee generates works of authorship, copyrights,
inventions, trademarks, trade dress or other such work products (collectively
the "Works") during the terms of employment by the Company, or uses the
premises, facilities or time of the Company to create or fix the Works, the
Employee shall and hereby does convey, assign and transfer ownership to
the Company of all right, title and interest in and to all the Works
throughout the world, including but not limited to any and all copyright,
patent, trademark, and trade dress rights. Whenever permitted by law, the
Company shall have the exclusive right to obtain copyright, patent and/or
trademark registration or other protection to the Works in its own name as
inventor, author and owner and to secure any renewals and extensions of such
rights throughout the world.
12.2 The Employee hereby acknowledges that the Employee retains no rights
whatsoever with respect to the Works, including but not limited to any rights
to reproduce the Works, prepare derivative works based thereon, file copyright
or trademark applications for the Works, distribute copies of the Works in any
manner whatsoever, exhibit, use or display the Works publicly or otherwise, or
license or assign to any third party the right to do any of the foregoing,
except as otherwise authorized in writing by the Company.
12.3 The Employee agrees to execute any documents as may be reasonably
required by the Company to affect the Company's ownership rights as provided
herein or to otherwise further the purpose of this Agreement.
12/06/06
5
<PAGE> 5
12.4 The Company shall be entitled to a shop right with respect to any
of the Works created by the Employee that is not assignable to the Company
under the terms of this Agreement. In the event of termination, expiration or
invalidation of this Agreement by statutory construction, judicial
interpretation or other means, Employee agrees that the Company has absolute
rights of first refusal to acquire any remaining portion or extension of the
copyright terms in the Works.
ARTICLE 13. AMENDMENTS AND NON-WAIVER
This Agreement may only be changed or amended by a written agreement
signed by all of the parties. A waiver by the Company of a breach of any
provision of this Agreement by the Employee is not to be construed as a waiver
of any other current or subsequent breach.
ARTICLE 14. ENTIRE AGREEMENT
This Agreement contains the entire understanding of the parties with
respect to the matters set forth herein. Each party acknowledges that there are
no warranties, representations, promises, covenants or understandings of any
kind except those that are expressly set forth in this Agreement.
ARTICLE 15. GOVERNING LAW AND JURISDICTION
This Agreement is governed by and is to be construed and enforced in
accordance with the laws of New Jersey as though made and to be fully performed
in New Jersey (without regard to the conflicts of law rules of New Jersey). All
disputes arising under this Agreement are to be resolved in the courts of the
State of New Jersey. If any party desires to commence an action to enforce any
provision of this Agreement, such action must be instituted in the appropriate
New Jersey court. The parties consent to the jurisdiction of the New Jersey
courts. The parties agree that the courts of the State of New Jersey are to
have exclusive jurisdiction over this Agreement. The parties agree that service
of any process is effective if served in the manner that a Notice may be served
pursuant to this Agreement.
ARTICLE 16. SEVERABILITY
The invalidity or unenforceability of any provision of this Agreement
does not in any manner affect any other provision. If any provision is
determined to be invalid or unenforceable, this Agreement is to be construed as
if the invalid or unenforceable provision was omitted.
IN WITNESS WHEREOF, the parties have signed this Agreement.
INTELLIGROUP, INC.
By: /s/ ASHOK PANDEY
----------------------------------
Ashok Pandey
President
/s/ Tony Knight
----------------------------------
Tony Knight
6 12/06/96
<PAGE> 6
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT (the "Amendment") made
effective as of the 18th day of February, 1997 (the "Effective Date") by and
between INTELLIGROUP, INC., a New Jersey corporation (the "Company"), and
ANTHONY KNIGHT (the "Employee").
WITNESSETH:
WHEREAS, the Company and the Employee are parties to that certain
Employment Agreement dated as of December 6, 1996 (the "Employment Agreement");
WHEREAS, the Company and the Employee desire to amend the Employment
Agreement to reflect the mutually agreed upon revised terms of employment of
the Employee in accordance with the provisions of this Amendment; and
WHEREAS, the Employee desires and is willing to accept continued
employment with the Company in accordance herewith.
NOW THEREFORE, in consideration of the premises and mutual covenants
contained herein, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Amendment. All references to the title of "Sales Director"
shall hereinafter be deleted and there shall be substituted in lieu thereof the
title "Vice President -- Sales and Marketing".
2. Reference to and Effect on the Employment Agreement.
(a) On and after the Effective Date, each reference to
"this Agreement", "hereunder", "hereof", "herein", or words of like import
shall mean and be a reference to the Employment Agreement as amended hereby. No
reference to this Amendment need be made in any instrument or document at any
time referring to the Employment Agreement, a reference to
<PAGE> 7
the Employment Agreement in any of such instrument or document to be deemed to
be a reference to the Employment Agreement as amended hereby.
(b) Except as expressly amended by this Amendment, the
Employment Agreement shall remain in full force and effect.
3. Governing Law. This Amendment shall be governed by and its
provisions construed and enforced with the internal laws of the State of New
Jersey without reference to its principles regarding conflicts of laws.
4. Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute a single instrument.
* * * * * * * * * *
-2-
<PAGE> 8
IN WITNESS WHEREOF, the Company has caused this Amendment to be
executed and attested by its duly authorized officers, and the Employee has set
his hand, all as of the day and year first above written.
ATTEST: INTELLIGROUP, INC.,
By: /s/ Ashok Pandey
- ------------------------------ -----------------------------
Ashok Pandey, President and
Chief Executive Officer
WITNESS: EMPLOYEE
/s/ Anthony Knight
- ------------------------------ --------------------------------
Anthony Knight
-3-
<PAGE> 1
EXHIBIT 11
INTELLIGROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net income $ 837,000 $ 227,000
=========== ===========
Weighted average shares outstanding 10,736,000 12,203,000
Incremental shares
considered outstanding (1) 153,000 1,534,000
----------- -----------
Shares used in per share calculation 10,889,000 13,737,000
=========== ===========
Net income per share $ 0.08 $ 0.02
=========== ===========
</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 per share as if they were outstanding for all periods using
the treasury stock method.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001016439
<NAME> INTELLIGROUP, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 5,330,000
<SECURITIES> 0
<RECEIVABLES> 13,443,000
<ALLOWANCES> 523,000
<INVENTORY> 0
<CURRENT-ASSETS> 19,210,000
<PP&E> 2,571,000
<DEPRECIATION> 299,000
<TOTAL-ASSETS> 21,856,000
<CURRENT-LIABILITIES> 3,804,000
<BONDS> 0
0
0
<COMMON> 107,000
<OTHER-SE> 17,892,000
<TOTAL-LIABILITY-AND-EQUITY> 21,856,000
<SALES> 15,738,000
<TOTAL-REVENUES> 15,738,000
<CGS> 11,336,000
<TOTAL-COSTS> 11,336,000
<OTHER-EXPENSES> 3,086,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (79,000)
<INCOME-PRETAX> 1,395,000
<INCOME-TAX> 558,000
<INCOME-CONTINUING> 837,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 837,000
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
