As Filed with the Securities and Exchange Commission on November 19, 1998
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Intelligroup, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
New Jersey 11-2880025
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
499 Thornall Street
Edison, New Jersey 08837
(732) 590-1600
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(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
STEPHEN A. CARNS
President and Chief Executive Officer
Intelligroup, Inc.
499 Thornall Street
Edison, New Jersey 08837
(732) 590-1600
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(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
DAVID J. SORIN, ESQ.
DAVID S. MATLIN, ESQ.
Buchanan Ingersoll Professional Corporation
College Centre
500 College Road East
Princeton, New Jersey 08540
(609) 987-6800
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this Registration Statement becomes effective.
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If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this form is filed toregister additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
<PAGE>
<TABLE>
<CAPTION>
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CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Proposed
Amount Maximum Proposed Maximum Amount Of
Title of Shares To Be Aggregate Price Aggregate Offering Registration
To Be Registered Registered Per Share(1) Price Fee
- ---------------------------- ------------------ ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Common Stock,
$.01 par value......... 185,500 $17.53 $3,251,815 $959.29
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<FN>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c). Such price is based upon the average of the high
and low price per share of the Registrant's Common Stock as reported on
the Nasdaq National Market on November 17, 1998.
</FN>
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 19, 1998
PROSPECTUS
185,500 Shares
INTELLIGROUP, INC.
499 Thornall Street
Edison, New Jersey 08837
(732) 590-1600
Common Stock
Tim Fenner, the Selling Shareholder, may offer and sell, from time to time,
185,500 Shares of the Common Stock of Intelligroup, Inc. The Selling Shareholder
may sell all or a portion of his Shares through public or private transactions,
at prevailing market prices, or at privately negotiated prices. The Company will
not receive any part of the proceeds from sales of these Shares.
Our Common Stock is listed on the Nasdaq National Market under the symbol
"ITIG". The last reported sale price of the Common Stock on November 18, 1998 on
the Nasdaq National Market was $18.0625 per share.
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INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 3.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
November , 1998
<PAGE>
INTELLIGROUP, INC.
TABLE OF CONTENTS
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Page
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Risk Factors ........................................................ 3
About Intelligroup .................................................. 13
Use of Proceeds ..................................................... 13
Selected Financial Data.............................................. 13
Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................... 15
Selling Shareholder ................................................ 24
Plan of Distribution................................................. 25
Legal Matters........................................................ 25
Experts ............................................................ 25
Where You Can Find More Information ................................. 26
Indemnification of Directors and Officers............................ 28
Financial Statements................................................. F-1
<PAGE>
RISK FACTORS
SOME INFORMATION IN THIS PROSPECTUS MAY CONTAIN "FORWARD-LOOKING
STATEMENTS". SUCH STATEMENTS CAN BE IDENTIFIED BY THE USE OF WORDS SUCH AS
"BELIEVE," "ANTICIPATE" AND "EXPECT." THESE STATEMENTS DISCUSS FUTURE
EXPECTATIONS, CONTAIN PROJECTIONS OR STATE OTHER "FORWARD-LOOKING" INFORMATION.
THE FACTORS DISCUSSED BELOW COULD CAUSE ACTUAL RESULTS AND DEVELOPMENTS TO BE
MATERIALLY DIFFERENT FROM THOSE EXPRESSED IN OR IMPLIED BY SUCH STATEMENTS. IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, YOU SHOULD
CONSIDER THE FOLLOWING FACTORS CAREFULLY BEFORE DECIDING TO PURCHASE SHARES OF
OUR COMMON STOCK.
SUBSTANTIAL VARIABILITY OF QUARTERLY OPERATING RESULTS.
In the past, the Company's operating results have varied substantially from
quarter to quarter, and the Company expects that they will continue to do so.
Due to the relatively fixed nature of certain of the Company's costs, including
personnel and facilities costs, a decline in revenue in any fiscal quarter would
result in lower profitability in that quarter. The Company's quarterly operating
results are influenced by:
o seasonal patterns of hardware and software capital spending by customers;
o information technology outsourcing trends;
o the timing, size and stage of projects;
o new service introductions by the Company or its competitors;
o levels of market acceptance for the Company's services;
o the hiring of additional staff; and
o changes in the Company's billing and employee utilization rates.
The Company believes, therefore, that past operating results and
period-to-period comparisons should not be relied upon as an indication of
future performance. Demand for the Company's services generally is lower in the
fourth quarter. This decrease is due to reduced activity during the holiday
season and fewer working days for those customers which curtail operations
during such period. The Company anticipates that its business will continue to
be subject to such seasonal variations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on page 15.
MANAGEMENT OF GROWTH.
The Company's growth has placed significant demands on its management,
administrative and operational resources. The Company's revenue increased from
$24.6 million in 1995 to $80.2 million in 1997 and $95.9 million for the nine
months ended September 30, 1998. From January 1, 1995 through December 31, 1997,
the Company's staff increased from 113 to 772 full-time employees. To manage its
growth effectively, the Company must continue
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to develop and improve its operational, financial and other internal systems, as
well as its business development capabilities. The Company must also continue to
attract, train, retain, motivate and manage its employees.
The Company's future success will depend in large part on its ability to:
o continue to maintain high rates of employee utilization at profitable
billing rates; and
o maintain project quality, particularly if the size and scope of the
Company's projects increase.
The inability of the Company to manage its growth and projects effectively
could have a material adverse effect on:
o the quality of the Company's services and products;
o its ability to retain key personnel; and
o its ability to report financial results in an accurate and timely
manner.
