SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1997
OR
| | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File No. 0-20943
INTELLIGROUP, INC.
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(Name of Small Business Issuer in Its Charter)
New Jersey 11-2880025
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(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
517 Route One South, Iselin, New Jersey 08830
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(Address of Principal Executive Offices) (Zip Code)
(732) 750-1600
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(Issuer's Telephone Number,
Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on which Registered
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
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Check whether the Issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes: X No:
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State Issuer's revenues for fiscal year ended December 31, 1997:
$80,189,000.
State the aggregate market value of the voting stock held by non-affiliates
of the Issuer: $82,019,915 at February 28, 1998 based on the last sales price on
that date.
State the number of shares outstanding of each of the Issuer's classes of
common stock, as of February 28, 1998:
Class Number of Shares
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Common Stock, $.01 par value 11,993,697
Transitional Small Business Disclosure Format
Yes: No: X
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The following documents are incorporated by reference into the Annual
Report on Form 10-KSB: Portions of the Issuer's definitive Proxy Statement for
its 1998 Annual Meeting of Shareholders are incorporated by reference into Part
III of this Report.
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TABLE OF CONTENTS
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Item Page
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PART I 1. Business............................................. 1
2. Properties........................................... 10
3. Legal Proceedings.................................... 10
4. Submission of Matters to a Vote of Security Holders.. 12
PART II 5. Market for the Company's Common Equity and Related
Shareholder Matters.................................. 13
6. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 14
7. Financial Statements................................. 21
8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 21
PART III 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16 (a) of the
Exchange Act......................................... 22
10. Executive Compensation............................... 22
11. Security Ownership of Certain Beneficial Owners
and Management....................................... 22
12. Certain Relationships and Related Transactions....... 22
PART IV 13. Exhibits, List and Reports on Form 8-K............... 23
SIGNATURES ..................................................... 24
EXHIBIT INDEX..................................................... 26
FINANCIAL STATEMENTS..............................................F-1
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PART I
Item 1. Business.
General
Intelligroup, Inc. ("Intelligroup" or 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 America, Inc. ("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
executive offices are located at 517 Route One South, Iselin, New Jersey 08830
and its telephone number is (732) 750-1600.
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"Intelligroup," "4SIGHT," "4SIGHTplus" and the Company's logo are service
marks and "4SIGHT Development Manager" and "OIM" are trademarks of the Company.
All other trade names, trademarks or service marks referenced herein are the
property of their respective owners and are not the property of the Company.
This Form 10-KSB contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, including,
without limitation, statements regarding the Company's intention to shift to
higher margin turnkey management assignments and more complex projects and to
utilize its proprietary implementation methodology in an increasing number of
projects. Such forward-looking statements include risks and uncertainties,
including, but not limited to: (i) the substantial variability of the Company's
quarterly operating results caused by a variety of factors, many of which are
not within the Company's control, including (a) seasonal patterns of hardware
and software capital spending by customers, (b) information technology
outsourcing trends, (c) the timing, size and stage of projects, (d) new service
introductions by the Company or its competitors, (e) levels of market acceptance
for the Company's services or (f) the hiring of additional staff; (ii) changes
in the Company's billing and employee utilization rates; (iii) the Company's
ability to manage its growth effectively which will require the Company (a) to
continue developing and improving its operational, financial and other internal
systems, as well as its business development capabilities, (b) to attract,
train, retain, motivate and manage its employees, (c) to continue to maintain
high rates of employee utilization at profitable billing rates and, (d) to
maintain project quality, particularly if the size and scope of the Company's
projects increase; (iv) the Company's ability to maintain an effective internal
control structure; (v) the Company's limited operating history within its
current line of business; (vi) the Company's reliance on a continued
relationship with SAP America and the Company's present status as a SAP National
Implementation Partner and its status as a SAP National Logo Partner; (vii) the
Company's substantial reliance on key customers and large projects; (viii) the
highly competitive nature of the markets for the Company's services; (ix) the
Company's ability to successfully address the continuing changes in information
technology, evolving industry standards and changing customer objectives and
preferences; (x) the Company's reliance on the continued services of its key
executive officers and leading technical personnel; (xi) the Company's ability
to attract and retain a sufficient number of highly skilled employees in the
future; (xii) uncertainties resulting from pending litigation matters and from
certain pending and potential administrative and regulatory immigration and tax
law matters; and (xiii) the Company's ability to protect its intellectual
property rights. The Company's actual results may differ materially from the
results discussed in such forward-looking statements.
Industry Background
Many large and mid-sized businesses face a rapidly changing business
environment, intense global competition and accelerating technological change.
To remain competitive, such businesses continually seek to improve the quality
of products and services, lower costs, reduce cycle times and increase value to
customers. Businesses are implementing and utilizing advanced information
technology solutions that enable them to redesign their business processes in
such areas as product development, service delivery, manufacturing, sales and
human resources. The
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ability of an organization to integrate and deploy redesigned business processes
and related information technologies timely and cost effectively is critical in
the changing business environment.
Concurrently, businesses are migrating from legacy systems running
proprietary software to open systems and client/server architectures based on
personal computers, local area network/wide area network ("LAN/WAN"), shared
databases and packaged software applications. Such client/server systems, when
developed and implemented appropriately, enable the creation and utilization of
more functional and flexible applications which are critical to the competitive
needs of businesses. Organizations often acquire packaged enterprise-wide
business software applications for client/server systems, including those
offered by leading vendors, such as SAP, Oracle, PeopleSoft or Baan, and
implement or customize these applications to match their needs. Organizations
also may develop customized software applications designed for their specific
business needs.
Despite the advantages of client/server systems, the complex task of
developing and implementing enterprise-wide, mission-critical, client/server
solutions presents significant challenges for most organizations and often is a
time consuming and costly undertaking. Implementing client/server solutions
typically requires significant allocation of organizational resources.
Information technology managers must integrate and manage open systems and
distributed computing environments consisting of multiple computing platforms,
operating systems, databases and networking protocols, and implement packaged
enterprise software applications to support business objectives. Companies also
must continually keep pace with new technological developments which can render
internal information technology skills outmoded. Professionals with the
requisite technology skills often are in short supply and many organizations are
reluctant to expand their internal information systems department for particular
projects. At the same time, external economic factors encourage organizations to
focus on their core competencies and trim work forces in the information
technology management area. Accordingly, organizations often lack sufficient
technical resources necessary to design, develop and implement emerging
information technology solutions on a timely basis.
To support their information technology needs, many businesses increasingly
engage experienced outside specialists to develop and implement solutions, in
shorter timeframes and at lower costs, while reducing implementation risks. As a
result, demand for information technology services has grown significantly.
The Intelligroup Solution
Intelligroup provides information technology services to develop and
implement cost-effective client/server business solutions on a timely basis by
combining its expertise in a wide range of technologies and business processes
with its proprietary implementation methodology and development tools. The
Company believes it offers the following advantages:
Expertise in a Wide Range of Technologies: The Company's consultants have
expertise with SAP, Oracle, PeopleSoft and Baan products and with a wide variety
of leading computing technologies, including internet, client/server
architectures, object-oriented technologies, CASE,
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distributed database management systems, micro-to-mainframe connectivity,
Lan/Wan and telecommunications technologies. Since many of the Company's
customers have invested in a variety of technologies, including legacy systems,
the Company also develops solutions for these environments.
