SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission File No. 0-20943
Intelligroup, Inc.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
New Jersey 11-2880025
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
517 Route One South, Iselin, New Jersey 08830
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(732) 750-1600
------------------------------
(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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:
--- ---
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of August 3, 1998:
Class Number of Shares
----- ----------------
Common Stock, $.01 par value 12,587,258
<PAGE>
INTELLIGROUP, INC. and SUBSIDIARIES
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements....................... 1
Consolidated Balance Sheets
as of June 30, 1998 (unaudited)
and December 31, 1997 .................................. 2
Consolidated Statements of Income and Comprehensive
Income for the Three Months Ended
June 30, 1998 and 1997 (unaudited)...................... 3
Consolidated Statements of Cash Flows
for the Three Months Ended
June 30, 1998 and 1997 (unaudited)...................... 4
Notes to Consolidated Financial Statements (unaudited).. 5
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition .......... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................... 15
Item 2. Changes in Securities and Use of Proceeds............... 16
Item 4. Submission of Matters to a Vote of Security Holders..... 17
Item 5. Other Information....................................... 18
Item 6. Exhibits and Reports on Form 8-K........................ 19
SIGNATURES............................................................. 20
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
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<PAGE>
<TABLE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and December 31, 1997
June 30, December 31,
1998 1997
----------- ------------
(unaudited)
<CAPTION>
Assets
<S> <C> <C>
Current Assets:
Cash and cash equivalents ........................................................... $ 2,610,000 $ 8,391,000
Accounts receivable, less allowance for doubtful accounts of $1,470,000
at June 30, 1998 and $799,000 at December 31, 1997 .............................. 27,341,000 17,668,000
Unbilled services ................................................................... 8,915,000 7,834,000
Deferred income taxes ............................................................... 404,000 404,000
Other current assets ................................................................ 1,768,000 668,000
------------ ------------
Total current assets ............................................................ 41,038,000 34,965,000
Equipment, net ........................................................................... 5,738,000 3,366,000
Cost in excess of fair value of net assets acquired, net ................................. 4,458,000 --
Other assets ............................................................................. 1,230,000 337,000
------------ ------------
$ 52,464,000 $ 38,668,000
============ ============
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable .................................................................... $ 3,294,000 $ 1,353,000
Accrued payroll and related taxes ................................................... 3,959,000 2,636,000
Accrued expenses and other liabilities .............................................. 4,476,000 1,074,000
Income taxes payable ................................................................ 767,000 901,000
Current portion of obligations under capital leases ................................. 21,000 20,000
------------ ------------
Total current liabilities ....................................................... 12,517,000 5,984,000
Obligations under capital leases, less current portion ................................... 26,000 51,000
Deferred income taxes .................................................................... 203,000 171,000
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;
12,571,392 and 11,987,981 shares issued and outstanding at
June 30, 1998 and December 31, 1997, respectively ............................... 126,000 120,000
Additional paid-in capital .......................................................... 33,682,000 30,175,000
Retained earnings ................................................................... 6,429,000 2,325,000
Currency translation adjustments .................................................... (519,000) (158,000)
------------ ------------
Total shareholders' equity ...................................................... 39,718,000 32,462,000
------------ ------------
$ 52,464,000 $ 38,668,000
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three Months and Six Months Ended June 30, 1998 and 1997
(unaudited)
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue ................................................ $ 32,798,000 $ 19,155,000 $ 60,121,000 $ 34,893,000
Cost of sales .......................................... 20,531,000 12,956,000 38,474,000 24,292,000
------------ ------------ ------------ ------------
Gross profit .................................. 12,267,000 6,199,000 21,647,000 10,601,000