WEAKNESSES IN INTERNAL CONTROLS.
Following the audit of the Company's consolidated financial statements for
the year ended December 31, 1995, the Company received a management letter from
its independent public accountants, Arthur Andersen LLP. The management letter
described significant deficiencies and material weaknesses in the Company's
internal control structure. Arthur Andersen LLP noted that, during 1995, the
Company's internal control structure had two material weaknesses:
o the Company did not reconcile its supporting records to the general
ledger or perform meaningful account analysis; and
o the Company did not maintain, summarize or reconcile any books or
records for its foreign operations.
The Company first hired a Chief Financial Officer in January 1996. In March
1996 it implemented an accounting system capable of generating information and
reports necessary to appropriately manage the Company. In February 1998, the
Company's Chief Financial Officer resigned and on April 29, 1998, the Company
appointed a new Chief Financial Officer. On April 29, 1998, Stephen A. Carns was
appointed President and Chief Executive Officer of the Company. The Company
continues to develop and implement a system of internal controls and otherwise
develop an appropriate administrative infrastructure. Following the audit for
the year ended December 31, 1996, Arthur Andersen LLP issued a management letter
which, although it did set forth significant deficiencies, did not specify any
material weaknesses in the Company's internal control structure. In addition,
Arthur Andersen LLP informed the Company that no material weaknesses in the
Company's internal control structure were noted during the audit of
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the Company's consolidated financial statements for the year ended December 31,
1997. The failure to continue to develop and maintain an effective internal
control structure could have a material adverse effect on the Company's
business.
DEPENDENCE ON SAP AND ORACLE.
During the years ended December 31, 1995, 1996 and 1997 and the nine months
ended September 30, 1998, 69%, 74%, 68% and 65%, respectively, of the Company's
revenue was derived from projects in which the Company implemented software
developed by SAP. SAP is a major international German-based software company and
a leading vendor of client/server application software for business
applications. The Company's future success in its SAP-related consulting
services depends largely on its continued:
o relationship with SAP America, SAP's United States affiliate; and
o status as a SAP National Logo Partner.
The Company executed its SAP National Logo Partner Agreement in April 1997
and previously had been a SAP National Implementation Partner since 1995. In
July 1997, the Company achieved Accelerated SAP Partner Status with SAP by
meeting certain performance criteria established by SAP. Such status is awarded
by SAP on an annual basis pursuant to contract. The Company's current contract
expires on December 31, 1998 and is automatically renewed for a successive
one-year period, unless terminated by either party.
During both the year ended December 31, 1997 and the nine months ended
September 30, 1998, 14% of the Company's total revenue was derived from projects
in which the Company implemented software developed by Oracle. Oracle is a
leading vendor of client/server application software for business applications.
The Company's current contract with Oracle expires on July 26, 1999 and is
automatically renewed for a successive one-year period, unless terminated by
either party. The Company expanded its relationship with Oracle by entering into
an agreement, effective October 26, 1998. The agreement is expected to help the
Company meet the demands of mid-size to large companies using Oracle. The
agreement is terminable by either party upon 30 days notice.
The Company has no reason to believe that its contracts with SAP and Oracle
will not be renewed or that the scope of such contracts will be modified or
limited in a manner adverse to the Company. However, there can be no assurance
that such contracts will be renewed on terms acceptable to the Company, if at
all. In addition, there could be a material adverse effect on the Company's
business if:
o either SAP or Oracle is unable to maintain its leadership position
within the business applications software market;
o the Company's relationship with SAP or Oracle deteriorates; or
o SAP or Oracle elects to compete directly with the Company.
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SUBSTANTIAL RELIANCE ON KEY CUSTOMERS.
The Company has derived and believes that it will continue to derive a
significant portion of its revenue from a limited number of customers and
projects. For the years ended December 31, 1995, 1996 and 1997 and the nine
months ended September 30, 1998, the Company's ten largest customers accounted
for in the aggregate approximately 56%, 66%, 54% and 42% of its revenue. During
1995, Ernst & Young LLP and PricewaterhouseCoopers LLP each accounted for more
than 10% of revenue. In 1996 and 1997, PricewaterhouseCoopers LLP and
Bristol-Myers Squibb each accounted for more than 10% of revenue. During the
nine months ended September 30, 1998, no single customer accounted for more than
10% of revenue. For the years ended December 31, 1995, 1996 and 1997 and the
nine months ended September 30, 1998, 50%, 44%, 38% and 38% of the Company's
revenue was generated by serving as a member of consulting teams assembled by
other information technology consulting firms, which also may be competitors of
the Company. There can be no assurance that such information technology
consulting firms will continue to use the Company in the future and at current
levels of retention, if at all. In addition, the amount of work performed for
specific customers is likely to vary from year to year. The loss of any large
customer or project could have a material adverse effect on the Company's
business.
Most of the Company's contracts can be canceled by the customer on short
notice and without significant penalty. The cancellation or significant
reduction in the scope of a large contract could have a material adverse effect
on the Company's business.
The Company provides services to its customers primarily on a time and
materials basis. Recently, however, the Company has bid on certain fixed price
projects. 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 more fixed price projects. The Company has had limited prior
experience in pricing and performing under fixed price arrangements. There can
be no assurance that the Company will be able to complete such projects within
the fixed price and required timeframes. The failure to perform within such
fixed price contracts could have a material adverse effect on the Company's
business.
