<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 17, 1997
REGISTRATION NO. 333-29119
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
INTELLIGROUP, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
NEW JERSEY 7373 11-2880025
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
517 ROUTE ONE SOUTH
ISELIN, NEW JERSEY 08830
(908) 750-1600
(ADDRESS AND TELEPHONE NUMBER
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE OF BUSINESS)
ASHOK PANDEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
INTELLIGROUP, INC.
517 ROUTE ONE SOUTH
ISELIN, NEW JERSEY 08830
(908) 750-1600
(NAME, ADDRESS, AND TELEPHONE NUMBER
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
DAVID J. SORIN, ESQ. MARK G. BORDEN, ESQ.
ANDREW P. GILBERT, ESQ. BRENT B. SILER, ESQ.
BUCHANAN INGERSOLL HALE AND DORR LLP
500 COLLEGE ROAD EAST 1455 PENNSYLVANIA AVENUE, N.W.
PRINCETON, NEW JERSEY 08540 WASHINGTON, D.C. 20004
(609) 987-6800 (202) 942-8400
</TABLE>
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION DATED JUNE 17, 1997
1,000,000 SHARES
LOGO
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by
Intelligroup, Inc. ("Intelligroup" or the "Company"). The Company's Common Stock
is traded on the Nasdaq National Market under the symbol "ITIG." On June 12,
1997, the last reported sale price of the Common Stock on the Nasdaq National
Market was $10.625 per share. See "Price Range of Common Stock." Upon completion
of this offering, certain of the Company's current officers, directors and
affiliated entities will together beneficially own approximately 66% of the
Company's outstanding Common Stock. See "Risk Factors" and "Principal
Shareholders."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Per Share..................................... $ $ $
Total(3)...................................... $ $ $
================================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriter and other matters.
(2) Before deducting expenses, estimated to be $230,000, payable by the Company.
(3) The Company has granted the Underwriter a 30-day option to purchase up to
150,000 additional shares of Common Stock, solely to cover over-allotments,
if any. If the Underwriter exercises this option in full, the Price to
Public will total $ , the Underwriting Discount will total
$ and the Proceeds to Company will total $ . See
"Underwriting."
The shares of Common Stock are offered by the Underwriter named herein,
subject to receipt and acceptance by it and subject to its right to reject any
order in whole or in part. It is expected that delivery of the certificates
representing such shares will be made against payment therefor at the office of
Montgomery Securities on or about
, 1997.
---------------------
MONTGOMERY SECURITIES
, 1997
<PAGE> 3
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the shares of Common Stock offered
hereby. This Prospectus, which forms a part of the Registration Statement, does
not contain all the information set forth in the Registration Statement and the
exhibits and schedules filed therewith. For further information with respect to
the Company and the shares of Common Stock offered hereby, reference is made to
the Registration Statement and to such exhibits and schedules filed therewith.
Statements contained herein as to the content of any contract or other document
are not necessarily complete and, in each instance, reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement, and each such statement shall be deemed qualified in its entirety by
such reference. The Registration Statement and any amendments thereto, including
exhibits filed or incorporated by reference as a part thereof, are available for
inspection and copying at the offices of the Securities and Exchange Commission
(the "Commission") as described in the following paragraph.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, is required to file reports, proxy and information statements and
other information with the Commission. Such reports, proxy and information
statements and other information can be inspected and copied at the Public
Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and 7
World Trade Center, Suite 1300, New York, New York 10048. Copies of filed
reports, proxy and information statements and other information can be obtained
from the Public Reference Section of the Commission, Washington, D.C. 20549,
upon payment of prescribed rates or in certain cases by accessing the
Commission's World Wide Web site at http://www.sec.gov. The Common Stock of the
Company is traded on the Nasdaq National Market under the symbol "ITIG," and
such reports, proxy and information statements and other information concerning
the Company also can be inspected at the offices of Nasdaq Operations, 1735 K
Street, N.W., Washington, D.C. 20006.
The Underwriter may engage in transactions that stabilize, maintain or
otherwise affect the price of the Common Stock. Such transactions may include
stabilizing and the purchase of Common Stock to cover short positions. For a
description of these activities, see "Underwriting."
IN CONNECTION WITH THE OFFERING, THE UNDERWRITER AND SELLING GROUP MEMBERS,
IF ANY, MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
NASDAQ IN ACCORDANCE WITH RULE 103 UNDER REGULATION M. SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the consolidated
financial statements, including the notes thereto, appearing elsewhere in this
Prospectus, including information under "Risk Factors." Except as otherwise
noted herein, all information in this Prospectus assumes no exercise of the
Underwriter's over-allotment option.
THE COMPANY
Intelligroup 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 believes such status and designation result in direct referrals and
in enhanced industry recognition. Also in 1997, the Company began to provide
implementation services to PeopleSoft and Baan licensees to further diversify
its service offerings. The Company's custom software development services are
enhanced by its exclusive access to qualified and experienced programmers at its
affiliated Advanced Development Center located in India and connected to the
Company's headquarters in the United States and to certain customer sites by
dedicated, high speed satellite links. The Company provides its services
directly to end-user organizations or as a member of consulting teams assembled
by other information technology consulting firms. The number of customers billed
by the Company has grown substantially from three customers in 1993 to 117
customers for the year ended December 31, 1996. The Company's customers are
Fortune 1000 and other large and mid-sized companies, as well as other
information technology consulting firms, and include AT&T, Bristol-Myers Squibb,
Ernst & Young LLP, IBM, ICS Deloitte & Touche LLP and Price Waterhouse LLP.
Many large and mid-sized businesses face a rapidly changing business
environment, intense global competition and accelerating technological change.
To remain competitive, businesses are implementing and utilizing advanced
information technology solutions that enable them to redesign their business
processes in such areas as product development, service delivery, manufacturing,
sales and human resources. Concurrently, businesses are migrating from legacy
systems running proprietary software to open systems and client/server systems.
Such client/server systems, when developed and implemented appropriately, enable
the creation and utilization of more functional and flexible applications which
are critical to the competitive needs of businesses. Organizations often acquire
packaged enterprise-wide business software applications for client/ server
systems, including those offered by leading vendors, such as SAP, Oracle,
PeopleSoft or Baan, and implement or customize these applications to match their
needs. Organizations also may develop customized software applications designed
for their specific business needs. Since organizations often lack sufficient
technical resources necessary to design, develop and implement emerging
information technology solutions on a timely basis, many businesses increasingly
engage experienced outside specialists to develop and implement solutions, in
shorter timeframes and at lower costs, while reducing implementation risks. As a
result, demand for information technology services has grown significantly.
Intelligroup provides information technology services to develop and
implement cost-effective client/ server business solutions on a timely basis by
combining its expertise in a wide range of technologies and business processes
with its proprietary implementation methodology and development tools. The
Company's consultants have expertise with SAP, Oracle, PeopleSoft and Baan
products and with a wide variety of leading computing technologies. The Company
has developed a proprietary implementation methodology, "4 SIGHT", which is
designed to minimize the time required to develop and implement SAP, Oracle and
Baan solutions for its customers. "4 SIGHT" is designed to be technology
independent and modular so that it may be utilized by the Company's consultants
and project managers in other packaged applications development or software
customization projects.
3
<PAGE> 5
The Company's objective is to be a leading provider of a wide range of
information technology services. The Company's strategy to achieve this
objective is to: (i) accelerate a shift from implementation assignments to
turnkey project management engagements; (ii) maintain and expand long-term
customer relationships; (iii) leverage and expand strategic relationships,
including existing relationships with SAP and Oracle; (iv) maintain
technological leadership and enhance its proprietary implementation methodology
and development tools; (v) continue to attract and retain skilled, motivated
technical employees; and (vi) expand its global sales and marketing efforts.
The Company was incorporated in New Jersey in October 1987 under the name
Intellicorp, Inc. The Company's name was changed to Intelligroup, Inc. in July
1992. The Company's executive offices are located at 517 Route One South,
Iselin, New Jersey 08830, and its telephone number is (908) 750-1600.
"Intelligroup," " "4 SIGHT"," " "4 SIGHT"plus" and the Company's logo are
service marks and OPMS and OIM are trademarks of the Company. All other trade
names, trademarks or service marks appearing in this Prospectus are the property
of their respective owners and are not the property of the Company.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 1,000,000 shares
Common Stock to be outstanding after
the offering............................... 11,778,267 shares(1)
Use of proceeds.............................. For general corporate purposes, including
working capital and possible acquisitions.
See "Use of Proceeds."
Nasdaq National Market Symbol................ ITIG
</TABLE>
- ---------------
(1) Based upon the number of shares outstanding as of June 10, 1997. Excludes
885,383 shares of Common Stock issuable upon the exercise of stock options
outstanding as of that date granted under the Company's 1996 Stock Plan,
120,795 of which were then exercisable, and 80,000 shares of Common Stock
issuable upon the exercise of stock options outstanding as of that date
granted under the Company's 1996 Non-Employee Director Stock Option Plan,
none of which were then exercisable. See "Management -- 1996 Stock Plan" and
"Management -- 1996 Non-Employee Director Stock Option Plan."
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue....................... $ 481 $ 933 $ 6,800 $24,589 $47,189 $ 8,710 $15,738
Gross profit.................. 129 305 958 4,568 13,584 2,287 4,402
Operating income (loss)....... 1 6 (28) 116 3,676 643 1,316
Income (loss) before
extraordinary charge....... 1 6 (437) (1,059) 1,941 227 837
Extraordinary charge(1)....... -- -- -- -- (1,148) -- --
Net income (loss)............. 1 6 (437) (1,059) 793 227 837
Income (loss) per share before
extraordinary charge....... 0.00 0.00 (0.03) (0.08) 0.18 0.02 0.08
Net income (loss) per share... $ 0.00 $ 0.00 $ (0.03) $ (0.08) $ 0.07 $ 0.02 $ 0.08
Shares used in per share
calculation(2)............. 13,737 13,737 13,737 13,737 10,989 13,737 10,889
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
DECEMBER 31, ------------------------
1996 ACTUAL AS ADJUSTED(3)
------------ ------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 7,479 $ 5,330 $ 15,194
Working capital.......................................... 15,713 15,406 25,270
Total assets............................................. 21,262 21,856 31,720
Shareholders' equity..................................... 17,162 17,999 27,863
</TABLE>
- ---------------
(1) The extraordinary charge relates to the early extinguishment of the
Company's subordinated debentures, net of an income tax benefit of $296,000.
See Note 3 of Notes to Consolidated Financial Statements.
(2) In April 1996, 4,881,066 shares were repurchased by the Company from its
then current shareholders, Messrs. Pandey, Koneru and Valluripalli, and such
shares were cancelled by the Company. See "Capitalization."
(3) Adjusted to reflect the estimated net proceeds from the sale of 1,000,000
shares of Common Stock offered by the Company hereby. See "Use of Proceeds."
5
<PAGE> 7
RISK FACTORS
Certain statements included in this Prospectus, 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,
the Company's objective to grow through strategic acquisitions and trends in
future operating performance, are forward-looking statements within the meaning
of Section 27A of the Securities Act. Other forward-looking statements may be
identified by the use of words such as "believe," "anticipate" and "expect." The
factors discussed below could cause actual results and developments to be
materially different from those expressed in or implied by such statements.
Accordingly, in addition to the other information contained in this Prospectus,
the following factors should be considered carefully by prospective investors in
evaluating an investment in the shares of Common Stock offered hereby.
SUBSTANTIAL VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's historical operating results have varied substantially from
quarter to quarter, and the Company expects that they will continue to do so.
Due to the relatively fixed nature of certain of the Company's costs, including
personnel and facilities costs, a decline in revenue in any fiscal quarter would
result in lower profitability in that quarter. A variety of factors, many of
which are not within the Company's control, influence the Company's quarterly
operating results, including seasonal patterns of hardware and software capital
spending by customers, information technology outsourcing trends, the timing,
size and stage of projects, new service introductions by the Company or its
competitors, levels of market acceptance for the Company's services or the
hiring of additional staff. Operating results also may be impacted by changes in
the Company's billing and employee utilization rates. The Company believes,
therefore, that past operating results and period-to-period comparisons should
not be relied upon as an indication of future performance. Demand for the
Company's services generally is lower in the fourth quarter due to reduced
activity during the holiday season and fewer working days for those customers
which curtail operations during such period. The Company anticipates that its
business will continue to be subject to such seasonal variations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Selected Quarterly Results of Operations."
MANAGEMENT OF GROWTH
The Company's growth has placed significant demands on its management,
administrative and operational resources. The Company's revenue increased from
$6.8 million in 1994, to $24.6 million in 1995 and to $47.2 million in 1996.
From January 1, 1995 through March 31, 1997, the Company's staff increased 282%
from 113 to 432 full-time employees. The Company's ability to manage its growth
effectively will require the Company to continue developing and improving its
operational, financial and other internal systems, as well as its business
development capabilities, and to attract, train, retain, motivate and manage its
employees. In addition, the Company's future success will depend in large part
on its ability to continue to maintain high rates of employee utilization at
profitable billing rates and maintain project quality, particularly if the size
and scope of the Company's projects increase. In addition, other than the
Company's Chief Financial Officer, none of the Company's senior management
previously has managed a business of the Company's scale or scope or has any
previous experience managing a public company. If the Company is unable to
manage its growth and projects effectively, such inability could have a material
adverse effect on the quality of the Company's services and products, its
ability to retain key personnel and its ability to report financial results in
an accurate and timely manner which could have a material adverse effect on the
Company's business, financial condition and results of operations.
WEAKNESSES IN INTERNAL CONTROLS
Following the audit of the Company's consolidated financial statements for
the year ended December 31, 1995, the Company received a management letter from
its independent public accountants, Arthur Andersen LLP, which set forth
significant deficiencies and material weaknesses in the Company's internal
control structure. The Company's independent public accountants noted that,
during 1995, the Company's internal
6
<PAGE> 8
control structure had two material weaknesses: (i) the Company did not reconcile
its supporting records to the general ledger or perform meaningful account
analysis; and (ii) the Company did not maintain, summarize or reconcile any
books or records for its foreign operations. The Company first hired a Chief
Financial Officer in January 1996 and in March 1996 it implemented an accounting
system capable of generating information and reports necessary to appropriately
manage the Company. The Company continues to develop and implement a system of
internal controls and otherwise develop an appropriate administrative
infrastructure. Following the audit of the Company's consolidated financial
statements for the year ended December 31, 1996, the Company's independent
public accountants issued a management letter which, although it did set forth
significant deficiencies, did not specify any material weaknesses in the
Company's internal control structure. The failure to continue to develop and
maintain an effective internal control structure could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
LIMITED OPERATING HISTORY; HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE
FINANCIAL RESULTS
The Company's strategic decision in 1994 to diversify its customer base and
to utilize SAP software as a primary tool to implement enterprise-wide business
process solutions resulted in significant growth and a major change of the
Company's business. As a result, the Company has a limited operating history
within its current line of business. Despite the fact that the Company
recognized substantially increased revenue during the years ended December 31,
1994 and 1995, the Company incurred net losses of $437,000 and $1.1 million for
such respective periods. Although the Company had net income of $793,000 for the
year ended December 31, 1996 and $837,000 for the three months ended March 31,
1997, there can be no assurance that the Company will continue to achieve
profitable levels of operations in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations."
DEPENDENCE ON SAP
During the years ended December 31, 1994, 1995 and 1996 and for the three
months ended March 31, 1997, 33%, 69%, 74% and 69% of the Company's revenue,
respectively, was derived from projects in which the Company implemented
software developed by SAP, a major international German-based software company
and a leading vendor of client/server application software for business
applications. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The Company's future success in its SAP-related
consulting services depends largely on its continued relationship with SAP
America, SAP's United States affiliate, and on its continued status as a SAP
National Logo Partner. The Company executed its SAP National Logo Partner
Agreement in April 1997 and previously had been a SAP National Implementation
Partner since 1995. Such status is awarded by SAP on an annual basis pursuant to
contract. The Company's current contract expires on December 31, 1997 and is
automatically renewed for a successive one-year period, unless terminated by
either party. While the Company has no reason to believe that its contract with
SAP will not be renewed or that the scope of such contract will be modified or
limited in a manner adverse to the Company, there can be no assurance that such
contract will be renewed on terms acceptable to the Company, if at all. In
addition, in the event that SAP is unable to maintain its leadership position
within the business applications software market, if the Company's relationship
with SAP deteriorates, or if SAP elects to compete directly with the Company,
the Company's business, financial condition and results of operations could be
materially adversely affected. See "Business."
SUBSTANTIAL RELIANCE ON KEY CUSTOMERS
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 years ended December 31, 1994, 1995 and 1996 and for the three
months ended March 31, 1997, the Company's ten largest customers accounted for
in the aggregate approximately 61%, 56%, 66% and 67% of its revenue,
respectively. During 1995, Ernst & Young LLP and Price Waterhouse LLP each
accounted for more than 10% of revenue. In 1996 and the three months ended March
31, 1997, Price Waterhouse LLP and Bristol-Myers Squibb each accounted for more
than 10% of revenue. For the years ended December 31, 1994, 1995 and 1996 and
for the three months ended March 31, 1997, 64%, 50%, 44% and 38%, respectively,
of the Company's revenue was generated by serving as a member
7
<PAGE> 9
of consulting teams assembled by other information technology consulting firms,
which also may be competitors of the Company. Such firms included Andersen
Consulting, Ernst & Young LLP, ICS Deloitte & Touche LLP, KPMG Peat Marwick LLP,
Price Waterhouse LLP and other information technology consulting firms. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Customers." There can be no assurance that such
information technology consulting firms will continue to engage the Company in
the future and at current levels of retention. In addition, the volume of work
performed for specific customers is likely to vary from year to year, and a
major customer in one year or quarter may not continue to use the Company's
services. The loss of any large customer or project could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Customers."
Most of the Company's contracts are terminable by the customer 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 cancellation or significant reduction in
the scope of a large contract could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Customers."
The Company provides services to its customers primarily on a time and
materials basis. 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 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 the fixed price and required 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Many of the Company's engagements involve projects that are critical to the
operations of its customers' businesses and provide benefits that may be
difficult to quantify. The Company's failure or inability to meet a customer's
expectations in the performance of its services could result in a material
adverse change to the customer's operations giving rise to claims for damages
against the Company or causing damage to the Company's reputation, adversely
affecting its business, financial condition and results of operations. In
addition, certain of the Company's agreements with its customers require the
Company to indemnify the customer for damages arising from services provided to,
or on behalf of, such customer. Such indemnification could have a material
adverse effect on the Company's financial condition and results of operations.
Under certain of the Company's customer contracts, the Company warrants that it
will repair errors or defects in its deliverables without additional charge to
the customer. The Company has not experienced, to date, any material claims
against such warranties. The Company currently is seeking to purchase and
maintain errors and omissions insurance to insure the Company for damages and
expenses incurred in connection with alleged negligent acts, errors or
omissions. There can be no assurance that such insurance will be available to
the Company on acceptable terms, if at all. See "Business -- Customers."
HIGHLY COMPETITIVE INFORMATION TECHNOLOGY SERVICES INDUSTRY
The markets for the Company's services are highly competitive. The Company
believes that its principal competitors include the internal information systems
groups of its prospective customers, as well as technology consulting and
systems integration firms, including the "Big Six" accounting firms, IBM Global
Services, Cambridge Technology Partners, SHL Systemhouse (a subsidiary of MCI),
and Computer Sciences Corporation, and the consulting divisions of software
applications vendors, some of which also are customers of the Company. Many of
the Company's competitors have longer operating histories, possess greater
industry and name recognition and have significantly greater financial,
technical and marketing resources than the Company. In addition, there are
relatively low barriers to entry into the Company's markets and the Company has
faced, and expects to continue to face, additional competition from new entrants
into its markets.
The Company believes that the principal competitive factors in its markets
include quality of service and deliverables, speed of development and
implementation, price, project management capability and technical
8
<PAGE> 10
and business expertise. The Company believes that its ability to compete also
depends in part on a number of competitive factors outside its control,
including the ability of its competitors to hire, retain and motivate project
managers and other senior technical staff, the development by others of services
that are competitive with the Company's services and the extent of its
competitors' responsiveness to customer needs. There can be no assurance that
the Company will be able to compete successfully with its existing and new
competitors. See "Business -- Competition."
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW SOLUTIONS
The Company's success will depend in part on its ability to develop
solutions that keep pace with continuing changes in information technology,
evolving industry standards and changing customer objectives and preferences.
There can be no assurance that the Company will be successful in adequately
addressing these developments on a timely basis or that, if these developments
are addressed, the Company will be successful in the marketplace. In addition,
there can be no assurance that products or technologies developed by others will
not render the Company's services non-competitive or obsolete. The Company's
failure to address these developments could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Strategy."
