As Filed with the Securities and Exchange Commission on June 5, 1998
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Intelligroup, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
New Jersey 11-2880025
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
517 Route One South
Iselin, New Jersey 08830
(732) 750-1600
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(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
STEPHEN A. CARNS
President and Chief Executive Officer
Intelligroup, Inc.
517 Route One South
Iselin, New Jersey 08830
(732) 750-1600
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(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copy to:
DAVID J. SORIN, ESQ.
JOHN F. CINQUE, ESQ.
Buchanan Ingersoll
College Centre
500 College Road East
Princeton, New Jersey 08540
(609) 987-6800
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Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. |X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
<PAGE>
<TABLE>
<CAPTION>
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CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Proposed
Amount Maximum Proposed Maximum Amount Of
Title of Shares To Be Aggregate Price Aggregate Offering Registration
To Be Registered Registered Per Share(1) Price Fee
- ---------------------------- ------------------ ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Common Stock,
$.01 par value......... 351,196 $19.38 $6,806,179 $2,007.82
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<FN>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c). Such price is based upon the average of the high
and low price per share of the Registrant's Common Stock as reported on
the Nasdaq National Market on June 1, 1998.
</FN>
</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.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 5, 1998
PROSPECTUS
351,196 Shares
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INTELLIGROUP, INC.
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Common Stock
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This Prospectus relates to an aggregate of 351,196 shares (the "Shares")
of Common Stock, $.01 par value ("Common Stock"), of Intelligroup, Inc. (the
"Company"), which may be offered for sale, from time to time, by or for the
account of the shareholders named herein (the "Selling Shareholders"). The
Company will not receive any of the proceeds from sales of the Shares by the
Selling Shareholders. See "Selling Shareholders."
The Selling Shareholders have advised the Company that they may from
time to time sell all or a portion of the Shares offered hereby in one or more
transactions in the over-the-counter market, on the Nasdaq National Market or
any exchange on which the Common Stock may then be listed, in negotiated
transactions or otherwise, or a combination of such methods of sale, at market
prices prevailing at the time of sale or prices related to such prevailing
market prices or at negotiated prices. The Selling Shareholders may effect such
transactions by selling the Shares to or through broker-dealers, and such
broker-dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Selling Shareholders and/or purchasers of
the Shares for whom they may act as agent (which compensation may be in excess
of customary commissions). The Selling Shareholders and any participating
broker-dealers may be deemed to be "underwriters" as defined in the Securities
Act of 1933, as amended (the "Securities Act"). Neither the Company nor the
Selling Shareholders can estimate at the present time the amount of commissions
or discounts, if any, that will be paid by the Selling Shareholders on account
of their sales of the Shares from time to time. Other offering expenses,
estimated at approximately $500,000.00, will be borne by the Company. See "Plan
of Distribution."
The Common Stock is quoted on the Nasdaq National Market under the
symbol "ITIG". The last reported sale price of the Common Stock on June 4, 1998
on the Nasdaq National Market was $20.13 per share.
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AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE
OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 3 HEREOF.
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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.
June , 1998
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the Commission at
Judiciary Plaza Building, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549, and its Regional Offices located at Seven World Trade Center, 13th Floor,
New York, New York 10048; and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such materials may be obtained
from the Public Reference Section of the Commission at Judiciary Plaza Building,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission also maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission 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 the Nasdaq Stock Market,
Inc., 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed a Registration Statement on Form S-3 (the
"Registration Statement) under the Securities Act. This Prospectus, which
constitutes part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain items of which are
contained in schedules and exhibits to the Registration Statement as permitted
by the rules and regulations of the Commission. Statements contained in this
Prospectus as to the contents of any agreement, instrument or other documents
referred to are not necessarily complete. With respect to each such agreement,
instrument, or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference.
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NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION, OTHER THAN AS CONTAINED HEREIN, IN CONNECTION WITH THE OFFERING
DESCRIBED IN THIS PROSPECTUS, AND ANY INFORMATION OR REPRESENTATION NOT
CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE SELLING SHAREHOLDERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL
FOR SUCH PERSON TO MAKE SUCH OFFER, SOLICITATION OR SALE. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
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<PAGE>
RISK FACTORS
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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 and 21E of the Exchange 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."
Management of Growth. The Company's growth has placed significant
demands on its management, administrative and operational resources. The
Company's revenue increased from $24.6 million in 1995 to $80.2 million in 1997.
From January 1, 1995 through December 31, 1997, the Company's staff increased
583% from 113 to 772 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 April 1998, the Company appointed two new executive officers.
Stephen A. Carns was appointed the Company's President and Chief Executive
Officer and Gerard E. Dorsey was appointed the Company's Senior Vice President -
Finance and Chief Financial Officer.
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. If the Company is
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<PAGE>
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
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. In February 1998, the Company's Chief Financial Officer
resigned and on April 29, 1998, the Company appointed a new Chief Financial
Officer. The Company continues to develop and implement a system of internal
controls and otherwise develop an appropriate administrative infrastructure. The
Company's independent public accountants informed the Company's audit committee
that no material weaknesses in the Company's internal control structure were
noted during the audit of the Company's consolidated financial statements for
the year ended December 31, 1997. However, 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.
Dependence on SAP and Oracle. During the years ended December 31, 1995,
1996 and 1997 and the three months ended March 31, 1998, 69%, 74%, 68% and 68%,
respectively, of the Company's revenue 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. 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. In July 1997, the Company achieved Accelerated SAP Partner
Status with SAP by meeting certain performance criteria established by SAP. Such
status is awarded by SAP on an annual basis pursuant to contract. The Company's
current contract expires on December 31, 1998 and is automatically renewed for a
successive one-year period, unless terminated by either party.
During the year ended December 31, 1997 and the three months ended
March 31, 1998, 14% of the Company's total revenue was derived from projects in
which the Company implemented software developed by Oracle, a leading vendor of
client/server application software for business applications. The Company's
current contract with Oracle expires on July
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<PAGE>
26, 1998 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 contracts with SAP
and Oracle will not be renewed or that the scope of such contracts will be
modified or limited in a manner adverse to the Company, there can be no
assurance that such contracts will be renewed on terms acceptable to the
Company, if at all. In addition, in the event that either SAP or Oracle is
unable to maintain its leadership position within the business applications
software market, if the Company's relationship with SAP or Oracle deteriorates,
or if SAP or Oracle elects to compete directly with the Company, the Company's
business, financial condition and results of operations could be materially
adversely affected.
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, 1995, 1996 and 1997 and the three months ended March 31, 1998, the Company's
ten largest customers accounted for in the aggregate approximately 56%, 66%, 54%
and 45% of its revenue, respectively. During 1995, Ernst & Young LLP and Price
Waterhouse LLP each accounted for more than 10% of revenue. In 1996 and 1997,
Price Waterhouse LLP and Bristol-Myers Squibb each accounted for more than 10%
of revenue. During the three months ended March 31, 1998, Bristol-Myers Squibb
accounted for more than 10% of revenue. For the years ended December 31, 1995,
1996 and 1997 and the three months ended March 31, 1998, 50%, 44%, 38% and 35%,
respectively, of the Company's revenue was generated by serving as a member of
consulting teams assembled by other information technology consulting firms,
which also may be competitors of the Company. 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, if at all. 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.
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.
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. None of these projects is currently material to the Company's
business, financial conditions and results of operations. However, 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 and believes that there
are certain risks related thereto. There can be no assurance that the Company
will be able to complete such projects within the fixed price and required
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<PAGE>
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.
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 maintains 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 continue to be available to the Company on acceptable terms.
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 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 the consulting divisions of software applications
vendors, some of which also are customers of the Company. In addition, the
Company competes with smaller companies such as Plaut and Spearhead Systems
Consultants (US) Ltd. 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 also 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.
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<PAGE>
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.
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. 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. 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. 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.
Acquisition Risks. The Company may acquire other businesses with
services complementary to those offered by the Company. In furtherance of this
strategy, on May 7, 1998, the Company consummated the acquisition of thirty
percent (30%) of the equity interests in CPI Consulting Limited, a corporation
formed pursuant to the laws of England and Wales ("Consulting"). In addition, on
May 21, 1998, the Company consummated the acquisition of all of the equity
interests in CPI Resources Limited, a corporation formed pursuant to the laws of
England and Wales ("Resources"). As a result of such acquisition, the Company
acquired Resources' seventy percent (70%) interest in Consulting. The principal
activity of each of Resources and Consulting is providing information technology
consulting staffing services in the United Kingdom.