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 could result in a material adverse change to the customer's
operations. Such failure could give rise to claims for damages against the
Company or cause damage to the Company's reputation. Such claims could adversely
affect the Company's business. In some of its agreements, the Company has agreed
to indemnify the customer for damages arising from services provided to, or on
behalf of, such customer. Such indemnification could have a material adverse
effect on the Company's financial condition and results of operations. In some
of its contracts, the Company warrants that it will repair errors or defects in
its deliverables without additional charge to the customer. To date, the Company
has not experienced any material claims against such warranties. The Company has
insurance for damages and expenses incurred in connection with alleged negligent
acts, errors or omissions. There can be no assurance that such insurance will
continue to be available to the Company on acceptable terms.
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HIGHLY COMPETITIVE INFORMATION TECHNOLOGY SERVICES INDUSTRY.
The Company's business is highly competitive. Many of the Company's
competitors have longer operating histories, possess greater industry and name
recognition and havesignificantly greater financial, technical and marketing
resources. Additionally, the Company has faced, and expects to continue to face,
additional competition from new entrants into its markets.
The Company believes that competitive factors in its markets include:
Principal Factors
-----------------
o quality of service and deliverables;
o speed of development and implementation;
o price;
o project management capability; and
o technical and business expertise.
Outside Factors
---------------
o the ability of its competitors to hire, retain and motivate project
managers and other senior technical staff;
o the development by others of services that are competitive with the
Company's services; and
o the extent of its competitors' responsiveness to customer needs.
The Company also believes that it competes based on its expertise in SAP,
Oracle, PeopleSoft and Baan products and a wide variety of technologies. There
can be no assurance that the Company will be able to continue to compete
successfully with existing and new competitors.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW SOLUTIONS.
The Company's success depends in part on its ability to develop solutions
that keep pace with:
o continuing changes in information technology;
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o evolving industry standards; and
o changing customer objectives and preferences.
There can be no assurance that the Company will be successful in adequately
addressing these developments on a timely basis. Even if these developments are
addressed, the Company may not be successful in the marketplace. In addition,
competitor's products or technologies may make the Company's services
non-competitive or obsolete. The Company's failure to address these developments
could have a material adverse effect on its business.
DEPENDENCE ON KEY PERSONNEL.
The Company believes that its success now and in the future will depend
largely on the continued services of its key executive officers and leading
technical personnel. Each executive officer and leading technical professional
has entered into an employment agreement with the Company which contains
non-competition, non-disclosure and non-solicitation covenants. The departure of
one or more of such key personnel may have a material adverse effect on the
Company's business.
COMPETITIVE MARKET FOR TECHNICAL PERSONNEL.
The Company believes that its success will depend in large part upon its
ability to attract, retain, train and motivate highly-skilled employees,
particularly project managers and other senior technical personnel. Such
qualified personnel are in great demand, there is significant competition for
such employees and it is likely that access to such personnel will remain
limited for the foreseeable future. There can be no assurance that the Company
will be successful in attracting a sufficient number of such personnel in the
future, or that it will be successful in retaining, training and motivating the
employees it is able to attract. The failure to do so could:
o impair the Company's ability to adequately manage and complete its
existing projects;
o impair the Company's ability to bid for or obtain new projects; and
o adversely affect the Company's business.
ACQUISITION RISKS.
The Company has acquired, and intends to continue to acquire, other
businesses with services complementary to those offered by the Company. For
example in May 1998, the Company consummated the acquisition of CPI Consulting
Limited and CPI Resources Limited, in the United Kingdom.
Risks associated with acquisitions may include:
o possible adverse short-term effects on the Company's operating
results;
o diversion of management's attention;
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o risks associated with unanticipated liabilities or contingencies;
o risks associated with financing; and
o integration with existing business.
RELIANCE ON INTELLECTUAL PROPERTY RIGHTS.
The Company's future success is dependent, in part, upon its proprietary
implementation methodology and toolset, development tools and other intellectual
property rights. In order to protect its proprietary rights, the Company:
o relies upon trade secrets, nondisclosure and other contractual
arrangements;
o relies on copyright and trademark laws;
o enters into confidentiality agreements with employees, consultants and
customers;
o limits access to and distribution of its proprietary information; and
o requires almost all employees and consultants to assign to the Company
their rights in intellectual property developed during their
employment or engagement by the Company.
There can be no assurance that the steps taken by the Company 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.
The Company believes that its trademarks, service marks, services,
methodology and development tools do not infringe on the intellectual property
rights of others. There can be no assurance, however, that such a claim will not
be asserted against the Company in the future, or that if asserted, any such
claim will be successfully defended.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
The Company's international operations have been increasing and its recent
acquisitions of CPI Consulting Limited and CPI Resources Limited likely will
result in an even greater percent of revenue being derived internationally. To
date, the Company has established foreign operations in Australia, Denmark,
India, Japan, New Zealand, Singapore and the United Kingdom. In order to expand
sales on an international basis, the Company may establish additional foreign
operations. Increasing foreign operations likely will require significant
management attention and financial resources and could materially adversely
affect the Company's business. In addition, there can be no assurance that the
Company will be able to increase international market demand for its services.
The risks in the Company's international business activities include:
o unexpected changes in regulatory environments;
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o foreign currency fluctuations;
o tariffs and other trade barriers;
o longer accounts receivable payment cycles;
o difficulties in managing international operations;
o potential foreign tax consequences including restrictions on the
repatriation of earnings; and
o the burdens of complying with a wide variety of foreign laws and
regulations.