Selling, general and administrative expenses ........... 8,727,000 4,389,000 15,619,000 7,474,000
Acquisition expenses ................................... 434,000 -- 434,000 --
------------ ------------ ------------ ------------
Operating expenses ............................ 9,161,000 4,389,000 16,053,000 7,474,000
------------ ------------ ------------ ------------
Operating income .............................. 3,106,000 1,810,000 5,594,000 3,127,000
Interest income ........................................ 21,000 44,000 101,000 122,000
------------ ------------ ------------ ------------
Income before provision for income taxes ............... 3,127,000 1,854,000 5,695,000 3,249,000
Provision for income taxes ............................. 943,000 686,000 1,669,000 1,245,000
------------ ------------ ------------ ------------
Net income ............................................. $ 2,184,000 $ 1,168,000 $ 4,026,000 $ 2,004,000
============ ============ ============ ============
Earnings per share:
Basic earnings per share:
Net income per share ...................... $ 0.18 $ 0.11 $ 0.33 $ 0.19
============ ============ ============ ============
Weighted average number of
common shares - Basic ........................ 12,290,000 10,787,000 12,145,000 10,761,000
============ ============ ============ ============
Diluted earnings per share:
Net income per share ...................... $ 0.17 $ 0.11 $ 0.32 $ 0.18
============ ============ ============ ============
Weighted average number of
common shares - Diluted ...................... 12,714,000 10,884,000 12,565,000 10,859,000
============ ============ ============ ============
Comprehensive Income
Net income ............................................. $ 2,184,000 $ 1,168,000 $ 4,026,000 $ 2,004,000
Other comprehensive income -
Currency translation adjustments .............. (289,000) -- (361,000) --
------------ ------------ ------------ ------------
Comprehensive income ................................... $ 1,895,000 $ 1,168,000 $ 3,665,000 $ 2,004,000
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
<TABLE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1998 and 1997
(unaudited)
<CAPTION>
June 30, June 30,
1998 1997
Cash flows from operating activities:
<S> <C> <C>
Net income ........................................................ $ 4,026,000 $ 2,004,000
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization ................................. 425,000 182,000
Provision for doubtful accounts ............................... 610,000 75,000
Deferred income taxes ......................................... 32,000 --
Changes in operating assets and liabilities:
Accounts receivable ........................................... (9,149,000) (3,284,000)
Unbilled services ............................................. (1,060,000) (2,533,000)
Other current assets .......................................... (1,076,000) (154,000)
Other assets .................................................. (894,000) (217,000)
Accounts payable .............................................. 1,649,000 481,000
Accrued payroll and related taxes ............................. 1,323,000 749,000
Accrued expenses and other liabilities ........................ 1,484,000 (385,000)
Income taxes payable .......................................... (440,000) (535,000)
----------- -----------
Net cash used in operating activities ..................... (3,070,000) (3,617,000)
Cash flows from investing activities:
Purchase of equipment ............................................. (2,708,000) (1,562,000)
Cash flows from financing activities:
Proceeds from exercise of stock options ........................... 382,000 342,000
Principal payments under capital leases ........................... (24,000) (4,000)
----------- -----------
Net cash provided by financing activities ................. 358,000 338,000
Effect of foreign currency exchange rate changes on cash .......... (361,000) --
----------- -----------
Net decrease in cash and cash equivalents ................. (5,781,000) (4,841,000)
Cash and cash equivalents at beginning of period ....................... 8,391,000 7,479,000
----------- -----------
Cash and cash equivalents at end of period ............................. $ 2,610,000 $ 2,638,000
=========== ===========
</TABLE>
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<PAGE>
INTELLIGROUP, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
- -------------------------
The consolidated financial statements and accompanying financial
information as of June 30, 1998 and for the three and six months ended June 30,
1998 and 1997 are unaudited and, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the financial position of the
Company at such dates and the operating results and cash flows for those
periods. The financial statements included herein have been prepared in
accordance with generally accepted accounting principles and the instructions of
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. These financial statements should be read in conjunction with the
Company's audited financial statements for the year ended December 31, 1997,
which were included as part of the Company's Form 10-KSB.
Results for interim periods are not necessarily indicative of results
for the entire year.