DEPENDENCE ON KEY PERSONNEL
The success of the Company for the foreseeable future will depend largely
on the continued services of its key executive officers and leading technical
personnel. Each executive officer has entered into an employment agreement with
the Company which contains non-competition, non-disclosure and non-solicitation
covenants that extends for a period ranging from one to two years following
termination of employment. See "Management -- Employment Agreements,
Indemnification Agreements and Non-Competition, Non-Disclosure and
Non-Solicitation Agreements." In addition, each of the leading technical
personnel has entered into an agreement with the Company which contains
non-competition, non-disclosure and non-solicitation provisions. See
"Business -- Employees." The Company maintains, and is the beneficiary of, life
insurance policies on the lives of Ashok Pandey, Rajkumar Koneru and Nagarjun
Valluripalli. The face amount of each such policy is $1.0 million. See
"Management -- Key Man Insurance." The Company does not maintain key man life
insurance on any of its other executive officers or employees. There can be no
assurance that the departure of one or more of such key personnel would not have
a material adverse effect on the Company's financial condition and results of
operations.
COMPETITIVE MARKET FOR TECHNICAL PERSONNEL
The Company's business is labor intensive and, therefore, the Company's
success will depend in large part upon its ability to attract, retain, train and
motivate highly-skilled employees, particularly project managers and other
senior technical personnel. There is significant competition for employees with
the skills required to perform the services the Company offers. Qualified
project managers and senior technical staff, including in particular, personnel
with development experience, are in great demand and are likely to remain a
limited resource for the foreseeable future. There can be no assurance that the
Company will be successful in attracting a sufficient number of highly skilled
employees in the future, or that it will be successful in retaining, training
and motivating the employees it is able to attract. Any inability to do so could
impair the Company's ability to adequately manage and complete its existing
projects and to bid for or obtain new projects and adversely affect the
Company's business, financial condition and results of operations. See
"Business -- Employees."
ACQUISITION RISKS
The Company may acquire other businesses with services complementary to
those offered by the Company. The Company intends to evaluate potential
acquisitions in the ordinary course of business and aggressively pursue
attractive businesses. Although the Company reviews and considers possible
acquisitions on an on-going basis, no specific acquisitions are being negotiated
or planned as of the date of this Prospectus. The success of such acquisitions,
if any, depends not only upon the Company's ability to acquire complementary
businesses on a cost-effective basis, but also upon its ability to integrate
acquired operations into its organization effectively, to retain and motivate
key personnel, and to retain customers of acquired firms.
9
<PAGE> 11
Furthermore, there can be no assurance that financing for any such transactions
will be available on satisfactory terms, or that the Company will be able to
accomplish its objectives as a result of any such transaction or transactions.
Finally, acquisitions also may involve a number of specific risks including:
possible adverse short-term effects on the Company's operating results;
diversion of management's attention; amortization of acquired intangible assets;
and risks associated with unanticipated problems, liabilities or contingencies.
See "Use of Proceeds."
UNCERTAINTIES RESULTING FROM PENDING LITIGATION MATTERS AND ADMINISTRATIVE
PROCEEDINGS
The Company is involved in disputes with third parties, including certain
former employees and other information technology consulting firms. Such
disputes have resulted in litigation with such parties and, although the Company
is a plaintiff in one of such matters, the Company is subject to claims and
counterclaims for damages and has incurred, and likely will continue to incur,
legal expenses in connection with such matters. There can be no assurance that
such litigation will result in favorable outcomes for the Company. These matters
also may result in diversion of management time and effort from the operations
of the business. There can be no assurance that damages, if any, and related
legal expenses and management diversion from operations will not have a material
adverse effect on the Company's business, reputation, financial condition or
results of operations. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Liquidity and Capital Resources" and
"Business -- Legal Proceedings."
RELIANCE ON INTELLECTUAL PROPERTY RIGHTS
The Company relies upon a combination of trade secrets, nondisclosure and
other contractual arrangements, and copyright and trademark laws to protect its
proprietary rights. The Company's future success is dependent, in part, upon its
proprietary implementation methodology and toolset, "4 SIGHT" and "4 SIGHT"
plus, development tools and other intellectual property rights. The Company
enters into confidentiality agreements with its employees, generally requires
that its consultants and customers enter into such agreements, and limits access
to and distribution of its proprietary information. There can be no assurance
that the steps taken by the Company in this regard will be adequate to deter
misappropriation of its proprietary information or that the Company will be able
to detect unauthorized use of and take appropriate steps to enforce its
intellectual property rights. See "Business -- Intellectual Property Rights" and
"Business -- Legal Proceedings."
Although the Company believes that its trademarks, service marks, services,
methodology and development tools do not infringe on the intellectual property
rights of others, there can be no assurance that such a claim will not be
asserted against the Company in the future, or that if asserted, any such claim
will be successfully defended. See "Business -- Intellectual Property Rights."
INTERNATIONAL OPERATIONS
While international operations historically have accounted for an
insignificant portion of the Company's revenue, the Company anticipates that in
the future a larger percentage of its revenue may be derived from international
operations. To date, the Company has established foreign operations in New
Zealand, the United Kingdom and Singapore. In order to expand sales on an
international basis, the Company may establish additional foreign operations. In
addition, the Company has established operations in India by forming an
affiliation with Intelligroup Asia Private Limited ("Intelligroup Asia"), an
entity which currently is wholly-owned by Messrs. Pandey, Koneru and
Valluripalli, certain of the Company's principal shareholders. The Company and
Messrs. Pandey, Koneru and Valluripalli have entered into an agreement pursuant
to which the Company will acquire, subject to necessary Indian government
approvals, all of the outstanding capital stock of Intelligroup Asia for nominal
consideration. See "Certain Transactions." Increasing foreign operations likely
will require significant management attention and financial resources and could
materially adversely affect the Company's business, financial condition or
results of operations. In addition, there can be no assurance that the Company
will be able to increase international market demand for its services. The risks
inherent in the Company's international business activities include unexpected
changes in regulatory environments, foreign currency fluctuations, tariffs and
other trade barriers, longer accounts receivable payment cycles, difficulties in
managing international operations and potential foreign tax consequences,
including restrictions on the repatriation of earnings, and the burdens of
complying with a wide variety of
10
<PAGE> 12
foreign laws and regulations. There can be no assurance that such factors will
not have a material adverse effect on the Company's future international sales,
if any, and, consequently, on the Company's business, financial condition or
results of operations. See "Business -- Sales and Marketing."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Common Stock in the public market following this offering
could adversely affect the market price of the Common Stock. Upon completion of
this offering, an aggregate of 3,988,917 shares, consisting of: (i) the
1,000,000 shares offered hereby; (ii) the 2,846,250 shares offered and sold
pursuant to the Company's initial public offering of its Common Stock
consummated in October 1996; and (iii) an aggregate of 142,667 shares, including
100,000 shares resold by certain shareholders pursuant to the provisions of Rule
144 under the Securities Act and 42,667 shares which were issued upon the
exercise of vested stock options pursuant to the provisions of Rule 701 under
the Securities Act, will be freely tradeable by persons other than "affiliates"
of the Company without restriction. Of the remaining 7,789,350 shares held by
certain current shareholders of the Company, 6,606,662 shares are subject to
"lock-up" agreements under which the holders of such shares (Messrs. Pandey,
Koneru and Valluripalli) have agreed not to sell or otherwise dispose of any
shares of Common Stock without the prior written consent of the Underwriter for
a period of 90 days following the date of this Prospectus. The Underwriter may,
in its sole discretion, and at any time without notice, release all or a portion
of the shares subject to these lock-up agreements. Subject to such lock-up
arrangements, all of such shares of Common Stock are eligible for resale in
accordance with the provisions of Rule 144, including, without limitation, the
volume limitations thereunder. The holders of 1,182,688 of such shares also have
certain registration rights. See "Description of Capital Stock -- Registration
Rights." Of the shares of Common Stock issuable upon the exercise of outstanding
options, 120,795 shares are eligible for immediate resale in the public market,
subject to compliance with Rules 144 and 701. The Company intends to file a
Registration Statement on Form S-8 shortly after the consummation of this
offering to register an aggregate of 1,547,333 shares of Common Stock issuable
upon stock options granted, or to be granted, under its 1996 Stock Plan and 1996
Non-Employee Director Stock Option Plan. Sales of substantial amounts of the
Common Stock in the public market, whether by purchasers in the offering or
other shareholders of the Company, or the perception that such sales could
occur, may adversely affect the market price of the Common Stock. See "Shares
Eligible for Future Sale."
CONTROL BY MANAGEMENT AND EXISTING SHAREHOLDERS
Upon completion of this offering, Messrs. Pandey, Koneru and Valluripalli
together will beneficially own approximately 56.1% of the outstanding shares of
Common Stock (approximately 66.3% together with the shares beneficially owned by
the other directors, officers and affiliated entities). As a result, these
shareholders, acting together, will be able to control matters requiring
approval by the shareholders of the Company, including the election of
directors. Such a concentration of ownership may have the effect of delaying or
preventing a change in control of the Company, including transactions in which
shareholders might otherwise receive a premium for their shares over then
current market prices. See "Principal Shareholders."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS AND NEW JERSEY LAW
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") authorizes the Board of Directors to issue,
without shareholder approval, 5,000,000 shares of Preferred Stock with voting,
conversion and other rights and preferences that could adversely affect the
voting power or other rights of the holders of Common Stock. The issuance of
Preferred Stock or of rights to purchase Preferred Stock could be used to
discourage an unsolicited acquisition proposal. In addition, the possible
issuance of Preferred Stock could discourage a proxy contest, make more
difficult the acquisition of a substantial block of the Company's Common Stock
or limit the price that investors might be willing to pay in the future for
shares of the Company's Common Stock. The Certificate of Incorporation also
provides that: (i) the affirmative vote of the holders of at least 80% of the
voting power of all of the then outstanding shares of the capital stock of the
Company shall be required to adopt, amend or repeal any provision of the By-laws
of the Company; (ii) shareholders of the Company may not take any action by
written consent; (iii) special meetings of shareholders may be called only by
the President, the Chairman of the Board or a majority of the Board of Directors
and business transacted at any such special meeting shall be limited to matters
relating to the
11
<PAGE> 13
purposes set forth in the notice of such special meeting; (iv) the Board of
Directors, when evaluating an offer related to a tender or exchange offer or
other business combination, is authorized to give due consideration to any
relevant factors, including without limitation, the social, legal and economic
effects upon employees, suppliers, customers, creditors, the community in which
the Company conducts its business, and the economy of the state, region and
nation; and (v) the affirmative vote of the holders of at least 80% of the
voting power of all of the then outstanding shares of the capital stock of the
Company shall be required to amend the above provisions (i) through (iv) or the
limitation on director liability, as set forth in the Certificate of
Incorporation. The foregoing provisions of the Certificate of Incorporation
could have the effect of delaying, deterring or preventing a change in control
of the Company. In addition, certain "anti-takeover" provisions of the New
Jersey Business Corporation Act, among other things, restrict the ability of
certain shareholders to effect a merger or business combination or obtain
control of the Company. These provisions may have the effect of delaying or
preventing a change of control of the Company without action by the shareholders
and, therefore, could adversely affect the price of the Company's Common Stock.
In the event of a merger or consolidation of the Company with or into another
corporation or the sale of all or substantially all of the Company's assets in
which the successor corporation does not assume outstanding options or issue
equivalent options, the Board of Directors of the Company is required to provide
accelerated vesting of outstanding options. See "Description of Capital Stock."
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the shares of Common Stock has been and in the future
may be highly volatile. Factors such as actual or anticipated fluctuations in
the Company's operating results, announcements of technological innovations or
new commercial products or services by the Company or its competitors, market
conditions in the computer software and hardware industries generally, changes
in recommendations or earnings estimates by securities analysts and actual or
anticipated quarterly fluctuations in financial results may have a significant
effect on the market price of the Common Stock. Furthermore, the stock market
historically has experienced volatility which has particularly affected the
market prices of securities of many technology companies and which sometimes has
been unrelated to the operating performances of such companies. See "Price Range
of Common Stock" and "Underwriting."
UNALLOCATED NET PROCEEDS
The anticipated net proceeds of this offering have not been designated for
specific uses. Therefore, the Board of Directors of the Company will have broad
discretion with respect to the use of the net proceeds of this offering. Failure
to utilize the net proceeds within a reasonable period of time may result in a
dilution of the Company's earnings per share which could have a material adverse
effect on the price of the Company's Common Stock. See "Use of Proceeds."
ABSENCE OF DIVIDENDS
The Company does not anticipate paying any dividends on its Common Stock in
the foreseeable future. See "Dividend Policy."
12
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$9.9 million (approximately $11.4 million if the Underwriter's over-allotment
option is exercised in full), based on an assumed offering price of $10.625 per
share after deducting the estimated Underwriter's discount and estimated
offering expenses.
The Company intends to use the net proceeds from this offering for general
corporate purposes, including working capital and possible acquisitions of
businesses or services complementary to the Company's business. Although the
Company reviews and considers possible acquisitions on an on-going basis, no
specific acquisitions are being negotiated or planned as of the date of this
Prospectus. Pending such uses, the net proceeds to the Company from this
offering will be invested in short-term, investment-grade, interest-bearing
instruments.
DIVIDEND POLICY
The Company has never declared or paid any dividends on its capital stock.
The Company intends to retain any earnings to fund future growth and the
operation of its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. Furthermore, the Company's credit
arrangement with PNC Bank, National Association, which expires on January 22,
1999, contains, among other provisions, a covenant which prohibits the Company
from paying cash dividends or making other distributions of assets to
shareholders.
PRICE RANGE OF COMMON STOCK
The Common Stock has been traded on the Nasdaq National Market under the
symbol "ITIG" since September 27, 1996 when the Company completed its initial
public offering. The following table sets forth, for the periods indicated, the
high and low sale prices per share of Common Stock as reported by the Nasdaq
National Market.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ----------------------------------------------------------------------------- ------ ------
<S> <C> <C>
September 30, 1996 (from September 27, 1996)................................. $13 7/8 $12 5/8
December 31, 1996............................................................ 19 3/4 11
March 31, 1997............................................................... 12 3/4 9 7/8
June 30, 1997 (through June 12, 1997)........................................ 11 7/8 8 1/4
</TABLE>
The prices shown above represent quotations among securities dealers, do
not include retail markups, markdowns or commissions and may not represent
actual transactions.
On June 12, 1997, the last sale price per share of the Common Stock as
reported by the Nasdaq National Market was $10.625 per share. The number of
shareholders of record at June 10, 1997 was 78.
13
<PAGE> 15
CAPITALIZATION
The following table sets forth as of March 31, 1997 the actual
capitalization of the Company and the capitalization of the Company on an
as-adjusted basis to reflect the sale of 1,000,000 shares of Common Stock
offered by the Company hereby, at an assumed offering price of $10.625 per
share:
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Capital lease obligations, less current portion............................. $ 53 $ 53
------- -------
Shareholders' equity:
Preferred Stock, $0.01 par value, 5,000,000 shares authorized;
none issued............................................................ -- --
Common Stock, $0.01 par value, 25,000,000 shares authorized, 10,735,600
shares actual (11,735,600 as adjusted) issued and outstanding(1)....... 107 117
Additional paid-in capital................................................ 19,201 29,055
Accumulated deficit....................................................... (1,309) (1,309)
------- -------
Total shareholders' equity............................................. 17,999 27,863
------- -------
Total capitalization.............................................. $18,052 $27,916
======= =======
</TABLE>
- ---------------
(1) Excludes 928,050 shares of Common Stock issuable upon the exercise of stock
options outstanding as of March 31, 1997 granted under the Company's 1996
Stock Plan and 80,000 shares of Common Stock issuable upon the exercise of
stock options outstanding as of March 31, 1997 granted under the Company's
1996 Non-Employee Director Stock Option Plan. See "Management -- 1996 Stock
Plan" and "Management -- 1996 Non-Employee Director Stock Option Plan."
Subsequent to March 31, 1997, 42,667 shares of Common Stock were issued upon
the exercise of vested stock options granted under the 1996 Stock Plan.
14
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below as of December 31,
1995 and 1996 and for the years then ended are derived from and are qualified by
reference to the audited consolidated financial statements and the related notes
thereto included elsewhere in this Prospectus. The selected consolidated
financial data as of December 31, 1994 and for the year then ended have been
derived from audited financial statements of the Company which are not included
in this Prospectus. The selected consolidated financial data as of December 31,
1992 and 1993 and March 31, 1997 and for the two years ended December 31, 1993
and for the three months ended March 31, 1996 and 1997 have been derived from
the unaudited consolidated financial statements of the Company. The unaudited
financial data include all adjustments (consisting only of normal, recurring
adjustments) that the Company considers necessary for fair presentation of the
financial position and results of operations for these periods. The results of
operations for the three months ended March 31, 1997 are not necessarily
indicative of the results for any future period or for the full year ending
December 31, 1997. The following should be read in conjunction with the
consolidated financial statements and notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing
elsewhere in this Prospectus:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................................... $ 481 $ 933 $ 6,800 $24,589 $47,189 $ 8,710 $15,738
Cost of sales............................... 352 628 5,842 20,021 33,605 6,423 11,336
---- ---- ---- ------ ------- ------- ------
Gross profit.............................. 129 305 958 4,568 13,584 2,287 4,402
Selling, general and administrative
expenses.................................. 128 299 986 4,452 9,908 1,644 3,086
---- ---- ---- ------ ------- ------- ------
Operating income (loss)................... 1 6 (28) 116 3,676 643 1,316
Factor charges/Interest expense (income),
net....................................... -- -- 409 1,175 1,235 315 (79)
---- ---- ---- ------ ------- ------- ------
Income (loss) before provision for
income taxes and extraordinary
charge.................................. 1 6 (437) (1,059) 2,441 328 1,395
Provision for income taxes.................. -- -- -- -- 500 101 558
---- ---- ---- ------ ------- ------- ------
Income (loss) before extraordinary charge... 1 6 (437) (1,059) 1,941 227 837
Extraordinary charge, net of income tax
benefit of $296........................... -- -- -- -- 1,148 -- --
---- ---- ---- ------ ------- ------- ------
Net income (loss)......................... $ 1 $ 6 $ (437) $(1,059) $ 793 $ 227 $ 837
==== ==== ==== ====== ======= ======= ======
Earnings (loss) per share:
Income (loss) before extraordinary
charge.................................. $ 0.00 $ 0.00 $ (0.03) $ (0.08) $ 0.18 $ 0.02 $ 0.08
Extraordinary charge, net of income tax
benefit................................. -- -- -- -- (0.11) -- --
---- ---- ---- ------ ------- ------- ------
Net income (loss) per share.......... $ 0.00 $ 0.00 $ (0.03) $ (0.08) $ 0.07 $ 0.02 $ 0.08
==== ==== ==== ====== ======= ======= ======
Shares used in per share calculation........ 13,737 13,737 13,737 13,737 10,989 13,737 10,889
==== ==== ==== ====== ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
--------------------------------------------------- MARCH 31,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 3 $ 34 $ 209 $ 71 $ 7,479 $ 5,330
Working capital (deficit)................... (2) 146 (426) (1,597) 15,713 15,406
Total assets................................ 14 257 2,313 6,784 21,262 21,856
Short-term debt, including subordinated
debentures................................ -- 5 1,032 3,489 20 20
Capital lease obligations, less current
portion................................... 5 52 -- 81 57 53
Shareholders' equity (deficit).............. 3 130 (307) (1,366) 17,162 17,999
</TABLE>
15
<PAGE> 17
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. The
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 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. 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
the fixed price and required 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 year ended December 31, 1996 and the three months ended March
31, 1997, the Company's ten largest customers accounted for approximately 66%
and 67% of its revenue, respectively. During the three months ended March 31,
1997, Price Waterhouse LLP and Bristol-Myers Squibb each accounted for more than
10% of revenue. For the year ended December 31, 1996, and the three months ended
March 31, 1997, 44% and 38%, 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 year ended
December 31, 1996, and the three months ended March 31, 1997, 74% and 69%,
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,
16
<PAGE> 18
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, and in 1995 established a sales office in California. In
addition, from 1994 to date, the Company has incurred significant expenses to
develop proprietary development tools and "4 SIGHT" and "4 SIGHT"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 59 such
personnel as of March 31, 1997, as compared to eight such personnel as of
January 1, 1995.
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
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
--------------- ---------------
1995 1996 1996 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenue..................................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................... 81.4 71.2 73.7 72.0
----- ----- ----- -----
Gross profit.............................................. 18.6 28.8 26.3 28.0
Selling, general and administrative expenses................ 18.1 21.0 18.9 19.6
----- ----- ----- -----
Operating income (loss)................................... 0.5 7.8 7.4 8.4
Factor fees/Interest expense (income), net.................. 4.8 2.6 3.6 (0.5)
----- ----- ----- -----
Income (loss) before provision for income taxes and
extraordinary charge...................................... (4.3) 5.2 3.8 8.9
Provision for income taxes.................................. -- 1.1 1.2 3.6
----- ----- ----- -----
Income (loss) before extraordinary charge................... (4.3) 4.1 2.6 5.3
Extraordinary charge, net of income tax benefit............. -- 2.4 -- --
----- ----- ----- -----
Net income (loss)......................................... (4.3)% 1.7% 2.6% 5.3%
===== ===== ===== =====
</TABLE>
17
<PAGE> 19
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1997
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 its
Advanced Development Center 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%. The increase in such expenses both 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 travel
and entertainment expenses. 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 terminated its factoring agreement and repaid the factor
approximately $4.4 million with a portion of the proceeds from the Company's
initial public offering. Such repayment constituted all amounts outstanding
under the agreement with the Company's factor.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1996
Revenue. Revenue increased by 91.9%, or $22.6 million, from $24.6 million
in 1995 to $47.2 million in 1996. This increase was attributable primarily to
increased demand for the Company's SAP-related consulting services and, to a
lesser extent, to increased demand for the Company's systems integration and
custom software development services.