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<PAGE>
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, including the acquisitions of
Resources and Consulting, 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. Furthermore,
there can be no assurance that financing for any future 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.
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 SIGHTplus, 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. The Company also requires that
substantially all of its employees and consultants assign to the Company their
rights in 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.
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.
Risks Associated with 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 Australia, Denmark, New
Zealand, Singapore, Japan and the United Kingdom. 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 acquiring 99.8% of
the shares of Intelligroup Asia Private Limited ("Intelligroup Asia"). The
remaining shares are expected to be transferred to the Company by the founders
later this year. Upon consummation of such transfer, Intelligroup Asia will be a
wholly-owned subsidiary of the Company. 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
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<PAGE>
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 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.
Risks Associated with Operations in India. The Company, through
Intelligroup Asia, is subject to the risks associated with doing business in
India. India's central and state governments are significantly involved in the
Indian economy as regulators. In the recent past, the government of India has
provided significant tax incentives and relaxed certain regulatory restrictions
in order to encourage foreign investment in certain sectors of the economy.
Certain of these benefits that directly affect Intelligroup Asia include, among
others, tax holidays, liberalized import and export duties and preferential
rules on foreign investment and repatriation. Changes in the business, political
or regulatory climate of India could have a material adverse effect on
Intelligroup Asia's business, operating results and financial condition. In
addition, India has experienced significant inflation, shortages of foreign
exchange and has been subject to civil unrest. Further, the United States and
Japan have recently imposed sanctions on India in response to certain nuclear
testing conducted by the Indian government. Changes in inflation, interest
rates, taxation or other social, political, economic or diplomatic developments
affecting India in the future, including, but not limited to, further sanctions,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Risk of Increased Government Regulation of Immigration. The Company in
the past has relied and in the future expects to rely increasingly upon
attracting and retaining individuals with technical and project management
skills from other countries. There is a limit to the number of new H-1B
petitions that the Immigration and Nationalization Service may approve in any
government fiscal year, and in years, such as 1997, in which the limit is
reached, the Company may be unable to obtain H-1B visas necessary to bring
critical foreign employees to the United States Compliance with existing
Information Technology Services immigration laws, or changes in such laws making
it more difficult to hire foreign nationals or limiting the ability of the
Company to retain H-1B employees in the United States, could increase
competition for technical personnel and increase the Company's cost of
recruiting and retaining the requisite number of information technology
professionals which could have a material adverse effect on the Company's
business, financial condition and results of operations.
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 7,258,046
shares, consisting of: (i) the 351,196 shares offered hereby; (ii) the 1,150,000
shares offered and sold pursuant to the Company's follow-on public offering of
its Common Stock consummated in July 1997; (iii) 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 (iv) an aggregate of 2,910,600 shares,
including 1,320,600 shares resold by certain shareholders pursuant to the
provisions of Rule 144 under the Securities Act, 42,767 shares which were issued
upon the exercise of vested stock options pursuant to the provisions of Rule 701
under the Securities Act and 1,547,233 shares which may be offered and sold
pursuant to an effective registration statement on filed by the Company (the
- 9 -
<PAGE>
"Form S-8"), will be freely tradable by persons other than "affiliates" of the
Company without restriction. The Company intends to amend the Form S-8 (or file
a new registration statement on Form S-8, if appropriate) shortly after the
consummation of this offering to register an additional 750,000 shares of Common
Stock issuable upon stock options granted or to be granted under its 1996 Stock
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.
Control by Management and Existing Shareholders. Upon completion of
this offering, Messrs. Pandey, Koneru and Valluripalli together will
beneficially own approximately 53.9% of the outstanding shares of Common Stock
(approximately 54.3% 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.
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 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
- 10 -
<PAGE>
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.
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.
Absence of Dividends. The Company does not anticipate paying any
dividends on its Common Stock in the foreseeable future.
- 11 -
<PAGE>
THE COMPANY
-----------
The Company provides a wide range of information technology services,
including enterprise-wide business process solutions, internet applications
services, 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 will result in direct referrals and enhanced industry
recognition. In July 1997, the Company achieved AcceleratedSAP Partner Status
with SAP by meeting certain performance criteria established by SAP. The
Company's current agreement with SAP expires on December 31, 1998 and provides
for an automatic one year renewal period unless either party provides at least
six weeks prior written notice of its intention not to renew. This agreement
contains no minimum revenue requirements or cost sharing arrangements and does
not provide for commissions or royalties to either party. Also in 1997, the
Company began to provide implementation services to PeopleSoft and Baan
licensees to further diversify its service offerings. In July 1997, the Company
was awarded an implementation partnership status by PeopleSoft. In September
1997, the Company was awarded an international consulting partnership status by
Baan. The Company's custom software development services are enhanced by its
access to qualified and experienced programmers at its Advanced Development
Center ("ADC") 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 167 customers in 1997. 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 and Price Waterhouse LLP.
The Company was incorporated in New Jersey in October 1987 under the
name Intellicorp, Inc. to provide systems integration and custom software
development. The Company's name was changed to Intelligroup, Inc. in July 1992.
In March 1994, the Company acquired Oxford Systems Inc. ("Oxford") in a
pooling-of-interests transaction. On December 31, 1996, Oxford was merged into
the Company and ceased to exist as an independent entity. The Company's
principal executive offices are located at 517 Route One South, Iselin, New
Jersey 08830 and its telephone number is (732) 750-1600.
USE OF PROCEEDS
---------------
The Company will not receive any of the proceeds from the sale of the
Shares offered by this Prospectus.
- 12 -
<PAGE>
SELECTED FINANCIAL DATA
-----------------------
The selected statement of operations data for the years ended December
31, 1995, 1996 and 1997 and the selected balance sheet data as of December 31,
1996 and 1997 are derived from and are qualified by reference to, and should be
read in conjunction with, the more detailed audited consolidated financial
statements and the related notes thereto included elsewhere in this Prospectus.