(2) Earnings Per Share
- ----------------------
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS
128") which has replaced the former rules for earnings per share computations,
presentation and disclosure. Under the new standard, basic earnings per share is
computed by dividing income available to common shareholders by the weighted
average number of common stock outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
The Company has adopted SFAS 128 and, as required by the standard, has
restated all prior period earnings per share data. The Company's new earnings
per share amounts as calculated under SFAS 128 are not materially different from
those computed under the former accounting standard.
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<PAGE>
A reconciliation of weighted average number of common shares
outstanding to weighted average common shares outstanding assuming dilution is
as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average number of common
shares 12,290,000 10,787,000 12,145,000 10,761,000
Common share equivalents of outstanding
stock options 424,000 97,000 420,000 98,000
---------- ---------- ---------- ----------
Weighted average number of common
shares assuming dilution 12,714,000 10,884,000 12,565,000 10,859,000
========== ========== ========== ==========
</TABLE>
Certain stock options outstanding at June 30, 1998 were not included in
the computations of earnings per share assuming dilution because the options'
exercise prices were greater than the average price of the common shares.
(3) Comprehensive Income
- ------------------------
Effective January 1, 1998, the Company adopted the provisions of SFAS
No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting comprehensive income and its components. In June 1997, the FASB issued
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 have no impact on the Company's financial position or results from
operations.
(4) Acquisitions
- ----------------
On May 7, 1998, the Company acquired thirty percent of the outstanding
share capital of CPI Consulting Limited. The acquisition of CPI Consulting
Limited was accounted for utilizing purchase accounting. The consideration paid
by the Company included the issuance of 165,696 shares of the Company's Common
Stock with a fair market value of $3.1 million, and a future liability to the
sellers predicated upon operating results for the balance of 1998, which is
currently estimated at $1.2 million. The excess of purchase price over the fair
value of the net assets acquired was attributed to intangible assets, amounting
in the aggregate to $4.5 million, which was recorded at the time of the
purchase.
On May 21, 1998, the Company acquired all of the outstanding share
capital of CPI Resources Limited. The acquisition of CPI Resources Limited was
accounted for as a pooling of interests. Prior year results have not been
restated due to immateriality. As consideration for this acquisition, the
Company issued 371,000 shares of the Company's Common Stock. At the time of the
acquisition, CPI Resources Limited owned seventy percent of the outstanding
share capital of CPI Consulting Limited. In connection with this acquisition,
the Company incurred one-time costs of $434,000.
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<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
- ------ Financial Condition.
--------------------------------------------------------------------
General
- -------
The Company provides a wide range of information technology services,
including enterprise-wide business process solutions, internet applications
services, systems integration and custom software development based on leading
technologies. The Company has grown rapidly since 1994 when it made a strategic
decision to diversify its customer base by expanding the scope of its
integration and development services and to utilize SAP software as a primary
tool to implement enterprise-wide business process solutions. In 1995, the
Company became an 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. 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 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
The Company generates revenue from professional services rendered to
customers. Revenue is recognized as services are performed. The Company's
services range from providing customers with a single consultant to
multi-personnel full-scale projects. The Company provides these services to its
customers primarily on a time and materials basis and pursuant to written
contracts which can be terminated with limited advance notice, typically not
more than 30 days, and without significant penalty, generally limited to fees
earned and expenses incurred by the Company through the date of termination. The
Company provides its services directly to end-user organizations or as a member
of a consulting team assembled by another information technology consulting firm
to Fortune 1000 and other large and mid-sized companies. The Company generally
bills its customers semi-monthly for the services provided by its consultants at
contracted rates. Where contractual provisions permit, customers also are billed
for reimbursement of expenses incurred by the Company on the customers' behalf.