Gross profit. The Company's cost of sales increased by 67.8% or $13.6
million, from $20.0 million in 1995 to $33.6 million in 1996. The increase was
due to increased personnel costs resulting from the hiring of additional
consultants to support the Company's significant increase in demand for the
Company's services. The Company's gross profit increased by 197.4%, or $9.0
million, from $4.6 million in 1995 to $13.6 million in 1996. Gross profit margin
increased from 18.6% of revenue in 1995 to 28.8% of revenue in 1996. The
increase in such gross profit margin was attributable primarily to the fact that
revenue increased at a faster rate than cost of sales which resulted from a
combination of improved billing margins and greater consultant utilization.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 122.6%, or $5.4 million, from $4.5 million
in 1995 to $9.9 million in 1996, and increased as a percentage of revenue from
18.1% to 21.0% in 1995 and 1996, respectively. The increases in such expenses in
absolute dollars and as a percentage of revenue were due primarily to the
expansion of the Company's sales and marketing activities in 1995 and 1996, the
additional accounting and financial personnel added in 1996 and
18
<PAGE> 20
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. In 1996, selling, general and administrative
expenses also included the Company's operations in the United Kingdom which were
established during the year.
Factor fees/Interest expense. During 1995 and 1996, the rapid increase in
the Company's business and revenue resulted in working capital requirements and
the Company utilized its increasing accounts receivable base as a source of
liquidity to obtain financing from the factor because the Company was unable to
obtain more traditional financing. See "-- Liquidity and Capital Resources." The
Company also incurred interest expense in connection with subordinated
debentures issued in April 1996. Factor fees and interest expense increased by
5.1% or $60,000 from 1995 to 1996 but decreased as a percentage of revenue from
4.8% to 2.6% in 1995 and 1996, respectively. Although the volume of accounts
receivable financed increased as a result of the revenue increase, the Company
was able to fund much of its working capital requirements during 1996 with the
proceeds from the subordinated debentures, which debentures carried an interest
rate lower than that charged by the factor. In addition, the Company established
a collections department in the first quarter of 1996. Slow accounts receivable
turnover in 1995 contributed to increased factor fees in that year.
19
<PAGE> 21
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table presents certain condensed unaudited quarterly
financial information for each of the nine quarters through March 31, 1997. This
information is derived from unaudited consolidated financial statements of the
Company that include, in the opinion of the Company, all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of
results of operations for such periods, when read in conjunction with the
consolidated financial statements of the Company and notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1995 1995 1995 1995 1996 1996 1996 1996 1997
-------- -------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue...................... $ 3,850 $5,623 $ 7,272 $7,844 $8,710 $ 10,916 $13,845 $ 13,718 $15,738
Cost of sales................ 3,857 4,454 5,791 5,919 6,423 7,723 9,825 9,634 11,336
------- ------ ------ ------ ------ ------- ------- ------ -------
Gross profit............... (7) 1,169 1,481 1,925 2,287 3,193 4,020 4,084 4,402
Selling, general and
administrative expenses.... 721 816 1,179 1,736 1,644 2,421 2,831 3,012 3,086
------- ------ ------ ------ ------ ------- ------- ------ -------
Operating income (loss).... (728) 353 302 189 643 772 1,189 1,072 1,316
Factor fees/Interest expense
(income), net.............. 320 317 344 194 315 387 562 (29) (79)
------- ------ ------ ------ ------ ------- ------- ------ -------
Income (loss) before
provision for income taxes
and extraordinary charge... (1,048) 36 (42) (5) 328 385 627 1,101 1,395
Provision for income taxes... -- -- -- -- 101 117 193 89 558
------- ------ ------ ------ ------ ------- ------- ------ -------
Income (loss) before
extraordinary charge....... (1,048) 36 (42) (5) 227 268 434 1,012 837
Extraordinary charge, net of
income tax benefit......... -- -- -- -- -- -- (1,034) (114) --
------- ------ ------ ------ ------ ------- ------- ------ -------
Net income (loss).......... $(1,048) $ 36 $ (42) $ (5) $ 227 $ 268 $ (600) $ 898 $ 837
======= ====== ====== ====== ====== ======= ======= ====== =======
Earnings (loss) per share:
Income (loss) before
extraordinary charge..... $ (0.08) $ 0.00 $ (0.00) $(0.00) $ 0.02 $ 0.02 $ 0.05 $ 0.09 $ 0.08
Extraordinary charge, net
of income tax benefit.... -- -- -- -- -- -- (0.12) (0.01) --
------- ------ ------ ------ ------ ------- ------- ------ -------
Net income (loss) per
share.................. $ (0.08) $ 0.00 $ (0.00) $(0.00) $ 0.02 $ 0.02 $ (0.07) $ 0.08 $ 0.08
======= ====== ====== ====== ====== ======= ======= ====== =======
Shares used in per share
calculation................ 13,737 13,737 13,737 13,737 13,737 11,913 8,877 10,989 10,889
======= ====== ====== ====== ====== ======= ======= ====== =======
</TABLE>
The Company's historical operating results have varied substantially from
quarter to quarter, and the Company expects that they will continue to do so.
Due to the relatively fixed nature of certain of the Company's costs, including
personnel and facilities costs, a decline in revenue in any fiscal quarter would
result in lower profitability in that quarter. A variety of factors, many of
which are not within the Company's control, influence the Company's quarterly
operating results, including seasonal patterns of hardware and software capital
spending by customers, information technology outsourcing trends, the timing,
size and stage of projects, new service introductions by the Company or its
competitors, levels of market acceptance for the Company's services or the
hiring of additional staff. Operating results also may be impacted by the timing
of billings and changes in the Company's billing and utilization rates. The
Company believes, therefore, that past operating results and period-to-period
comparisons should not be relied upon as an indication of future performance.
Demand for the Company's services generally is lower in the fourth quarter due
to reduced activity during the holiday season and fewer working days for those
customers which curtail operations during such period. The Company anticipates
that its business will continue to be subject to such seasonal variations.
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.
20
<PAGE> 22
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 public offering consummated in October 1996. Cash used in
operating activities was $2.3 million and $4.3 million in 1995 and 1996,
respectively, and resulted primarily from the growth in accounts receivable and
unbilled services. During the three months ended March 31, 1997, cash used in
operating activities was $1.1 million which resulted primarily from the growth
in unbilled services and the payment during such period of accrued expenses and
other liabilities, offset in part by a decline in accounts receivable.
The Company's working capital was $15.7 million and $15.4 million at
December 31, 1996 and March 31, 1997, respectively.
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 $1.1 million and $1.0 million in computer equipment
and furniture in 1996 and the first three months of 1997, respectively. Although
there are no other material commitments for capital expenditures currently
outstanding, the Company intends further capital expenditures for computer
equipment and furniture in the remainder of 1997 approximating an additional
$1.0 million.
The Company's factoring agreement 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. For a variety
of reasons, including the rapid growth of the Company, the lack of available
tangible security to utilize as collateral and the absence of historical
operating profits prior to 1996, the Company was unable to obtain more
traditional financing. On October 10, 1996, the Company repaid approximately
$4.4 million, consisting of all amounts outstanding under the agreement with the
factor and terminated the factoring agreement.
In March 1996, in anticipation of the debenture financing described below,
the Company obtained a $750,000 line of credit, payable on demand, from a bank.
The line of credit carried interest at the federal funds rate plus 1%.
Borrowings under the line totalled $200,000 at March 31, 1996 and $300,000 in
April 1996, when the Company repaid all amounts outstanding under such line in
connection with the debenture financing described below. The line of credit has
been terminated in accordance with the terms of such debenture financing.
In April 1996, the Company issued and sold five-year 9% subordinated
debentures in the aggregate principal amount of $6.0 million to Summit Ventures
IV, L.P. and Summit Investors III, L.P. The subordinated debentures were issued
to raise funds for working capital and general corporate purposes, to repurchase
from the then-current shareholders, Messrs. Pandey, Koneru and Valluripalli, an
aggregate of 4,881,066 shares of Common Stock for an aggregate of $1.5 million,
to repay approximately $300,000 outstanding under the $750,000 credit facility
described above and to satisfy approximately $358,000 of cash overdrafts. Upon
receipt of the net proceeds from the Company's initial public offering in
October 1996, the Company prepaid approximately $6.3 million, representing all
amounts outstanding under such debentures, including interest. See "Certain
Transactions."
Subsequent to December 31, 1995, the Company determined that it had
unrecorded and unpaid federal and state payroll-related taxes for certain
employees. As a result of the Company's voluntary disclosure to the Internal
Revenue Service of certain unpaid tax liabilities, on June 5, 1996, the Company
received an audit assessment from the Internal Revenue Service for unpaid 1994
and 1995 federal income tax withholding, FICA and FUTA taxes in the aggregate
amount of $814,000, of which approximately $800,000 was paid in August 1996. No
interest or penalties were assessed. Reserves, aggregating $1.0 million,
including the amount of the Internal Revenue Service audit assessment, were
recorded at December 31, 1995. No assurance may be given, however, that
interest, penalties or additional state or federal taxes will not be assessed in
the future. The Company's principal shareholders, Messrs. Pandey, Koneru and
Valluripalli, have agreed to indemnify the Company for any and all losses which
the Company may sustain, in excess of the $1.0 million reserve, net
21
<PAGE> 23
of any tax benefits realized by the Company, arising from or relating to federal
or state tax, interest or penalty payment obligations resulting from the above
subject matter. See "Certain Transactions." The Company believes that its
failure to record and pay 1994 and 1995 federal and state payroll-related taxes
for certain employees resulted from a combination of factors, including lack of
internal controls and lack of financial expertise and oversight. The Company
hired a Chief Financial Officer in January 1996 who has implemented accounting
and financial controls to ensure the Company's compliance with payroll tax
regulations.
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 0.25%)
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 0.75%) 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. As of March 31, 1997, there were no amounts
outstanding under the revolving line of credit and no equipment term loans
outstanding.
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.
The Company believes that the net proceeds of this offering, together with
available funds, its existing credit arrangements and the cash flow expected to
be generated from operations, will be adequate to satisfy its current and
planned operations for at least the next 24 months.
RECENTLY ISSUED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, "Earnings per Share" ("FAS 128"). FAS
128 is effective for fiscal years ending after December 15, 1997 and changes the
method in which earnings per share will be determined. If the Company had
adopted FAS 128 for the period ended March 31, 1997, there would have been no
effect on earnings per share, on either the basic or diluted basis.
22
<PAGE> 24
BUSINESS
GENERAL
Intelligroup 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 believes that such status and designation result in direct referrals
and enhanced industry recognition. Also in 1997, the Company began to provide
implementation services to PeopleSoft and Baan licensees to further diversify
its service offerings. The Company's custom software development services are
enhanced by its exclusive access to qualified and experienced programmers at its
affiliated Advanced Development Center located in India and connected to the
Company's headquarters in the United States and to certain customer sites by
dedicated, high speed satellite links. The Company provides its services
directly to end-user organizations or as a member of consulting teams assembled
by other information technology consulting firms. The number of customers billed
by the Company has grown substantially from three customers in 1993 to 117
customers in 1996. The Company's customers are Fortune 1000 and other large and
mid-sized companies, as well as other information technology consulting firms,
and include AT&T, Bristol-Myers Squibb, Ernst & Young LLP, IBM, ICS Deloitte &
Touche LLP and Price Waterhouse LLP.
INDUSTRY BACKGROUND
Many large and mid-sized businesses face a rapidly changing business
environment, intense global competition and accelerating technological change.
To remain competitive, such businesses continually seek to improve the quality
of products and services, lower costs, reduce cycle times and increase value to
customers. Businesses are implementing and utilizing advanced information
technology solutions that enable them to redesign their business processes in
such areas as product development, service delivery, manufacturing, sales and
human resources. The ability of an organization to integrate and deploy
redesigned business processes and related information technologies timely and
cost effectively is critical in the changing business environment.
Concurrently, businesses are migrating from legacy systems running
proprietary software to open systems and client/server architectures based on
personal computers, LANs/WANs, shared databases and packaged software
applications. Such client/server systems, when developed and implemented
appropriately, enable the creation and utilization of more functional and
flexible applications which are critical to the competitive needs of businesses.
Organizations often acquire packaged enterprise-wide business software
applications for client/server systems, including those offered by leading
vendors, such as SAP, Oracle, PeopleSoft or Baan, and implement or customize
these applications to match their needs. Organizations also may develop
customized software applications designed for their specific business needs.
Despite the advantages of client/server systems, the complex task of
developing and implementing enterprise-wide, mission-critical, client/server
solutions presents significant challenges for most organizations and often is a
time consuming and costly undertaking. Implementing client/server solutions
typically requires significant allocation of organizational resources.
Information technology managers must integrate and manage open systems and
distributed computing environments consisting of multiple computing platforms,
operating systems, databases and networking protocols, and implement packaged
enterprise software applications to support business objectives. Companies also
must continually keep pace with new technological developments which can render
internal information technology skills outmoded. Professionals with the
requisite technology skills often are in short supply and many organizations are
reluctant to expand their internal information systems department for particular
projects. At the same time, external economic factors encourage organizations to
focus on their core competencies and trim workforces in the information
23
<PAGE> 25
technology management area. Accordingly, organizations often lack sufficient
technical resources necessary to design, develop and implement emerging
information technology solutions on a timely basis.
To support their information technology needs, many businesses increasingly
engage experienced outside specialists to develop and implement solutions, in
shorter timeframes and at lower costs, while reducing implementation risks. As a
result, demand for information technology services has grown significantly.
THE INTELLIGROUP SOLUTION
Intelligroup provides information technology services to develop and
implement cost-effective client/server business solutions on a timely basis by
combining its expertise in a wide range of technologies and business processes
with its proprietary implementation methodology and development tools. The
Company believes it offers the following advantages:
Expertise in a Wide Range of Technologies: The Company's consultants have
expertise with SAP, Oracle, PeopleSoft and Baan products and with a wide variety
of leading computing technologies, including client/server architectures,
object-oriented technologies, CASE, distributed database management systems,
micro-to-mainframe connectivity, LAN/WAN and telecommunications technologies.
Since many of the Company's customers have invested in a variety of
technologies, including legacy systems, the Company also develops solutions for
these environments.
Accelerated Implementation Methodology and Toolset: The Company recently
has developed a proprietary implementation methodology, "4 SIGHT", as well as a
software-based implementation toolset, "4 SIGHT" plus, which are designed to
minimize the time required to develop and implement SAP, Oracle and Baan
solutions for its customers. "4 SIGHT" and "4 SIGHT" plus are designed to be
technology independent and modular so that they may be utilized by the Company's
consultants and project managers in other packaged applications development or
software customization projects. The Company only recently began marketing its
new implementation capability, which currently is being utilized in three
projects, each of which involves implementation of a SAP solution for a Fortune
500 or other large company in which the Company has been retained directly by
the end-user organization. See "-- Customers."
Value-Oriented Implementation: The Company provides experienced project
managers and consultants to its customers. The Company believes that its
personnel are effective because of their industry experience. In addition, the
Company has the ability to develop and implement business solutions through its
affiliated offshore Advanced Development Center in India which gives the Company
access to qualified and experienced programmers at a reduced labor cost.
Customer-Driven Approach: The Company's project managers and consultants
maintain on-going communication and close interaction with customers to ensure
that they are involved in all facets of a project and that the solutions
designed and implemented by the Company meet the customer's needs. The Company's
goal is to provide training to its customers during a project to achieve high
levels of self-sufficiency among its customers' end users and internal
information technology personnel. The Company believes that its ability to
deliver the requisite knowledge base to its customers is critical to fostering
long-term relationships with, and generating referrals from, existing customers.
STRATEGY
The Company's objective is to be a leading provider of 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's strategy includes the following key elements:
Accelerate Shift to Turnkey Project Management: The Company provides its
services directly to its customers or as a member of consulting teams in which
other information technology consulting firms serve as project managers. To
date, the Company has been retained primarily to implement project
specifications designed by other members of the project team. The Company
believes that turnkey project management assignments typically carry higher
margins. The Company intends to accelerate a shift to such higher-margin turnkey
project management assignments and to more complex projects. The Company seeks
to accomplish
24
<PAGE> 26
such shift 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 project management assignments and more complex
projects may adversely impact the Company's future growth. The Company is unable
to determine the period of time it may take to accomplish such shift and no
assurance may be given that such shift will occur. Turnkey project management
assignments require the Company to allocate resources to employ qualified
project managers and consultants and direct sales personnel. In addition, such
assignments carry long sales cycles, typically ranging from one to six months.
See "-- Sales and Marketing."
Maintain and Expand Long-Term Customer Relationships: The Company
recognizes the importance of offering superior services to its customers, which
it believes is essential to building long-term customer relationships. The
Company believes that satisfying customer expectations within established
budgets and estimated timeframes is critical to gaining repeat business and
generating new business from referrals. As information technology continues to
evolve, the Company believes that service providers with established customer
relationships and the ability to maintain a high level of expertise in new
technologies will be market leaders.
Leverage and Expand Strategic Relationships: The Company currently
maintains strategic relationships with SAP and Oracle, which are leading
enterprise software applications developers. The Company believes that its
designation as a SAP National Logo Partner and its status as an Oracle services
provider result in direct referrals and in enhanced industry recognition. The
Company also believes that such relationships enable the Company to broaden its
customer base, maintain technological leadership and increase its
competitiveness. The Company intends to continue to cultivate its relationships
with SAP and Oracle to expand its sales opportunities. The Company also seeks to
continue to form alliances with other developers and vendors of information
technologies. In addition, the Company seeks to form strategic alliances with
other business partners, such as management consulting firms, to pursue joint
business opportunities.
Maintain Technological Leadership and Enhance Methodology and Development
Tools: The Company intends to continue to enhance its proprietary
implementation methodology and development tools as new information technology
challenges and technologies emerge. The Company continually evaluates new and
emerging software applications and technologies and intends to incorporate such
technologies into the Company's service offerings.
Attract and Retain Skilled, Motivated Technical Employees: The Company
believes that its future success depends upon its ability to continue to
attract, retain and train skilled, motivated technical employees. To this end,
the Company focuses on maintaining its merit-driven employment environment and
incentive systems, including stock options, to continue to motivate and reward
its employees and to align their goals with those of the Company. The Company
believes that it will continue to benefit from the recruitment efforts of its
existing employee base to attract additional qualified consultants and
programmers in a highly competitive employment environment.
Expand Global Sales and Marketing Efforts: The Company intends to expand
its sales and marketing efforts by hiring additional experienced sales
personnel, leveraging existing customers to gain referrals, offering new
services to new and existing customers, and utilizing its relationships with
industry leading information technology providers. In addition, the Company
intends to expand by establishing additional sales offices in the United States
and abroad in areas in which the Company has a base of customers or perceives
significant market opportunities. The Company believes that a strong domestic
and international presence will enhance its competitiveness by providing
additional sales presence at the local level. To date, the Company has
established operations or affiliated operations in New Jersey, California,
India, New Zealand, Singapore and the United Kingdom.
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<PAGE> 27
INTELLIGROUP SERVICES
Intelligroup provides a wide range of information technology services,
including (i) enterprise-wide business process solutions utilizing SAP R/3, as
well as Oracle, PeopleSoft and Baan products, all of which are leading software
applications; and (ii) systems integration and custom software development
solutions in a wide variety of computing environments utilizing leading
technologies, including client/server architectures, object-oriented
technologies, CASE, distributed database management systems, LAN/WAN and
telecommunications technologies. 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 agreements which are terminable upon relatively
short notice. The Company's custom software development services are enhanced by
its exclusive access to qualified and experienced programmers at the Advanced
Development Center located in India and connected to the Company's headquarters
in the United States and to certain customer sites by dedicated, high speed
satellite links.
ENTERPRISE-WIDE BUSINESS PROCESS SOLUTIONS
The Company designs, develops, integrates and implements sophisticated
business process solutions utilizing SAP R/3, as well as Oracle, PeopleSoft and
Baan products, and incorporating best business practices and methods. The
Company builds business solutions for its customers by focusing on each
customer's business objectives and by providing business process re-engineering,
information systems strategic planning, technology implementation, comprehensive
training and organizational change management services. The Company believes
that its expertise in a wide variety of technologies, coupled with its ability
to provide comprehensive business process solutions and timely and
cost-effective implementation of new business systems, enables its customers to
achieve substantial improvements in efficiency and effectiveness in their
businesses and fosters long-term customer relationships.
On-line Project Management System ("OPMS"): The Company utilizes its OPMS
to monitor enterprise-wide business process solutions development projects. The
Company designed OPMS as a SAP subsystem developed in R/3 and installable on
customers' SAP systems. OPMS provides real-time information relating to: the
current stage of development of each program; the number of man-hours spent at
each stage of development; total man-hours spent on development during any
interval of time; programs developed by each programmer; analysis of time spent
on the development project; and technical information, including source code,
documentation and tables used in the system. The Company believes that OPMS also
shortens the turn-around time for program development as it streamlines the
information flow between the Company's offices and customer sites.