Accelerated Implementation Methodology and Toolset: The Company has
developed a proprietary implementation methodology, 4SIGHT, as well as a
software-based implementation toolset, 4SIGHTplus, which are designed to
minimize the time required to develop and implement SAP, Oracle and Baan
solutions for its customers. 4SIGHT and 4SIGHTplus are designed to be technology
independent and modular so that they may be utilized by the Company's
consultants and project managers in other packaged applications development or
software customization projects.
Value-Oriented Implementation: The Company provides experienced project
managers and consultants to its customers. The Company believes that its
personnel are effective because of their industry experience. In addition, the
Company has the ability to develop and implement business solutions through its
offshore ADC in India, which gives the Company access to qualified and
experienced programmers at a reduced labor cost.
Customer-Driven Approach: The Company's project managers and consultants
maintain on-going communication and close interaction with customers to ensure
that they are involved in all facets of a project and that the solutions
designed and implemented by the Company meet the customer's needs. The Company's
goal is to provide training to its customers during a project to achieve high
levels of self-sufficiency among its customers' end users and internal
information technology personnel. The Company believes that its ability to
deliver the requisite knowledge base to its customers is critical to fostering
long-term relationships with, and generating referrals from, existing customers.
Intelligroup Services
Intelligroup provides a wide range of information technology services,
including (i) enterprise-wide business process solutions utilizing SAP R/3, as
well as Oracle, PeopleSoft and Baan products, all of which are leading software
applications; (ii) internet application services; and (iii) systems integration
and custom software development solutions in a wide variety of computing
environments utilizing leading technologies, including client/server
architectures, object-oriented technologies, CASE, distributed database
management systems, LAN/WAN and telecommunications technologies. The Company's
services range from providing customers with a single consultant to
multi-personnel full-scale projects. The Company provides these services to its
customers primarily on a time and materials basis and pursuant to agreements
which are terminable upon relatively short notice. The Company's custom software
development services are enhanced by its access to qualified and experienced
programmers at the ADC and connected to the Company's headquarters in the United
States and to certain customer sites by dedicated, high speed satellite links.
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Enterprise-Wide Business Process Solutions
The Company designs, develops, integrates and implements sophisticated
business process solutions utilizing SAP R/3, as well as Oracle, PeopleSoft and
Baan products, and incorporating best business practices and methods. The
Company builds business solutions for its customers by focusing on each
customer's business objectives and by providing business process re-engineering,
information systems strategic planning, technology implementation, comprehensive
training and organizational change management services. The Company believes
that its expertise in a wide variety of technologies, coupled with its ability
to provide comprehensive business process solutions and timely and
cost-effective implementation of new business systems, enables its customers to
achieve substantial improvements in efficiency and effectiveness in their
businesses and fosters long-term customer relationships.
4SIGHT Development Manager: The Company utilizes its 4SIGHT Development
Manager, formerly known as "On-line Project Management System," to monitor
enterprise-wide business process solutions development projects. The Company
designed 4SIGHT Development Manager as a SAP subsystem developed in R/3 and
installable on customers' SAP systems. 4SIGHT Development Manager provides
real-time information relating to: the current stage of development of each
program; the number of man-hours spent at each stage of development; total
man-hours spent on development during any interval of time; programs developed
by each programmer; analysis of time spent on the development project; and
technical information, including source code, documentation and tables used in
the system. The Company believes that 4SIGHT Development Manager also shortens
the turn-around time for program development as it streamlines the information
flow between the Company's offices and customer sites.
Accelerated Implementation Methodology and Software-Based Implementation
Toolset: As a result of its experience in implementing SAP software, the Company
has developed a proprietary methodology, 4SIGHT, for implementing enterprise
business software applications and 4SIGHTplus, a software-based implementation
toolset. 4SIGHT and 4SIGHTplus, initially used by the Company in projects
implementing SAP R/3, are designed to be portable to other packaged software
applications and to be adaptable to the scope of a particular project. 4SIGHT
and 4SIGHTplus have been adapted for Oracle and Baan implementations. The
Company believes that the use of 4SIGHT and 4SIGHTplus throughout an
implementation project may enable its customers to realize significant savings
in time and resources.
Internet Application Services
In August 1997, the Company announced its internet application services, a
comprehensive set of internet consulting approaches designed to help companies
develop innovative ways to reach their customers, suppliers and target markets
by leveraging the power of the internet and corporate intranets. Internet
application services include an Internet Strategy for Enterprise, Internet
Application Architecture and Internet Application Development.
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Internet Strategy for Enterprise: Internet Strategy for Enterprise helps
companies define their internet/corporate intranet strategy, including
infrastructure, security, encryption, proof-of-concept, application hosting and
deployment, training, change management and technology evaluation.
Internet Application Architecture: Internet Application Architecture
enables companies to identify their Internet application needs and determine the
most appropriate and cost-effective technologies in which to make robust
application development on the Internet possible.
Internet Application Development: Internet Application Development assists
companies in implementing their internet/corporate intranet strategy and rapidly
developing and deploying their Internet applications.
Systems Integration and Custom Software Development
The Company provides a broad range of systems integration and customized
application solutions to customers in a wide variety of industries. The Company
is engaged by customers to undertake feasibility studies, systems engineering,
custom software development and tailoring, migration strategies, systems design,
development, testing, integration, implementation, training and support in a
wide variety of computing environments. The Company, in providing such services,
utilizes leading technologies, including internet, client/server architectures,
object-oriented technologies, CASE, distributed database management systems,
LAN/WAN and telecommunications technologies.
Advanced Development Center
The Company provides cost-effective, timely custom software development and
tailoring in the United States, at customer sites and through the ADC. The ADC
is connected to the Company's headquarters in the United States and to certain
customer sites by dedicated, high speed satellite links. The ADC is staffed with
qualified and experienced programmers, including those with SAP configuration
expertise and SAP's ABAP/4 programming capability. Additionally, the programmers
at the ADC have performed work with Baan as well as internet custom programming.
The Company utilizes the programmers at the ADC, in conjunction with its
consultants in the United States who are on site at customer locations, to
provide its customers with savings in development and implementation costs and
time to project completion. All SAP and Baan development projects undertaken by
the ADC are monitored by the Company's 4SIGHT Development Manager. 4SIGHT
Development Manager also minimizes the turn-around time for program development
as it streamlines the information flow between customer sites and the ADC. The
Company has utilized the ADC to provide similar development services to
customers that utilize software applications other than SAP software. The
Company owns 99.8% of the shares of Intelligroup Asia Private Ltd.
("Intelligroup Asia") which operates the ADC. 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.
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Sales and Marketing
The Company historically has generated new sales leads from referrals from
existing customers, and from introductions to potential customers by the
Company's alliance partners, which often need to recommend qualified systems
integrators to implement their software products. In addition, the Company has
been introduced to customers by certain of its competitors, such as "Big Six"
accounting firms, which at times require the Company's expertise and ability to
deliver qualified personnel for complex projects. In January 1997, the Company
began to dedicate an increased level of resources to more focused sales and
marketing efforts. The Company will continue to market to potential customers
with demonstrated needs for the Company's expertise in core information
technologies and solutions such as SAP. To implement this plan, the Company
intends to continue to expand its dedicated sales and marketing force by hiring
several individuals with experience in the industry sectors in which the Company
has prior experience.