The selected statement of operations data for the year ended December 31, 1994
and the selected balance sheet data as of December 31,1995 and 1994 have been
derived from audited financial statements of the Company which are not included
in this Prospectus. The selected statement of operations data for the year ended
December 31, 1993 and for the three months ended March 31, 1997 and 1998 and the
selected balance sheet data as of December 31, 1993 and March 31, 1998 have been
derived from the unaudited 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 data for such periods. The interim results are not necessarily
indicative of results of operations for the entire year. 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>
Year Ended December 31, Three Months Ended
------------------------------------------------------- --------------------
March 31,
---------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- ---------
(In thousands, except per share data)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue ....................................... $ 933 $ 6,800 $ 24,589 $ 47,189 $ 80,189 $ 15,738 $ 27,323
Cost of sales ................................. 628 5,842 20,021 33,605 55,976 11,336 17,943
-------- -------- -------- -------- -------- -------- ---------
Gross profit ................................ 305 958 4,568 13,584 24,213 4,402 9,380
Selling, general and administrative
expenses .................................... 299 986 4,452 9,908 18,041 3,086 6,891
-------- -------- -------- -------- -------- -------- ---------
Operating income (loss) ..................... 6 (28) 116 3,676 6,172 1,316 2,489
Factor charges/Interest expense
(income), net................................ -- 409 1,175 1,235 (338) (79) (80)
-------- -------- -------- -------- -------- -------- ---------
Income (loss) before provision for
income taxes and extraordinary
charge .................................... 6 (437) (1,059) 2,441 6,510 1,395 2,569
Provision for income taxes .................... -- -- -- 500 2,039 558 727
-------- -------- -------- -------- -------- -------- ---------
Income (loss) before extraordinary charge...... 6 (437) (1,059) 1,941 4,471 837 1,842
Extraordinary charge, net of income tax
benefit of $296 ............................. -- -- -- 1,148 -- -- --
-------- -------- -------- -------- -------- -------- ---------
Net income (loss) ........................... $ 6 $ (437) $ (1,059) $ 793 $ 4,471 $ 837 $ 1,842
======== ======== ======== ======== ======== ======== ========
Earnings (loss) per share:
Basic earnings per share:
Income (loss) before extraordinary charge.... $ 0.00 $ (0.04) $ (0.09) $ 0.20 $ 0.39 $ 0.08 $ 0.15
Extraordinary charge, net of income tax
benefit.................................... -- -- -- (0.12) -- -- --
-------- -------- -------- -------- -------- -------- ---------
Net income (loss) ......................... $ 0.00 $ (0.04) $ (0.09) $ 0.08 $ 0.39 $ 0.08 $ 0.15
======== ======== ======== ======== ======== ======== ========
Weighted average number of common shares --
Basic ......................................... 12,203 12,203 12,203 9,729 11,362 10,736 11,997
======== ======== ======== ======== ======== ======== ========
Diluted earnings per share:
Income (loss) before extraordinary charge..... $ 0.00 $ (0.04) $ (0.09) $ 0.17 $ 0.38 $ 0.08 0.15
Extraordinary charge, net of income tax
benefit .................................... -- -- -- (0.10) -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) ........................ $ 0.00 $ (0.04) $ (0.09) $ 0.07 $ 0.38 $ 0.08 $ 0.15
======== ======== ======== ======== ======== ======== =========
Weighted average number of common shares --
Diluted 12,203 12,203 12,203 10,989 11,842 10,889 12,419
======== ======== ======== ======== ======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of
-------------------------------------------------------
March 31,
1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- ---------
(In thousands)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents ................... $ 34 $ 209 $ 71 $ 7,479 $ 8,391 $ 3,425
Working capital (deficit) ................... 146 (426) (1,597) 15,713 28,981 28,384
Total assets ................................ 257 2,313 6,784 21,262 38,668 42,128
Short-term debt, including subordinated
debentures ................................ 5 1,032 3,489 20 20 20
Capital lease obligations, less current
portion ................................... 52 -- 81 57 51 51
Shareholders' equity (deficit) .............. 130 (307) (1,366) 17,162 32,462 34,534
</TABLE>
- 13 -
<PAGE>
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, internet applications
services, 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, 1998 and provides for an automatic one-year
renewal period unless either party provides at least six weeks prior written
notice of its intention not to renew. This agreement contains no minimum revenue
requirements or cost sharing arrangements and does not provide for commissions
or royalties to either party. In July 1997, the Company achieved AcceleratedSAP
Partner Status with SAP by meeting certain performance criteria established by
SAP. Also, in 1997, the Company began to provide implementation services to
PeopleSoft and Baan licensees to further diversify its service offerings. The
Company recently expanded its Oracle applications implementation services
practice and added upgrade services to meet market demand of mid-size to large
companies that are implementing or upgrading Oracle applications. In July 1997,
the Company was awarded an implementation partnership status by PeopleSoft. In
September 1997, the Company was awarded an international consulting partnership
status by Baan.
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 provided services on certain projects in which
it, at the request of the clients, offered a fixed price for its services,
however, none of these projects are currently material to the Company's
business, financial condition and results of operations. 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 and believes that there
are certain risks related thereto. There can be no assurance that the Company
will be able to complete such projects within the fixed price timeframes. The
- 14 -
<PAGE>
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 years ended December 31, 1995, 1996 and 1997 and the three
months ended March 31, 1998, the Company's ten largest customers accounted for
in the aggregate of approximately 56%, 66%, 54% and 45% of its revenue,
respectively. During 1995, Ernst & Young LLP and Price Waterhouse LLP each
accounted for more than 10% of revenue. In 1996 and 1997, Price Waterhouse LLP
and Bristol-Myers Squibb each accounted for more than 10% of revenue. During the
three months ended March 31, 1998, Bristol-Myers Squibb accounted for more than
10% of revenue. For the years ended December 31, 1995, 1996 and 1997 and the
three months ended March 31, 1998, 50%, 44%, 38% and 35%, 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 years ended December 31, 1995, 1996 and 1997 and the three months
ended March 31, 1998, 69%, 74%, 68% and 68%, respectively, of the Company's
total revenue was derived from projects in which the Company implemented
software developed by SAP. For the year ended December 31, 1997 and the three
months ended March 31, 1998, 14% of the Company's total revenue was derived from
projects in which the Company implemented software developed by Oracle. During
the three months ended March 31, 1998, approximately 42% of the Company's
revenue was derived from engagements at which the Company had project management
responsibilities, compared to 33%, 16% and 0% during the years ended December
31, 1997, 1996 and 1995, respectively.
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 has been shifting to such higher-margin turnkey
management assignments and more complex projects by leveraging its reputation,
existing capabilities, proprietary implementation methodology, development tools
and offshore development capabilities with expanded sales and marketing efforts
and new service offerings to develop turnkey project sales opportunities with
both new and existing customers. The Company's inability to continue its shift
to higher-margin turnkey management assignments and more complex projects may
adversely impact the Company's future growth.
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 operations in India, the ADC, and in 1995
established a sales office in California. In addition, from 1994 to date, the
Company has incurred expenses to develop proprietary development tools and
4SIGHT and 4SIGHTplus, 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 144 such personnel as of March 31, 1998, as compared to eight such
personnel as of January 1, 1995. During 1997 and 1998, the Company opened sales
and operations offices in Atlanta, Boston, Chicago, Dallas,
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<PAGE>
Detroit and Washington D.C. In addition to the ADC and sales offices in
India, the Company also has offices in, Australia, Denmark, New Zealand,
Singapore, Japan and the United Kingdom. The Company has reviewed the adequacy
of its leased facilities in light of its expanded staff and has executed a lease
for approximately 48,475 square feet in Edison, New Jersey for an initial term
of 10 years. The Company expects to move its headquarters to such location in
the summer of 1998. The Company expects to be able to sublet its current
headquarters for the remainder of the term of its sublease, which expires
November 15, 1999; however, there is no assurance that the Company will be able
to find a subtenant.
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
---------------------
Year Ended
December 31,
---------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Revenue .................................................... 100.0% 100.0% 100.0%
Cost of sales .............................................. 81.4 71.2 69.8
----- ----- -----
Gross profit ............................................... 18.6 28.8 30.2
Selling, general and administrative expenses ............... 18.1 21.0 22.5
----- ----- -----
Operating income (loss) .................................... 0.5 7.8 7.7
Factor fees/Interest expense (income), net ................. 4.8 2.6 (0.4)
----- ----- -----
Income (loss) before provision for income taxes and
extraordinary charge ....................................... (4.3) 5.2 8.1
Provision for income taxes ................................. 1.1 2.5
----- ----- -----
Income (loss) before extraordinary charge .................. (4.3) 4.1 5.6
Extraordinary charge, net of income tax benefit ............ -- 2.4 --
----- ----- -----
Net income (loss) .......................................... (4.3)% 1.7% 5.6%
===== ===== =====
</TABLE>
- 16 -
<PAGE>
Year Ended December 31, 1996 Compared to Year Ended December 31, 1997
Revenue. Revenue increased by 69.9%, or $33.0 million, from $47.2
million in 1996 to $80.2 million in 1997. This increase was attributable
primarily to increased demand for the Company's SAP related implementation
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 66.6%, or $22.4 million, from $33.6 million
in 1996 to $56.0 million in 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 78.2%, or $10.6 million, from $13.6 million in 1996 to $24.2
million in 1997. Gross profit margin increased from 28.8% of revenue in 1996 to
30.2% of revenue in 1997. The increase in such gross profit margin was
attributable to the increase in implementation services projects and a
combination of improved billing margins, greater consultant utilization and
achieving certain customer performance incentives.
Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of administrative salaries, sales
person compensation, travel and entertainment, some of the costs associated with
the ADC and related development costs and professional fees. Selling, general
and administrative expenses increased by 82.1%, or $8.1 million, from $9.9
million in 1996 to $18.0 million in 1997, and increased as a percentage of
revenue from 21.0% to 22.5%, 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 1997 and increased
travel and entertainment expenses due to the growth of the business and the
employee base. Such expenses were increased to support the continued revenue
growth of the Company in the United States and abroad. In addition, such
expenses increased due to increased sales and management recruiting costs,
support services, and an increase in the provision for doubtful accounts.
Factor fees/Interest (income) expense, net. Factor fees in the 1996
period were the charges incurred by the Company to finance its accounts
receivable. On October 10, 1996, the Company repaid the factor with a portion of
the proceeds from the Company's initial public offering, approximately $4.4
million, consisting of all amounts outstanding under the agreement with its
factor and terminated its factor agreement. Subsequent to the Company's initial
public offering, interest income has been earned on interest bearing cash
accounts and short term investments.