26
<PAGE> 28
Accelerated Implementation Methodology and Software-Based Implementation
Toolset: As a result of its experience in implementing SAP software, the
Company has developed a proprietary methodology, "4 SIGHT", for implementing
enterprise business software applications and "4 SIGHT"plus, a software-based
implementation toolset. "4 SIGHT" and "4 SIGHT"plus, used by the Company to date
solely in projects implementing SAP R/3, are designed to be portable to other
packaged software applications and to be adaptable to the scope of a particular
project. "4 SIGHT" and "4 SIGHT"plus have been adapted for Oracle and Baan
implementations. The following chart outlines the framework of the Company's
methodology:
- --------------------------------------------------------------------------------
"4 SIGHT"
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PHASE DESCRIPTION SELECTED ACTIVITIES
---------------- ----------------------------- -------------------------------------
<S> <C> <C>
Requirements Develop a detailed project - Project goals definition
Analysis plan. - Project scoping and planning
- Process identification
- Cost/benefit analysis
- Data requirement analysis
- Detailed implementation plan
development
- ------------------------------------------------------------------------------------------------
Prototyping Convert the customer's - Business process prototyping
business requirements to a - Report prototyping
basic systems solution. - Design data conversion
implementation and enhancements
- Transaction testing
- ------------------------------------------------------------------------------------------------
Development Implement end user input to - Software customization
customize the solution, - New reports and layouts development
integrate with other systems - Data interfaces completion
and prepare for the "go-live" - Data conversion
point. - Technical implementation
- System testing
- Training preparation
- ------------------------------------------------------------------------------------------------
Implementation Determine the most - Data conversion
appropriate implementation - Acceptance testing
approach, including "big - Maintenance handover
bang," functionally phased - Benefits tracking
and location phased - Implementation review
approaches.
</TABLE>
- --------------------------------------------------------------------------------
The Company believes that the use of "4 SIGHT" and "4 SIGHT"plus throughout
an implementation project may enable its customers to realize significant
savings in time and resources.
SYSTEMS INTEGRATION AND CUSTOM SOFTWARE DEVELOPMENT
The Company provides a broad range of systems integration and customized
application solutions to customers in a wide variety of industries. The Company
is engaged by customers to undertake feasibility studies, systems engineering,
custom software development and tailoring, migration strategies, systems design,
development, testing, integration, implementation, training and support in a
wide variety of computing environments. The Company, in providing such services,
utilizes leading technologies, including client/server architectures,
object-oriented technologies, CASE, distributed database management systems,
LAN/WAN and telecommunications technologies.
ADVANCED DEVELOPMENT CENTER
The Company provides cost-effective, timely custom software development and
tailoring in the United States, at customer sites and through its affiliated
Advanced Development Center ("ADC") located in
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<PAGE> 29
Hyderabad, India. The ADC is connected to the Company's headquarters in the
United States and to certain customer sites by dedicated, high speed satellite
links. The ADC is staffed with qualified and experienced programmers, including
those with SAP configuration expertise and SAP's ABAP/4 programming capability.
The Company utilizes the programmers at the ADC, in conjunction with its
consultants in the United States who are on site at customer locations, to
provide its customers with savings in development and implementation costs and
time to project completion. All development projects undertaken by the ADC are
monitored by the Company's OPMS. OPMS also minimizes the turn-around time for
program development as it streamlines the information flow between customer
sites and the ADC. The Company intends to utilize the ADC to provide similar
development services to customers that utilize software applications other than
SAP software. The ADC is owned by Intelligroup Asia, a corporation organized
pursuant to the laws of India and wholly-owned by Messrs. Pandey, Koneru and
Valluripalli, three of the principal shareholders of the Company. The ADC is
operated for the sole and exclusive use and benefit of the Company. See "Certain
Transactions."
SALES AND MARKETING
The Company historically has generated new sales leads from referrals from
existing customers, and from introductions to potential customers by SAP or
Oracle, which often need to recommend qualified systems integrators to implement
their software products. In addition, the Company has been introduced to
customers by certain of its competitors, such as "Big Six" accounting firms,
which at times require the Company's expertise and ability to deliver qualified
personnel for complex projects. To date, the Company has been able to grow its
customer base without allocating significant resources to its sales and
marketing effort. The Company believes, however, that in order to continue its
growth, it must dedicate an increased level of resources to more focused sales
and marketing efforts. The Company will continue to market to potential
customers with demonstrated needs for the Company's expertise in core
information technologies and solutions such as SAP. To implement this plan, the
Company intends to expand its dedicated sales and marketing force by hiring
several individuals with experience in the industry sectors in which the Company
has prior experience. Toward this end, the Company hired Anthony Knight, its
Vice President -- Sales and Marketing, in December 1996.
Among its sales and marketing efforts, the Company's sales force has
presented the Company's expertise at SAPPHIRE, the annual SAP America conference
for SAP service providers and end-users, and uses direct marketing techniques.
The Company intends to increase its participation in industry-recognized
programs and trade shows. Most importantly, however, the Company believes that
satisfying customer expectations within budgets and time schedules is critical
to gaining repeat business and obtaining new business from referrals. The
Company believes that it has consistently met customer expectations with respect
to budgets and time schedules.
As of March 31, 1997, the Company's sales and marketing group consisted of
21 employees in the United States and three in the United Kingdom. The Company
markets and delivers its services to customers on an international basis through
its network of offices. The Company's headquarters in New Jersey and its branch
office in San Jose, California serve the United States market. Intelligroup Asia
serves as the Company's sales agent in Asia and the Middle East. In addition,
the Company also has established operations in New Zealand and currently has
information technology consultants on-site at a customer location. The Company
recently added sales and marketing capabilities in New Zealand. The Company also
established operations in the United Kingdom in June 1996. In November 1996, the
Company commenced operations in Singapore with the incorporation of Intelligroup
Singapore Private Ltd. See "Certain Transactions."
The Company's services require a substantial financial commitment by
customers and, therefore, typically involve a long sales cycle. Once a lead is
generated, the Company endeavors to understand quickly the potential customer's
business needs and objectives in order to develop the appropriate solution and
bid accordingly. The Company's project managers are involved throughout the
sales cycle to ensure mutual understanding of customer goals, including time to
completion, and technological requirements. Sales cycles for complex business
solutions projects typically range from one to six months from the time the
Company
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<PAGE> 30
initially meets with a prospective customer until the customer decides whether
to authorize commencement of an engagement.
CUSTOMERS
The Company provides its services directly to Fortune 1000 and other large
and mid-sized companies, many of which have information-intensive, multinational
operations, or as a member of a consulting team assembled by other information
technology consultants, such as "Big Six" accounting firms. The number of
customers billed by the Company has grown substantially from three customers in
1993 to 117 customers for the year ended December 31, 1996.
Since January 1, 1994, the Company has served customers in a broad range of
industries. The following list includes representative customers which have
engaged the Company to perform services for which the Company has generated a
minimum of $250,000 in revenue from January 1, 1994 through March 31, 1997.
IT CONSULTING
------------------------------
Andersen Consulting
Ernst & Young LLP
ICS Deloitte & Touche LLP
KPMG Peat Marwick LLP
Price Waterhouse LLP
BASIC INDUSTRIES
------------------------------
American Cyanamid
Bristol-Myers Squibb
Coors Brewing
Hoechst Celanese
Hoffman LaRoche
National Starch
Schlumberger
Wisconsin Electric & Power
TECHNOLOGIES
---------------------
AT&T
Analog Devices
Brother Industries
GTech
IBM
Informix Software
Landmark Graphics
Merisel
NCR
Oracle
SAP America
FINANCIAL
---------------------
Citibank
PaineWebber
The Company's ten largest customers accounted for, in the aggregate,
approximately 56%, 66% and 67% of its revenue in 1995, 1996 and the three months
ended March 31, 1997, respectively. In 1995, Ernst & Young LLP and Price
Waterhouse LLP each accounted for more than 10% of revenue. During 1996 and the
three months ended March 31, 1997, Price Waterhouse LLP and Bristol-Myers Squibb
each accounted for more than 10% of revenue. Currently, the Company is engaged
in nine projects for Price Waterhouse LLP. In 1995, 1996 and the three months
ended March 31, 1997, 50%, 44% and 38%, respectively, of the Company's revenue
was generated by serving as a member of consulting teams assembled by leading
information technology consulting firms retained by organizations to manage
projects to provide enterprise-wide business process solutions.
Although the Company has contracts with many of its large customers to
provide its services, in general such contracts are terminable upon relatively
short notice, typically not more than 30 days. There can be no assurance that
the Company's customers will continue to enter into contracts with the Company
or that existing contracts will not be terminated.
Many of the Company's engagements involve projects that are critical to the
operations of its customers' businesses and provide benefits that may be
difficult to quantify. The Company's failure or inability to meet a customer's
expectations in the performance of its services could result in a material
adverse change to the customer's operations giving rise to claims for damages
against the Company or causing damage to the Company's reputation, adversely
affecting its business, financial condition and results of operations. In
addition, certain of the Company's agreements with its customers require the
Company to indemnify the customer for damages arising from services provided to,
or on behalf of, such customer. Under certain of the Company's customer
contracts, the Company warrants that it will repair errors or defects in its
deliverables without additional charge to the customer. The Company has not
experienced, to date, any material claims
29
<PAGE> 31
against such warranties. The Company currently is seeking to purchase and
maintain errors and omissions insurance to insure the Company for damages and
expenses incurred in connection with alleged negligent acts, errors or
omissions. There can be no assurance that such insurance will be available to
the Company on acceptable terms, if at all.
COMPETITION
The markets for the Company's services are highly competitive. The Company
believes that its principal competitors include the internal information systems
groups of its prospective customers, as well as consulting and software
integration firms, including the "Big Six" accounting firms, IBM Global
Services, Cambridge Technology Partners, SHL Systemhouse (a subsidiary of MCI),
and Computer Sciences Corporation, and software applications vendors, some of
which are also customers of the Company. Many of the Company's competitors have
longer operating histories, possess greater industry and name recognition and
have significantly greater financial, technical and marketing resources than the
Company. In addition, there are relatively low barriers to entry into the
Company's markets and the Company has faced, and expects to continue to face,
additional competition from new entrants into its markets.
The Company believes that the principal competitive factors in its markets
include quality of service and deliverables, speed of development and
implementation, price, project management capability and technical and business
expertise. The Company believes that its ability to compete also depends in part
on a number of competitive factors outside its control, including the ability of
its competitors to hire, retain and motivate project managers and other senior
technical staff, the development by others of services that are competitive with
the Company's services and the extent of its competitors' responsiveness to
customer needs.
The Company believes that it competes based on its expertise in SAP,
Oracle, PeopleSoft and Baan products and a wide variety of technologies. There
can be no assurance that the Company will be able to continue to compete
successfully with existing and new competitors. See "Risk Factors -- Highly
Competitive Information Technology Services Industry."
EMPLOYEES
As of March 31, 1997, the Company employed 432 full-time employees, of whom
373 were engaged as consultants, 21 were engaged in sales and marketing, and 38
were engaged in finance, administration, and management. Of the total number of
employees, 402 were based in the United States, 13 were based in New Zealand and
17 were based in the United Kingdom. In addition, the Company engaged 35
independent contractors to perform information technology services and has
exclusive access to all of the employees of Intelligroup Asia, which consisted
of 85 software developers and 4 administrative personnel at March 31, 1997.
None of the Company's employees is covered by a collective bargaining
agreement. Substantially all of the Company's employees have executed a
non-competition, non-disclosure and non-solicitation agreement. In addition, the
Company requires that all new employees execute such agreement as a condition of
employment by the Company. The Company believes that it has been successful in
attracting and retaining skilled and experienced personnel. There is increasing
competition for experienced sales and marketing personnel and technical
professionals. The Company's future success will depend in part on its ability
to continue to attract, retain, train and motivate highly qualified personnel.
See "Risk Factors -- Competitive Market for Technical Personnel." The Company
considers relations with its employees to be good.
INTELLECTUAL PROPERTY RIGHTS
The Company's success is dependent, in part, upon its proprietary
accelerated implementation methodology, development tools and other intellectual
property rights. The Company relies upon a combination of trade secret,
nondisclosure and other contractual arrangements, and copyright and trademark
laws, to protect its proprietary rights. The Company generally enters into
confidentiality agreements with its employees, consultants and customers, and
limits access to and distribution of its proprietary information. The Company
also requires that substantially all of its employees and consultants assign to
the Company their rights in
30
<PAGE> 32
intellectual property developed while employed or engaged by the Company. There
can be no assurance that the steps taken by the Company in this regard will be
adequate to deter misappropriation of its proprietary information or that the
Company will be able to detect unauthorized use of and take appropriate steps to
enforce its intellectual property rights. See "Risk Factors -- Reliance on
Intellectual Property Rights."
FACILITIES
The Company owns no real property and currently leases or subleases all of
its office space. The Company subleases its headquarters in Iselin, New Jersey,
totaling approximately 13,200 square feet. The sublease expires in November
1999. The Company believes that such headquarters has sufficient space for its
current and anticipated near-term needs. The Company uses such facility for
certain technical and support personnel, sales and marketing, administrative,
finance and management personnel. The Company also leases or subleases offices
for its operations in San Jose, California, and operations in New Zealand,
Singapore and the United Kingdom. In addition, the Company provides funds to
Intelligroup Asia, which Intelligroup Asia uses to satisfy its lease obligations
for its offices in Hyderabad and Bombay, India.
LEGAL PROCEEDINGS
The Company had been 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.
On February 16, 1996, the Company, as plaintiff, filed a complaint in the
Superior Court of New Jersey, Chancery Division, Middlesex County, against a
former consultant to the Company, seven former employees of the Company and
Pegasus Systems, Inc. ("Pegasus"), a corporation which currently employs such
individuals (collectively, the "Defendants"). The complaint, which seeks damages
and injunctive relief against the Defendants, alleges, among other things,
misappropriation of proprietary information, unfair competition, tortious
interference, breach of employment agreements, breach of a consulting agreement
between the Company and Pegasus, and breach of duty of loyalty, good faith and
fair dealing. Upon the filing of its complaint, the Company obtained a temporary
restraining order and in May 1996 obtained a preliminary injunction prohibiting
the Defendants from using or disclosing the Company's proprietary information,
prohibiting the Defendants from contacting or soliciting certain of the
Company's customers and prohibiting the Defendants from recruiting or attempting
to recruit the Company's employees, agents or contractors. The preliminary
injunction remains in effect and the Company intends to pursue vigorously
enforcement of the injunction against the Defendants. The Defendants have filed
an answer and counterclaim. Pegasus has asserted a breach of contract
counterclaim against the Company alleging that the Company owes it $129,000 for
consulting services. Pegasus and two of the individual Defendants also asserted
claims against the Company and two of its officers for tortious interference and
defamation. In addition, one of the individual Defendants has asserted that the
Company owes him $70,000 in commissions. In addition to monetary damages the
Defendants seek injunctive relief. The Defendants unsuccessfully sought a
temporary restraining order against the Company. The Company denies the
allegations made and intends to defend vigorously the counterclaims. The Company
does not believe that the outcome of these claims and counterclaims will have a
material effect upon the Company's business, financial condition or results of
operations.
Oxford Systems Inc., a New Jersey corporation and formerly a wholly-owned
subsidiary of the Company ("Oxford") which was merged into the Company in
December 1996, was named as a defendant in a civil complaint that was filed on
June 8, 1995 by Design Strategy Corp. ("Design Strategy"), in New York State
31
<PAGE> 33
Supreme Court in the County of New York. Design Strategy alleges that another
named defendant, Citibank, N.A. ("Citibank"), contracted with Design Strategy
for database administration services. Design Strategy claims that Citibank and
Oxford conspired to deprive it of commissions, tortiously interfered with
contract, engaged in unfair competition, damaged its reputation and
misappropriated services. Design Strategy recently settled its claims against
Citibank. The Company denies the allegations made and intends to continue to
defend vigorously such action. The Company does not believe that the outcome of
the action will have a material effect upon the Company's business, financial
condition or results of operations.
There is no other material litigation pending to which the Company is a
party or to which any of its property is subject.
32
<PAGE> 34
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------- ---- ----------------------------------------
<S> <C> <C>
Ashok Pandey(1)(2)............................... 39 Chairman of the Board, President, Chief
Executive Officer and Director
Rajkumar Koneru.................................. 27 Executive Vice President and Director
Nagarjun Valluripalli............................ 29 Executive Vice President and Director
Robert M. Olanoff................................ 40 Chief Financial Officer, Treasurer and
Secretary
Paul W. Coombs................................... 41 Vice President -- Business Solutions
Anthony Knight................................... 38 Vice President -- Sales and Marketing
Klaus P. Besier(2)(3)............................ 45 Director
David A. Finley(2)(3)............................ 64 Director
Kevin P. Mohan(1)................................ 33 Director
Thomas S. Roberts(1)............................. 33 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
(3) Member of Option Committee.
All executive officers of the Company are elected annually by the Board of
Directors and serve until their successors are duly elected and qualified. All
directors hold office until the next annual meeting of shareholders and until
their successors shall have been duly elected and qualified. There are no family
relationships among any of the executive officers and directors of the Company.
Ashok Pandey founded the Company and has served as a director, Chairman of
the Board, President, and Chief Executive Officer of the Company since its
inception in 1987. Prior to founding the Company, Mr. Pandey was a consultant to
AT&T and Bell Laboratories. He has more than twelve years of experience in
developing systems and application software.
Rajkumar Koneru joined the Company in April 1996 and currently serves as
Executive Vice President and as a director. In May 1993, Messrs. Koneru and
Valluripalli co-founded Oxford Systems Inc., a systems integration company
("Oxford"). In March 1994, they sold all of the issued and outstanding capital
stock of Oxford to the Company. See "Certain Transactions." From June 1992
through December 1992, Mr. Koneru was a consultant with Super Solutions
Corporation and, from March 1993 until March 1996 he was a consultant for the
Boston Group, each an information technology consulting firm. Following
consummation of the Company's transaction with Oxford, Mr. Koneru continued to
be employed by the Boston Group, which subcontracted Mr. Koneru's services to
the Company.
Nagarjun Valluripalli joined the Company in March 1994 and currently serves
as Executive Vice President and as a director. In May 1993, Messrs. Koneru and
Valluripalli co-founded Oxford, at which Mr. Valluripalli was responsible for
business development. In March 1994, Messrs. Koneru and Valluripalli sold all of
the issued and outstanding capital stock of Oxford to the Company. See "Certain
Transactions." Prior to founding Oxford, from 1990, Mr. Valluripalli was
marketing manager for VJ Infosystems, a software training and services company.
Robert M. Olanoff joined the Company in January 1996 and currently serves
as its Chief Financial Officer, Treasurer and Secretary. Prior to joining the
Company, from 1993 through 1995, Mr. Olanoff was Chief Financial Officer and
Vice President of InfoMed Holdings, Inc. From 1990 to 1993, he was Controller of
Execu-Flow Systems, Inc. Each company is a turnkey software provider to the
healthcare industry. Mr. Olanoff is a certified public accountant.
33
<PAGE> 35
Paul W. Coombs joined the Company in July 1994 and currently serves as Vice
President -- Business Solutions. From November 1993 through December 1994, he
was a director of CBC Limited, a computer consulting company, of which he was a
principal shareholder. From July 1986 through November 1993, he was an
Associate -- Strategic Planning with Touche Ross & Co.
Anthony Knight joined the Company in December 1996 and currently serves as
Vice President -- Sales and Marketing. Prior to joining the Company, Mr. Knight
served in various sales and sales management positions from September 1995 to
December 1996 with EDS, and from June 1991 to September 1995 with Computer
Sciences Corp. Both companies engage in outsourcing and systems integration.
Klaus P. Besier has been a director of the Company since December 1996. Mr.
Besier was Chairman and Chief Executive Officer of OneWave, Inc., a provider of
intranet and internet business solutions, from early 1996 to June 1997.
Effective July 1997, Mr. Besier will join Clear With Computers, Inc., a
privately-held provider of technology-enabled selling solutions, as its
President and Chief Executive Officer. Prior to joining OneWave, Inc., Mr.
Besier served from 1994 to early 1996 as Chief Executive Officer and from 1992
to 1993 as President of SAP America, Inc., a subsidiary of SAP AG and a leading
provider of client/service business application solutions software. Prior to
joining SAP America, Inc., Mr. Besier was Corporate Vice President and a general
manager of a subsidiary of Hoechst Celanese.
David A. Finley has been a director of the Company since January 1997. Mr.
Finley currently serves as Executive Vice President, Chief Financial Officer and
as a director of Broadway and Seymour, Inc., a software and services company.
Prior to joining Broadway and Seymour, Inc., Mr. Finley was self-employed from
January 1990 to January 1996 as a consultant to various software companies,
investment firms and finance companies. Mr. Finley is the founder and first
chief executive of IBM Credit Corporation. Mr. Finley also served for over 30
years with IBM, most recently as its Treasurer.