Among its sales and marketing efforts, the Company's sales force has
presented the Company's expertise at SAPPHIRE, the annual SAP conference for SAP
service providers and end-users, and uses direct marketing techniques. The
Company intends to increase its participation in industry-recognized programs
and trade shows. Most importantly, however, the Company believes that satisfying
customer expectations within budgets and time schedules is critical to gaining
repeat business and obtaining new business from referrals. The Company believes
that it has consistently met customer expectations with respect to budgets and
time schedules.
As of December 31, 1997, the Company's sales and marketing group consisted
of 25 employees in the United States, six for the geographical area of the
United Kingdom and Denmark, and two for the geographical area of New Zealand and
Australia. The Company markets and delivers its services to customers on an
international basis through its network of offices. The Company's headquarters
in New Jersey and its branch offices in Foster City, California; Atlanta,
Georgia; Chicago, Illinois; Boston, Massachusetts; and Dallas, Texas serve the
United States market. Intelligroup Asia serves as the Company's sales agent in
Asia and the Middle East. In addition, the Company also has established
operations in New Zealand, Denmark and Australia, and currently has information
technology consultants on-site at customer locations. The Company recently added
sales and marketing capabilities in New Zealand. In November 1996, the Company
commenced operations in Singapore with the incorporation of Intelligroup
Singapore Private Ltd. Each of the Company and Rajkumar Koneru, President of US
Operations, Chief Executive Officer and Director of the Company, own 50% of such
company.
The Company's services require a substantial financial commitment by
customers and, therefore, typically involve a long sales cycle. Once a lead is
generated, the Company endeavors to understand quickly the potential customer's
business needs and objectives in order to develop the appropriate solution and
bid accordingly. The Company's project managers are involved throughout the
sales cycle to ensure mutual understanding of customer goals, including time to
completion, and technological requirements. Sales cycles for complex business
solutions projects
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typically range from one to six months from the time the Company initially meets
with a prospective customer until the customer decides whether to authorize
commencement of an engagement.
Customers
The Company provides its services directly to Fortune 1000 and other large
and mid-sized companies, many of which have information-intensive, multinational
operations, or as a member of a consulting team assembled by other information
technology consultants, such as "Big Six" accounting firms. The number of
customers billed by the Company has grown substantially from three customers in
1993 to 167 customers in the year ended December 31, 1997.
The Company's ten largest customers accounted for, in the aggregate,
approximately 56%, 66% and 54% of its revenue in 1995, 1996 and 1997,
respectively. In 1995, Ernst & Young LLP and Price Waterhouse LLP each accounted
for more than 10% of revenue. During 1996 and 1997, Price Waterhouse LLP and
Bristol-Myers Squibb each accounted for more than 10% of revenue. Currently, the
Company is engaged in 12 projects for Price Waterhouse LLP. In 1995, 1996 and
1997, 50%, 44% and 38%, respectively, of the Company's revenue was generated by
serving as a member of consulting teams assembled by leading information
technology consulting firms retained by organizations to manage projects to
provide enterprise-wide business process solutions.
Although the Company has contracts with many of its large customers to
provide its services, in general such contracts are terminable upon relatively
short notice, typically not more than 30 days. There can be no assurance that
the Company's customers will continue to enter into contracts with the Company
or that existing contracts will not be terminated.
Many of the Company's engagements involve projects that are critical to the
operations of its customers' businesses and provide benefits that may be
difficult to quantify. The Company's failure or inability to meet a customer's
expectations in the performance of its services could result in a material
adverse change to the customer's operations giving rise to claims for damages
against the Company or causing damage to the Company's reputation, adversely
affecting its business, financial condition and results of operations. In
addition, certain of the Company's agreements with its customers require the
Company to indemnify the customer for damages arising from services provided to,
or on behalf of, such customer. Under certain of the Company's customer
contracts, the Company warrants that it will repair errors or defects in its
deliverables without additional charge to the customer. The Company has not
experienced, to date, any material claims against such warranties. The Company
recently purchased and maintains errors and omissions insurance to insure the
Company for damages and expenses incurred in connection with alleged negligent
acts, errors or omissions.
Competition
The markets for the Company's services are highly competitive. The Company
believes that its principal competitors include the internal information systems
groups of its prospective
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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), Computer Sciences Corporation and
software applications vendors, some of which are also 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 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.
Employees
As of December 31, 1997, the Company employed 772 full-time employees, of
whom 668 were engaged as consultants or as software developers, 31 were engaged
in sales and marketing, and 73 were engaged in finance, administration, and
management. Of the total number of employees, 529 were based in the United
States, 178 were based in India, one was based in Australia, two were based in
Denmark, 23 were based in New Zealand, 39 were based in the United Kingdom and
no employees were based in Singapore. In addition, the Company engaged 40
independent contractors to perform information technology services.
None of the Company's employees is covered by a collective bargaining
agreement. Substantially all of the Company's employees have executed employment
agreements containing non-competition, non-disclosure and non-solicitation
clauses. In addition, the Company requires that all new employees execute such
agreements as a condition of employment by the Company. The Company believes
that it has been successful in attracting and retaining skilled and experienced
personnel. There is increasing competition for experienced sales and marketing
personnel and technical professionals. The Company's future success will depend
in part on its ability to continue to attract, retain, train and motivate highly
qualified personnel. The Company considers relations with its employees to be
good.
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Intellectual Property Rights
The Company's success is dependent, in part, upon its proprietary
accelerated implementation methodology, development tools and other intellectual
property rights. The Company relies upon a combination of trade secret,
non-disclosure and other contractual arrangements, and copyright and trademark
laws, to protect its proprietary rights. The Company generally enters into
confidentiality agreements with its employees, consultants and customers, and
limits access to and distribution of its proprietary information. The Company
also requires that substantially all of its employees and consultants assign to
the Company their rights in 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.
Item 2. Properties.
The Company owns no real property and currently leases or subleases all of
its office space. The Company subleases its headquarters in Iselin, New Jersey,
totaling approximately 13,200 square feet. The sublease expires in November
1999. The Company uses such facility for certain technical and support
personnel, sales and marketing, administrative, finance and management
personnel. The Company also leases or subleases offices for its sales and
operations in Foster City, California; Atlanta, Georgia; Chicago, Illinois;
Boston, Massachusetts; and Dallas, Texas; and operations in Hyderabad and
Bombay, India; Australia; New Zealand; Denmark; Singapore and the United
Kingdom. The Company is reviewing the adequacy of its leased facilities in light
of its expanded staff and expects to increase the size of its leased facilities.
The Company expects to move its headquarters to nearby Edison, New Jersey in the
summer of 1998. The Company has negotiated a lease with the landlord for
approximately 48,475 square feet, but is awaiting the return of a fully executed
lease. The Company expects to be able to sublet its current headquarters for the
remainder of the term of its sublease, however, there is no assurance that the
Company will be able to find a subtenant.
Item 3. Legal Proceedings.