Provision for Income Taxes. The Company's effective income tax rate was
31.3% and 20.5% for the years ended December 31, 1997 and 1996. During 1997 and
1996 the Company reduced their valuation allowance by $207,000 and $461,000,
respectively as management determined that it was more likely than not, that the
applicable portion of the net deferred tax asset would be or had been realized.
The 1997 and 1996 valuation allowance reduction favorably impacted the effective
income tax rate by 3% and 14%, respectively. In 1996, the Company elected a five
year tax holiday in India in accordance with a local tax incentive program
whereby no income tax will be due during such period. For the year ended
December
- 17 -
<PAGE>
31, 1997, the tax holiday favorably impacted the effective tax rate by
approximately 8%. There was no significant impact for 1996. Based on current and
anticipated profitability, management believes all net deferred tax assets are
more likely than not to be realized.
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 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.
- 18 -
<PAGE>
Backlog
-------
The Company normally enters into written contracts with its customers
at the time it commences work on a project. These written contracts contain
varying terms and conditions and the Company does not generally believe it is
appropriate to characterize such written contracts as creating backlog. In
addition, because these written contracts often provide that the arrangement can
be terminated with limited advance notice and without significant penalty, the
Company does not believe that projects in process at any one time are a reliable
indicator or measure of expected future revenue. In the event that a customer
terminates a project, the customer remains obligated to pay the Company for
services performed by it through the date of termination.
Liquidity and Capital Resources
-------------------------------
The Company funds its operations primarily from cash flow generated
from operations, and to a lesser extent, from cash balances generated from the
Company's initial and follow-on public offerings consummated in October 1996 and
July 1997, respectively. On July 2, 1997, the Company consummated a follow-on
public offering (the "Offering") of 1,000,000 shares of its Common Stock at a
price to the public of $9.50 per share. On July 15, 1997 and as part of the
Offering, an additional 150,000 shares at $9.50 per share were issued to cover
overallotments. The net proceeds to the Company from the Offering, after
underwriting discounts and commissions and other expenses of the Offering, were
approximately $9.9 million.
Cash used in operating activities was $3.2 million during the three
months ended March 31, 1998, resulting primarily from the growth in accounts
receivable and unbilled services. Cash used in operating activities for the
years ended December 31, 1997, 1996 and 1995 was $7.2 million, $4.3 million and
$2.3 million, respectively.
The Company had working capital of $28.4 million at March 31, 1998 and
$29.0 million at December 31, 1997.
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 $142,000, $1.1 million, $2.5 million and $2.0
million in computer equipment and furniture in 1995, 1996 and 1997 and the three
months ended March 31, 1998, respectively. The Company has outstanding
commitments of $800,000 related to furniture and fixtures for the new
headquarters in Edison, New Jersey. Of this amount, $200,000 was paid subsequent
to March 31, 1998.
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
- 19 -
<PAGE>
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 totaled $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 a $750,000 credit facility 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.
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 approximately $800,000 which was paid in full 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 of any tax
benefits realized by the Company, arising from or relating to federal or state
tax, interest or penalty payment obligations resulting from the above subject
matter. The Company believes that its failure to record and pay 1994 and 1995
federal and state payroll-related taxes for certain employees resulted from a
combination of factors, including lack of internal controls 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, and as later amended on August 18, 1997, the Company
entered into a two-year credit agreement with a bank (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 either at the
Bank's prime rate per annum or the EuroRate plus 2% (at the Company's option),
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 1/4 of 1% per annum) to
purchase equipment. 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
- 20 -
<PAGE>
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. 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. At December 31, 1997, the Company
failed to meet such certain financial criteria, and as a result, the Bank did
not release the collateral securing the revolving line of credit.
As of March 31, 1998, there were no amounts outstanding under the
revolving line of credit and no equipment term loans outstanding.
The Company believes that its available funds, together with current
credit arrangements and the cash flow expected to be generated from operations,
will be adequate to satisfy its current and planned operations for at least the
next 12 months.
Recently Issued Accounting Standards
- ------------------------------------
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share" was issued in February 1997 and replaces Accounting Principles Board
("APB") Opinion No. 15. The new statement simplifies the computations of
earnings per share ("EPS") by replacing the presentation of primary EPS with
basic EPS, which is computed by dividing income available to common shareholders
by the weighted-average number of common shares outstanding for the period.
Diluted EPS under the new statement is computed similarly to fully diluted EPS
pursuant to APB Opinion No. 15. The Company has adopted SFAS No. 128 and has
restated EPS for comparative purposes. SFAS No. 128 did not have a material
impact on the computation of the earnings per share presented in the
consolidated financial statements.
SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997.
This statement is effective for the Company's fiscal year ending December 31,
1998. This statement addresses the reporting and displaying of comprehensive
income and its components. Adoption of SFAS No. 130 relates to disclosure within
the financial statements and is not expected to have a material effect on the
Company's consolidated financial statements. The Company adopted the provisions
of SFAS No. 130 on January 1, 1998.
SFAS No. 131, "Disclosures about Segments of and Enterprise and Related
Information" was issued in June 1997. This statement is effective for the
Company's fiscal year ending December 31, 1998. This statement changes the way
public companies report information about segments of their business in their
annual financial statements and requires them to report selected segment
information in their quarterly reports. Adoption of SFAS No. 131 relates to
disclosure within the financial statements and is not expected to have a
material effect on the Company's consolidated financial statements.
- 21 -
<PAGE>
SELLING SHAREHOLDERS
--------------------
The Shares to be offered under this Prospectus are owned by the Selling
Shareholders listed below. All of the Selling Shareholders, other than Mr.
Fenner, acquired the Shares in connection with the acquisition by Intelligroup
Europe Limited (No. 3205142), a corporation formed pursuant to the laws of
England and Wales and a wholly-owned subsidiary of the Company ("Sub"), of such
Selling Shareholders' equity interests in CPI Consulting Limited (No. 3316554),
a corporation formed pursuant to the laws of England and Wales, pursuant to the
terms of an Agreement of Purchase and Sale dated as of May 7, 1998, among the
Company, Sub and the Selling Shareholders (other than Mr. Fenner)(the
"Consulting Agreement"). Mr. Fenner acquired his Shares in connection with the
acquisition by Sub of Mr. Fenner's equity interests in CPI Resources Limited
(No. 2080824), a corporation formed pursuant to the laws of England and Wales,
pursuant to the terms of an Agreement of Purchase and Sale dated as of May 21,
1998, among the Company, Sub and Mr. Fenner (collectively, with the Consulting
Agreement, the "CPI Agreements"). Pursuant to the terms of the CPI Agreements,
the Company agreed to file a registration statement covering the Shares held by
the Selling Shareholders with the Commission.
The following table sets forth, as of May 21, 1998, certain information
with respect to the Selling Shareholders.
<TABLE>
<CAPTION>
Number of
Beneficial Ownership Shares Beneficial
Name of Shares Prior to Offered Ownership of Shares
Selling Shareholder Offering (1) Hereby(2) After Offering (2)
- ------------------ ----------------------- --------- ---------------------
Number Percent Number Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Bandele Attah 27,616(3) * 27,616 -- --
Tim Fenner 371,000 3.0 185,500 185,500 1.5
Paul Grant 27,616(3) * 27,616 -- --
Michael J. Hirst 27,616(3) * 27,616 -- --
Richard M. Lucy 27,616(3) * 27,616 -- --
Christopher J.J. Smith 27,616(3) * 27,616 -- --
Robert J. Wilson 27,616(3) * 27,616 -- --
- -------------
* Less than 1%.
<FN>
(1) Applicable percentage of ownership is based on 12,561,792 shares of Common
Stock outstanding, plus any Common Stock equivalents held by such holder.
(2) Assumes that all Shares are sold pursuant to this offering and that no
other shares of Common Stock are acquired or disposed of by the Selling
Shareholders prior to the termination of this offering. Because the
Selling Shareholders may sell all, some or none of their Shares or may
acquire or dispose of other shares of Common Stock, no reliable estimate
can be made of the aggregate number of Shares that will be sold pursuant
to this offering or the number or percentage of shares of Common Stock
that each Selling Shareholder will own upon completion of this offering.