Kevin P. Mohan has been a director of the Company since April 1996. Mr.
Mohan currently serves as a Principal of various venture capital funds
(including Summit Ventures IV, L.P. and Summit Investors III, L.P., shareholders
of the Company) affiliated with Summit Partners, a venture capital firm, at
which he has been employed since 1994. Prior to joining Summit Partners, Mr.
Mohan served as an engagement manager at McKinsey & Company, Inc. Mr. Mohan is
also a director of several privately held companies.
Thomas S. Roberts has been a director of the Company since April 1996. Mr.
Roberts currently serves as a General Partner of various venture capital funds
(including Summit Ventures IV, L.P. and Summit Investors III, L.P., shareholders
of the Company) affiliated with Summit Partners, a venture capital firm, at
which he has been employed since 1989. Mr. Roberts is also a director of AMX
Corporation, PowerCerv Corporation, and several privately held companies.
The Board of Directors has a Compensation Committee, which approves
salaries and certain incentive compensation for management and key employees of
the Company; an Audit Committee, which reviews the results and scope of the
audit and other services provided by the Company's independent public
accountants; and an Option Committee, which administers the Company's 1996 Stock
Plan.
DIRECTORS' COMPENSATION
On October 19, 1996, the Company's Board of Directors adopted a policy to
compensate each non-employee director who is elected to the Company's Board of
Directors after such date. The Board of Directors established a cash payment of
$1,500 per meeting, for each meeting attended by each such director. Other than
Messrs. Besier and Finley, who are each compensated pursuant to such policy,
directors do not otherwise receive cash compensation for services on the
Company's Board of Directors. The Company does provide, however, reimbursement
to directors for reasonable and necessary expenses incurred in connection with
attendance at meetings of the Board of Directors.
1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
On June 3, 1996 the Board of Directors approved and shareholders adopted
the Company's Non-Employee Director Plan which became effective on July 12,
1996. The Non-Employee Director Plan provides
34
<PAGE> 36
for the grant of options to purchase a maximum of 140,000 shares of Common Stock
of the Company to non-employee directors of the Company. The Non-Employee
Director Plan is administered by the Board of Directors. Effective September 26,
1996, Messrs. Roberts and Mohan each was granted options to purchase 20,000
shares of Common Stock, at an exercise price of $10.00 per share, under such
plan. On December 17, 1996, Mr. Besier was granted options to purchase 20,000
shares of Common Stock at an exercise price of $12.125 per share and on January
28, 1997, Mr. Finley was granted options to purchase 20,000 shares of Common
Stock at an exercise price of $11.75 per share, under such plan.
Each person who was a director of the Company on the effective date of the
Company's initial public offering or became or will become a director of the
Company thereafter, and who is not also an employee or officer of the Company,
was or shall be granted, on the date of such initial public offering or the date
on which he or she became or becomes a director, whichever is later, an option
to purchase 20,000 shares of Common Stock, at an exercise price per share equal
to the then fair market value of the shares. No subsequent grants are permitted
to such individuals under the Non-Employee Director Plan. All options become
exercisable in five equal annual installments commencing one year after the date
of grant provided that the optionee then remains a director at the time of
vesting of the installments. The right to exercise annual installments of
options will be reduced proportionately based on the optionee's actual
attendance at directors' meetings if the optionee fails to attend at least 80%
of the directors' meetings held in any calendar year. The term of each option
will be for a period of ten years from the date of grant, unless sooner
terminated in accordance with the Non-Employee Director Plan. Options may not be
transferred except by will or by the laws of descent and distribution or
pursuant to a domestic relations order and are exercisable to the extent vested
at any time prior to the scheduled expiration date of the option. The
Non-Employee Director Plan terminates on the earlier of May 31, 2006 or at such
time as all shares of Common Stock currently or hereafter reserved for issuance
shall have been issued.
35
<PAGE> 37
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by or paid to the Company's Chief
Executive Officer and to each other executive officer of the Company whose
aggregate cash compensation exceeded $100,000 (collectively, the "Named
Executives") during the years ended December 31, 1995 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
--------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
SALARY BONUS COMPENSATION OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(L) (#) ($)(2)
- ------------------------------------------------------- ---- --------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Ashok Pandey........................................... 1996 208,461 -- 12,290 -- 11,570
Chairman of the Board, President and 1995 145,150 -- 18,367 -- 12,190
Chief Executive Officer(3)
Rajkumar Koneru........................................ 1996 141,667 -- 7,678 -- --
Executive Vice President(3) 1995 -- -- -- -- --
Nagarjun Valluripalli.................................. 1996 200,000 -- -- -- --
Executive Vice President(3) 1995 147,968 -- 19,727 -- 3,858
Robert M. Olanoff...................................... 1996 91,316 10,000 -- 88,000 --
Chief Financial Officer, Treasurer 1995 -- -- -- -- --
and Secretary(3)(4)
Paul Coombs............................................ 1996 210,533 -- -- 132,000 --
Vice President -- 1995 148,588 -- -- -- --
Business Solutions(3)(5)
</TABLE>
- ---------------
(1) Represents car allowance payments by the Company and, in the case of each of
Ashok Pandey and Nagarjun Valluripalli, for 1995, includes certain
non-recurring personal expenses.
(2) Represents the value of insurance premiums paid by the Company with respect
to whole life insurance for the benefit of the Named Executive.
(3) Each of the Named Executives has entered into an employment agreement with
the Company. See "-- Employment Agreements, Change-In-Control Agreements,
Indemnification Agreements, Non-Competition, Non-Disclosure and
Non-Solicitation Agreements."
(4) Mr. Olanoff joined the Company in January 1996.
(5) Paul Coombs served as Director of Business Solutions of the Company in 1995
and 1996. Mr. Coombs was promoted to the position of Vice
President -- Business Solutions in February 1997.
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<PAGE> 38
OPTION GRANTS IN 1996
The following table sets forth information concerning individual grants of
stock options made pursuant to the Company's 1996 Stock Plan during 1996 to each
of the Named Executives. The Company has never granted any stock appreciation
rights.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES IN EXERCISE OR
OPTIONS GRANTED FISCAL YEAR BASE PRICE EXPIRATION
NAME (#)(1) (2) ($/SH) DATE
- ------------------------------------------------ --------------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Ashok Pandey.................................... -- -- --
Rajkumar Koneru................................. -- -- --
Nagarjun Valluripalli........................... -- -- --
Robert M. Olanoff............................... 88,000 17.5 8.00 7/11/06
Paul W. Coombs.................................. 132,000 26.3 8.00 7/11/06
</TABLE>
- ---------------
(1) Options were granted pursuant to and in accordance with the Company's 1996
Stock Plan. See "-- 1996 Stock Plan." Subsequent to December 31, 1996, the
Company granted options to purchase an aggregate of 459,000 shares of Common
Stock, of which 396,000 were granted to Mr. Coombs.
(2) Based on an aggregate of 501,450 options granted to employees in 1996,
including options granted to the Named Executives.
AGGREGATED OPTION EXERCISES IN 1996 AND YEAR-END OPTION VALUES
The following table sets forth information concerning each exercise of
options during 1996 by each of the Named Executives and the year-end number and
value of unexercised options held by each of the Named Executives.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES FISCAL YEAR-END FISCAL YEAR-END
ACQUIRED ON VALUE (#) ($)(1)
EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
- ----------------------------------------- ----------- -------- ---------------------- ---------------
<S> <C> <C> <C> <C>
Ashok Pandey............................. -- -- -- / -- -- / --
Rajkumar Koneru.......................... -- -- -- / -- -- / --
Nagarjun Valluripalli.................... -- -- -- / -- -- / --
Robert M. Olanoff........................ -- -- -- / 88,000(2) -- / 264,000
Paul W. Coombs........................... -- -- -- / 132,000(2) -- / 396,000
</TABLE>
- ---------------
(1) Based on a year-end fair market value of the underlying securities equal to
$11.00 per share, less the exercise price for such shares.
(2) One third of such options became exercisable on January 12, 1997.
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<PAGE> 39
1996 STOCK PLAN
The 1996 Stock Plan was adopted by the Board of Directors and approved by
the shareholders of the Company on June 3, 1996 and became effective on July 12,
1996. A total of 1,450,000 shares are reserved for issuance upon the exercise of
options and/or stock purchase rights granted under the 1996 Stock Plan, of which
options to purchase 885,383 shares have been granted and are currently
outstanding, while options to purchase 42,667 shares were granted and have been
exercised. Those eligible to receive stock option grants or stock purchase
rights under the 1996 Stock Plan include employees, non-employee directors and
consultants. The 1996 Stock Plan is administered by the Option Committee of the
Board of Directors of the Company, which is comprised solely of outside
directors.
Subject to the provisions of the 1996 Stock Plan, the administrator of the
1996 Stock Plan has the discretion to determine the optionees and/or grantees,
the type of options to be granted (incentive stock options ("ISOs") or
non-qualified stock options ("NQSOs")), the vesting provisions, the terms of the
grants and such other related provisions as are consistent with the 1996 Stock
Plan. The exercise price of an ISO may not be less than the fair market value
per share of the Common Stock on the date of grant or, in the case of an
optionee who beneficially owns 10% or more of the outstanding capital stock of
the Company, not less than 110% of the fair market value per share on the date
of grant. The exercise price of a NQSO may not be less than 85% of the fair
market value per share of the Common Stock on the date of grant or, in the case
of an optionee who beneficially owns 10% or more of the outstanding capital
stock of the Company, not less than 110% of the fair market value per share on
the date of grant. The purchase price of shares issued pursuant to stock
purchase rights may not be less than 50% of the fair market value of such shares
as of the offer date of such rights.
The options terminate not more than ten years from the date of grant,
subject to earlier termination on the optionee's death, disability or
termination of employment with the Company, but provide that the term of any
options granted to a holder of more than 10% of the outstanding shares of
capital stock may be no longer than five years. Options are not assignable or
otherwise transferable except by will or the laws of descent and distribution.
In the event of a merger or consolidation of the Company with or into another
corporation or the sale of all or substantially all of the Company's assets in
which the successor corporation does not assume outstanding options or issue
equivalent options, the Board of Directors of the Company is required to provide
accelerated vesting of outstanding options. The 1996 Stock Plan terminates on
July 11, 2006.
EMPLOYMENT AGREEMENTS, CHANGE-IN-CONTROL AGREEMENTS, INDEMNIFICATION AGREEMENTS,
NON-COMPETITION,
NON-DISCLOSURE AND NON-SOLICITATION AGREEMENTS
Each of the executive officers of the Company entered into a two-year
employment agreement with the Company commencing June 1, 1996, with the
exception of Anthony Knight whose employment agreement was executed in December
1996 and provides for termination upon thirty days written notice by either
party. Pursuant to Mr. Coombs' amended employment agreement, Mr. Coombs is an
employee-at-will and may be terminated at any time with or without cause. Under
the terms of their respective agreements, Messrs. Pandey, Koneru, Valluripalli,
Olanoff, Coombs and Knight currently are entitled to annual base salary of
$200,000, $200,000, $200,000, $135,000, $200,000 and $200,000, respectively, and
bonuses, the amounts and payments of which are within the discretion of the
Compensation Committee of the Board of Directors. In addition, the Company and
Mr. Olanoff entered into a Change in Control Severance Pay Agreement, dated June
1, 1996, pursuant to which the Company has agreed, subject to certain
restrictions, to pay Mr. Olanoff the equivalent of six months salary in the
event that Mr. Olanoff is terminated without cause if there is a change in
control of the Company. The Company has not entered into any change-in-control
agreement with any other employee.
The above described agreements require each individual to maintain the
confidentiality of Company information. In addition, each of such persons has
agreed that during the term of his respective agreement and thereafter for a
period of two years, and in the case of Mr. Knight for a period of one year,
such person will not compete with the Company in any state or territory of the
United States, or any other country, where the Company does business by engaging
in any capacity, or in the case of Mr. Knight in certain limited capacities, in
any business which is competitive with the business of the Company. The
employment agreements also
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<PAGE> 40
provide that for a period of two years, and in the case of Mr. Knight for a
period of one year, following the termination of employment, each such
individual shall not solicit the Company's customers or employees.
In addition to the foregoing employment contracts, the Company has executed
indemnification agreements with each of its executive officers and directors
pursuant to which the Company has agreed to indemnify such party to the full
extent permitted by law, subject to certain exceptions, if such party becomes
subject to an action because such party is a director, officer, employee, agent
or fiduciary of the Company.
Substantially all of the Company's employees have agreed not to compete
with the Company, not to disclose Company information and not to solicit Company
employees.
KEY MAN INSURANCE
Messrs. Pandey, Koneru and Valluripalli are key employees of the Company
and the contribution of each of them to the Company has been and will be a
significant factor in the Company's future success. The loss of any of them
could adversely affect the Company's business and results of operations. The
Company maintains, and is the beneficiary of, a life insurance policy on the
life of each of Messrs. Pandey, Koneru and Valluripalli. The face amount of each
such policy is $1.0 million.
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<PAGE> 41
CERTAIN TRANSACTIONS
In March 1994, the Company acquired all of the issued and outstanding
shares of Oxford Systems Inc., a New Jersey corporation ("Oxford"), from Messrs.
Koneru and Valluripalli, the co-founders of Oxford, in exchange for an aggregate
of a two-thirds equity interest in the Company. In December 1996, Oxford was
merged into the Company and ceased to exist as a corporate entity.
Messrs. Pandey, Koneru and Valluripalli are the sole shareholders of
Intelligroup Asia. Intelligroup Asia operates the Advanced Development Center in
Hyderabad, India for the sole and exclusive use and benefit of the Company and
all contracts and commercial arrangements of Intelligroup Asia are subject to
prior approval by the Company. The Company and Messrs. Pandey, Koneru and
Valluripalli have entered into an agreement pursuant to which the Company will,
subject to necessary Indian government approvals, acquire the shares of
Intelligroup Asia for nominal consideration when and if such shares may be
transferred in accordance with the laws of India. The Company has agreed to
provide all of the necessary support and assistance to Intelligroup Asia,
including technical and financial support, subject to certain financial
restrictions set forth in the Company's credit agreement with PNC Bank.
In November 1996, the Company commenced operations in Singapore with the
incorporation of Intelligroup Singapore Private Ltd. ("Intelligroup Singapore").
Each of the Company and Mr. Koneru owns 50% of Intelligroup Singapore.
In March 1996, Summit Ventures IV, L.P., guaranteed a $750,000 line of
credit obtained by the Company from a bank. All borrowings under such line of
credit were repaid by the Company in April 1996, upon consummation of the
financing described below.
In April 1996, the Company issued and sold five-year 9% subordinated
debentures in the aggregate principal amount of $6.0 million to Summit Ventures
IV, L.P. and Summit Investors III, L.P. In connection therewith, the Company
also issued warrants to purchase, for nominal consideration (less than $0.25 in
the aggregate), up to a maximum of 1,922,845 shares of Common Stock of the
Company. The number of shares underlying the warrants was subject to downward
adjustment based upon the initial public offering price. At the initial public
offering price of $10.00 per share, there were 1,364,000 shares of Common Stock
underlying the warrants. The warrants were exercised upon effectiveness of the
Company's initial public offering on September 26, 1996. Summit Ventures IV,
L.P. and Summit Investors III, L.P. have certain registration rights. See
"Description of Capital Stock -- Registration Rights." In addition, each of
Messrs. Pandey, Koneru and Valluripalli have granted Summit Ventures IV, L.P.
and Summit Investors III, L.P. certain rights of co-sale in the event that such
individuals propose to sell their shares of Common Stock. In October 1996, the
Company prepaid in full the amounts outstanding under the subordinated
debentures, including accrued interest, with a portion of the net proceeds from
its initial public offering. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Following the issuance and sale of the subordinated debentures and in
connection therewith, the Company repurchased from Messrs. Pandey, Koneru and
Valluripalli an aggregate of 4,881,066 shares of Common Stock for an aggregate
cash payment of $1.5 million, or $500,000 to each such shareholder, at a price
per share equal to $0.31. The repurchased shares were canceled upon consummation
of such transaction. The debenture transaction was consummated, in part, to
allow Messrs. Pandey, Koneru and Valluripulli to diversify their portfolios and
achieve a degree of liquidity.
Subsequent to December 31, 1995, the Company determined that it had
unrecorded and unpaid federal and state payroll-related taxes for certain
employees. As a result of the Company's voluntary disclosure to the Internal
Revenue Service of certain unpaid tax liabilities, on June 5, 1996, the Company
received an audit assessment from the Internal Revenue Service for unpaid 1994
and 1995 federal income tax withholding, FICA and FUTA taxes in the aggregate
amount of $814,000, of which approximately $800,000 has been paid as of the date
of this Prospectus. No interest or penalties were assessed. Reserves,
aggregating $1.0 million, including the amount of the Internal Revenue Service
audit assessment, were recorded at December 31, 1995. No assurance may be given,
however, that interest, penalties or additional state or federal taxes will not
be assessed in the future. The Company's principal shareholders, Messrs. Pandey,
Koneru and Valluripalli, have
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<PAGE> 42
agreed to indemnify the Company for any and all losses which the Company may
sustain, in excess of the $1.0 million reserve, net of any tax benefits realized
by the Company, arising from or relating to federal or state tax, interest or
penalty payment obligations resulting from the above subject matter. To secure
such indemnification obligations, Messrs. Pandey, Koneru and Valluripalli have
pledged to the Company an aggregate of $450,000 and 191,667 shares of Common
Stock owned by them. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
The Board of Directors of the Company has adopted a policy requiring that
any future transactions between the Company and its officers, directors,
principal shareholders and their affiliates be on terms no less favorable to the
Company than could be obtained from unrelated third parties. In addition, New
Jersey law requires that any such transactions be approved by a majority of the
disinterested members of the Company's Board of Directors.
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<PAGE> 43
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of May 31, 1997, of (i) each person
who is known to the Company to own beneficially more than 5% of the outstanding
shares of Common Stock, (ii) each of the Company's directors and Named
Executives, and (iii) all current directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
PERCENT OF CLASS
BENEFICIALLY OWNED
NUMBER OF SHARES ---------------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING(2) OFFERING(2)
- ------------------------------------------------------ ---------------- ----------- -----------
<S> <C> <C> <C>
Ashok Pandey(3)(4).................................... 2,202,221 20.4% 18.7%
Rajkumar Koneru(3)(4)................................. 2,202,220 20.4 18.7
Nagarjun Valluripalli(3)(4)........................... 2,202,221 20.4 18.7
Summit Ventures IV, L.P. and Summit Investors III,
L.P.(5)............................................. 1,182,688 11.0 10.0
Klaus Besier.......................................... -- -- --
David Finley.......................................... -- -- --
Kevin P. Mohan(6)..................................... 1,182,688 11.0 10.0
Thomas S. Roberts(7).................................. 1,182,688 11.0 10.0
Robert M. Olanoff(3)(8)............................... 29,334 * *
Paul W. Coombs(3)(9).................................. 44,000 * *
All directors and officers as a group (10
persons)(10)........................................ 7,862,684 72.5 66.3
</TABLE>
- ---------------
* Less than one percent.
(1) Except as set forth in the footnotes to this table and subject to
applicable community property law, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by such shareholder.
(2) Applicable percentage of ownership is based on 10,778,267 shares of Common
Stock outstanding on May 31, 1997, plus any presently exercisable stock
options and options which will become exercisable within 60 days after May
31, 1997 held by each such holder, and 11,778,267 shares of Common Stock
outstanding after the completion of this offering.
(3) The address for each of Messrs. Pandey, Koneru, Valluripalli, Olanoff,
Coombs and Knight is c/o Intelligroup, Inc., 517 Route One South, Iselin,
New Jersey 08830.
(4) Ashok Pandey, Rajkumar Koneru, and Nagarjun Valluripalli each has sole
power to vote or to direct the vote of and to dispose of or direct the
disposition of 2,202,221, 2,202,220, and 2,202,221 shares, respectively,
provided, however, that 63,889 of each such individual's shares have been
pledged to the Company to secure certain indemnification obligations. See
"Certain Transactions."
(5) Represents 1,123,554 shares and 59,134 shares of Common Stock owned by
Summit Ventures IV, L.P. and Summit Investors III, L.P., respectively. The
address of both entities is 600 Atlantic Avenue, Suite 2800, Boston,
Massachusetts 02210.
(6) Kevin P. Mohan is a Principal of Summit Partners and, as such, has the
power to vote or direct the vote of and to dispose of or direct the
disposition of the shares owned by Summit Ventures IV, L.P. and Summit
Investors III, L.P. See Note 5. Mr. Mohan expressly disclaims beneficial
ownership of such shares, except as to his proportionate interest in Summit
Ventures IV, L.P. and Summit Investors III, L.P. Excludes 20,000 shares
underlying options held by Mr. Mohan which become exercisable over time
commencing in September 1997.
(7) Thomas S. Roberts is a General Partner of Summit Partners and, as such, has
the power to vote or direct the vote of and to dispose of or direct the
disposition of the shares owned by Summit Ventures IV, L.P. and Summit
Investors III, L.P. See Note 5. Mr. Roberts expressly disclaims beneficial
ownership of such shares, except as to his proportionate interest in Summit
Ventures IV, L.P.