The Company had been investigated by the Immigration and Naturalization
Service (the "INS") and on April 2, 1997, the Company received two Notices of
Intent to Fine from the INS in relation to violations by the Company of the
Immigration Reform and Control Act of 1990. Specifically, the INS investigated
whether the Company improperly employed certain foreign national individuals
prior to their obtaining appropriate work authorization and failed to complete
proper employment eligibility verification forms for all employees. The Company
cooperated fully with the INS. Pursuant to settlement agreements signed April
28, 1997, fines totaling approximately $42,000 were assessed and paid by the
Company. Such amounts were accrued as of December 31, 1996. The Company employs
many foreign national individuals and has implemented procedures and controls
which it believes will ensure full compliance with the Immigration Reform and
Control Act of 1990 and related regulations. The Company now employs in-house
counsel to oversee this function.
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On February 16, 1996, the Company, as plaintiff, filed a complaint in the
Superior Court of New Jersey, Chancery Division, Middlesex County, against a
former consultant to the Company, seven former employees of the Company and
Pegasus Systems, Inc. ("Pegasus"), a corporation which currently employs certain
of such individuals (collectively, the "Defendants"). The complaint, which seeks
damages and injunctive relief against the Defendants, alleges, among other
things, misappropriation of proprietary information, unfair competition,
tortious interference, breach of employment agreements, breach of a consulting
agreement between the Company and Pegasus, and breach of duty of loyalty, good
faith and fair dealing. Upon the filing of its complaint, the Company obtained a
temporary restraining order and in May 1996 obtained a preliminary injunction
prohibiting the Defendants from using or disclosing the Company's proprietary
information, prohibiting the Defendants from contacting or soliciting certain of
the Company's customers and prohibiting the Defendants from recruiting or
attempting to recruit the Company's employees, agents or contractors. The
preliminary injunction remains in effect and the Company intends to pursue
vigorously enforcement of the injunction against the Defendants. The Defendants
have filed an answer and counterclaim. Pegasus has asserted a breach of contract
counterclaim against the Company alleging that the Company owes it $129,000 for
consulting services. Pegasus and two of the individual Defendants also asserted
claims against the Company and two of its officers for tortious interference and
defamation. In addition, one of the individual Defendants has asserted that the
Company owes him $70,000 in commissions. In addition to monetary damages the
Defendants seek injunctive relief. The Defendants unsuccessfully sought a
temporary restraining order against the Company. The Company denies the
allegations made and intends to defend vigorously the counterclaims. The Company
does not believe that the outcome of these claims and counterclaims will have a
material effect upon the Company's business, financial condition or results of
operations.
Oxford Systems Inc. ("Oxford"), a New Jersey corporation and formerly a
wholly-owned subsidiary of the Company which was merged into the Company in
December 1996, was named as a defendant in a civil complaint that was filed on
June 8, 1995, by Design Strategy Corp. ("Design Strategy"), in New York State
Supreme Court in the County of New York. Design Strategy alleges that another
named defendant, Citibank N.A. ("Citibank"), contracted with Design Strategy for
database administration services. Design Strategy claims that Citibank and
Oxford conspired to deprive it of commissions, tortiously interfered with
contract, engaged in unfair competition, damaged its reputation and
misappropriated services. Design Strategy settled its claims against Citibank.
Design Strategy then moved to amend its complaint to substitute the Company for
Oxford and to join Nagarjun Valluripalli, the Company's President of
International Operations, as defendants. At the same time, Oxford and another
defendant cross-moved for summary judgment. Thereafter, on September 9, 1997,
the New York State Supreme Court granted Design Strategy's motion to add the
Company and Mr. Valluripalli as defendants while simultaneously granting the
Company's cross-motion for summary judgment. On September 18, 1997, the Court
entered a decision and order dismissing Design Strategy's complaint in its
entirety. Subsequently, on October 17, 1997, Design Strategy filed a notice of
motion of reargument of the Decision and a notice of appeal. The appeal is
currently scheduled to be heard in June 1998. The Company does not believe that
the outcome of these claims will have a material effect upon the Company's
business, financial condition or results of operations.
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<PAGE>
On February 13, 1998, Russell Schultz, a former employee of the Company,
filed a complaint in the Superior Court of New Jersey, Law Division, Monmouth
County, naming the Company as a defendant. The complaint, which seeks damages,
alleges, among other things, that the Company misrepresented plaintiff's job
description in order to induce plaintiff to leave his prior employer, failed to
provide stock options to the plaintiff and violated plaintiff's written
employment contract. The Company was served with the complaint on March 16,
1998, and is still in the process of evaluating the merits of the claims. It is
too early in the litigation process to determine the impact, if any, that such
litigation will have upon the Company's business, financial condition or results
of operations.
There is no other material litigation pending to which the Company is a
party or to which any of its property is subject.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
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<PAGE>
PART II
Item 5. Market for the Company's Common Equity and Related Shareholder Matters.
The Common Stock has been quoted on the Nasdaq National Market (the "NNM")
under the symbol "ITIG" since September 27, 1996 when the Company conducted its
initial public offering. The following table sets forth, for each of the periods
indicated, the high and low sale prices per share of Common Stock as quoted on
the NNM. The prices shown represent quotations among securities dealers, do not
include retail markups, markdowns or commissions and may not represent actual
transactions.
Quarter Ended High Low
---------------------- ------------- -------------
September 30, 1996 $13 7/8 $12 5/8
(from September
27, 1996)
December 31, 1996 $19 3/4 $11
March 31, 1997 $12 3/4 $9 7/8
June 30, 1997 $11 7/8 $8 1/4
September 30, 1997 $23 1/2 $9 1/2
December 31, 1997 $25 7/8 $13 3/4
As of February 28, 1998, the approximate number of holders of record of the
Common Stock was 116 and the approximate number of beneficial holders of the
Common Stock was 800.
The Company has never declared or paid any dividends on its capital stock.
The Company intends to retain any earnings to fund future growth and the
operation of its business, and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. Furthermore, the Company's credit
arrangement with PNC Bank, National Association, which expires on January 22,
1999, contains, among other provisions, a covenant which prohibits the Company
from paying cash dividends or making other distributions of assets to
shareholders.
All information relating to the Common Stock of the Company in this Annual
Report on Form 10-KSB reflects a 81,351.1111-for-1 stock split of the Common
Stock effected July 12, 1996, prior to the Company's initial public offering of
its Common Stock in September 1996. Within the past three years, the Company has
issued and sold certain unregistered securities. On April 19, 1996, the Company
issued and sold five-year 9.0% subordinated debentures in the aggregate
principal amount of $6.0 million to Summit Ventures IV, L.P. and Summit
Investors III, L.P. with warrants to purchase up to 20.8% of the Common Stock of
the Company. Such warrants were exercised for an aggregate of 1,364,000 shares
of Common Stock upon effectiveness of the Company's registration statement
relating to its initial public offering on September 26, 1996. On May 1, 1997,
the Company sold to Mr. Uma Pandey 14,667 shares of the Company's Common Stock
and to Ms. Eileen Clark 100 shares of the Company's Common Stock. Thereafter, on
June 3, 1997, the Company sold to Mr. Paul Coombs 28,000 shares of the Company's
Common Stock. Each of the sales to Messrs. Pandey and Coombs and Ms. Clark were
made pursuant to the exercise of stock options that were issued on July 12, 1996
at an
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<PAGE>
exercise price of $8.00 per share. No underwriter was employed by the Company in
connection with the issuance and sale of the restricted securities described
above. The Company claims that the issuance and sale of all of such securities
were exempt from registration under Section 4(2) of the Securities Act as
transactions not involving a public offering. Appropriate legends were affixed
to the certificates evidencing such securities. All recipients had adequate
access to information relating to the Company. There were no other unregistered
securities sold by the Company within the past three years.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The Company provides a wide range of information technology services,
including enterprise-wide business process solutions, systems integration and
custom software development based on leading technologies. The Company has grown
rapidly since 1994 when it made a strategic decision to diversify its customer
base by expanding the scope of its integration and development services and to
utilize SAP software as a primary tool to implement enterprise-wide business
process solutions. In 1995, the Company became a SAP National Implementation
Partner and also began to utilize Oracle products to diversify its service
offerings. In 1997, the Company achieved National Logo Partner status with SAP.