There can be no assurance that such factors will not have a material
adverse effect on the Company's future international sales, if any, and,
consequently, on the Company's business.
RISKS ASSOCIATED WITH OPERATIONS IN INDIA.
The Company, through Intelligroup Asia Private Limited, is subject to the
risks associated with doing business in India. India's central and state
governments are significantly involved in the Indian economy as regulators. In
the recent past, the government of India has provided significant tax incentives
and relaxed certain regulatory restrictions in order to encourage foreign
investment in certain sectors of the economy. Certain of these benefits that
directly affect Intelligroup Asia include:
o tax holidays;
o liberalized import and export duties; and
o preferential rules on foreign investment and repatriation.
Changes in the business, political or regulatory climate of India could
have a material adverse effect on Intelligroup Asia's business. In addition,
India has experienced significant inflation, shortages of foreign exchange and
has been subject to civil unrest. Further, the United States and Japan have
recently imposed sanctions on India in response to certain nuclear testing
conducted by the Indian government. Changes in the following factors could have
a material adverse effect on the Company's business:
o inflation;
o interest rates;
o taxation; or
o other social, political, economic or diplomatic developments affecting
India in the future.
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RISK OF INCREASED GOVERNMENT REGULATION OF IMMIGRATION.
The Company has relied and in the future expects to continue to rely
increasingly upon attracting and retaining personnel with technical and project
management skills from other countries. The Immigration and Naturalization
Service limits the number of new petitions it approves each year. Accordingly,
the Company may be unable to obtain visas necessary to bring critical foreign
employees to the United States. Any difficulty in hiring or retaining foreign
nationals in the United States could increase competition for technical
personnel and have a material adverse effect on the Company's business.
SHARES ELIGIBLE FOR FUTURE SALE.
Future sales of Common Stock in the public market following this offering
could adversely affect the market price of the Common Stock. Upon completion of
this offering, an aggregate of 7,443,546 shares will be freely tradable by
persons other than "affiliates" of the Company without restriction. The
7,443,546 shares consist of:
o the 185,500 shares offered in this registration statement;
o the 351,196 shares which may be offered and sold pursuant to an
effective registration statement on Form S-3 filed by the Company in
June 1998;
o the 1,150,000 shares offered and sold pursuant to the Company's
follow-on public offering consummated in July 1997;
o the 2,846,250 shares offered and sold pursuant to the Company's
initial public offering consummated in October 1996; and
o an aggregate of 2,910,600 shares, including 1,320,600 shares resold by
certain shareholders pursuant to the provisions of Rule 144 under the
Securities Act, 42,767 shares which were issued upon the exercise of
vested stock options pursuant to the provisions of Rule 701 of the
Securities Act and 1,547,233 shares which may be offered and sold
pursuant to an effective registration statement on Form S-8 filed by
the Company.
Shortly after this offering, the Company intends to register an additional
750,000 shares of Common Stock issuable upon stock options granted or to be
granted under its 1996 Stock Plan. Sales of substantial amounts of the Common
Stock in the public market, or the perception that such sales could occur, may
adversely affect the market price of the Common Stock.
CONTROL BY MANAGEMENT AND EXISTING SHAREHOLDERS.
Upon completion of this offering, Ashok Pandey, Rajkumar Koneru and
Nagarjun Valluripalli together will beneficially own approximately 50% of the
outstanding shares of Common Stock (approximately 51% together with the shares
beneficially owned by the other directors, officers and affiliated entities). As
a result, these shareholders, acting together, will be able to control matters
requiring approval by the shareholders of the Company, including the
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election of directors. Such a concentration of ownership may have the effect of
delaying or preventing a change in control of the Company, including
transactions in which shareholders might otherwise receive a premium for their
shares over then current market prices.
CERTAIN ANTI-TAKEOVER PROVISIONS; PREFERRED STOCK.
Certain Provisions of the Certificate of Incorporation and the Shareholder
Protection Rights Agreement could make it more difficult for a third party to
acquire control of the Company, even if such change in control would be
beneficial to stockholders. The Certificate of Incorporation allows the Company
to issue preferred stock without shareholder approval. Such issuances could make
it more difficult for a third party to acquire the Company.
POTENTIAL VOLATILITY OF STOCK PRICE.
The market price of the shares of Common Stock has been and in the future
may be highly volatile. Some factors that may affect the market price include:
o actual or anticipated fluctuations in the Company's operating results;
o announcements of technological innovations or new commercial products
or services by the Company or its competitors;
o market conditions in the computer software and hardware industries
generally;
o changes in recommendations or earnings estimates by securities
analysts; and
o actual or anticipated quarterly fluctuations in financial results.
Furthermore, the stock market historically has experienced volatility which
has particularly affected the market prices of securities of many technology
companies and which sometimes has been unrelated to the operating performances
of such companies.
ABSENCE OF DIVIDENDS.
The Company has never paid, and does not anticipate paying any dividends on
its Common Stock in the foreseeable future.
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ABOUT INTELLIGROUP
The Company provides a wide range of information technology services,
including enterprise-wide business process solutions, internet applications
services, applications outsourcing and maintenance, systems integration and
custom software development based on leading technologies. 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 Company's
customers are Fortune 1000 and other large and mid-sized companies, as well as
other information technology consulting firms.
The Company was incorporated in New Jersey in October 1987 under the name
Intellicorp, Inc. The Company's name was changed to Intelligroup, Inc. in July
1992. The Company's principal executive offices are located at 499 Thornall
Street, Edison, New Jersey 08837 and its telephone number is (732) 590-1600.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Shares offered by this Prospectus.