The Company 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 is 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 continue to offer fixed price projects. The Company has
had limited prior experience in pricing and performing under fixed price
arrangements and believes that there are
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<PAGE>
certain risks related thereto, and thus prices such arrangements to reflect the
associated risk. 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 six months ended June 30, 1998 and the year ended December 31,
1997, the Company's ten largest customers accounted for in the aggregate
approximately 44% and 54% of its revenue, respectively. During the six months
ended June 30, 1998, Bristol-Myers Squibb accounted for more than 10% of
revenue. During the year ended December 31, 1997, PricewaterhouseCoopers LLP
(formerly Price Waterhouse LLP) and Bristol-Myers Squibb each accounted for more
than 10% of revenue. For the six months ended June 30, 1998 and the year ended
December 31, 1997, 36% and 38% of the Company's revenue was generated by serving
as a member of consulting teams assembled by other information technology
consulting firms. There can be no assurance that such information technology
consulting firms will continue to engage the Company in the future at current
levels of retention, if at all. During the six months ended June 30, 1998 and
the year ended December 31, 1997, 65% and 68% of the Company's total revenue was
derived from projects in which the Company implemented software developed by
SAP. Of the Company's total revenue for each respective period, 14% was derived
from projects in which the Company implemented software developed by Oracle.
During the six months ended June 30, 1998, approximately 48% of the Company's
revenue was derived from engagements in which the Company had project management
responsibilities, compared to 33% during the year ended December 31, 1997.
The Company's most significant cost is project personnel expenses,
which consist of consultant salaries, benefits and payroll-related expenses.
Thus, the Company's financial performance is based primarily upon billing margin
(billable hourly rate less the cost to the Company of a consultant on an hourly
basis) and personnel utilization rates (billable hours divided by paid hours).
The Company believes that turnkey project management assignments typically carry
higher margins. The Company has been shifting to such higher-margin turnkey
management assignments and more complex projects by leveraging its reputation,
existing capabilities, proprietary implementation methodology, development tools
and offshore development capabilities with expanded sales and marketing efforts
and new service offerings to develop turnkey project sales opportunities with
both new and existing customers. The Company's inability to continue its shift
to higher-margin turnkey management assignments and more complex projects may
adversely impact the Company's future growth.
Since late 1994, the Company has made substantial investments in its
infrastructure in order to support its rapid growth. For example, in 1994, the
Company established and funded an Advanced Development Center (the "ADC") in
India, and in 1995 established a sales office in Northern California. In
addition, from 1994 to date, the Company has incurred expenses to develop
proprietary development tools and 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.
-8-
<PAGE>
The Company currently maintains sales and operations offices in
Chicago, Detroit, Foster City (California), Reston (Virginia) and Washington,
D.C. In addition to the ADC and sales offices in India, the Company also has
offices in, Australia, Denmark, Japan, New Zealand, Singapore and the United
Kingdom. The Company has reviewed the adequacy of its leased facilities in light
of its expanded staff and has executed a lease for approximately 48,475 square
feet, in Edison, New Jersey for an initial term of 10 years. The Company expects
to move its headquarters to such location in September 1998. The Company expects
to be able to sublet its current headquarters for the remainder of the term of
its sublease, which expires November 15, 1999; and is currently negotiating a
sub-lease agreement which it expects will become effective in September.
This Form 10-Q 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 and the timing of new product
introductions by the Company's ERP partners, (e) levels of market acceptance for
the Company's services, (f) the hiring of additional staff; (ii) changes in the
Company's billing and employee utilization rates; (iii) the Company's ability to
manage its growth effectively, which will require the Company (a) to continue
developing and improving its operational, financial and other internal systems,
as well as its business development capabilities, (b) to attract, train, retain,
motivate and manage its employees, (c) to continue to maintain high rates of
employee utilization at profitable billing rates and, (d) to maintain project
quality, particularly if the size and scope of the Company's projects increase;
(iv) the Company's ability to maintain an effective internal control structure;
(v) the Company's limited operating history within its current line of business;
(vi) the Company's reliance on a continued relationship with SAP America and the
Company's present status as a SAP National Logo Partner; (vii) the Company's
substantial reliance on key customers and large projects; (viii) the highly
competitive nature of the markets for the Company's services; (ix) the Company's
ability to successfully address the continuing changes in information
technology, evolving industry standards and changing customer objectives and
preferences; (x) the Company's reliance on the continued services of its key
executive officers and leading technical personnel; (xi) the Company's ability
to attract and retain a sufficient number of highly skilled employees in the
future; (xii) the progress the Company may have at continuing to diversify its
offerings, including growth in its Oracle, Baan and PeopleSoft services; (xiii)
uncertainties resulting from pending litigation matters and from potential
administrative and regulatory immigration and tax law matters; and (xiv) the
Company's ability to protect its intellectual property rights. The Company's
actual results may differ materially from the results disclosed in such
forward-looking statements.