(3) Does not include options to purchase 3,000 shares of Common Stock granted
to such holder pursuant to the Company's 1996 Stock Plan. Such options
become exercisable to the extent of one-fourth of the options on the first
anniversary of the date of grant (April 27, 1998) with an additional
one-fourth of the options granted becoming exercisable on each of the
second, third and fourth anniversary of the date of grant.
</FN>
</TABLE>
Under agreements with the Selling Shareholders, all offering expenses
are borne by the Company except the fees and expenses of any counsel and other
advisors that the Selling Shareholders may employ to represent them in
connection with the offering and all brokerage or underwriting discounts or
commissions paid to broker-dealers in connection with the sale of the Shares.
- 22 -
<PAGE>
PLAN OF DISTRIBUTION
--------------------
The Selling Shareholders have not advised the Company of any specific
plan for distribution of the Shares offered hereby, but it is anticipated that
the Shares will be sold from time to time by the Selling Shareholders or by
pledgees, donees, transferees or other successors in interest. Such sales may be
made over-the-counter on the Nasdaq National Market at prices and at terms then
prevailing or at prices related to the then current market price, or in
negotiated transactions. The Shares may be sold by one or more of the following:
(i) a block trade in which the broker or dealer so engaged will attempt to sell
the Shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction; (ii) purchases by a broker or dealer
for its account pursuant to this Prospectus; or (iii) ordinary brokerage
transactions and transactions in which the broker solicits purchases. In
effecting sales, brokers or dealers engaged by the Selling Shareholders may
arrange for other brokers or dealers to participate. Brokers or dealers will
receive commissions or discounts from Selling Shareholders in amounts to be
negotiated immediately prior to the sale. Such brokers or dealers and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales, and any commissions
received by them and any profit realized by them on the resale of shares as
principals may be deemed underwriting compensation under the Securities Act. The
expenses of preparing this Prospectus and the related Registration Statement
with the Commission will be paid by the Company. Shares of Common Stock covered
by this Prospectus also may qualify to be sold pursuant to Rule 144 under the
Securities Act, rather than pursuant to this Prospectus. The Selling
Shareholders have been advised that they are subject to the applicable
provisions of the Exchange Act, including without limitation, Rules 10b-5 and
Regulation M thereunder.
LEGAL MATTERS
-------------
The validity of the issuance of the Shares of Common Stock offered
hereby will be passed upon for the Company by Buchanan Ingersoll, 500 College
Road East, Princeton, New Jersey.
EXPERTS
-------
The audited consolidated financial statements included in this
Prospectus and elsewhere in the Registration Statement, to the extent and for
the periods indicated in their reports, 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 reports.
- 23 -
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
-----------------------------------------------
The following documents which previously have been filed by the Company
with the Commission pursuant to the Exchange Act are incorporated in and made a
part of this Prospectus by reference:
1. The Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997;
2. The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998;
3. The Company's Current Report on Form 8-K dated May 4, 1998;
4. The Company's Current Report on Form 8-K dated May 27, 1998; and
5. The description of the Company's Common Stock, $.01 par value,
which is contained in the Company's Registration Statement on Form
8-A filed pursuant to Section 12(g) of the Exchange Act in the
form declared effective by the Commission on September 26, 1996,
including any subsequent amendments or reports filed for the
purposes of updating such description.
All documents hereafter filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination of the
offering of the Shares offered hereby shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the date of filing
of such documents. Any statement contained in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document, which also is or
is deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.
This Prospectus incorporates documents by reference that are not
presented herein or delivered herewith. The Company hereby undertakes to
provide, without charge, to each person, including any beneficial owner, to whom
a copy of this Prospectus is delivered, on the written or oral request or such
person, a copy of any or all of the information incorporated herein by
reference. Exhibits to any of such documents, however, will not be provided
unless such exhibits are specifically incorporated by reference into such
documents. The requests should be addressed to: Gerard E. Dorsey, Chief
Financial Officer, Intelligroup, Inc., 517 Route One South, Iselin, New Jersey
08830, telephone number (732) 750-1600.
- 24 -
<PAGE>
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 or her 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 or she reasonably believed to be in
or not opposed to the best interests of the corporation, and with respect to any
criminal proceeding, if he or she had no reasonable cause to believe his or her
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, or (iii) for any transaction
from which the director or officer derived an improper personal benefit.
The Company's 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 Company shall indemnify its directors and officers to the extent such
parties are involved in or made a party to any action, suit or proceeding
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 Company 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 capital stock of the Company is required to adopt, amend
or repeal such provision of the By-laws.
The Company has executed indemnification agreements with each of its
directors and executive officers pursuant to which the Company 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 Company 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
- 25 -
<PAGE>
against such persons acting as directors or officers of the Company (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.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
- 26 -
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Page
----
Report of Independent Public Accountants......................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1996..... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995.................... F-4
Consolidated Statements of Shareholders' Equity (Deficit) for
the years ended December 31, 1997, 1996 and 1995.... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995................... F-6
Notes to Consolidated Financial Statements....................... F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Shareholders of Intelligroup, Inc.:
We have audited the accompanying consolidated balance sheets of
Intelligroup, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ARTHUR ANDERSEN LLP
Princeton, New Jersey
February 5, 1998 (except for the
matters discussed in Note 9, as to
which the date is May 21, 1998)
F-2
<PAGE>
<TABLE>
<CAPTION>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
1997 1996
------------ ------------
Assets
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents ............................................................... $ 8,391,000 $ 7,479,000
Accounts receivable, less allowance for doubtful accounts of $799,000 and
$546,000 at December 31, 1997 and 1996, respectively
17,668,000 8,538,000
Unbilled services ....................................................................... 7,834,000 2,916,000
Deferred income taxes ................................................................... 404,000 331,000
Other current assets .................................................................... 668,000 492,000
------------ ------------
Total current assets ................................................................ 34,965,000 19,756,000
Equipment, net ............................................................................. 3,366,000 1,281,000
Other assets ............................................................................... 337,000 225,000
------------ ------------
$ 38,668,000 $ 21,262,000
============ ============
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities:
Accounts payable ........................................................................ $ 1,353,000 $ 406,000
Accrued payroll and related taxes ....................................................... 2,636,000 1,814,000
Accrued expenses and other liabilities .................................................. 1,074,000 1,268,000
Income taxes payable .................................................................... 901,000 535,000
Current portion of obligations under capital leases ..................................... 20,000 20,000
------------ ------------
Total current liabilities ........................................................... 5,984,000 4,043,000
------------ ------------
Obligations under capital leases, less current portion ..................................... 51,000 57,000
------------ ------------
Deferred income taxes ...................................................................... 171,000 --
------------ ------------
Commitments and contingencies
Shareholders' Equity
Preferred stock, $.01 par value, 5,000,000 shares authorized, none
issued or outstanding ................................................................. -- --
Common stock, $.01 par value, 25,000,000 shares authorized, 11,987,981 and
10,735,600 shares issued and outstanding at
December 31, 1997 and 1996, respectively .............................................. 120,000 107,000
Additional paid-in capital .............................................................. 30,175,000 19,201,000
Retained earnings (deficit) ............................................................. 2,325,000 (2,146,000)
Currency translation adjustments ........................................................ (158,000) --
------------ ------------
Total shareholders' equity .......................................................... 32,462,000 17,162,000
------------ ------------
$ 38,668,000 $ 21,262,000
============ ============
See notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
Revenue ................................................................ $ 80,189,000 $ 47,189,000 $ 24,589,000
Cost of sales .......................................................... 55,976,000 33,605,000 20,021,000
------------ ------------ ------------
Gross profit .................................................... 24,213,000 13,584,000 4,568,000
Selling, general and administrative expenses ........................... 18,041,000 9,908,000 4,452,000
------------ ------------ ------------
Operating income ................................................ 6,172,000 3,676,000 116,000
------------ ------------ ------------
Other expenses:
Interest (income) expense, net ...................................... (338,000) 236,000 4,000
Factor charges ...................................................... -- 999,000 1,171,000
------------ ------------ ------------
(338,000) 1,235,000 1,175,000
------------ ------------ ------------
Income before provision for income taxes and extraordinary
charge .............................................................. 6,510,000 2,441,000 (1,059,000)
Provision for income taxes ............................................. 2,039,000 500,000 --
------------ ------------ ------------
Income before extraordinary charge ..................................... 4,471,000 1,941,000 (1,059,000)
Extraordinary charge-Loss on early extinguishment of debt,
net of income tax benefit of $296,000 ............................... -- 1,148,000 --
------------ ------------ ------------
Net income ............................................................. $ 4,471,000 $ 793,000 $ (1,059,000)
============ ============ ============
Earnings per share:
Basic earnings per share:
Income before extraordinary charge .............................. $ 0.39 $ 0.20 $ (0.09)
Extraordinary charge, net of income tax benefit ................. -- (0.12) --
------------ ------------ ------------
Net income per share .......................................... $ 0.39 $ 0.08 $ (0.09)
============ ============ ============
Weighted average number of common shares - Basic ................ 11,362,000 9,729,000 12,203,000
============ ============ ============
Diluted earnings per share:
Income before extraordinary charge .............................. $ 0.38 $ 0.17 $ (0.09)
Extraordinary charge, net of income tax benefit ................. -- (0.10) --
------------ ------------ ------------
Net income per share .......................................... $ 0.38 $ 0.07 $ (0.09)
============ ============ ============
Weighted average number of common shares - Diluted ..............