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<PAGE> 44
and Summit Investors III, L.P. Excludes 20,000 shares underlying options
held by Mr. Roberts which become exercisable over time commencing in
September 1997.
(8) Represents 29,334 shares of Common Stock underlying options which are
exercisable as of May 31, 1997 or sixty (60) days after such date. Excludes
58,666 shares underlying options which become exercisable over time after
such period.
(9) Represents 44,000 shares of Common Stock underlying options which are
exercisable as of May 31, 1997 or sixty (60) days after such date. Excludes
484,000 shares underlying options which become exercisable over time after
such period. Subsequent to May 31, 1997, Mr. Coombs exercised options to
purchase 28,000 shares of Common Stock and resold such shares in a broker's
transaction pursuant to Rules 701 and 144 under the Securities Act.
(10) Includes an aggregate of 73,334 shares of Common Stock underlying options
granted to individuals listed in the table which are exercisable as of May
31, 1997 or within sixty (60) days after such date.
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<PAGE> 45
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 25,000,000 shares of
Common Stock, $.01 par value per share, and 5,000,000 shares of undesignated
Preferred Stock, $.01 par value per share (the "Preferred Stock").
The following statements are brief summaries of certain provisions with
respect to the Company's capital stock contained in its Amended and Restated
Certificate of Incorporation, a copy of which has been incorporated by reference
as an exhibit to the Registration Statement. The following summary is qualified
in its entirety by reference thereto.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote for each share
held of record on matters to be voted on by the shareholders of the Company.
Holders of shares of Common Stock will be entitled to receive dividends, subject
to the senior rights of preferred shareholders, if any, when, as and if declared
by the Board of Directors (see "Dividend Policy") and to share ratably in the
assets of the Company legally available for distribution to its shareholders in
the event of the liquidation, dissolution or winding-up of the Company. Holders
of Common Stock have no preemptive, subscription, redemption or conversion
rights. All of the issued and outstanding shares of Common Stock are, and all
shares of Common Stock to be sold in this offering will be, duly authorized,
validly issued, fully paid and nonassessable.
At June 10, 1997, there were 10,778,267 shares issued and outstanding and
held of record by 78 shareholders.
PREFERRED STOCK
The Company's Board of Directors may without further action by the
Company's shareholders, from time to time, direct the issuance of shares of
Preferred Stock in series and may, at the time of issuance, determine the
rights, preferences and limitations of each series. The holders of Preferred
Stock would normally be entitled to receive a preference payment in the event of
any liquidation, dissolution or winding-up of the Company before any payment is
made to the holders of the Common Stock. The Company does not presently intend
to issue any series of Preferred Stock.
The overall effect of the ability of the Company's Board of Directors to
issue Preferred Stock may be to render more difficult the accomplishment of
mergers or other takeover or change-in-control attempts. To the extent that this
ability has this effect, removal of the Company's incumbent Board of Directors
and management may be rendered more difficult. Further, this may have an adverse
impact on the ability of shareholders of the Company to participate in a tender
or exchange offer for the Common Stock and in so doing diminish the market value
of such stock. See "Risk Factors -- Control by Management and Existing
Shareholders" and "Risk Factors -- Anti-takeover Effect of Certain Charter and
By-law Provisions and New Jersey Law."
REGISTRATION RIGHTS
In April 1996, in connection with the sale of subordinated debentures and
warrants by the Company, the Company and Summit Ventures IV, L.P. and Summit
Investors III, L.P. executed a Registration Rights Agreement (the "Rights
Agreement") pursuant to which the Company granted certain registration rights to
such entities. Pursuant to the Rights Agreement, Summit Ventures IV, L.P. and
Summit Investors III, L.P. and their assignees have the right, subject to
certain restrictions set forth in the Rights Agreement, to require that the
Company register, under the Securities Act, the Registrable Securities, as
defined in the Rights Agreement (the "Registrable Securities"), requested by
such holders at the Company's expense (on no more than two occasions).
Under the Rights Agreement, the Company is obligated to use its best
efforts to qualify for registration of securities on Form S-3 under the
Securities Act. After the Company has qualified for the use of Form S-3, the
holders of Registrable Securities have the right to an unlimited number of
registrations on such form. The Company is not, however, required to effect the
registration on a Form S-3 more than once in any six-month period, or if the
aggregate market value of such securities to be registered is less than $1.0
million.
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<PAGE> 46
Also pursuant to the Rights Agreement, if, at any time, the Company
proposes to register any of its Common Stock under the Securities Act for sale
to the public, the holders of the Registrable Securities have unlimited
piggyback registration rights at the Company's expense, subject to certain
restrictions set forth in the Rights Agreement. In addition, the Company has
agreed to indemnify the holders of such registration rights and each underwriter
in any such offering against certain liabilities, including liabilities under
the Securities Act. The holders of such Registrable Securities have waived their
registration rights with respect to this offering.
LIMITATION OF DIRECTOR LIABILITY
The Amended and Restated Certificate of Incorporation of the Company limits
the liability of directors and officers of the Company to the Company or its
shareholders to the fullest extent permitted by New Jersey law. Specifically,
directors and officers of the Company will not be personally liable for money
damages for breach of a duty as a director or an officer, except for liability
(i) for any breach of the director's or officer's duty of loyalty to the Company
or its shareholders, (ii) for acts or omissions not in good faith or which
involve a knowing violation of law, (iii) as to directors only, under Section
14A: 6-12 (1) of the New Jersey Business Corporation Act, which relates to
unlawful declarations of dividends or other distributions of assets to
shareholders or the unlawful purchase of shares of the corporation, or (iv) for
any transaction from which the director or officer derived an improper personal
benefit.
ANTI-TAKEOVER PROVISIONS
The Company is governed by the provisions of Section 14A:10A-1 et seq., the
New Jersey Shareholders Protection Act (the "New Jersey Act"), of the New Jersey
Business Corporation Act, an anti-takeover law. In general, the statute
prohibits a publicly-held New Jersey corporation from engaging in a "business
combination" with an "interested shareholder" for a period of five years after
the date of the transaction in which the person became an interested
shareholder, unless the business combination is approved in a prescribed manner.
A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested shareholder. An "interested
shareholder" is a person who, together with affiliates and associates, owns (or
within three years, did own) 10% or more of the corporation's voting stock.
After the five-year waiting period has elapsed, a business combination between a
corporation and an interested shareholder will be prohibited unless the business
combination is approved by the holders of at least two-thirds of the voting
stock not beneficially owned by the interested shareholder, or unless the
business combination satisfies the New Jersey Act. The New Jersey Act's fair
price provision is intended to provide that all shareholders (other than the
interested shareholders) receive a fair price for their shares.
In addition, the Company is authorized to issue up to 5,000,000 shares of
Preferred Stock, with rights, preferences and other designations, including
voting rights, to be determined by the Board of Directors. Furthermore, the
Amended and Restated Certificate of Incorporation also provides that: (i) the
affirmative vote of the holders of at least 80% of the voting power of all of
the then outstanding shares of the capital stock of the Company shall be
required to adopt, amend or repeal any provision of the By-laws of the Company;
(ii) shareholders of the Company may not take any action by written consent;
(iii) special meetings of shareholders may be called only by the President, the
Chairman of the Board or a majority of the Board of Directors and business
transacted at any such special meeting shall be limited to matters relating to
the purposes set forth in the notice of such special meeting; (iv) the Board of
Directors, when evaluating an offer related to a tender or exchange offer or
other business combination, is authorized to give due consideration to any
relevant factors, including without limitation, the social, legal and economic
effects upon employees, suppliers, customers, creditors, the community in which
the Company conducts its business, and the economy of the state, region and
nation; and (v) the affirmative vote of the holders of at least 80% of the
voting power of all of the then outstanding shares of the capital stock of the
Company shall be required to amend the above provisions (i) through (iv) or the
limitation on director liability as set forth in the Amended and Restated
Certificate of Incorporation. The New Jersey statute, the authorized
undesignated Preferred Stock and the foregoing provisions of the Amended and
Restated Certificate of Incorporation may discourage certain types of
transactions involving an actual or potential change in control of the Company
and could have the effect of delaying, deterring or preventing a change in
control of the Company. In addition, in the event of a merger or
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<PAGE> 47
consolidation of the Company with or into another corporation or the sale of all
or substantially all of the Company's assets in which the successor corporation
does not assume outstanding options or issue equivalent options, the Board of
Directors of the Company is required to provide accelerated vesting of
outstanding options.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
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<PAGE> 48
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
11,778,267 shares of Common Stock, based on shares outstanding as of June 10,
1997. See "Capitalization." Of these shares, an aggregate of 3,988,917 shares,
consisting of: (i) the 1,000,000 shares sold in this offering; (ii) the
2,846,250 shares offered and sold pursuant to the Company's initial public
offering of Common Stock consummated in October 1996; and (iii) an aggregate of
142,667 shares, including 100,000 shares resold by certain shareholders pursuant
to the provisions of Rule 144 and 42,667 shares which were issued upon the
exercise of vested stock options pursuant to Rule 701, will be freely
transferable by persons other than "affiliates" of the Company without
restriction or further registration under the Securities Act. The remaining
7,789,350 shares of Common Stock are "restricted securities" (the "Restricted
Shares") within the meaning of Rule 144 and may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available, including an exemption afforded by Rule 144.
Messrs. Pandey, Koneru and Valluripalli, owning in the aggregate 6,606,662
shares, have entered into "lock-up" agreements with the Underwriter, providing
that, subject to certain exceptions, they will not offer, sell or otherwise
dispose of any shares of Common Stock for a period of 90 days following the date
of this Prospectus without the prior written consent of the Underwriter. The
Underwriter may, in its sole discretion, and at any time without notice, release
all or a portion of the shares subject to these "lock-up" agreements. Subject to
the "lock-up" agreements, all of such shares will be eligible for resale in the
public market pursuant to Rule 144, subject to certain limitations described
below. Certain other affiliated shareholders holding an aggregate of 1,182,688
shares are also eligible to resell such shares in the public market under Rule
144 and have the right in certain circumstances to require the Company to
register under the Securities Act such shares of Common Stock for resale to the
public. See "Description of Capital Stock -- Registration Rights."
Rule 144 provides that an affiliate of the Company or a person (or persons
whose sales are aggregated) who has beneficially owned Restricted Shares for at
least one year but less than two years is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of one
percent of the then outstanding shares of Common Stock (117,783 shares
immediately after this offering) or the average weekly trading volume in the
Common Stock during the four calendar weeks preceding such sale. Sales under
Rule 144 also are subject to certain manner-of-sale provisions, notice
requirements and the availability of current public information about the
Company. However, a person who is not an "affiliate" of the Company at any time
during the three months preceding a sale, and who has beneficially owned
Restricted Shares for at least two years, is entitled to sell such shares under
Rule 144 without regard to the limitations described above.
As of June 10, 1997, there were outstanding options to purchase an
aggregate of 885,383 shares of Common Stock, of which 120,795 shares are
eligible for immediate resale in compliance with Rules 144 and 701 (relating to
the sale of shares issuable under certain compensatory stock plans). The Company
intends to file a Registration Statement on Form S-8 shortly after the
consummation of this offering to register an aggregate of 1,547,333 shares of
Common Stock issuable upon stock options granted, or to be granted, under its
1996 Stock Plan and 1996 Non-Employee Director Stock Option Plan.
The Common Stock has been traded on the Nasdaq National Market since
September 27, 1996. Nevertheless, sales of a substantial amount of the Common
Stock in the public market, or the perception that such sales could occur, could
adversely affect the market price of the shares of Common Stock and could impair
the Company's future ability to raise capital through an offering of its equity
securities. See "Risk Factors -- Shares Eligible for Future Sale."
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<PAGE> 49
UNDERWRITING
Montgomery Securities (the "Underwriter") has agreed, subject to the terms
and conditions in the underwriting agreement (the "Underwriting Agreement"), by
and between the Company and the Underwriter, to purchase from the Company
1,000,000 shares of Common Stock at the public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriter are
subject to certain conditions precedent and that the Underwriter is committed to
purchase all of the shares of Common Stock, if it purchases any.
The Underwriter has advised the Company that it initially proposes to offer
the Common Stock to the public on the terms set forth on the cover page of this
Prospectus. The Underwriter may allow selected dealers a concession of not more
than $ per share; and the Underwriter may allow, and such dealers may
reallow, a concession of not more than $ per share to certain other
dealers. After the public offering, the public offering price and other selling
terms may be changed by the Underwriter. The Common Stock is offered subject to
receipt and acceptance by the Underwriter, and to certain other conditions,
including the right to reject orders in whole or in part.
The Company has granted an option to the Underwriter, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 150,000 additional shares of Common Stock to cover over-allotments, if any,
at the same price per share as the initial shares to be purchased by the
Underwriter. The Underwriter may purchase such shares only to cover
over-allotments made in connection with the offering.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments the Underwriter may be required
to make in respect thereof.
Messrs. Pandey, Koneru and Valluripalli have agreed that for a period of 90
days following the date of this Prospectus they will not, without the prior
written consent of the Underwriter, directly or indirectly, sell, offer,
contract or grant an option to sell (including without limitation any short
sale), pledge, transfer, establish an open put equivalent position or otherwise
dispose of any shares of Common Stock, options or warrants to acquire shares of
Common Stock or securities exchangeable or exercisable or convertible into
shares of Common Stock held by them, or publicly announce the intention to do
any of the foregoing. In addition, the Company has agreed that for a period of
90 days after the date of this Prospectus it will not, without the consent of
Montgomery Securities, directly or indirectly, sell, offer, contract or grant an
option to sell, pledge, transfer or otherwise dispose of, or announce the
offering of, or file any registration statement under the Securities Act in
respect of, any shares of Common Stock, options or warrants to acquire shares of
Common Stock or securities convertible into or exchangeable or exercisable for
shares of Common Stock, or publicly announce the intention to do any of the
foregoing, except for shares of Common Stock offered hereby and shares issued
pursuant to the 1996 Stock Option Plan and 1996 Non-Employee Director Stock
Option Plan. See "Shares Eligible for Future Sale."
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriter and
certain selling group members, if any, to bid for and purchase the Common Stock.
As an exception to these rules, the Underwriter is permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Stock. If the Underwriter creates a short
position in the Common Stock in connection with the offering, i.e., if it sells
more shares of Common Stock than are set forth on the cover page of this
Prospectus, the Underwriter may reduce that short position by purchasing Common
Stock in the open market. The Underwriter may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. Neither the Company nor the
Underwriter makes any representation or predictions as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Common Stock. In addition, neither
48
<PAGE> 50
the Company nor the Underwriter makes any representation that the Underwriter
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
The Common Stock is traded on the Nasdaq National Market under the symbol
ITIG.
49
<PAGE> 51
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Buchanan Ingersoll, Princeton, New Jersey.
Certain legal matters in connection with the offering will be passed upon for
the Underwriter by Hale and Dorr LLP, Washington, D.C.
EXPERTS
The consolidated financial statements included in this Prospectus and
elsewhere in the registration statement to the extent and for the periods
indicated in their report have been audited by Arthur Andersen LLP, independent
public accountants and are included herein in reliance upon the authority of
said firm as experts in giving said report.
On December 15, 1995, the Company retained Arthur Andersen LLP to act as
its independent public accountants and informed the prior auditors, Amper,
Politziner & Mattia, the Company's independent accountants since January 1995,
of its decision. The former auditor's report on the Company's financial
statements for the year ended December 31, 1994 does not cover the financial
statements of the Company included in this Prospectus. In connection with its
audit of the consolidated financial statements for the year ended December 31,
1994, there were no disagreements with the prior auditors on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures. The prior auditors' report on the Company's consolidated
financial statements for the year ended December 31, 1994 contained no adverse
opinion or disclaimer of opinion and was not modified or qualified as to
uncertainty, audit scope, or accounting principles. The decision to change
accountants was approved by the Board of the Directors of the Company. The
Company previously provided the prior auditors with a copy of the above
disclosure and the prior auditors furnished the Company with a letter addressed
to the Securities and Exchange Commission stating its agreement with the above
statements. Prior to retaining Arthur Andersen LLP, the Company had not
consulted with Arthur Andersen LLP regarding accounting principles.
50
<PAGE> 52
INTELLIGROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1995 and 1996........................ F-3
Consolidated Statements of Operations for the Years Ended December 31, 1995 and
1996............................................................................. F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended
December 31, 1995 and 1996....................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995 and
1996............................................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
Consolidated Financial Statements:
Consolidated Balance Sheet as of March 31, 1997 (unaudited)......................... F-14
Consolidated Statements of Income for the Three Months Ended March 31, 1996 and 1997
(unaudited)...................................................................... F-15
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1996 and
1997 (unaudited)................................................................. F-16
Notes to Consolidated Financial Statements (unaudited)................................ F-17
</TABLE>
F-1
<PAGE> 53
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Intelligroup, Inc.:
We have audited the accompanying consolidated balance sheets of
Intelligroup, Inc. and subsidiaries as of December 31, 1995 and 1996, and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Intelligroup, Inc. and
subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Princeton, New Jersey
February 5, 1997 (except with respect to
Note 9, as to which the date is June 13, 1997)
F-2
<PAGE> 54
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents..................................... $ 71,000 $ 7,479,000
Restricted cash held in escrow................................ 100,000 --
Accounts receivable, less allowance for doubtful accounts of
$531,000 and $546,000 at December 31, 1995 and 1996,
respectively............................................... 4,729,000 8,538,000
Unbilled services............................................. 1,569,000 2,916,000
Deferred income taxes......................................... -- 331,000
Other current assets.......................................... 3,000 492,000
----------- ----------
Total current assets.................................. 6,472,000 19,756,000
Property and equipment, less accumulated depreciation of $99,000
and $243,000 at December 31, 1995 and 1996, respectively...... 282,000 1,281,000
Other assets.................................................... 30,000 225,000
----------- ----------
$ 6,784,000 $21,262,000
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable.............................................. $ 1,480,000 $ 406,000
Accrued payroll and related taxes............................. 2,568,000 1,814,000
Accrued expenses and other liabilities........................ 532,000 1,268,000
Income taxes payable.......................................... -- 535,000
Cash overdraft................................................ 83,000 --
Line of credit................................................ 45,000 --
Loans from factors............................................ 3,343,000 --
Current portion of obligations under capital leases........... 18,000 20,000
----------- ----------
Total current liabilities............................. 8,069,000 4,043,000
----------- ----------
Obligations under capital leases, less current portion.......... 81,000 57,000
----------- ----------
Commitments and contingencies
Shareholders' Equity (Deficit)
Preferred stock, $.01 par value, 5,000,000 shares authorized,
none outstanding........................................... -- --
Common stock, $.01 par value, 25,000,000 shares authorized,
12,202,666 and 10,735,600 issued and outstanding at
December 31, 1995 and 1996, respectively................... 122,000 107,000
Additional paid-in capital.................................... -- 19,201,000
Accumulated deficit........................................... (1,488,000) (2,146,000)
----------- ----------
Total shareholders' equity (deficit).................. (1,366,000) 17,162,000
----------- ----------
$ 6,784,000 $21,262,000
=========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 55
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Revenue........................................................... $24,589,000 $47,189,000
Cost of sales..................................................... 20,021,000 33,605,000
----------- -----------
Gross profit................................................. 4,568,000 13,584,000
Selling, general and administrative expenses...................... 4,452,000 9,908,000
----------- -----------
Operating income............................................. 116,000 3,676,000
----------- -----------
Other expenses:
Interest expense, net........................................... 4,000 236,000
Factor charges.................................................. 1,171,000 999,000
----------- -----------
1,175,000 1,235,000
----------- -----------
Income (loss) before provision for income taxes and extraordinary
charge.......................................................... (1,059,000) 2,441,000
Provision for income taxes........................................ -- 500,000
----------- -----------
Income (loss) before extraordinary charge......................... (1,059,000) 1,941,000
Extraordinary charge-loss on early extinguishment of debt, net of
income tax benefit of $296,000.................................. -- 1,148,000
----------- -----------
Net income (loss)............................................ $(1,059,000) $ 793,000
=========== ===========
Earnings (loss) per share:
Income (loss) before extraordinary charge....................... $ (0.08) $ 0.18
Extraordinary charge, net of income tax benefit................. -- (0.11)
----------- -----------
Net income (loss) per share.................................. $ (0.08) $ 0.07
=========== ===========
Shares used in per share calculation.............................. 13,737,000 10,989,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 56
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL SHAREHOLDERS'
--------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
---------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994....... 12,202,666 $122,000 $ -- $ (429,000) $ (307,000)
Net loss......................... -- -- -- (1,059,000) (1,059,000)
---------- -------- ----------- ----------- -----------
Balance at December 31, 1995....... 12,202,666 122,000 -- (1,488,000) (1,366,000)
Net income....................... -- -- -- 793,000 793,000
Repurchase and retirement of
common stock.................. (4,881,066) (49,000) -- (1,451,000) (1,500,000)
Issuance of common stock, net of
related costs................. 2,050,000 20,000 17,815,000 -- 17,835,000
Exercise of warrants............. 1,364,000 14,000 1,386,000 -- 1,400,000
---------- -------- ----------- ----------- -----------
Balance at December 31, 1996....... 10,735,600 $107,000 $19,201,000 $(2,146,000) $17,162,000
========== ======== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 57
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................... $(1,059,000) $ 793,000
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization................................ 51,000 214,000
Provision for doubtful accounts.............................. 411,000 590,000
Extraordinary charge......................................... -- 1,444,000
Deferred income taxes........................................ -- (331,000)
Changes in assets and liabilities:
Restricted cash deposited in escrow.......................... (100,000) 100,000
Accounts receivable.......................................... (3,339,000) (4,399,000)
Unbilled services............................................ (1,386,000) (1,347,000)
Other current assets......................................... 27,000 (489,000)
Other assets................................................. (30,000) (197,000)
Cash overdraft............................................... 83,000 (83,000)
Accounts payable............................................. 1,480,000 (1,074,000)
Accrued payroll and related taxes............................ 1,035,000 (754,000)
Income taxes payable......................................... -- 535,000
Accrued expenses and other liabilities....................... 478,000 736,000
----------- -----------
Net cash used in operating activities................... (2,349,000) (4,262,000)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment.............................. (142,000) (1,143,000)
----------- -----------
Cash flows from financing activities:
Proceeds from subordinated debentures and warrants, net of
issuance costs............................................... -- 5,888,000
Repayment of subordinated debentures............................ -- (6,000,000)
Repurchase of common stock...................................... -- (1,500,000)
Proceeds from issuance of common stock, net of issuance costs... -- 17,835,000
Loans from (repayments to) factors, net......................... 2,349,000 (3,343,000)
Proceeds from (repayments of) lines of credit, net.............. 6,000 (45,000)
Principal payments under capital leases......................... (2,000) (22,000)
----------- -----------
Net cash provided by financing activities............... 2,353,000 12,813,000
----------- -----------
Net increase (decrease) in cash and cash equivalents.... (138,000) 7,408,000
Cash and cash equivalents at beginning of period.................. 209,000 71,000
----------- -----------
Cash and cash equivalents at end of period........................ $ 71,000 $ 7,479,000
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest.......................................... $ 1,175,000 $ 1,264,000
=========== ===========
Noncash transactions:
Capital lease obligations....................................... $ 102,000 $ --
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 58
INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Intelligroup, Inc., and its subsidiaries (the "Company") provide 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 markets its services to a wide variety of
industries primarily in the United States. The majority of the Company's
business is with large established companies, including consulting firms,
serving numerous industries.