The Company's current contract with SAP expires on December 31, 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
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<PAGE>
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 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, 1997 and 1996, the Company's ten
largest customers accounted for in the aggregate of approximately 54% and 66% of
its revenue, respectively. During 1997 and 1996, Price Waterhouse LLP and
Bristol-Myers Squibb each accounted for more than 10% of revenue. For the years
ended December 31, 1997 and 1996, 38% and 44% 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, 1997 and 1996, 68% and 74%, respectively, of the Company's total
revenue was derived from projects in which the Company implemented software
developed by SAP. During 1997, 14% of the Company's total revenue was derived
from projects in which the Company implemented software developed by Oracle. In
1996, the Oracle projects accounted for less than 10% of the Company's total
revenue. During the year ended December 31, 1997, approximately 33% of the
Company's revenue was derived from engagements at which the Company had project
management responsibilities, compared to 16% during the year ended December 31,
1996.
The Company's most significant cost is project personnel expenses, which
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.
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<PAGE>
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 31 such personnel as of December 31, 1997, as compared to eight such
personnel as of January 1, 1995. During 1997, the Company opened sales and
operations offices in Atlanta, Boston and Dallas. In addition to the ADC and
sales offices in India, the Company also has offices in, Australia, Denmark, New
Zealand, Singapore and the United Kingdom. The Company is reviewing the adequacy
of its leased facilities in light of its expanded staff and expects to increase
the size of its leased facilities. The Company expects to move its headquarters
to nearby Edison, New Jersey in the summer of 1998. The Company has negotiated a
lease with the landlord for approximately 48,475 square feet, but is awaiting
the return of a fully executed lease. The Company expects to be able to sublet
its current headquarters for the remainder of the term of its sublease, 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:
Percentage of Revenue
---------------------
Year Ended December 31,
-----------------------
1996 1997
Revenue.................................................. 100.0% 100.0%
Cost of sales............................................ 71.2 69.8
------ ------
Gross profit.......................................... 28.8 30.2
Selling, general and administrative expenses............. 21.0 22.5
------ ------
Operating income...................................... 7.8 7.7
Factor fees / Interest expense (income), net............. 2.6 (0.4)
------ ------
Income before provision for income taxes and 5.2 8.1
extraordinary charge...................................
Provision for income taxes............................... 1.1 2.5
------ ------
Income before extraordinary charge....................... 4.1 5.6
Extraordinary charge, net of income tax benefit.......... 2.4 --
------ ------
Net income............................................... 1.7% 5.6%
====== ======
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.
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<PAGE>
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 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.
-17-
<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 $7.2 million during the year ended
December 31, 1997, resulting primarily from the growth in accounts receivable
and unbilled services. Cash used in operating activities for the year ended
December 31, 1996 was $4.3 million.
The Company had working capital of $15.7 million and $29.0 million at
December 31, 1996 and 1997, respectively.
In accordance with investment guidelines approved by the Company's Board of
Directors, cash balances in excess of those required to fund operations have
been invested in short-term U.S. Treasury securities and commercial paper with a
credit rating no lower than A1/P1.
The Company invested $1.1 million and $2.5 million in computer equipment
and furniture in 1996 and 1997, respectively.
The Company's factoring agreement required that the Company offer all of
its trade accounts receivable to the factor for financing; however, the factor
was under no obligation to accept any or all of such receivables. For a variety
of reasons, including the rapid growth of the Company, the lack of available
tangible security to utilize as collateral and the absence of historical
operating profits prior to 1996, the Company was unable to obtain more
traditional financing. On October 10, 1996, the Company repaid approximately
$4.4 million consisting of all amounts outstanding under the agreement with the
factor and terminated the factoring agreement.
In March 1996, in anticipation of the debenture financing described below,
the Company obtained a $750,000 line of credit, payable on demand, from a bank.
The line of credit carried interest at the federal funds rate plus 1%.
Borrowings under the line totaled $200,000 at March
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<PAGE>
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 $814,000, of which approximately $800,000 was paid in August 1996. No
interest or penalties were assessed. Reserves, aggregating $1.0 million,
including the amount of the Internal Revenue Service audit assessment, were
recorded at December 31, 1995. No assurance may be given, however, that
interest, penalties or additional state or federal taxes will not be assessed in
the future. The Company's principal shareholders, Messrs. Pandey, Koneru and
Valluripalli, have agreed to indemnify the Company for any and all losses which
the Company may sustain, in excess of the $1.0 million reserve, net 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 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
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<PAGE>
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 December 31, 1997, there were no amounts outstanding under the
revolving line of credit and no equipment term loans outstanding.
The Company believes that its available funds, together with current credit
arrangements and the cash 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 1996 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 financial statements.
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 financial statements.
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<PAGE>
Item 7. Financial Statements.
The financial statements required to be filed pursuant to this Item 7 are
included in this Annual Report on Form 10-KSB. A list of the financial
statements filed herewith is found at "Item 13. Exhibits, List, and Reports on
Form 8-K."
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
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<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The information relating to the Company's directors, nominees for election
as directors and executive officers under the headings "Election of Directors"
and "Executive Officers" in the Company's definitive proxy statement for the
1998 Annual Meeting of Shareholders is incorporated herein by reference to such
proxy statement.
Item 10. Executive Compensation.
The discussion under the heading "Executive Compensation" in the Company's
definitive proxy statement for the 1998 Annual Meeting of Shareholders is
incorporated herein by reference to such proxy statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The discussion under the heading "Security Ownership of Certain Beneficial
Owners and Management" in the Company's definitive proxy statement for the 1998
Annual Meeting of Shareholders is incorporated herein by reference to such proxy
statement.
Item 12. Certain Relationships and Related Transactions.
The discussion under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for the 1998 Annual
Meeting of Shareholders is incorporated herein by reference to such proxy
statement.
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<PAGE>
PART IV
Item 13. Exhibits, List, and Reports on Form 8-K.
(a) (1) Financial Statements.
Reference is made to the Index to Financial Statements on Page
F-1.
(a) (2) Financial Statement Schedules.
None.
(a) (3) Exhibits.
Reference is made to the Index to Exhibits on Page 26.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the Company's fourth
fiscal quarter.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 30th day of March,
1998.