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Results of Operations
- ---------------------
The following table sets forth for the periods indicated certain
financial data as a percentage of revenue:
<TABLE>
<CAPTION>
Percentage of Revenue
-------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue ........................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ..................................... 62.6 67.6 64.0 69.6
----- ----- ----- -----
Gross profit .................................. 37.4 32.4 36.0 30.4
Selling, general and administrative
expenses .......................................... 26.6 22.9 26.0 21.4
Acquisition expenses .............................. 1.3 -- 0.7 --
----- ----- ----- -----
Operating income .............................. 9.5 9.5 9.3 9.0
Interest income ................................... 0.0 0.2 0.2 0.3
----- ----- ----- -----
Income before provision for income taxes .......... 9.5 9.7 9.5 9.3
Provision for income taxes ........................ 2.8 3.6 2.8 3.6
----- ----- ----- -----
Net income ........................................ 6.7% 6.1% 6.7% 5.7%
===== ===== ===== =====
</TABLE>
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
- -----------------------------------------------------------------------------
Revenue. Revenue increased by 71.2%, or $13.6 million, from $19.2
million during the three months ended June 30, 1997 to $32.8 million during the
three months ended June 30, 1998. This increase was attributable primarily to
increased demand for the Company's SAP-related implementation consulting
services and, to a lesser extent, to increased demand for the Company's systems
integration and custom software development services.
Gross profit. The Company's cost of sales includes primarily the cost
of salaries to consultants and related employee benefits and payroll taxes. The
Company's cost of sales increased by 58.5%, or $7.6 million, from $13.0 million
during the three months ended June 30, 1997 to $20.5 million during the three
months ended June 30, 1998. 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
97.9%, or $6.1 million, from $6.2 million during the three months ended June 30,
1997 to $12.3 million during the three months ended June 30, 1998. Gross profit
margin increased from 32.4% of revenue during the three months ended June 30,
1997 to 37.4% of revenue during the three months ended June 30, 1998. The
increase in such gross profit margin was attributable to the increase in
implementation service projects, an increase in utilization and improved billing
margins.
Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of administrative salaries, sales
personnel 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 98.8%, or $4.3 million, from
$4.4 million during the three months ended June 30, 1997 to $8.7 million during
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the three months ended June 30, 1998, and increased as a percentage of revenue
from 22.9% to 26.6% of revenue. 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, and increased travel and
entertainment expenses due to the growth of the business and the employee base.
These expenses were incurred to support the continued revenue growth of the
Company in 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.
Acquisition expense. During the three months ended June 30, 1998, the
Company incurred costs of $434,000 in connection with the acquisition of CPI
Resources Limited, which was accounted for as a pooling of interests. These
costs primarily consisted of professional fees associated with the acquisition.
Interest income. Interest income has been earned on interest bearing
cash accounts and short term investments. 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.
Provision for Income Taxes. The Company's effective tax rate was 30%
and 37% for the three months ended June 30, 1998, and June 30, 1997,
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
in such period. For the three months ended June 30, 1998, the tax holiday
favorably impacted the Company's effective tax rate by approximately 11%, while
the effect was not significant in the three months ended June 30, 1997.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
- -------------------------------------------------------------------------
Revenue. Revenue increased by 72.3%, or $25.2 million, from $34.9
million during the six months ended June 30, 1997 to $60.1 million during the
six months ended June 30, 1998. This increase was attributable primarily to
increased demand for the Company's SAP-related implementation consulting
services and, to a lesser extent, to increased demand for the Company's systems
integration and custom software development services.