SELECTED FINANCIAL DATA
The selected statement of operations data for the years ended December 31,
1995, 1996 and 1997 and the selected balance sheet data as of December 31, 1996
and 1997 are derived from and are qualified by reference to, and should be read
in conjunction with, the more detailed audited consolidated financial statements
and the related notes thereto included elsewhere in this Prospectus. The
selected statement of operations data for the year ended December 31, 1994 and
the selected balance sheet data as of December 31,1995 and 1994 have been
derived from audited financial statements of the Company which are not included
in this Prospectus. The selected statement of operations data for the year ended
December 31, 1993 and for the nine months ended September 30, 1997 and 1998 and
the selected balance sheet data as of December 31, 1993 and September 30, 1998
have been derived from the unaudited financial statements of the Company. The
unaudited financial data include all adjustments (consisting only of normal,
recurring adjustments) that the Company considers necessary for fair
presentation of the financial data for such periods. The interim results are not
necessarily indicative of results of operations for the entire year.
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The following should be read in conjunction with the consolidated financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus:
<TABLE>
<CAPTION>
Nine Months Ended
(In thousands, except per share data) September 30,
-------------
1993 1994 1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ---------- ---------- -------
(unaudited)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue............................. $ 933 $ 6,800 $ 24,589 $ 47,189 $ 80,189 $ 56,797 $ 95,890
Cost of sales....................... 628 5,842 20,021 33,605 55,976 38,631 61,374
-------- --------- --------- -------- -------- -------- ---------
Gross profit...................... 305 958 4,568 13,584 24,213 18,166 34,516
Selling, general and administrative
expenses.......................... 299 986 4,452 9,908 18,041 12,670 24,902
Acquisition expenses.................. -- -- -- -- -- -- 434
-------- --------- --------- -------- -------- -------- ---------
Operating expenses................ 299 986 4,452 9,908 18,041 12,670 25,336
-------- --------- --------- -------- -------- -------- ---------
Operating income (loss)........... 6 (28) 116 3,676 6,172 5,496 9,180
Factor charges/Interest expense
(income), -- 409 1,175 1,235 (338) (266) (281)
-------- --------- --------- -------- --------- --------- ----------
net...............................
Income (loss) before provision for
income taxes and extraordinary
charge.......................... 6 (437) (1,059) 2,441 6,510 5,762 9,461
Provision for income taxes.......... -- -- -- 500 2,039 2,175 2,817
-------- --------- --------- -------- --------- -------- ---------
Income (loss) before extraordinary 6 (437) (1,059) 1,941 4,471 3,587 6,644
charge................................
Extraordinary charge, net of income tax
benefit of $296................... -- -- -- 1,148 -- -- --
-------- --------- --------- -------- --------- -------- ---------
Net income (loss)................. $ 6 $ (437) $ (1,059) $ 793 $ 4,471 $ 3,587 $ 6,644
======= ======== ======== ======== ========= ======== =========
Earnings (loss) per share(1):
Basic earnings per share:
Income (loss) before extraordinary $ 0.00 $ (0.04) $ (0.09) $ 0.20 $ 0.39 $ 0.32 $ 0.54
charge................................
Extraordinary charge, net of income
tax -- -- -- (0.12) -- -- --
-------- --------- --------- --------- --------- -------- ---------
benefit.......................
Net income (loss)............... $ $ (0.04) $ (0.09) $ 0.08 $ 0.39 $ 0.32 $ 0.54
======= ========= ======== ========= ========= ========= ==========
0.00
Weighted average number of common shares
- - Basic.......................... 12,203 12,203 12,203 9,729 11,362 11,106 12,289
========= ========= ========= ======== ========= ======== =========
Diluted earnings per share:
Income (loss) before extraordinary $ 0.00 $ (0.04) $ (0.09) $ 0.17 $ 0.38 $ 0.31 $ 0.52
charge................................
Extraordinary charge, net of income tax
benefit........................... -- -- -- (0.10) -- -- --
-------- -------- --------- --------- --------- --------- ---------
Net income (loss)............... $ 0.00 $ (0.04) $ (0.09) $ 0.07 $ 0.38 $ 0.31 $ 0.52
======== ========= ======== ======== ======== ======== ========
Weighted average number of common shares
Diluted........................ 12,203 12,203 12,203 10,989 11,842 11,555 12,786
========= ========= ========= ========= ========= ========= =========
<PAGE>
As of December 31, As of September 30,
-----------------
1993 1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -------------- ----------------
(In thousands) (unaudited)
Balance Sheet Data:
Cash and cash equivalents........ $ 34 $ 209 $ 71 $ 7,479 $ 8,391 $ 5,439
Working capital (deficit)........ 146 (426) (1,597) 15,713 28,981 30,612
Total assets..................... 257 2,313 6,784 21,262 38,668 57,968
Short-term debt, including subordinated
debentures..................... 5 1,032 3,489 20 20 18
Capital lease obligations, less current
portion........................ 52 -- 81 57 51 54
Shareholders' equity (deficit)... 130 (307) (1,366) 17,162 32,462 42,918
- ------------------
(1) Basic and diluted earnings per share have replaced primary and fully diluted
earnings per share in accordance with SFAS No. 128.
</TABLE>
-14-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company provides a wide range of information technology services,
including enterprise-wide business process solutions, internet applications
services, applications outsourcing and maintenance, 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.