INTELLIGROUP, INC.
By: /s/ Rajkumar Koneru
-----------------------------------
Rajkumar Koneru, Chief Executive
Officer and President of U.S.
Operations
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<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Rajkumar Koneru Chief Executive Officer, March 30, 1998
- ------------------------- President of U.S. Operations
Rajkumar Koneru and Director (principal
executive officer)
/s/ Ashok Pandey Chairman of the Board, March 30, 1998
- ------------------------- President of Corporate
Ashok Pandey Services, Acting Chief
Financial Officer and Director
(principal financial and
accounting officer)
/s/ Nagarjun Valluripalli President of International March 30, 1998
- ------------------------- Operations and Director
Nagarjun Valluripalli
Director March , 1998
- -------------------------
Klaus Besier
/s/ David Finley Director March 30, 1998
- --------------------------
David Finley
Director March , 1998
- -------------------------
Kevin P. Mohan
Director March , 1998
- -------------------------
Thomas S. Roberts
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<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
2 Agreement and Plan of Merger of the Company and its wholly
owned subsidiary Oxford Systems Inc. (Incorporated by
reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1996).
3.1 Amended and Restated Certificate of Incorporation.
(Incorporated by reference to the Company's Registration
Statement on Form SB-2 (Registration Statement No. 333-5981)
declared effective on September 26, 1996).
3.2 Amended and Restated Bylaws. (Incorporated by reference to
the Company's Registration Statement on Form SB-2
(Registration Statement No. 333-5981) declared effective on
September 26, 1996).
4.1 Debenture and Warrant Purchase Agreement dated April 10,
1996 by and between the Company, Messrs. Pandey, Koneru and
Valluripalli and Summit Ventures IV, L.P. and Summit
Investors III, L.P. (Incorporated by reference to the
Company's Registration Statement on Form SB-2 (Registration
Statement No. 333-5981) declared effective on September 26,
1996).
4.2 Warrant Agreement dated April 10, 1996 by and between the
Company and Summit Ventures IV, L.P. and Summit Investors
III, L.P. (Incorporated by reference to the Company's
Registration Statement on Form SB-2 (Registration Statement
No. 333-5981) declared effective on September 26, 1996).
4.3 Registration Rights Agreement dated April 10, 1996 by and
between the Company and Summit Ventures IV, L.P. and Summit
Investors III, L.P. (Incorporated by reference to the
Company's Registration Statement on Form SB-2 (Registration
Statement No. 333-5981) declared effective on September 26,
1996).
4.4 Redemption Agreement dated April 10, 1996 by and between the
Company and Summit Ventures IV, L.P. and Summit Investors
III, L.P. (Incorporated by reference to the Company's
Registration Statement on Form SB-2 (Registration Statement
No. 333-5981) declared effective on September 26, 1996).
10.1* 1996 Stock Plan of the Company. (Incorporated by reference
to the Company's Registration Statement on Form SB-2
(Registration Statement No. 333-5981) declared effective on
September 26, 1996).
10.2* 1996 Non-Employee Director Stock Option Plan. (Incorporated
by reference to the Company's Registration Statement on Form
SB-2 (Registration Statement No. 333-5981) declared
effective on September 26, 1996).
10.3* Employment Agreement dated June 1, 1996 between the Company
and Ashok Pandey. (Incorporated by reference to the
Company's Registration Statement on Form SB-2 (Registration
Statement No. 333-5981) declared effective on September 26,
1996).
-26-
<PAGE>
Exhibit No. Description of Exhibit
----------- ----------------------
10.4* Employment Agreement dated June 1, 1996 between the Company
and Rajkumar Koneru. (Incorporated by reference to the
Company's Registration Statement on Form SB-2 (Registration
Statement No. 333-5981) declared effective on September 26,
1996).
10.5* Employment Agreement dated June 1, 1996 between the Company
and Nagarjun Valluripalli. (Incorporated by reference to the
Company's Registration Statement on Form SB-2 (Registration
Statement No. 333-5981) declared effective on September 26,
1996).
10.6* Employment Agreement dated June 1, 1996 between the Company
and Robert M. Olanoff, together with Change in Control
Severance Pay Agreement dated June 1, 1996 between the
Company and Robert M. Olanoff. (Incorporated by reference to
the Company's Registration Statement on Form SB-2
(Registration Statement No. 333-5981) declared effective on
September 26, 1996).
10.7* Employment Agreement dated June 1, 1996 between the Company
and Paul Coombs. (Incorporated by reference to the Company's
Registration Statement on Form SB-2 (Registration Statement
No. 333-5981) declared effective on September 26, 1996). See
Exhibit 10.21.
10.8 Form of Indemnification Agreement entered into by the
Company and each of its Directors and officers.
(Incorporated by reference to the Company's Registration
Statement on Form SB-2 (Registration Statement No. 333-5981)
declared effective on September 26, 1996).
10.9 Sublease Agreement between Micrognosis, Inc., as sublessor,
the Company, as sublessee, with master lease. (Incorporated
by reference to the Company's Registration Statement on Form
SB-2 (Registration Statement No. 333-5981) declared
effective on September 26, 1996).
10.10 Employee's Invention Assignment and Confidentiality
Agreement. (Incorporated by reference to the Company's
Registration Statement on Form SB-2 (Registration Statement
No. 333-5981) declared effective on September 26, 1996).
10.11 Intentionally Left Blank.
10.12 Services Provider Agreement by and between Oracle
Corporation and the Company dated July 26, 1994.
(Incorporated by reference to the Company's Registration
Statement on Form SB-2 (Registration Statement No. 333-5981)
declared effective on September 26, 1996). See Exhibit
10.20.
10.13 Amended and Restated Agreement by Messrs. Pandey, Koneru and
Valluripalli dated July 16, 1996 to indemnify the Company
for certain losses. (Incorporated by reference to the
Company's Registration Statement on Form SB-2 (Registration
Statement No. 333-5981) declared effective on September 26,
1996).
10.14 Factoring Agreement by and between Access Capital, Inc. and
the Company dated as of October 20, 1995, with exhibits.
(Incorporated by reference to the Company's Registration
Statement on Form SB-2 (Registration Statement No. 333-5981)
declared effective
-27-
<PAGE>
Exhibit No. Description of Exhibit
----------- ----------------------
on September 26, 1996). See Exhibit 10.17.
10.15 Agreement of Waiver and Consent dated as of June 4, 1996 by
and among the Company, certain shareholders of the Company,
and Summit Ventures IV, L.P. and Summit Investors III, L.P.,
with Amendment No. 1 thereto. (Incorporated by reference to
the Company's Registration Statement on Form SB-2
(Registration Statement No. 333-5981) declared effective on
September 26, 1996). See Exhibit 10.24.
10.16 Agreement by and between the Company and Intelligroup Asia
Private Limited ("Intelligroup Asia") relating to
operational control of Intelligroup Asia, with related
agreements. (Incorporated by reference to the Company's
Registration Statement on Form SB-2 (Registration Statement
No. 333-5981) declared effective on September 26, 1996).
10.17 Letter agreements terminating factoring arrangements by and
between each of the Company and Oxford Systems Inc., and
Access Capital, Inc. dated October 10, 1996. (Incorporated
by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1996). See Exhibit 10.14.