Gross profit. The Company's cost of sales increased by 58.4%, or $14.2
million, from $24.3 million during the six months ended June 30, 1997 to $38.5
million during the six months ended June 30, 1998. 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 104.2% or $11.0 million, from $10.6 million during the six
months ended June 30, 1997 to $21.6 million during the six months ended June 30,
1998. Gross profit margin increased from 30.4% of revenue during the six months
ended June 30, 1997 to 36.0% of revenue during the six months ended June 30,
1998. The increase in such gross profit margin was attributable to the increase
in implementation service projects, an increase in utilization and improved
billing margins.
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<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 109% or $8.1 million, from $7.5 million
during the six months ended June 30, 1997 to $15.6 million during the six months
ended June 30, 1998, and increased as a percentage of revenue from 21.4% to
26.0% of revenue. 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, and increased travel and entertainment expenses due to
the growth of the business and the employee base. These expenses were incurred
to support the continued revenue growth of the Company in 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.
Acquisition expense. During the six months ended June 30, 1998, the
Company incurred costs of $434,000 in connection with the acquisition of CPI
Resources Limited, which was accounted for as a pooling of interests. These
costs primarily consisted of professional fees associated with the acquisition.
Interest income. Interest income has been earned on interest bearing
cash accounts and short term investments. 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.
Provision for Income Taxes. The Company's effective tax rate was 29%
and 38% for the six months ended June 30, 1998, and June 30, 1997, 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 in such
period. For the six months ended June 30, 1998, the tax holiday favorably
impacted the Company's effective tax rate by approximately 12%, while the effect
was not significant in the six months ended June 30, 1997.
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.
-12-
<PAGE>
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.
The Company had cash and cash equivalents of $2.6 million at June 30,
1998, and $8.4 million at December 31, 1997. The Company had working capital of
$28.7 million at June 30, 1998, and $29.0 million at December 31, 1997.
Cash used in operating activities was $3.1 million during the six
months ended June 30, 1998, resulting primarily from the growth in accounts
receivable and unbilled services. Cash used in operating activities for the six
months ended June 30, 1997 was $3.6 million.
The Company invested $2.7 million and $1.6 million in computer
equipment and furniture during the six months ended June 30, 1998 and 1997,
respectively. The Company has outstanding commitments of approximately $882,000
related to furniture and fixtures for the new headquarters in Edison, New
Jersey. The Company made advance payments of $283,000 during the six months
ended June 30, 1998 toward these commitments, which is presented in other
current assets on the June 30, 1998 balance sheet.
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. As of June 30, 1998, the Company is in compliance with
all debt covenants. 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.
As of June 30, 1998, there were no amounts outstanding under the
revolving line of credit and no equipment term loans outstanding.
-13-
<PAGE>
The Company believes that its available funds, together with current
credit arrangements and the cash flows expected to be generated from operations,
will be adequate to satisfy its current and planned operations through at least
the next 12 months.
-14-
<PAGE>
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings.
- ------- ------------------
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
-15-
<PAGE>
reargument of the Decision and a notice of appeal. On July 2, 1998, the
Appellate Division affirmed the lower court's decision dismissing Design
Strategy's complaint in its entirety. 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.
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. Subsequently, on July 10, 1998, upon the Company's
Motion to Compel Arbitration, the court dismissed the plaintiff's complaint
without prejudice. Pending plaintiff's motion to reconsider the dismissal,
plaintiff's claims will be submitted to arbitration. 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.
On May 28, 1998, the Company and Rajkumar Koneru, as plaintiffs, filed
a complaint in the United States District Court for the District of New Jersey,
against Sophien Bennaceur, a former employee and officer of the Company. The
complaint, which seeks damages and injunctive relief against the defendant,
alleges among other things, misappropriation of proprietary information, breach
of employment agreement, breach of fiduciary duty and duty of loyalty, unfair
competition and tortious interference. The defendant was served with the
complaint and filed an answer on July 9, 1998.