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 are currently material to the Company's business. 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 certain risks related
thereto and thus prices such arrangements to reflect the associated risk. There
can be no assurance that the
-15-
<PAGE>
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.
The Company has derived and believes that it will continue to derive a
significant portion of its revenue from a limited number of customers and
projects. For the years ended December 31, 1995, 1996 and 1997 and the nine
months ended September 30, 1998, the Company's ten largest customers accounted
for in the aggregate of approximately 56%, 66%, 54% and 42% of its revenue,
respectively. During 1995, Ernst & Young LLP and PricewaterhouseCoopers LLP
(formerly Price Waterhouse LLP) each accounted for more than 10% of revenue. In
1996 and 1997, PricewaterhouseCoopers LLP and Bristol-Myers Squibb each
accounted for more than 10% of revenue. During the nine months ended September
30, 1998, no customer accounted for more than 10% of revenue. For the years
ended December 31, 1995, 1996 and 1997 and the nine months ended September 30,
1998, 50%, 44%, 38% and 38%, respectively, of the Company's revenue was
generated by serving as a member of consulting teams assembled by other
information technology consulting firms. There can be no assurance that such
information technology consulting firms will continue to engage the Company in
the future at current levels of retention, if at all. During the years ended
December 31, 1995, 1996 and 1997 and the nine months ended September 30, 1998,
69%, 74%, 68% and 65%, respectively, of the Company's total revenue was derived
from projects in which the Company implemented software developed by SAP. For
both the year ended December 31, 1997 and the nine months ended September 30,
1998, approximately 14% of the Company's total revenue was derived from projects
in which the Company implemented software developed by Oracle. During the nine
months ended September 30, 1998, approximately 47% of the Company's revenue was
derived from engagements at which the Company had project management
responsibilities, compared to 33%, 16% and 0% during the years ended December
31, 1997, 1996 and 1995, respectively.
The Company's most significant cost is project personnel expenses, which
consist of consultant salaries, benefits and payroll-related expenses. Thus, the
Company's financial performance is based primarily upon billing margin (billable
hourly rate less the cost to the Company of a consultant on an hourly basis) and
personnel utilization rates (billable hours divided by paid hours). The Company
believes that turnkey project management assignments typically carry higher
margins. The Company has been shifting to such higher-margin turnkey management
assignments and more complex projects by leveraging its reputation, existing
capabilities, proprietary implementation methodology, development tools and
offshore development capabilities with expanded sales and marketing efforts and
new service offerings to develop turnkey project sales opportunities with both
new and existing customers. The Company's inability to continue its shift to
higher-margin turnkey management assignments and more complex projects may
adversely impact the Company's future growth.
Since late 1994, the Company has made substantial investments in its
infrastructure in order to support its rapid growth. For example, in 1994, the
Company established and funded an operations facility in India, the Advance
Development Center (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 its proprietary accelerated
-16-
<PAGE>
implementation methodology and toolset. Since 1995, the Company has also been
increasing its sales force and its marketing, finance, accounting and
administrative staff, in order to manage its growth. The Company currently
maintains sales and operations offices in Chicago, Detroit, Foster City
(California), Reston (Virginia), Edison (New Jersey), Dallas, Atlanta, Phoenix,
Boston, Miami and Washington, D.C. In addition to the ADC and sales offices in
India, the Company also currently maintains offices in Australia, Denmark,
Japan, New Zealand, and the United Kingdom. The Company leases its headquarters
in Edison, New Jersey, totaling approximately 48,475 square feet. Such lease has
an initial term of ten (10) years, commencing in September 1998. The Company is
in the process of finalizing an agreement to sublet the space used for its prior
headquarters for the remainder of the term of its sublease, which expires
November 15, 1999.
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
---------------------
Nine Months
Year Ended Ended
December 31, September 30,
----------- -------------
1997 1996 1995 1998
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenue..................................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................... 69.8 71.2 81.4 64.0
-------- ----- -------- --------
Gross profit.............................................. 30.2 28.8 18.6 36.0
Selling, general and administrative expenses................ 22.5 21.0 18.1 26.0
Acquisition expenses........................................ -- -- -- 0.4
-------- ------- -------- --------
Operating income (loss)................................... 7.7 7.8 0.5 9.6
Factor fees/Interest expense (income), net.................. (0.4) 2.6 4.8 (0.3)
-------- ----- -------- --------
Income (loss) before provision for income taxes and
extraordinary charge...................................... 8.1 5.2 (4.3) 9.9
Provision for income taxes.................................. 2.5 1.1 -- 2.9
-------- ----- -------- --------
Income (loss) before extraordinary charge................... 5.6 4.1 (4.3) 7.0
Extraordinary charge, net of income tax benefit............. -- 2.4 -- --
-------- ----- -------- --------
Net income (loss)......................................... 5.6% 1.7% (4.3)% 7.0%
======== ===== ======== ========
</TABLE>
-17-
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUE. Revenue increased by 69.9%, or $33.0 million, from $47.2 million
in 1996 to $80.2 million in 1997. This increase was attributable primarily to
increased demand for the Company's SAP related implementation consulting
services and, to a lesser extent, to increased demand for the Company's systems
integration and custom software development services.