Principles of Consolidation and Use of Estimates
The accompanying financial statements include the accounts of Intelligroup,
Inc. and its majority-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the recorded amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of investments in highly liquid
short-term instruments, with original maturities of three months or less.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets (five years). Costs of maintenance and repairs are
charged to expense as incurred.
Revenue Recognition
The Company generates revenue from professional services rendered. Revenue
is recognized as services are performed with the corresponding cost of providing
those services reflected as cost of sales. Substantially all customers are
billed on a per diem basis whereby actual time is charged directly to the
customer. Billings to customers for out-of-pocket expenses are recorded as a
reduction of expenses incurred. Unbilled services at December 31, 1995 and 1996
represent services provided which are billed subsequent to year-end. All such
amounts are anticipated to be realized in the following year.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts arising from
services, which is based upon a review of outstanding receivables as well as
historical collection information. In determining the amount of the allowance,
management is required to make certain estimates and assumptions. The provision
for doubtful accounts totaled $411,000 and $590,000 in 1995 and 1996,
respectively. Credit is granted to substantially all customers on an unsecured
basis.
Recoverability of Long-Lived Assets
The Company reviews the recoverability of its long-lived assets on a
periodic basis in order to identify business conditions which may indicate a
possible impairment. The assessment for potential impairment is based primarily
on the Company's ability to recover the unamortized balance of its long-lived
assets from expected future cash flows from its operations on an undiscounted
basis.
F-7
<PAGE> 59
INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation," which requires companies to
measure employee stock compensation plans based on the fair value method using
an option pricing model or to continue to apply APB No. 25, "Accounting for
Stock Issued to Employees," and provide pro forma footnote disclosures under the
fair value method. The Company continues to apply APB No. 25 and provides pro
forma disclosures (See Note 7).
Concentrations
For the years ended December 31, 1995 and 1996, approximately 69% and 74%
of revenue, respectively, was derived from projects in which the Company's
personnel implemented software developed by SAP. The Company's future success in
its SAP-related consulting services depends largely on its continued
relationship with SAP and on its continued status as a SAP National Logo
Partner. The Company's agreement with SAP (the "Agreement") is awarded on an
annual basis. The Company's current contract expires on December 31, 1997. The
Agreement contains no minimum revenue requirement or cost sharing arrangements
and does not provide for commissions or royalties to either party. In February
1997, the Company achieved National Logo Partner status with SAP, SAP's highest
consulting alliance partnership status, and will begin operating under the terms
of such partnership agreement pending partnership agreement negotiations.
A substantial portion of the Company's revenue is derived from projects in
which an information technology consulting firm other than the Company has been
retained by the end-user organization to manage the overall project. For years
ended December 31, 1995 and 1996, 50% 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.
One customer accounted for approximately 13% of revenue in 1996. Accounts
receivable due from this customer was $2,268,000 as of December 31, 1996.
Another customer accounted for approximately 10% and 20% of revenue for 1995 and
1996, respectively. Accounts receivable due from this customer was $611,000 and
$988,000 as of December 31, 1995 and 1996, respectively. Another customer
accounted for approximately 12% of revenue for 1995. Accounts receivable due
from this customer was $1,400,000 as of December 31, 1995.
Foreign Operations
Revenues from foreign operations were not significant in 1995 and 1996.
Translation effects were not material.
Income Taxes
The Company accounts for income taxes pursuant to the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," which utilizes the liability method and results in the determination of
deferred taxes based on the estimated future tax effects of differences between
the financial statement and tax basis of assets and liabilities, using enacted
tax rates currently in effect.
Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average number
of common and dilutive common equivalent shares outstanding during the period
after giving retroactive effect to the stock split (See Note 8). Pursuant to the
requirements of the Securities and Exchange Commission, stock options and
F-8
<PAGE> 60
INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
warrants issued by the Company during the twelve months immediately preceding
its initial public offering (see Note 8) have been included in computing net
income (loss) per share as if they were outstanding for all periods using the
treasury stock method.
Financial Instruments
Financial instruments that potentially subject the Company to credit risk
consist principally of trade receivables and unbilled services. Management of
the Company believes the fair value of accounts receivable and unbilled services
approximates the carrying value.
NOTE 2 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31, 1995
and 1996:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Vehicles............................................ $ 26,000 $ 26,000
Furniture........................................... 98,000 98,000
Equipment........................................... 257,000 1,400,000
---------- --------
381,000 1,524,000
Less -- Accumulated depreciation.................... (99,000) (243,000)
---------- --------
$ 282,000 $1,281,000
========== ========
</TABLE>
Included in the above is $102,000 of equipment held under capital leases.
Depreciation expense was $51,000 and $144,000 in 1995 and 1996, respectively.
NOTE 3 -- LINES OF CREDIT AND SUBORDINATED DEBENTURES
In January 1997, the Company entered into a two-year credit agreement with
a bank. The credit facility with the bank includes (i) a revolving line of
credit pursuant to which the Company may borrow up to $7,500,000 (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 $7,500,000 or the Company's borrowing base. Such borrowing base
is 70% 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, among other things, require the maintenance of a minimum working capital
ratio and a minimum net worth, as defined, and prohibit distribution of cash
dividends. The Company's obligations under the credit agreement are
collateralized by substantially all of the Company's assets. The Company's
obligations under the credit facility are payable at the expiration of such
facility on January 22, 1999.
The Company had available, under an agreement with a bank, a $50,000 line
of credit bearing interest at the bank's prime lending rate plus 2%, which was
collateralized by all Company assets and personally guaranteed by one of the
Company's shareholders. The line of credit expired May 26, 1996 and was repaid
in November 1996. The outstanding balance as of December 31, 1995 was $45,000.
In March 1996, in anticipation of the financing discussed below, the
Company obtained a $750,000 line of credit, payable on demand, from a bank.
Aggregate borrowings in the amount of $300,000 were repaid and the line of
credit was terminated by the Company in accordance with the financing described
below.
In April 1996, the Company issued $6,000,000 of five-year, 9% subordinated
debentures. All principal and interest was due at maturity (April 2001). The
debentures were issued with detachable warrants to purchase Common Stock of the
Company (See Note 7). Proceeds from the debentures were allocated
F-9
<PAGE> 61
INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
between the debentures and the warrants based on estimated fair value which
resulted in a discount on the debentures (based on a 15% interest rate) and a
value assigned to the warrants of $1,400,000. A portion of the net proceeds of
the Company's initial public offering (see Note 8) was used to repay the
subordinated debentures which resulted in an extraordinary charge of $1,148,000,
net of an income tax benefit of $296,000.
Subsequent to the issuance of the subordinated debentures, the Company
purchased and retired 4,881,066 shares of its Common Stock for $1,500,000 from
its shareholders.
NOTE 4 -- LOANS PAYABLE TO FACTORS
On October 20, 1995, the Company entered into a factoring agreement with a
financing institution (the "Factor") under which the Company was required to
offer all its trade accounts receivable to the Factor for financing; however,
the Factor was not obligated to accept them. The agreement had a term of one
year with automatic one-year renewals unless the Company or the Factor gave
notice of cancellation. The Factor charged an administration fee of 0.75% on
each invoice plus an additional 0.75% for each 15-day increment the invoice
remained unpaid, to a maximum of 120 days, or 6.5%. If the amount of a factored
receivable was not paid by reason of financial inability of the customer, the
Company was not liable to reimburse the Factor. If, however, the Factor, through
legal action or otherwise, settled, compromised or assigned the claim for any
receivable, the amount of any reduction resulting from such settlement,
compromise or assignment reduced the balance due to the Company. The Company
used approximately $4.4 million of the net proceeds from the Company's initial
public offering to repay loans from the Factor (See Note 8). The Factor
agreement was terminated in October 1996.
The Company had factoring agreements with a former financing institution
under which it could sell qualified trade accounts receivable, with recourse
provisions. The agreements, which were terminated in October 1995 required the
Company to repurchase or replace any receivable remaining uncollected for more
than 120 days.
NOTE 5 -- INCOME TAXES
Income tax attributable to income from continuing operations consists of
the following:
<TABLE>
<CAPTION>
1996
---------
<S> <C>
Current:
Federal........................................................ $ 631,000
State.......................................................... 200,000
---------
831,000
---------
Deferred:
Federal........................................................ (259,000)
State.......................................................... (72,000)
---------
(331,000)
---------
Total.................................................. $ 500,000
=========
</TABLE>
F-10
<PAGE> 62
INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes differs from the amount computed by applying
the statutory rate of 35% to income (loss) before income taxes. The principal
reasons for this difference are:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Tax at federal statutory rate.................................. (35% ) 35%
Nondeductible expenses......................................... -- 1
State income tax, net of federal benefit....................... -- (3)
Utilization of net operating loss carryforwards................ -- (8)
Foreign losses for which no benefit is available............... -- 9
Changes in valuation allowance................................. 35 (14)
--- ---
Effective tax rate............................................. -- % 20%
=== ===
</TABLE>
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities under SFAS No.
109 as of December 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts.................... $ 234,000 $ 224,000
Certain accrued liabilities........................ 207,000 146,000
Net operating losses............................... 227,000 131,000
Other.............................................. -- 37,000
--------- ---------
Total deferred tax assets............................ 668,000 538,000
Valuation allowance for deferred tax assets.......... (668,000) (207,000)
--------- ---------
Net deferred tax assets.............................. $ -- $ 331,000
========= =========
</TABLE>
Realization of the net deferred tax assets is dependent on the timing of
the reversal of other temporary differences. Although realization is not
assured, management believes it is more likely than not, that the majority of
the 1996 net deferred tax assets will be realized. The Company reduced their
valuation allowance in 1996 as a result of current and anticipated future
profitability. The Company's 1996 valuation allowance relates primarily to the
net operating loss of a foreign subsidiary which is yet to be profitable.
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
Employment Agreements
Commencing June 1, 1996, the Company entered into two year employment
agreements with five employees with aggregate annual compensation of $935,000.
Payroll and Related Taxes
As of December 31, 1995, the Company had $1,000,000 included in accrued
payroll and related taxes related to unpaid federal and state payroll related
taxes for certain employees. As a result of the Company's voluntary disclosure
to the Internal Revenue Service ("IRS") on June 5, 1996, the IRS issued an audit
assessment to the Company for $814,000 which had been included in the above
accrual. The assessment was paid in 1996. The Company's principal shareholders
have agreed to indemnify the Company for any and all losses which the Company
may sustain in excess of the amounts accrued as of December 31, 1995 arising
from or relating to federal or state tax, interest or penalty payment
obligations, net of any tax benefits realized by the Company, resulting from the
subject matter discussed above.
F-11
<PAGE> 63
INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Leases
The Company leases office space and office equipment under capital and
operating leases that have initial or remaining non-cancelable lease terms in
excess of one year as of December 31, 1996. Future minimum aggregate annual
lease payments are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDING DECEMBER 31, CAPITAL OPERATING
------------------------------------------------------- -------- ---------
<S> <C> <C>
1997................................................... $ 37,000 $ 254,000
1998................................................... 37,000 245,000
1999................................................... 20,000 221,000
2000................................................... 20,000 19,000
2001................................................... -- 16,000
--------
114,000
Less -- Interest....................................... (37,000)
--------
77,000
Less -- Current portion................................ (20,000)
--------
$ 57,000
========
</TABLE>
Rent expense for the years ended December 31, 1995 and 1996 was $74,000 and
$176,000, respectively.
Legal
The Company is being investigated by the Immigration and Naturalization
Service concerning possible violations of the Immigration Reform and Control Act
of 1990. Although a notice of intent to fine has not been served upon the
Company and therefore the potential for fines is not known, the Company believes
that fines, if any, would not have a material effect on the Company's results of
operations or financial condition.
The Company is engaged in certain other legal and administrative
proceedings. Management believes the outcome of these proceedings will not have
a material adverse effect on the Company's financial position or results of
operations.
NOTE 7 -- STOCK OPTION PLANS AND WARRANTS
The Company's 1996 Stock Plan (the "Plan") permits the granting of options
to employees, non-employee directors and consultants. The Plan is administered
by the Option Committee of the Board of Directors, which generally has the
authority to select individuals who are to receive options and to specify the
terms and conditions of each option so granted, including the number of shares
covered by the option, the type of option (incentive stock option or
non-qualified stock option), the exercise price, vesting provisions, and the
overall option term. A total of 1,450,000 shares of Common Stock have been
reserved for issuance under the Plan. In June 1996, effective July 1996, the
Company granted options to purchase an aggregate of 500,000 shares of its Common
Stock to certain employees at an exercise price of $8.00 per share. One-third of
these options vest six months from date of grant with remaining options vesting
over the following two years. At December 31, 1996, 492,000 of these options
remain outstanding, none of which are exercisable. Eight thousand options were
forfeited in 1996. Subsequent to December 31, 1996, the Company granted options
to purchase an aggregate of 459,000 shares of its Common Stock to certain
employees at an exercise price of $11.00 per share. All of the options issued
pursuant to this Plan expire ten years from the date of grant.
The 1996 Non-Employee Director Stock Option Plan provides for the granting
of options to purchase a maximum of 140,000 shares of Common Stock of the
Company to non-employee directors. Each person who was a director of the Company
on the effective date of the Company's initial public offering or becomes a
director of the Company thereafter, and who is not also an employee or officer
of the Company, was or shall be
F-12
<PAGE> 64
INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
granted, on the effective date of such initial public offering or on the date on
which he or she becomes a director, whichever is later, an option to purchase
20,000 shares of Common Stock, at an exercise price per share equal to the then
fair market value of the shares. All options will vest in five equal
installments, commencing one year after grant and have a ten-year term. Options
to purchase 80,000 shares of the Company's Common Stock were granted in 1996
with exercise prices ranging from $10 to $12.125 per share with a weighted
average exercise price of $10.78. At December 31, 1996 all of these options
remain outstanding, none of which are exercisable.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions: expected volatility of 41%, risk-free interest rate of 5.6%; and
expected lives of three years. The weighted-average grant-date fair value of
options granted during the year was $2.93 per share.
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the Company has chosen to continue
accounting for stock options at their intrinsic value. Accordingly, no
compensation cost has been recognized for the stock option plans. Had
compensation cost for the Company's two stock option plans been determined based
on the fair value option pricing method of accounting, the Company's net income
and earnings per share would have been reduced to $434,000 and $0.04,
respectively.
The subordinated debenture holders (see Note 3) received warrants for the
purchase of up to 20.8% of the fully diluted common stock of the Company, as
defined, at a nominal exercise price (less than $0.25 in the aggregate). The
warrants were exercised in September 1996 which resulted in the issuance of
1,364,000 shares of the Company's Common Stock.
NOTE 8 -- INITIAL PUBLIC OFFERING, STOCK SPLIT AND PREFERRED STOCK AUTHORIZATION
The Company's initial public offering for the sale of 2,050,000 shares of
its common stock became effective on September 26, 1996 and the net proceeds of
approximately $19,065,000 (before deducting expenses of the offering paid by the
Company) were received on October 2, 1996. A portion of the net proceeds was
used to prepay subordinated debentures and repay other debt (See Notes 3 and 4).
In July 1996, the Company's Board of Directors recommended and shareholders
approved an amendment to the Company's Certificate of Incorporation to effect an
81,351.1111-for-1 stock split. All common shares and per share amounts in the
accompanying financial statements have been adjusted retroactively to give
effect to the stock split. In addition, the Company's Board of Directors
authorized a change in the Company's authorized capitalization to 25,000,000
shares of Common Stock, $0.01 par value per share, and 5,000,000 shares of
undesignated preferred stock, $0.01 par value per share.
NOTE 9 -- SUBSEQUENT EVENT
In June 1997, the Board of Directors authorized management of the Company
to file a registration statement with the Securities and Exchange Commission to
register a maximum of 1,150,000 shares of the Company's Common Stock to sell to
the public. Existing and prospective investors should consider, among other
things, the risks and difficulties faced by the Company, including competition
from existing companies offering the same or similar services, rapid
technological change and management of growth. See "Risk Factors" included
elsewhere in this Prospectus for a discussion of these and other factors.
F-13
<PAGE> 65
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
1997
-----------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents..................................................... $ 5,330,000
Accounts receivable, less allowance for doubtful accounts of $523,000......... 6,891,000
Unbilled services............................................................. 6,029,000
Deferred income taxes......................................................... 331,000
Other current assets.......................................................... 629,000
-----------
Total current assets.................................................. 19,210,000
Property and equipment, less accumulated depreciation of $299,000............... 2,272,000
Other assets.................................................................... 374,000
-----------
$21,856,000
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.............................................................. $ 653,000
Accrued payroll and related taxes............................................. 2,079,000
Accrued expenses and other liabilities........................................ 548,000
Income taxes payable.......................................................... 504,000
Current portion of obligations under capital leases........................... 20,000
-----------
Total current liabilities............................................. 3,804,000
-----------
Obligations under capital leases, less current portion.......................... 53,000
-----------
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..................................................... 107,000
Additional paid-in capital.................................................... 19,201,000
Accumulated deficit........................................................... (1,309,000)
-----------
Total shareholders' equity............................................ 17,999,000
-----------
$21,856,000
===========
</TABLE>
See notes to consolidated financial statements.
F-14
<PAGE> 66
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
Revenue........................................................... $ 8,710,000 $15,738,000
Cost of sales..................................................... 6,423,000 11,336,000
----------- -----------
Gross profit................................................. 2,287,000 4,402,000
Selling, general and administrative expenses...................... 1,644,000 3,086,000
----------- -----------
Operating income............................................. 643,000 1,316,000
----------- -----------
Other expenses (income):
Interest expense (income), net.................................. 7,000 (79,000)
Factor charges.................................................. 308,000 --
----------- -----------
315,000 (79,000)
----------- -----------
Income before provision for income taxes.......................... 328,000 1,395,000
Provision for income taxes........................................ 101,000 558,000
----------- -----------
Net income................................................... $ 227,000 $ 837,000
=========== ===========
Earnings per share:
Net income per share......................................... $ 0.02 $ 0.08
=========== ===========
Shares used in per share calculation.............................. 13,737,000 10,889,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-15
<PAGE> 67
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
-------------------------
1996 1997
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................... $ 227,000 $ 837,000
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization................................. 24,000 56,000
Provision for doubtful accounts............................... 205,000 --
Changes in assets and liabilities:
Accounts receivable........................................... (436,000) 1,647,000
Unbilled services............................................. 134,000 (3,113,000)
Other current assets.......................................... (28,000) (137,000)
Other assets.................................................. (84,000) (149,000)
Cash overdraft................................................ 8,000 --
Accounts payable.............................................. (436,000) 247,000
Accrued payroll and related taxes............................. 199,000 265,000
Income taxes payable.......................................... 100,000 (31,000)
Accrued expenses and other liabilities........................ 219,000 (720,000)
----------- ---------
Net cash provided by (used in) operating activities...... 132,000 (1,098,000)
----------- ---------
Cash flows from investing activities:
Purchase of property and equipment............................... (27,000) (1,047,000)
----------- ---------
Cash flows from financing activities:
Repayment of loans to factors, net............................... (289,000) --
Proceeds from lines of credit, net............................... 198,000 --
Principal payments under capital leases.......................... (6,000) (4,000)
----------- ---------
Net cash used in financing activities.................... (97,000) (4,000)
----------- ---------
Net increase (decrease) in cash and cash equivalents..... 8,000 (2,149,000)
Cash and cash equivalents at beginning of period................... 71,000 7,479,000
----------- ---------
Cash and cash equivalents at end of period......................... $ 79,000 $ 5,330,000
=========== =========
Supplemental disclosures of cash flow information:
Cash paid for interest........................................... $ 7,000 $ --
=========== =========
Cash paid for income taxes....................................... $ -- $ 586,000
=========== =========
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE> 68
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, 1996
and 1997 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
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.