There is no other material litigation pending to which the Company is a
party or to which any of its property is subject.
Item 2. Changes in Securities and Use of Proceeds.
- ------- ------------------------------------------
The following information relates to all securities of the Company sold
by the Company within the quarter ended June 30, 1998 which were not registered
under the Securities Act of 1933, as amended (the "Securities Act"), at the time
of grant, issuance and/or sale:
On May 7, 1998, the Company, through its wholly-owned
subsidiary Intelligroup Europe Limited (No. 3205142), a corporation
formed pursuant to the laws of England and Wales ("Intelligroup
Europe"), consummated the acquisition (the "Consulting Acquisition") of
thirty percent (30%) of the equity interests in CPI Consulting Limited
(No. 3316554), a corporation formed pursuant to the laws of England and
Wales ("Consulting"). In addition, on May 21, 1998, the Company
consummated the acquisition (the "Resources Acquisition") of all of the
equity interests in CPI Resources Limited (No. 2080824), a corporation
formed pursuant to the laws of England and Wales ("Resources"). As a
result of the Resources Acquisition, the Company acquired Resources'
seventy percent (70%) interest in
-16-
<PAGE>
Consulting. The principal activity of each of Resources and Consulting
is providing information technology consulting staffing services in
the United Kingdom.
The purchase price in the Consulting Acquisition consisted of
the issuance of an aggregate of 165,696 shares of restricted common
stock to independent minority investors of Consulting (the "Selling
Shareholders") as well as a contingent earn-out payment of up to
(pound)1,513,200 payable in the Company's restricted common stock to be
determined as of December 31, 1998. The Selling Shareholders,
consisting of Bandele Attah, Paul Grant, Michael J. Hirst, Richard M.
Lucy, Christopher J.J. Smith and Robert J. Wilson, each received 27,616
shares of the 165,696 shares of restricted common stock issued by the
Company.
The purchase price in the Resources Acquisition consisted of
the issuance of 371,000 shares of the Company's restricted common stock
to Timothy Hugh Fenner, the sole shareholder of Resources ("Fenner").
No underwriter was employed by the Company in connection with the
issuance of the securities described above. The Company claims that the issuance
of all of the foregoing securities was exempt from registration under Section
4(2) of the Securities Act as transactions not involving any public offering.
Appropriate legends were affixed to the stock certificates issued in such
transactions. All recipients had adequate access to information about the
Company.
On June 5, 1998, the Company filed a Registration Statement on Form S-3
to register an aggregate of 351,196 shares of Common Stock of the Company to be
offered for sale, from time to time, by or for the account of the Selling
Shareholders and Fenner. The Company did not and will not receive any of the
proceeds from sales of the shares by the Selling Shareholders and Fenner.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
The Annual Meeting of Shareholders of the Company was held on May 13,
1998.
There were present at the meeting in person or by proxy shareholders
holding an aggregate of 9,769,361 shares of Common Stock. The results of the
vote taken at such meeting with respect to each nominee for director were as
follows:
Common Stock Nominees For Withheld
--------------------- --- --------
Ashok Pandey 9,718,728 50,633
Rajkumar Koneru 9,718,728 50,633
Nagarjun Valluripalli 9,718,728 50,633
Klaus P. Besier 9,718,728 50,633
David A. Finley 9,718,728 50,633
Kevin P. Mohan 9,718,728 50,633
-17-
<PAGE>
In addition, a vote was taken on the proposal to amend the Company's
1996 Stock Plan to increase the number of shares of Common Stock reserved for
issuance upon the exercise of options granted under such plan from 1,450,000 to
2,200,000 shares and to reserve an additional 750,000 shares of Common Stock of
the Company for issuance under the Company's 1996 Stock Plan. Of the shares
present at the meeting in person or by proxy, 8,083,337 shares of Common Stock
were voted in favor of such proposal, 1,107,142 shares of Common Stock were
voted against such proposal and 433 shares of Common Stock abstained from
voting.