GROSS PROFIT. The Company's cost of sales includes primarily the cost of
salaries to consultants and related employee benefits and payroll taxes. The
Company's cost of sales increased by 66.6%, or $22.4 million, from $33.6 million
in 1996 to $56.0 million in 1997. The increase was due to increased personnel
costs resulting from the hiring of additional consultants to support the
increase in demand for the Company's services. The Company's gross profit
increased by 78.2%, or $10.6 million, from $13.6 million in 1996 to $24.2
million in 1997. Gross profit margin increased from 28.8% of revenue in 1996 to
30.2% of revenue in 1997. The increase in such gross profit margin was
attributable to the increase in implementation services projects and a
combination of improved billing margins, greater consultant utilization and
achieving certain customer performance incentives.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of administrative salaries, sales
person compensation, travel and entertainment, some of the costs associated with
the ADC and related development costs and professional fees. Selling, general
and administrative expenses increased by 82.1%, or $8.1 million, from $9.9
million in 1996 to $18.0 million in 1997, and increased as a percentage of
revenue from 21.0% to 22.5%, respectively. The increases in such expenses in
absolute dollars and as a percentage of revenue were due primarily to the
expansion of the Company's sales and marketing activities in 1997 and increased
travel and entertainment expenses due to the growth of the business and the
employee base. Such expenses were increased to support the continued revenue
growth of the Company in the United States and abroad. In addition, such
expenses increased due to increased sales and management recruiting costs,
support services, and an increase in the provision for doubtful accounts.
FACTOR FEES/INTEREST (INCOME) EXPENSE, NET. Factor fees in the 1996 period
were the charges incurred by the Company to finance its accounts receivable. On
October 10, 1996, the Company repaid the factor with a portion of the proceeds
from the Company's initial public offering, approximately $4.4 million,
consisting of all amounts outstanding under the agreement with its factor and
terminated its factor agreement. Subsequent to the Company's initial public
offering, interest income has been earned on interest bearing cash accounts and
short term investments.
PROVISION FOR INCOME TAXES. The Company's effective income tax rate was
31.3% and 20.5% for the years ended December 31, 1997 and 1996. During 1997 and
1996 the Company reduced their valuation allowance by $207,000 and $461,000,
respectively as management determined that it was more likely than not, that the
applicable portion of the net deferred tax asset would be or had been realized.
The 1997 and 1996 valuation allowance reduction favorably impacted the effective
income tax rate by 3% and 14%, respectively. In 1996, the
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<PAGE>
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.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUE. Revenue increased by 91.9%, or $22.6 million, from $24.6 million
in 1995 to $47.2 million in 1996. This increase was attributable primarily to
increased demand for the Company's SAP-related consulting services and, to a
lesser extent, to increased demand for the Company's systems integration and
custom software development services.
GROSS PROFIT. The Company's cost of sales increased by 67.8% or $13.6
million, from $20.0 million in 1995 to $33.6 million in 1996. The increase was
due to increased personnel costs resulting from the hiring of additional
consultants to support the Company's significant increase in demand for the
Company's services. The Company's gross profit increased by 197.4%, or $9.0
million, from $4.6 million in 1995 to $13.6 million in 1996. Gross profit margin
increased from 18.6% of revenue in 1995 to 28.8% of revenue in 1996. The
increase in such gross profit margin was attributable primarily to the fact that
revenue increased at a faster rate than cost of sales which resulted from a
combination of improved billing margins and greater consultant utilization.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by 122.6%, or $5.4 million, from $4.5 million
in 1995 to $9.9 million in 1996, and increased as a percentage of revenue from
18.1% to 21.0% in 1995 and 1996, respectively. The increases in such expenses in
absolute dollars and as a percentage of revenue were due primarily to the
expansion of the Company's sales and marketing activities in 1995 and 1996, the
additional accounting and financial personnel added in 1996 and increased travel
and entertainment expenses due to the growth of the business and the employee
base. These expenses were incurred to support the continued revenue growth of
the Company. In 1996, selling, general and administrative expenses also included
the Company's operations in the United Kingdom which were established during the
year.
FACTOR FEES/INTEREST EXPENSE. During 1995 and 1996, the rapid increase in
the Company's business and revenue resulted in working capital requirements and
the Company utilized its increasing accounts receivable base as a source of
liquidity to obtain financing from the factor because the Company was unable to
obtain more traditional financing. See "-- Liquidity and Capital Resources." The
Company also incurred interest expense in connection with subordinated
debentures issued in April 1996. Factor fees and interest expense increased by
5.1% or $60,000 from 1995 to 1996 but decreased as a percentage of revenue from
4.8% to 2.6% in 1995 and 1996, respectively. Although the volume of accounts
receivable financed increased as a result of the revenue increase, the Company
was able to fund much of its working capital requirements during 1996 with the
proceeds from the subordinated debentures, which debentures carried an interest
rate lower than that charged by the factor. In addition, the Company
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<PAGE>
established a collections department in the first quarter of 1996. Slow accounts
receivable turnover in 1995 contributed to increased factor fees in that year.
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 has funded 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.
Cash provided by operating activities was $1.1 million during the nine
months ended September 30, 1998, resulting primarily from net income of $6.6
million for the nine months ended September 30, 1998, an increase of $5.9
million in accounts payable and accrued payroll, offset by an increase of $11.9
million in accounts receivable and unbilled services. Cash used in operating
activities for the years ended December 31, 1997, 1996 and 1995 was $7.2
million, $4.3 million and $2.3 million, respectively.
The Company had working capital of $30.6 million at September 30, 1998 and
$29.0 million at December 31, 1997.
In accordance with investment guidelines approved by the Company's Board of
Directors, cash balances in excess of those required to fund operations have
been invested in short-term U.S. Treasury securities and commercial paper with a
credit rating no lower than A1/P1.