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.
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings Per Share" ("FAS
128"). FAS 128 is effective for fiscal years ending after December 15, 1997,
and, when adopted, it will require restatement of prior years' earnings per
share and changes the method in which earnings per share will be determined. If
the Company had adopted FAS 128 for the period ended March 31, 1997, there would
have been no effect on earnings per share, on either the basic or diluted basis.
(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.
(4) SUBSEQUENT EVENT
In June, 1997, the Board of Directors authorized management of the Company
to file a registration statement with the Securities and Exchange Commission to
register a maximum of 1,150,000 shares of the Company's Common Stock to sell to
the public.
F-17
<PAGE> 69
======================================================
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or the Underwriter. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any securities
other than the shares of Common Stock to which it relates or an offer to, or a
solicitation of, any person in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication that
there has been no change in the affairs of the Company or that the information
contained herein is correct as of any time subsequent to the date hereof.
----------------------------
TABLE OF CONTENTS
----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information................. 2
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 13
Dividend Policy....................... 13
Price Range of Common Stock........... 13
Capitalization........................ 14
Selected Consolidated Financial
Data................................ 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 23
Management............................ 33
Certain Transactions.................. 40
Principal Shareholders................ 42
Description of Capital Stock.......... 44
Shares Eligible for Future Sale....... 47
Underwriting.......................... 48
Legal Matters......................... 50
Experts............................... 50
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
======================================================
======================================================
1,000,000 SHARES
LOGO
COMMON STOCK
--------------------------
PROSPECTUS
--------------------------
MONTGOMERY SECURITIES
, 1997
======================================================
<PAGE> 70
PART II
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 14A:3-5 of the New Jersey Business Corporation Act permits each New
Jersey business corporation to indemnify its directors, officers, employees and
agents against expenses and liabilities in connection with any proceeding
involving such persons by reason of his serving or having served in such
capacities or for each such person's acts taken in his capacity as a director,
officer, employee or agent of the corporation if such actions were taken in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the corporation, and with respect to any criminal
proceeding, if he had no reasonable cause to believe his conduct was unlawful,
provided that any such proceeding is not by or in the right of the corporation.
Section 14A:2-7(3) of the New Jersey Business Corporation Act enables a
corporation in its certificate of incorporation to limit the liability of
directors and officers of the corporation to the corporation or its
shareholders. Specifically, the certificate of incorporation may provide that
directors and officers of the corporation will not be personally liable for
money damages for breach of a duty as a director or an officer, except for
liability (i) for any breach of the director's or officer's duty of loyalty to
the corporation or its shareholders, (ii) for acts or omissions not in good
faith or which involve a knowing violation of law, (iii) as to directors only,
under Section 14A:6-12(1) of the New Jersey Business Corporation Act, which
relates to unlawful declarations of dividends or other distributions of assets
to shareholders or the unlawful purchase of shares of the corporation, (iv) or
for any transaction from which the director or officer derived an improper
personal benefit.
The registrant's Amended and Restated Certificate of Incorporation limits
the liability of its directors and officers as authorized by Section 14A:2-7(3).
The affirmative vote of the holders of at least 80% of the voting power of all
outstanding shares of the capital stock of the Company is required to amend such
provisions.
Article 11 of the registrant's Amended and Restated By-laws specifies that
the registrant shall indemnify its directors and officers to the extent such
parties are involved in or made a party to any action, suit or processing
because he was a director or officer of the Company. The Company has agreed to
indemnify such parties for their actual and reasonable expenses if such party
acted in good faith and in a manner he reasonably believed to be in the best
interests of the Company and such party had no reasonable cause to believe his
conduct was unlawful. This provision of the By-laws is deemed to be a contract
between the registrant and each director and officer who serves in such capacity
at any time while such provision and the relevant provisions of the New Jersey
Business Corporation Act are in effect, and any repeal or modification thereof
shall not offset any action, suit or proceeding theretofore or thereafter
brought or threatened based in whole or in part upon any such state of facts.
The affirmative vote of the holders of at least 80% of the voting power of all
outstanding shares of the capital stock of the Company is required to adopt,
amend or repeal such provision of the By-laws.
The registrant has executed indemnification agreements with each of its
directors and executive officers pursuant to which the registrant has agreed to
indemnify such parties to the full extent permitted by law, subject to certain
exceptions, if such party becomes subject to an action because such party is a
director, officer, employee, agent or fiduciary of the Company.
The registrant has liability insurance for the benefit of its directors and
officers which will provide coverage for losses of directors and officers for
liabilities arising out of claims against such persons acting as directors or
officers of the registrant (or any subsidiary thereof) due to any breach of
duty, neglect, error, misstatement, misleading statement, omission or act done
by such directors and officers, except as prohibited by law, or otherwise
excluded by such insurance policy.
At present, there is no pending litigation or proceeding involving a
director or officer of the registrant as to which indemnification is being
sought, nor is the registrant aware of any threatened litigation that may result
in claims for indemnification by any director or officer.
II-1
<PAGE> 71
Reference is made to Section 8 of the Underwriting Agreement, the proposed
form of which is filed as Exhibit One, in which the Underwriter agrees to
indemnify the directors and officers of the registrant and certain other
persons, against civil liabilities, including certain liabilities under the
Securities Act.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemized estimate of fees and expenses
payable by the registrant in connection with the offering described in this
registration statement, other than underwriting discounts and commissions:
<TABLE>
<S> <C>
SEC registration fee.................................................... $ 3,760.16
NASD filing fee......................................................... 1,740.85
Nasdaq National Market additional listing fee........................... 17,500.00
Counsel fees and expenses............................................... 100,000.00
Accounting fees and expenses............................................ 50,000.00
Blue sky fees and expenses.............................................. 5,000.00
Printing expenses....................................................... 35,000.00
Transfer agent and registrar fees....................................... 5,000.00
Miscellaneous........................................................... 11,998.99
----------
Total......................................................... $230,000.00
==========
</TABLE>
- ---------------
All of the above expenses will be paid by the registrant.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following information relates to all securities of the registrant sold
by the registrant within the past three years which were not registered under
the Securities Act:
1. On March 31, 1994, the registrant issued an aggregate of 8,135,111
shares of Common Stock (on a post-stock split recapitalization basis) to
Messrs. Koneru and Valluripalli in exchange for all of the issued and
outstanding shares of Oxford Systems Inc.
2. On April 19, 1996, the registrant issued to two venture capital
funds 9.0% subordinated debentures with warrants to purchase up to 20.8% of
the Common Stock of the Company for an aggregate purchase price of
$6,000,000.
3. On May 1, 1997 the registrant sold to Mr. Uma Pandey 14,667 shares
of the registrant's Common Stock and on June 3, 1997 the registrant sold to
Mr. Paul Coombs 28,000 shares of the registrant's Common Stock, each such
sale being made pursuant to the exercise of stock options that were issued
to each of Messrs. Pandey and Coombs on July 12, 1996 at an exercise price
of $8.00 per share.
No underwriter was employed by the registrant in connection with the
issuance and sale of the securities described above. The registrant believes
that the issuance and sale of all of the foregoing securities were exempt from
registration under either (i) Section 4(2) of the Securities Act as transactions
not involving any public offering, or (ii) Rule 701 under the Securities Act as
transactions made pursuant to a written contract relating to compensation.
Appropriate legends were affixed to the stock certificates issued in such
transactions. All recipients had adequate access to information about the
registrant.
There were no other securities sold by the registrant within the past three
years.
II-2
<PAGE> 72
ITEM 27. EXHIBITS AND FINANCIAL STATEMENTS.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------------------------------------------------------------------
<S> <C>
1 Form of Underwriting Agreement.
2# Agreement and Plan of Merger of the Company and its wholly owned subsidiary Oxford
Systems Inc.
3.1* Amended and Restated Certificate of Incorporation.
3.2* Amended and Restated Bylaws.
4.1* Debenture and Warrant Purchase Agreement dated April 10, 1996 by and between the
Company, Messrs. Pandey, Koneru and Valluripalli and Summit Ventures IV, L.P. and
Summit Investors III, L.P.
4.2* Warrant Agreement dated April 10, 1996 by and between the Company and Summit
Ventures IV, L.P. and Summit Investors III, L.P.
4.3* Registration Rights Agreement dated April 10, 1996 by and between the Company and
Summit Ventures IV, L.P. and Summit Investors III, L.P.
4.4* Redemption Agreement dated April 10, 1996 by and between the Company and Summit
Ventures IV, L.P. and Summit Investors III, L.P.
4.5* Shareholders Agreement dated April 10, 1996 by and between the Company, Messrs.
Pandey, Koneru and Valluripalli and Summit Ventures IV, L.P. and Summit Investors
III, L.P.
5 Opinion of Buchanan Ingersoll as to validity of Common Stock.
10.1* 1996 Stock Plan of the Company.
10.2* 1996 Non-Employee Director Stock Option Plan.
10.3* Employment Agreement dated June 1, 1996 between the Company and Ashok Pandey.
10.4* Employment Agreement dated June 1, 1996 between the Company and Rajkumar Koneru.
10.5* Employment Agreement dated June 1, 1996 between the Company and Nagarjun
Valluripalli.
10.6* Employment Agreement dated June 1, 1996 between the Company and Robert M. Olanoff,
together with Change in Control Severance Pay Agreement dated June 1, 1996 between
the Company and Robert M. Olanoff.
10.7* Employment Agreement dated June 1, 1996 between the Company and Paul Coombs. See
Exhibit 10.21.
10.8* Form of Indemnification Agreement entered into by the Company and each of its
directors and officers.
10.9* Sublease Agreement between Micrognosis, Inc., as sublessor, the Company, as
sublessee, with master lease.
10.10* Employee's Invention Assignment and Confidentiality Agreement.
10.11 Intentionally Left Blank.
10.12* Services Provider Agreement by and between Oracle Corporation and the Company
dated July 26, 1994. See Exhibit 10.20.
10.13* Amended and Restated Agreement by Messrs. Pandey, Koneru and Valluripalli dated
July 16, 1996 to indemnify the Company for certain losses.
10.14* Factoring Agreement by and between Access Capital, Inc. and the Company dated as
of October 20, 1995, with exhibits. See Exhibit 10.17.
10.15* Agreement of Waiver and Consent dated as of June 4, 1996 by and among the Company,
certain shareholders of the Company, and Summit Ventures IV, L.P. and Summit
Investors III, L.P., with Amendment No. 1 thereto. See Exhibit 10.24.
10.16* Agreement by and between the Company and Intelligroup Asia Private Limited
("Intelligroup Asia") relating to operational control of Intelligroup Asia, with
related agreements.
</TABLE>
II-3
<PAGE> 73
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------------------------------------------------------------------
<S> <C>
10.17# Letter agreements terminating factoring arrangements by and between each of the
Company and Oxford Systems Inc., and Access Capital, Inc. dated October 10, 1996.
See Exhibit 10.14.
10.18# Loan and Security Agreement between PNC Bank, National Association and the Company
dated as of January 22, 1997, and related documents.
10.19 Intentionally Left Blank.
10.20# Amendment No. 1 to Services Provider Agreement by and between Oracle Corporation
and the Company dated December 30, 1996. See Exhibit 10.12.
10.21# Amendment No. 1, dated February 18, 1997, to Employment Agreement dated June 1,
1996, between the Company and Paul Coombs. See Exhibit 10.7.
10.22 R/3 National Logo Partner Agreement by and between SAP America, Inc. and the
Company dated as of April 29, 1997.
10.23+ Employment Agreement dated December 6, 1996 between the Company and Anthony
Knight, as amended on February 18, 1997.
10.24 Amended and Restated Agreement of Waiver and Consent dated June 6, 1997 by and
among the Company, certain shareholders of the Company, Summit Ventures IV, L.P.
and Summit Investors III, L.P. See Exhibit 10.15.
11 Statement re: Computation of per share earnings.
16* Letter re: Change of Certifying Accountant.
21# Subsidiaries of the Registrant.
23.1** Consent of Arthur Andersen LLP.
23.2 Consent of Buchanan Ingersoll (contained in the opinion filed as Exhibit 5 to the
Registration Statement).
24 Powers of Attorney of certain officers and directors of the Company (contained on
the signature page of this Registration Statement).
27.1 Financial Data Schedule for the year ended December 31, 1996.
27.2 Financial Data Schedule for the three months ended March 31, 1997.
</TABLE>
- ---------------
* Incorporated by reference to the Company's Registration Statement on Form
SB-2 (Registration Statement No. 333-5981) declared effective on September
26, 1996.
# Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1996 filed with the Securities and Exchange
Commission on March 28, 1997.
+ Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarterly period ended March 31, 1997 filed with the Securities and
Exchange Commission on May 14, 1997.
** Filed herewith. All other exhibits previously filed.
(b) Financial Statement Schedules
All financial statement schedules are omitted because the information is
not required, or is otherwise included in the consolidated financial statements
or the notes thereto.
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted to
directors, officers, and controlling persons of the registrant pursuant to
the provisions described in Item 24, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action,
II-4
<PAGE> 74
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(2) For purpose of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities
Act each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 75
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Amendment to the
Registration Statement to be signed on its behalf by the undersigned, in the
Township of Iselin, State of New Jersey, on June 16, 1997.
Intelligroup, Inc.
By: /s/ ASHOK PANDEY
------------------------------------
Ashok Pandey, President and
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed by the following persons
in the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ------------------------------------ --------------
<S> <C> <C>
/s/ ASHOK PANDEY President, Chief Executive Officer June 16, 1997
- ------------------------------------- and Director (Principal Executive
Ashok Pandey Officer)
* Executive Vice President and June 16, 1997
- ------------------------------------- Director
Rajkumar Koneru
* Executive Vice President and June 16, 1997
- ------------------------------------- Director
Nagarjun Valluripalli
/s/ ROBERT M. OLANOFF Chief Financial Officer, Treasurer June 16, 1997
- ------------------------------------- and Secretary (Principal Financial
Robert M. Olanoff and Accounting Officer)
* Director June 16, 1997
- -------------------------------------
Klaus Besier
* Director June 16, 1997
- -------------------------------------
David Finley
* Director June 16, 1997
- -------------------------------------
Kevin P. Mohan
* Director June 16, 1997
- -------------------------------------
Thomas S. Roberts
- ---------------
* By his signature set forth below the undersigned, pursuant to duly authorized powers of
attorney filed with the Securities and Exchange Commission, has signed this Amendment to the
Registration Statement on behalf of the persons indicated.
By: /s/ ROBERT M. OLANOFF
---------------------------------
Robert M. Olanoff
(Attorney-in-fact)
</TABLE>
II-6
<PAGE> 76
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE
- ----------- ----------------------------------------------------------------------- ------------
<S> <C> <C>
1 Form of Underwriting Agreement.
2# Agreement and Plan of Merger of the Company and its wholly owned
subsidiary Oxford Systems Inc.
3.1* Amended and Restated Certificate of Incorporation.
3.2* Amended and Restated Bylaws.
4.1* Debenture and Warrant Purchase Agreement dated April 10, 1996 by and
between the Company, Messrs. Pandey, Koneru and Valluripalli and Summit
Ventures IV, L.P. and Summit Investors III, L.P.
4.2* Warrant Agreement dated April 10, 1996 by and between the Company and
Summit Ventures IV, L.P. and Summit Investors III, L.P.
4.3* Registration Rights Agreement dated April 10, 1996 by and between the
Company and Summit Ventures IV, L.P. and Summit Investors III, L.P.
4.4* Redemption Agreement dated April 10, 1996 by and between the Company
and Summit Ventures IV, L.P. and Summit Investors III, L.P.
4.5* Shareholders Agreement dated April 10, 1996 by and between the Company,
Messrs. Pandey, Koneru and Valluripalli and Summit Ventures IV, L.P.
and Summit Investors III, L.P.
5 Opinion of Buchanan Ingersoll as to validity of Common Stock.
10.1* 1996 Stock Plan of the Company.
10.2* 1996 Non-Employee Director Stock Option Plan.
10.3* Employment Agreement dated June 1, 1996 between the Company and Ashok
Pandey.
10.4* Employment Agreement dated June 1, 1996 between the Company and
Rajkumar Koneru.
10.5* Employment Agreement dated June 1, 1996 between the Company and
Nagarjun Valluripalli.
10.6* Employment Agreement dated June 1, 1996 between the Company and Robert
M. Olanoff, together with Change in Control Severance Pay Agreement
dated June 1, 1996 between the Company and Robert M. Olanoff.
10.7* Employment Agreement dated June 1, 1996 between the Company and Paul
Coombs. See Exhibit 10.21.
10.8* Form of Indemnification Agreement entered into by the Company and each
of its directors and officers.
10.9* Sublease Agreement between Micrognosis, Inc., as sublessor, the
Company, as sublessee, with master lease.
10.10* Employee's Invention Assignment and Confidentiality Agreement.
10.11 Intentionally Left Blank.
10.12* Services Provider Agreement by and between Oracle Corporation and the
Company dated July 26, 1994. See Exhibit 10.20.
10.13* Amended and Restated Agreement by Messrs. Pandey, Koneru and
Valluripalli dated July 16, 1996 to indemnify the Company for certain
losses.
10.14* Factoring Agreement by and between Access Capital, Inc. and the Company
dated as of October 20, 1995, with exhibits. See Exhibit 10.17.
</TABLE>
<PAGE> 77
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE
- ----------- ----------------------------------------------------------------------- ------------
<S> <C> <C>
10.15* Agreement of Waiver and Consent dated as of June 4, 1996 by and among
the Company, certain current shareholders of the Company, and Summit
Ventures IV, L.P. and Summit Investors III, L.P., with Amendment No. 1
thereto. See Exhibit 10.24.
10.16* Agreement by and between the Company and Intelligroup Asia Private
Limited ("Intelligroup Asia") relating to operational control of
Intelligroup Asia, with related agreements.
10.17# Letter agreements terminating factoring arrangements by and between
each of the Company and Oxford Systems Inc., and Access Capital, Inc.
dated October 10, 1996. See Exhibit 10.14.
10.18# Loan and Security Agreement between PNC Bank, National Association and
the Company dated as of January 22, 1997, and related documents.
10.19 Intentionally Left Blank.
10.20# Amendment No. 1 to Services Provider agreement by and between Oracle
Corporation and the Company dated December 30, 1996. See Exhibit 10.12.
10.21# Amendment No. 1, dated February 18, 1997, to Employment Agreement dated
June 1, 1996, between the Company and Paul Coombs. See Exhibit 10.7.
10.22 R/3 National Logo Partner Agreement by and between SAP America, Inc.
and the Company dated as of April 29, 1997.
10.23+ Employment Agreement dated December 6, 1996 between the Company and
Anthony Knight, as amended on February 18, 1997.
10.24 Amended and Restated Agreement of Waiver and Consent dated June 6, 1997
by and among the Company, certain shareholders of the Company, Summit
Ventures IV, L.P. and Summit Investors III, L.P. See Exhibit 10.15.
11 Statement re: Computation of per share earnings.
16* Letter re: Change of Certifying Accountant.
21# Subsidiaries of the Registrant.
23.1** Consent of Arthur Andersen LLP.
23.2 Consent of Buchanan Ingersoll (contained in the opinion filed as
Exhibit 5 to the Registration Statement).
24 Powers of Attorney of certain officers and directors of the Company
(contained on the signature page of this Registration Statement).
27.1 Financial Data Schedule for the year ended December 31, 1996.
27.2 Financial Data Schedule for the three months ended March 31, 1997.
</TABLE>
- ---------------
* Incorporated by reference to the Company's Registration Statement on Form
SB-2 (Registration Statement No. 333-5981) declared effective on September
26, 1996.
# Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1996 filed with the Securities and Exchange
Commission on March 28, 1997.
+ Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarterly period ended March 31, 1997 filed with the Securities and
Exchange Commission on May 14, 1997.
** Filed herewith. All other exhibits previously filed.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Intelligroup, Inc.:
As independent public accountants, we hereby consent to the use of our
report and all references to our firm included in or made part of this
registration statement.
ARTHUR ANDERSEN LLP
Princeton, New Jersey
June 16, 1997