10.18 Loan and Security Agreement between PNC Bank, National
Association and the Company dated as of January 22, 1997,
and related documents. (Incorporated by reference to the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996 filed with the Securities and Exchange
Commission on March 28, 1997). See Exhibit 10.28.
10.19 Intentionally Left Blank.
10.20 Amendment No. 1 to Services Provider Agreement by and
between Oracle Corporation and the Company dated December
30, 1996. (Incorporated by reference to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1996).
See Exhibit 10.12.
10.21* Amendment No. 1, dated February 18, 1997, to Employment
Agreement dated June 1, 1996, between the Company and Paul
Coombs. (Incorporated by reference to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1996).
See Exhibit 10.7.
10.22 R/3 National Logo Partner Agreement by and between SAP
America, Inc. and the Company dated as of April 29, 1997.
(Incorporated by reference to the Company's Registration
Statement on Form SB-2 (Registration Statement No.
333-29119) declared effective on June 26, 1997). See Exhibit
10.25.
10.23* Employment Agreement dated December 6, 1996 between the
Company and Anthony Knight, as amended on February 18, 1997
(Incorporated by reference to the Company's Quarterly Report
on Form 10-QSB for the quarter ended March 31, 1997).
10.24 Amended and Restated Agreement of Waiver and Consent dated
June 6, 1997 by and among the Company, certain shareholders
of the Company, Summit Ventures IV, L.P. and Summit
Investors III, L.P.
-28-
<PAGE>
Exhibit No. Description of Exhibit
----------- ----------------------
(Incorporated by referenced to the Company's Registration
Statement on Form SB-2 (Registration Statement No.
333-29119) declared effective on June 26, 1997). See Exhibit
10.15.
10.25 ASAP Partner Addendum to R/3 National Logo Partner Agreement
between SAP America, Inc. and the Company effective July 1,
1997 (amends existing R/3 National Logo Partner Agreement).
(Incorporated by reference to the Company's Quarterly Report
on Form 10-QSB for the quarter ended September 30, 1997).
10.26 Implementation Partner Agreement between PeopleSoft, Inc.
and the Company effective July 15, 1997. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1997).
10.27 Consulting Alliance Agreement with Baan International B.V.
and the Company effective September 29, 1997. (Incorporated
by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1997).
10.28 Amendment to Loan and Security Agreement dated as of August
18, 1997 by and between PNC Bank, National Association and
the Company (amends Loan and Security Agreement dated as of
January 22, 1997. (Incorporated by reference to the
Company's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1997).
21** Subsidiaries of the Registrant.
23** Consent of Arthur Andersen LLP.
27** Financial Data Schedule for the year ended December 31,
1997.
- ------------
* A management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 13(a) of Form 10-KSB.
** Filed herewith. All other exhibits previously filed.
-29-
<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 Income for the years ended December
31, 1997 and 1996............................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended December 31, 1997 and 1996.......................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996...................................... 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 income, shareholders' equity (deficit) and
cash flows for the years then ended. 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 the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Princeton, New Jersey
February 5, 1998
F-2
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
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 17,668,000 8,538,000
and 1996, respectively........................
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
========== ==========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1997 and 1996
<TABLE>
1997 1996
------------ -------------
<S> <C> <C>
Revenue........................................ $80,189,000 $47,189,000
Cost of sales.................................. 55,976,000 33,605,000
----------- ----------
Gross profit.............................. 24,213,000 13,584,000
Selling, general and administrative expenses... 18,041,000 9,908,000
----------- ----------
Operating income.......................... 6,172,000 3,676,000
----------- ----------
Other expenses:
Interest (income) expense, net............... (338,000) 236,000
Factor charges............................... -- 999,000
---------- ----------
(338,000) 1,235,000
Income before provision for income taxes and 6,510,000 2,441,000
extraordinary charge.........................
Provision for income taxes..................... 2,039,000 500,000
---------- ----------
Income before extraordinary charge............. 4,471,000 1,941,000
Extraordinary charge-Loss on early
extinguishment of debt, net of income tax -- 1,148,000
benefit of $296,000.......................... ---------- ----------
Net income..................................... $ 4,471,000 $ 793,000
========== ==========
Earnings per share:
Basic earnings per share:
Income before extraordinary charge........ $ 0.39 $ 0.20
Extraordinary charge, net of income tax -- (0.12)
benefit................................. ----------- ----------
Net income per share..................... $ 0.39 $ 0.08
=========== ===========
Weighted average number of common shares
- Basic................................. 11,362,000 9,729,000
========== ==========
Diluted earnings per share:
Income before extraordinary charge........ $ 0.38 $ 0.17
Extraordinary charge, net of income tax -- (0.10)
benefit................................. ----------- ----------
Net income per share..................... $ 0.38 $ 0.07
=========== ==========
Weighted average number of common shares
- Diluted............................... 11,842,000 10,989,000
=========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1997 and 1996
<TABLE>
Cumulative
Retained Foreign Total
Common Stock Additional Earnings Currency Shareholders'
------------ Paid in (Accumulated Translation Equity
Shares Amount Capital Deficit) Adjustments (Deficit)
------ ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
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 adjustments....... -- -- -- -- (158,000) (158,000)
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
========== ======== ========== ========== ========= ==========
</TABLE>
F-5
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997 and 1996
<TABLE>
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 4,471,000 $ 793,000
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization............... 392,000 214,000
Provision for doubtful accounts............. 765,000 590,000
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
Accounts receivable......................... (9,895,000) (4,399,000)
Unbilled services........................... (4,918,000) (1,347,000)
Other current assets........................ (176,000) (489,000)
Other assets................................ (112,000) (197,000)
Cash overdraft.............................. -- (83,000)
Accounts payable............................ 947,000 (1,074,000)
Accrued payroll and related taxes........... 822,000 (754,000)
Accrued expenses and other liabilities...... (194,000) 736,000
Income taxes payable........................ 366,000 535,000
----------- ---------
Net cash used in operating activities..... (7,186,000) (4,262,000)
----------- ---------
Cash flows from investing activities:
Purchases of equipment.......................... (2,477,000) (1,143,000)
----------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 9,900,000 17,835,000
of issuance costs.............................
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)
Repayments to factors, net...................... -- (3,343,000)
Repayments of lines of credit, net.............. -- (45,000)
Principal payments under capital leases......... (6,000) (22,000)
----------- ----------
Net cash provided by financing activities 10,733,000 12,813,000
----------- ----------
Effect of foreign currency exchange rate (158,000) --
changes on cash...............................
Net increase in cash and cash equivalents 912,000 7,408,000
Cash and cash equivalents at beginning of year... 7,479,000 71,000
----------- ----------
Cash and cash equivalents at end of year.......... $ 8,391,000 $ 7,479,000
=========== ==========
Supplemental disclosures of cash flow information:
Cash paid for interest.......................... $ -- $ 1,264,000
============ ==========
Cash paid for income taxes...................... $ 1,795,000 $ --
============ ==========
</TABLE>
See notes to consolidated financial statements.
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 liabilites 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 1996
represent services provided which are billed subsequent to year-end. All such
amounts are anticipated to be realized in the following year.