11,842,000 10,989,000 12,203,000
============ ============ ============
See notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1997, 1996 and 1995
Cumulative
Retained Foreign Total
Additional Earnings Currency Shareholders's
Common Stock Paid in (Accumulated Translation Equity
Shares Amount Capital Deficit) Adjustments (Deficit)
------ ------ ------- -------- ----------- ---------
<S> <C> <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)
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
Net income ............................. -- -- -- 793,000 -- 793,000
----------- --------- ----------- ----------- --------- ------------
Balance at December 31, 1996 ........... 10,735,600 107,000 19,201,000 (2,146,000) -- 17,162,000
Issuance of common stock,
net of related costs ................... 1,150,000 12,000 9,888,000 -- -- 9,900,000
Exercise of stock options .............. 102,381 1,000 838,000 -- -- 839,000
Tax benefit from exercise
of stock options ....................... -- -- 248,000 -- -- 248,000
Currency Translation ................... -- -- -- -- (158,000) (158,000)
adjustments
Net income ............................. -- -- -- 4,471,000 -- 4,471,000
----------- --------- ----------- ----------- --------- ------------
Balance at December 31, 1997 ........... 11,987,981 $ 120,000 $30,175,000 $ 2,325,000 $(158,000) $ 32,462,000
=========== ========= =========== =========== ========= ============
See notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------ ------------ -----------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) ........................................................... $ 4,471,000 $ 793,000 $(1,059,000)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization ........................................... 392,000 214,000 51,000
Provision for doubtful accounts ......................................... 765,000 590,000 411,000
Extraordinary charge .................................................... -- 1,444,000 --
Deferred income taxes ................................................... 98,000 (331,000) --
Tax benefit from exercise of stock options .............................. 248,000 -- --
Changes in operating assets and liabilities:
Restricted cash deposited in escrow ..................................... -- 100,000 (100,000)
Accounts receivable ..................................................... (9,895,000) (4,399,000) (3,339,000)
Unbilled services ....................................................... (4,918,000) (1,347,000) (1,386,000)
Other current assets .................................................... (176,000) (489,000) 27,000
Other assets ............................................................ (112,000) (197,000) (30,000)
Cash overdraft .......................................................... -- (83,000) 83,000
Accounts payable ........................................................ 947,000 (1,074,000) 1,480,000
Accrued payroll and related taxes ....................................... 822,000 (754,000) 1,035,000
Accrued expenses and other liabilities .................................. (194,000) 736,000 478,000
Income taxes payable .................................................... 366,000 535,000 --
------------ ------------ -----------
Net cash used in operating activities ............................... (7,186,000) (4,262,000) (2,349,000)
------------ ------------ -----------
Cash flows from investing activities:
Purchases of equipment ...................................................... (2,477,000) (1,143,000) (142,000)
------------ ------------ -----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of
issuance costs ............................................................ 9,900,000 17,835,000 --
Proceeds from exercise of stock options ..................................... 839,000 -- --
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) --
Loans from (repayments to) factors, net ..................................... -- (3,343,000) 2,349,000
Proceeds from (repayments of) lines of credit, net .......................... -- (45,000) 6,000
Principal payments under capital leases ..................................... (6,000) (22,000) (2,000)
------------ ------------ -----------
Net cash provided by financing activities ........................... 10,733,000 12,813,000 2,353,000
------------ ------------ -----------
Effect of foreign currency exchange rate changes on
cash ..................................................................... (158,000) -- --
------------ ------------ -----------
Net increase (decrease) in cash and cash
equivalents ......................................................... 912,000 7,408,000 (138,000)
Cash and cash equivalents at beginning of year ................................. 7,479,000 71,000 209,000
------------ ------------ -----------
Cash and cash equivalents at end of year ....................................... $ 8,391,000 $ 7,479,000 $ 71,000
============ ============ ===========
Supplemental disclosures of cash flow information:
Cash paid for interest ...................................................... $ -- $ 1,264,000 $ 1,175,000
============ ============ ===========
Cash paid for income taxes .................................................. $ 1,795,000 $ -- $ --
============ ============ ===========
Noncash transactions:
Capital lease obligations ................................................... $ -- $ -- $ 102,000
============ ============ ===========
See notes to consolidated financial statements.
</TABLE>
F-6
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
- ---------------------------------------------------
Business
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. Minority interests were
not significant at December 31, 1997 and 1996. 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 and
disclosure of contingent 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 maturities of three months or less from the date of
purchase.
Equipment
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, 1997 and
F-7
<PAGE>
Note 1 - Summary of Significant Accounting Policies - (cont'd)
- --------------------------------------------------------------
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 $765,000, $590,000 and $411,000 in 1997, 1996 and
1995, 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.
Stock-Based Compensation
Stock-based compensation is recognized using the intrinsic value
method. For disclosure purposes, pro forma net income and earnings per share
impacts are provided as if the fair market value method had been applied.
Currency Translation
Assets and liabilities relating to foreign operations are translated
into U.S. dollars using exchange rates in effect at the balance sheet date;
income and expenses are translated into U.S. dollars using monthly average
exchange rates during the year. Translation adjustments associated with assets
and liabilities are excluded from income and credited or charged directly to
shareholders' equity. Translation adjustments for 1996 and 1995 were not
material.
Concentrations
For the years ended December 31, 1997, 1996 and 1995, approximately
68%, 74% and 69% 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
Implementation Partner, which was first obtained in 1995. The Company's
agreement with SAP (the "Agreement") is awarded on an annual basis. The
Company's current contract expires on December 31, 1998. This Agreement contains
no
F-8
<PAGE>
Note 1 - Summary of Significant Accounting Policies - (cont'd)
- --------------------------------------------------------------
minimum revenue requirements or cost sharing arrangements and does not provide
for commissions or royalties to either party. In February 1997, the Company
achieved a National Logo Partner relationship with SAP. For the year ended
December 31, 1997, approximately 14% of revenue was derived from projects in
which the Company's personnel implemented software developed by Oracle.
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, 1997, 1996 and 1995, 38%, 44% and 50%, 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 11% and 13% of revenue in 1997
and 1996, respectively. Accounts receivable due from this customer was
approximately $1,628,000 and $2,268,000 as of December 31, 1997 and 1996,
respectively. Another customer accounted for approximately 12%, 20% and 10% of
revenue for 1997, 1996 and 1995, respectively. Accounts receivable due from this
customer was approximately $2,049,000, $988,000 and $611,000 as of December 31,
1997, 1996 and 1995, 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 and identifiable assets from foreign operations were not
significant in 1997, 1996 and 1995. During 1997, approximately $2,100,000 of
income from operations was generated from foreign operations while during 1996
and 1995 income from foreign operations was not significant.
Income Taxes
The Company accounts for income taxes pursuant to the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," ("SFAS No. 109") 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 bases of assets and
liabilities, using enacted tax rates currently in effect. The Company does not
provide for additional U.S. income taxes on undistributed earnings
(approximately $1,855,000) considered to be permanently invested in foreign
subsidiaries.