Finally, a vote was taken on the proposal to ratify the appointment of
Arthur Andersen LLP as the independent auditors of the Company for the fiscal
year ending December 31, 1998. Of the shares present at the meeting in person or
by proxy, 9,768,078 shares of Common Stock were voted in favor of such proposal,
1,050 shares of Common Stock were voted against such proposal and 233 shares of
Common Stock abstained from voting.
Item 5. Other Information.
- ------- ------------------
On April 29, 1998, Stephen A. Carns was appointed President and Chief
Executive Officer of the Company. Mr. Carns, 52, has approximately 30 years of
executive management experience in professional services companies. He joined
the Company as General Manager in 1998. From 1995 until joining the Company, Mr.
Carns served as President of TLB Enterprises, LLC. Prior to that, from 1994
until 1995, Mr. Carns served as Executive Vice President of Unisys Corporation,
responsible for world wide operations at Unisys Corporation . From 1992 until
1994, Mr. Carns served as President and Chief Operating Officer of Systematics,
Inc., an international outsourcing firm. Prior to joining Systematics, from 1990
until 1992, he served as President and Chief Operating Officer of Cap Gemini
America, a computer services and business consultancy company.
On April 29, 1998, Gerard E. Dorsey was appointed Senior Vice President
- - Finance and Chief Financial Officer of the Company. Mr. Dorsey, 51, has 25
years of CFO, treasury and accounting experience. Most recently, he served as
Senior Vice President-Finance and Chief Financial Officer of Ariel Corporation,
a data communications company. Prior to joining Ariel Corporation, from 1991
until 1995, Mr. Dorsey served as Chief Financial Officer of Information
Management Technologies Corporation, a printing and office services outsourcing
company. From 1987 until 1990, Mr. Dorsey served as Treasurer of Loral
Corporation.
At the same time, Ashok Pandey, Rajkumar Koneru and Nagarjun
Valluripalli were named as Co-Chairmen of the Board. Mr. Pandey will no longer
serve as President of Corporate Services and Acting Chief Financial Officer, but
instead, will be responsible for strategic planning, market research and methods
and tools. Mr. Koneru will no longer serve as President of U.S. Operations, but
instead, will manage application outsourcing, new business development and
mergers and acquisitions. Mr. Valluripalli will continue to serve as President
of International Operations.
On May 7, 1998, the Company, through its wholly-owned subsidiary
Intelligroup Europe, consummated the acquisition of thirty percent (30%) of the
equity interests in Consulting. In
-18-
<PAGE>
addition, on May 21, 1998, the Company consummated the acquisition of all of the
equity interests in Resources. See Item 2. "Changes in Securities and Use of
Proceeds" for more detailed information concerning such acquisitions.
On July 22, 1998, Stephen A. Carns was named a director of the Company.
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
(a) Exhibits.
27. Financial Data Schedule for the period ended June
30, 1998.
(b) Reports on Form 8-K.
On May 4, 1998, the Company filed a report on Form
8-K to disclose certain management changes.
On May 27, 1998, the Company filed a report on Form
8-K to disclose the acquisitions of CPI Consulting
Limited (No. 3316554) and CPI Resources Limited
(No. 2080824).
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Intelligroup, Inc.
DATE: August 13, 1998 By: /s/ Stephen A. Carns
--------------------------
Stephen A. Carns,
President and Chief Executive Officer
(Principal Executive Officer)
DATE: August 13, 1998 By: /s/ Gerard E. Dorsey
--------------------------
Gerard E. Dorsey,
Senior Vice President - Finance
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE
REGISTRANT'S FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<CIK> 0001016439
<NAME> Intelligroup, Inc.
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<FN>
<F1> This amount represents Basic Earnings per Share in accordance with the
requirements of Statement of Financial Accounting Standards No. 128 -
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<F2> This amount represents Diluted Earnings per Share in accordance with
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</TABLE>