F-7
<PAGE>
Note 1 - Summary of Significant Accounting Policies - (Continued)
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 and $590,000 in 1997 and 1996,
respectively. Credit is granted to substantially all customers on an unsecured
basis.
Recoverability of Long-Lived Assets
The Company reviews the recoverability of its long-lived assets on a
periodic basis in order to identify business conditions which may indicate a
possible impairment. The assessment for potential impairment is based primarily
on the Company's ability to recover the unamortized balance of its long-lived
assets from expected future cash flows from its operations on an undiscounted
basis.
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 were not material.
Concentrations
For the years ended December 31, 1997 and 1996, approximately 68% and 74%
of revenue, respectively, was derived from projects in which the Company's
personnel implemented software developed by SAP. The Company's future success in
its SAP-related consulting services depends largely on its continued
relationship with SAP and on its continued status as a SAP National
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 minimum revenue
F-8
<PAGE>
Note 1 - Summary of Significant Accounting Policies - (Continued)
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 and 1996, 38% and 44%, respectively, of the Company's
revenue was generated by serving as a member of consulting teams assembled by
other information technology consulting firms.
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% and 20% of revenue for 1997 and
1996, respectively. Accounts receivable due from this customer was approximately
$2,049,000 and $988,000 as of December 31, 1997 and 1996, respectively.
Foreign Operations
Revenues and identifiable assets from foreign operations were not
significant in 1997 and 1996. During 1997, approximately $2,100,000 of income
from operations was generated from foreign operations while during 1996 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.
F-9
<PAGE>
Note 1 - Summary of Significant Accounting Policies - (Continued)
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 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
--------------------- -----------------
Net Income $ 4,471,000 $ 793,000
---------- ---------
Denominator:
Weighted average number of common
shares........................... 11,362,000 9,729,000
----------- ----------
Basic earnings per share......... $ 0.39 $ 0.08
========== =========
Denominator:
Weighted average number of common
shares........................... 11,362,000 9,729,000
Common share equivalents of
outstanding stock options........ 480,000 1,260,000
----------- ----------
Total shares........................ 11,842,000 10,989,000
----------- ----------
Diluted earnings per share.......... $ 0.38 $ 0.07
========== =========
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 and $144,000 in
1997 and 1996, 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.
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
F-11
<PAGE>
Note 3 - Lines of Credit and Subordinated Debentures - (Continued)
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:
1997 1996
----------------- ---------------
Current:
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
=========== =========
The provision for income taxes differs from the amount computed by applying
the statutory rate of 35% to income before income taxes. The principal reasons
for this difference are:
1997 1996
----------------- -----------
Tax at federal statutory rate............. 35% 35%
Nondeductible expenses.................... 1 1
State income tax, net of federal benefit.. 4 (3)
Utilization of net operating loss -- (8)
carryforwards...........................
Foreign losses for which no benefit is -- 9
available...............................
Changes in valuation allowance............ (3) (14)
Foreign Operations taxed at less than
U.S. statutory rate, primarily India.... (9) --
Other..................................... 3 --
------ -----
Effective tax rate........................ 31% 20%
====== =====
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.
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
F-13
<PAGE>
Note 5 - Income Taxes - (Continued)
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:
1997 1996
-------------- ------------
Deferred tax assets:
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 171,000 --
depreciation............................
Valuation allowance for deferred tax
assets.................................. -- (207,000)
-------- ---------
Net deferred tax assets................... $ 233,000 $ 331,000
======== ========
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 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 state tax, interest or penalty payment
obligations, net of any tax benefits realized by the Company, resulting from the
subject matter discussed above.
F-14
<PAGE>
Note 6 - Commitments and Contingencies - (Continued)
Leases
The Company leases office space and office equipment under capital and
operating leases that have initial or remaining non-cancelable lease terms in
excess of one year as of December 31, 1997. Future minimum aggregate annual
lease payments are as follows:
For the Years Ending December 31, Capital Operating
------------------------------------ ------------- -------------
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
========
The Company is in the process of finalizing 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 and 1996 was
$388,000 and $176,000, 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. A total of 1,590,000
shares of Common Stock have been reserved for issuance under the plans.
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.
F-15
<PAGE>
Note 7 - Stock Option Plans and Warrants - (Continued)
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.
Weighted
Number of Average
Shares Exercise Price
- ---------------------------------------------------------------
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
========= =====
F-16
<PAGE>
Note 7 - Stock Option Plans and Warrants - (Continued)
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1997:
Outstanding Exercisable
----------- -----------
Weighted Weighted Weighted
Exercise Number of Average Average Number of Average
Price Range shares Remaining Exercise shares Exercise
Life (in Price Price
years)
- --------------------------------------------------------------------------------
$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
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.
F-18
Subsidiaries:
Intelligroup New Zealand Limited, a corporation formed pursuant to the
laws of New Zealand and a wholly-owned subsidiary of Intelligroup, Inc.
Intelligroup Europe Limited, a corporation formed pursuant to the laws of
the United Kingdom and a wholly-owned subsidiary of Intelligroup, Inc.
Intelligroup Singapore Private Ltd., a corporation formed pursuant to the
laws of Singapore and 50% owned by each of Intelligroup, Inc., and Rajkumar
Koneru, Chief Executive Officer, President of U.S. Operations and Director of
Intelligroup, Inc.
Intelligroup Nordic A/S, a corporation formed pursuant to the laws of
Denmark and a wholly-owned subsidiary of Intelligroup, Inc.
Intelligroup Australia Pty Limited, a corporation formed pursuant to the
laws of Australia and a wholly-owned subsidiary of Intelligroup, Inc.
Intelligroup Asia Private, Ltd., a corporation formed pursuant to the laws
of India, a 99.8% owned and wholly-controlled subsidiary of Intelligroup, Inc.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Intelligroup, Inc.:
As independent public accountants, we hereby consent to the incorporation
by reference of our report included in this Form 10-KSB, into the Company's
previously filed Registration Statement File No. 333-31809.
ARTHUR ANDERSEN LLP
Princeton, New Jersey
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 1997 AND FOR THE TWELVE MONTH
PERIOD ENDED DECEMBER 31, 1997 WHICH ARE INCLUDED IN THE REGISTRANT'S FORM
10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001016439
<NAME> Intelligroup, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 8,391,000
<SECURITIES> 0
<RECEIVABLES> 17,668,000
<ALLOWANCES> 799,000
<INVENTORY> 0
<CURRENT-ASSETS> 34,695,000
<PP&E> 3,366,000
<DEPRECIATION> 635,000
<TOTAL-ASSETS> 38,668,000
<CURRENT-LIABILITIES> 5,984,000
<BONDS> 0
0
0
<COMMON> 120,000
<OTHER-SE> 32,342,000
<TOTAL-LIABILITY-AND-EQUITY> 38,668,000
<SALES> 80,189,000
<TOTAL-REVENUES> 80,189,000
<CGS> 55,976,000
<TOTAL-COSTS> 55,976,000
<OTHER-EXPENSES> 18,041,000
<LOSS-PROVISION> 765,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,510,000
<INCOME-TAX> 2,039,000
<INCOME-CONTINUING> 4,471,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,471,000
<EPS-PRIMARY> .39
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</TABLE>