Earnings Per Share
In the fourth quarter of 1997, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings per share," which
requires certain changes to the manner in which earnings per share ("EPS") is
reported. SFAS No. 128 is effective for fiscal years
F-9
<PAGE>
Note 1 - Summary of Significant Accounting Policies - (cont'd)
- --------------------------------------------------------------
ending after December 15, 1997, and, requires restatement of previously reported
earnings per share. The computation of basic earnings per share and diluted
earnings per share were as follows:
1997 1996 1995
----------- ----------- ------------
Net Income $ 4,471,000 $ 793,000 $(1,095,000)
----------- ----------- ------------
Denominator:
Weighted average number of common
shares 11,362,000 9,729,000 12,203,000
----------- ----------- ------------
Basic earnings per share $ 0.39 $ 0.08 $ (0.09)
=========== =========== ============
Denominator:
Weighted average number of common
shares 11,362,000 9,729,000 12,203,000
Common share equivalents of
outstanding stock options 480,000 1,260,000 --
----------- ----------- ------------
Total shares 11,842,000 10,989,000 12,203,000
----------- ----------- ------------
Diluted earnings per share $ 0.38 $ 0.07 $ (0.09)
=========== =========== ============
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," which establishes standards for reporting
comprehensive income and its components, and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes revised
reporting and disclosure requirements for operating segments. These standards
increase financial reporting disclosures and will have no impact on the
Company's financial position or results from operations.
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.
F-10
<PAGE>
Note 2 - Equipment
- ------------------
Equipment consists of the following as of December 31:
1997 1996
---- ----
Vehicles.......................... $ 26,000 $ 26,000
Furniture......................... 285,000 98,000
Equipment......................... 3,690,000 1,400,000
----------- -----------
4,001,000 1,524,000
Less-Accumulated depreciation..... (635,000) (243,000)
------------ -----------
$ 3,366,000 $ 1,281,000
=========== ===========
Included in the above is $102,000 of equipment held under capital
leases at December 31, 1997 and 1996. Depreciation expense was $392,000,
$144,000 and $51,000 in 1997, 1996 and 1995, respectively.
Note 3 - Lines of Credit and Subordinated Debentures
- ----------------------------------------------------
In January 1997, and as later amended on August 18, 1997, the Company
entered into a two-year credit agreement with a bank (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 either at the
Bank's prime rate per annum or the EuroRate plus 2% (at the Company's option),
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 1/4 of 1% per annum) to
purchase equipment. 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. 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.
At December 31, 1997, the Company failed to meet such certain financial
criteria, and as a result, the Bank did not release the collateral securing the
revolving line of credit. The Company has not utilized this credit facility
since its inception.
F-11
<PAGE>
Note 3 - Lines of Credit and Subordinated Debentures (cont'd)
- -------------------------------------------------------------
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 totaled $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. The Company has not utilized this
credit facility since its inception.
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.
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.
F-12
<PAGE>
Note 5 - Income Taxes
- ---------------------
Income tax attributable to income from continuing operations consists
of the following:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
Current:
<S> <C> <C> <C>
Federal ........................ $ 1,384,000 $ 631,000 $ --
State .......................... 389,000 200,000 --
Foreign ........................ 168,000 -- --
----------- --------- ---------
1,941,000 831,000 --
----------- --------- ---------
Deferred:
Federal ........................ 76,000 (259,000) --
State .......................... 22,000 (72,000) --
----------- --------- ---------
98,000 (331,000) --
----------- --------- ---------
Total ............................ $ 2,039,000 $ 500,000 $ --
=========== ========= =========
</TABLE>
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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Tax at federal statutory rate .................. 35% 35% (35%)
Nondeductible expenses ......................... 1 1 --
State income tax, net of federal benefit ....... 4 (3) --
Utilization of net operating loss carryforwards -- (8) --
Foreign losses for which no benefit is available -- 9 --
Changes in valuation allowance ................. (3) (14) 35
Foreign Operations taxed at less than U.S. .....
statutory rate, primarily India .............. (9) -- --
Other .......................................... 3 -- --
---------- ---------- ----------
Effective tax rate ............................. 31% 20% --%
========== ========== ==========
</TABLE>
In 1996, the Company elected a five year tax holiday in India in
accordance with a local tax incentive program whereby no income taxes will be
due for such period.
F-13
<PAGE>
Note 5 - Income Taxes - (cont'd)
- --------------------------------
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, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
Deferred tax assets:
<S> <C> <C>
Allowance for doubtful accounts ................ $327,000 $ 224,000
Certain accrued liabilities .................... 77,000 146,000
Net operating losses ........................... -- 131,000
Other .......................................... -- 37,000
Total deferred tax assets ........................ 404,000 538,000
Deferred tax liability-accelerated depreciation .. 171,000 --
Valuation allowance for deferred tax assets ...... -- (207,000)
-------- ---------
Net deferred tax assets .......................... $233,000 $ 331,000
======== =========
</TABLE>
Realization of the net deferred tax assets is dependent on the timing
of the reversal of temporary differences. Although realization is not assured,
management believes it is more likely than not, that the 1997 net deferred tax
assets will be realized. The Company reduced their valuation allowance in 1997
and 1996. The 1996 reduction was as a result of current and anticipated future
profitability. The Company's 1996 valuation allowance related primarily to the
net operating loss of a foreign subsidiary which was not yet profitable,
however, such subsidiary was able to utilize their net operating loss in 1997.
Note 6 - Commitments and Contingencies
- --------------------------------------
Employment Agreements
As of December 31, 1997, the Company had two year employment agreements
with five key employees with remaining aggregate compensation of approximately
$360,000.
Payroll and Related Taxes
As of December 31, 1995, the Company had $1,000,000 included in accrued
payroll and related taxes resulting from unpaid federal and state payroll 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
F-14
<PAGE>
Note 6 - Commitments and Contingencies - (cont'd)
- -------------------------------------------------
state tax, interest or penalty payment obligations, net of any tax benefits
realized by the Company, resulting from the subject matter discussed above.
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, 1997. Future minimum aggregate annual
lease payments are as follows:
<TABLE>
<CAPTION>
For the Years Ending December 31, Capital Operating
- ----------------------------------------- -------- ---------
<S> <C> <C>
1998 .................................... $ 20,000 $493,000
1999 .................................... 20,000 456,000
2000 .................................... 20,000 258,000
2001 .................................... 20,000 260,000
2002 .................................... -- 228,000
--------
80,000
Less-Interest ........................... (9,000)
--------
71,000
Less-Current portion .................... (20,000)
--------
$ 51,000
</TABLE>
In March 1998, the Company entered into a ten year lease for its new
corporate headquarters. Annual rent expense is anticipated to approximate
$1,200,000. Rent expense for the years ended December 31, 1997, 1996 and 1995
was $388,000, $176,000 and $74,000, respectively.
Legal
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 stock option plans permit the granting of options to
employees, non-employee directors and consultants. The Option Committee of the
Board of Directors 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. As of December 31, 1997,
a total of 1,590,000 shares of Common Stock were reserved for issuance under the
plans. Subsequent to December 31, 1997, the Company's shareholders approved a
proposal to amend the Company's 1996 Stock Plan to increase the number of shares
of Common Stock under such plan from 1,450,000 to 2,200,000 shares. Accordingly,
a total of 2,340,000 shares of Common Stock have been reserved for
F-15
<PAGE>
Note 7 - Stock Option Plans and Warrants (cont'd)
- -------------------------------------------------
issuance under the plans. In addition, subsequent to December 31, 1997, the
Company granted options to purchase an aggregate of 226,850 shares of its Common
Stock to certain employees at a weighted average exercise price of $16.12 per
share. All of the options issued pursuant to these plans expire ten years from
the date of grant.
In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," which was effective January 1, 1996, the fair value of option
grants is estimated on the date of grant using the Black-Scholes option-pricing
model using the following weighted-average assumptions: expected volatility of
62% and 41%, risk-free interest rate of 7.0% and 5.6%; and expected lives of 4.5
and 3.1 years, in 1997 and 1996, respectively. The weighted average fair value
of options granted during 1997 and 1996 was $6.96 and $2.93, respectively.
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
- --------------------------------------------------------------------------------
<S> <C> <C>
Options Outstanding, December 31, 1995 -- --
Granted ..................................... 580,000 8.38
Canceled .................................... (8,200) 8.00
- --------------------------------------------------------------------------------
Options Outstanding, December 31,
1996 (none exercisable)
571,800 8.39
Granted ..................................... 647,640 11.52
Exercised ................................... (102,381) 8.20
Canceled .................................... (74,113) 9.78
- --------------------------------------------------------------------------------
Options Outstanding,
December 31, 1997
(93,674 exercisable) .................... 1,042,946 10.25
========== =====
</TABLE>
F-16
<PAGE>
Note 7 - Stock Option Plans and Warrants - (cont'd)
- ---------------------------------------------------
The following table summarizes information about stock options
outstanding and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------- -----------
Weighted Weighted Weighted
Exercise Price Number of Average Average Number of Average
Range shares Remaining Exercise shares Exercise
Life (in years) Price Price
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$8 to 10 398,306 8.6 $8.20 73,402 $8.22
$10 to 12 554,440 9.3 $10.82 16,272 $10.99
$12 to 15 50,200 9.4 $13.33 4,000 $12.13
$15 to 22 40,000 9.8 $18.92 -- --
$8 to 22 1,042,946 9.0 $10.25 93,674 $8.87
</TABLE>
As permitted by SFAS 123, 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 stock option plans been determined based on the fair value option
pricing method of accounting, the tax-effective impact would be as follows:
1997 1996
- --------------------------------------------------------------------------------
Net income:
as reported $ 4,471,000 $ 793,000
pro forma $ 3,469,000 $ 434,000
- --------------------------------------------------------------------------------
Basic Earnings per Share:
as reported $0.39 $0.08
pro forma $0.31 $0.04
- --------------------------------------------------------------------------------
Diluted Earnings per Share:
as reported $0.38 $0.07
pro forma $0.29 $0.04
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.
F-17
<PAGE>
Note 8 - Initial Public Offering, Stock Split and Preferred Stock Authorization
- -------------------------------------------------------------------------------
In July 1996, the Company's Board of Directors recommended and
shareholders approved an amendment to the Company's Certificate of Incorporation
to effect an 81,351.1111-for-1 stock split. All common shares and per share
amounts in the accompanying financial statements have been adjusted
retroactively to give effect to the stock split.
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).
On July 2, 1997, the Company consummated a follow-on public offering
(the "Offering") of 1,000,000 shares of its Common Stock at a price to the
public of $9.50 per share. On July 15, 1997 and as part of the Offering, an
additional 150,000 shares at $9.50 per share were issued and sold by the Company
to cover over-allotments. The net proceeds to the Company from the Offering,
after underwriting discounts and commissions and other expenses of the Offering,
were approximately $9,900,000.
Note 9 - Subsequent Events
On May 7, 1998, the Company consummated the acquisition of the thirty
percent (30%) minority interest in CPI Consulting Limited, a corporation formed
pursuant to the laws of England and Wales ("Consulting"), in exchange for an
aggregate of 165,696 shares of the Company's Common Stock and a contingent
earn-out payment of up to (pound)1,573,200 payable in the Company's Common Stock
to be determined as of December 31, 1998. Such acquisition will be accounted for
using the purchase method of accounting. In the opinion of management, the
overall impact of this transaction is immaterial to the accompanying
consolidated financial statements of the Company.
On May 21, 1998, the Company consummated the acquisition of CPI
Resources Limited, a corporation formed pursuant to the laws of England and
Wales ("Resources"), in exchange for 371,000 shares of the Company's Common
Stock. As a result of such acquisition, the Company acquired Resources' seventy
percent (70%) interest in Consulting. Such acquisition will be accounted for
using the pooling of interests method of accounting. In the opinion of
management, the overall impact of this transaction is immaterial to the
accompanying consolidated financial statements of the Company.
F-18
<PAGE>
PART II
-------
INFORMATION NOT REQUIRED IN PROSPECTUS
--------------------------------------
Item 14. Other Expenses of Issuance and Distribution.
- -----------------------------------------------------
SEC registration fee............................. $ 2,007.82
Counsel fees and expenses........................ 90,000.00*
Accounting fees and expenses..................... 30,000.00*
Miscellaneous expenses........................... 377,992.18*
-------------
Total*...................................... $ 500,000.00
=============
* Estimated
All expenses of issuance and distribution listed above will be borne by
the Company. The costs of fees and expenses of legal counsel and other advisors,
if any, that the Selling Shareholders employ in connection with the offering
will be borne by the Selling Shareholders.
Item 15. 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 or her 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 or she reasonably believed to be in
or not opposed to the best interests of the corporation, and with respect to any
criminal proceeding, if he or she had no reasonable cause to believe his or her
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, or (iii) for any transaction
from which the director or officer derived an improper personal benefit.
The Company's 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 Company shall indemnify its directors and officers to the extent such
parties are involved in or made a
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party to any action, suit or proceeding 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 Company 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 capital stock of the
Company is required to adopt, amend or repeal such provision of the By-laws.
The Company has executed indemnification agreements with each of its
directors and executive officers pursuant to which the Company 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 Company 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 Company (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.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
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<PAGE>
Item 16. Exhibits.
- ------------------
Exhibit No. Description of Exhibit
----------- ----------------------
5 Opinion of Buchanan Ingersoll as to validity of Common Stock.
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).
Item 17. Undertakings.
- ----------------------
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this Registration Statement to
include any material information with respect to the plan of distribution not
previously disclosed in this Registration Statement or any material change to
such information in this Registration Statement.
(2 ) That, for the purpose of determining any liability
under the Securities Act, each such post-effective amendment 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.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement 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.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, 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, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with
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<PAGE>
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.
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<PAGE>
SIGNATURES
----------
Pursuant to 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 S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Township of Iselin, State of New Jersey, on the 5th day of
June, 1998.
INTELLIGROUP, INC.
By:/s/ Stephen A. Carns
-------------------------------------
President and Chief Executive Officer
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<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Stephen A. Carns and Alan Ziegler, Esq.,
and each of them, his true and lawful attorneys-in-fact and agents with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the same
with all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Stephen A. Carns President and Chief Executive Officer June 5, 1998
- ------------------------ (principal executive officer)
Stephen A. Carns
/s/ Ashok Pandey Co-Chairman of the Board and Director June 5, 1998
- ------------------------
Ashok Pandey
/s/ Rajkumar Koneru Co-Chairman of the Board and Director June 5, 1998
- ------------------------
Rajkumar Koneru
/s/ Nagarjun Valluripalli Co-Chairman of the Board, President of June 5, 1998
- ------------------------ International Operations and Director
Nagarjun Valluripalli
/s/ Gerard E. Dorsey Senior Vice President-Finance and Chief June 5, 1998
- ------------------------ Financial Officer (principal
Gerard E. Dorsey financial and accounting officer)
/s/ Klaus Besier Director June 5, 1998
- ------------------------
Klaus Besier
/s/ David Finley Director June 5, 1998
- ------------------------
David Finley
/s/ Kevin P. Mohan Director June 5, 1998
- ------------------------
Kevin P. Mohan
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<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Description of Exhibit
----------- ----------------------
5 Opinion of Buchanan Ingersoll as to validity of Common Stock.
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).
BUCHANAN INGERSOLL
Attorneys
500 College Road East
Princeton, New Jersey 08540
June 5, 1998
Intelligroup, Inc.
517 Route One South
Iselin, New Jersey 08830
Gentlemen:
We have acted as counsel to Intelligroup, Inc., a New Jersey
corporation (the "Company"), in connection with the filing by the Company of a
registration statement on Form S-3 (the "Registration Statement"), under the
Securities Act of 1933, as amended, relating to the registration of an aggregate
of 351,196 shares (the "Shares") of the Company's common stock, $0.01 par value,
all of which are to be offered by certain Selling Shareholders as set forth
therein.
In connection with the Registration Statement, we have examined such
corporate records and documents, other documents, and such questions of law as
we have deemed necessary or appropriate for purposes of this opinion. On the
basis of such examination, it is our opinion that:
1. The issuance of the Shares has been duly and validly authorized; and
2. The Shares are legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Registration Statement.
Very truly yours,
/s/BUCHANAN INGERSOLL
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
To Intelligroup, Inc.:
As independent public accountants, we hereby consent to the use of our
report dated February 5, 1998, except with respect to the matters discussed in
Note 9, as to which the date is May 21, 1998 and to all references to our Firm
included in this Form S-3 registration statement.
/s/ARTHUR ANDERSEN LLP
Princeton, New Jersey
June 2, 1998