The Company invested $142,000, $1.1 million, $2.5 million and $4.8 million
in computer equipment and office furniture and fixtures in 1995, 1996 and 1997
and the nine months ended September 30, 1998, respectively. The increase
reflects purchases of computer and telecommunications equipment for consultants
and administrative staff and office furniture and fixtures related to the
Company's new headquarters in Edison, New Jersey, and other offices opened
during 1998.
The Company's factoring agreement required that the Company offer all of
its trade accounts receivable to the factor for financing; however, the factor
was under no obligation to accept any or all of such receivables. For a variety
of reasons, including the rapid growth of the Company, the lack of available
tangible security to utilize as collateral and the absence of historical
operating profits prior to 1996, the Company was unable to obtain more
traditional
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<PAGE>
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 31, 1996 and $300,000 in
April 1996, when the Company repaid all amounts outstanding under such line in
connection with the debenture financing described below. The line of credit has
been terminated in accordance with the terms of such debenture financing.
In April 1996, the Company issued and sold five-year 9% subordinated
debentures in the aggregate principal amount of $6.0 million to Summit Ventures
IV, L.P. and Summit Investors III, L.P. The subordinated debentures were issued
to raise funds for working capital and general corporate purposes, to repurchase
from the then-current shareholders, Messrs. Pandey, Koneru and Valluripalli, an
aggregate of 4,881,066 shares of Common Stock for an aggregate of $1.5 million,
to repay approximately $300,000 outstanding under a $750,000 credit facility and
to satisfy approximately $358,000 of cash overdrafts. Upon receipt of the net
proceeds from the Company's initial public offering in October 1996, the Company
prepaid approximately $6.3 million, representing all amounts outstanding under
such debentures, including interest.
Subsequent to December 31, 1995, the Company determined that it had
unrecorded and unpaid federal and state payroll-related taxes for certain
employees. As a result of the Company's voluntary disclosure to the Internal
Revenue Service of certain unpaid tax liabilities, on June 5, 1996, the Company
received an audit assessment from the Internal Revenue Service for unpaid 1994
and 1995 federal income tax withholding, FICA and FUTA taxes in the aggregate
amount of approximately $800,000 which was paid in full in August 1996. No
interest or penalties were assessed. Reserves, aggregating $1.0 million,
including the amount of the Internal Revenue Service audit assessment, were
recorded at December 31, 1995. No assurance may be given, however, that
interest, penalties or additional state or federal taxes will not be assessed in
the future. The Company's principal shareholders, Messrs. Pandey, Koneru and
Valluripalli, have agreed to indemnify the Company for any and all losses which
the Company may sustain, in excess of the $1.0 million reserve, net of any tax
benefits realized by the Company, arising from or relating to federal or state
tax, interest or penalty payment obligations resulting from the above subject
matter. The Company believes that its failure to record and pay 1994 and 1995
federal and state payroll-related taxes for certain employees resulted from a
combination of factors, including lack of internal controls and lack of
financial expertise and oversight.
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
-21-
<PAGE>
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 September 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 September 30, 1998, there were no amounts outstanding under the
revolving line of credit and no equipment term loans outstanding.
On October 22, 1998, the Company announced that it had executed a
commitment letter with PNC Bank for a three-year $30 million revolving credit
facility. When finalized, such facility will replace the Company's current
two-year $7.5 million credit facility. The Company expects to close this
facility in November 1998. There can be no assurance, however, that such
facility will be finalized in 1998, if at all.
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
twelve months.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share" was issued in February 1997 and replaces Accounting Principles Board
("APB") Opinion No. 15. The new statement simplifies the computations of
earnings per share ("EPS") by replacing the presentation of primary EPS with
basic EPS, which is computed by dividing income available to common shareholders
by the weighted-average number of common shares outstanding for the period.
Diluted EPS under the new statement is computed similarly to fully diluted EPS
pursuant to APB Opinion No. 15. The Company has adopted SFAS No. 128 and has
restated EPS for comparative purposes. SFAS No. 128 did not have a material
impact on the computation of the earnings per share presented in the
consolidated financial statements.
SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997.
This statement is effective for the Company's fiscal year ending December 31,
1998. This statement addresses the reporting and displaying of comprehensive
income and its components. Adoption of SFAS No. 130 relates to disclosure within
the financial statements and is not expected to have a material effect on the
Company's consolidated financial statements. The Company adopted the provisions
of SFAS No. 130 on January 1, 1998.
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<PAGE>
SFAS No. 131, "Disclosures about Segments of and Enterprise and Related
Information" was issued in June 1997. This statement is effective for the
Company's fiscal year ending December 31, 1998. This statement changes the way
public companies report information about segments of their business in their
annual financial statements and requires them to report selected segment
information in their quarterly reports. Adoption of SFAS No. 131 relates to
disclosure within the financial statements and is not expected to have a
material effect on the Company's consolidated financial statements.
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<PAGE>
SELLING SHAREHOLDER
The Shares to be offered under this Prospectus are owned by Tim Fenner. Mr.
Fenner acquired his Shares in connection with the acquisition by Intelligroup
Europe Limited (No. 3205142), a corporation formed pursuant to the laws of
England and Wales and a wholly-owned subsidiary of the Company ("Sub"), of Mr.
Fenner's equity interests in CPI Resources Limited (No. 2080824), a corporation
formed pursuant to the laws of England and Wales, pursuant to the terms of an
Agreement of Purchase and Sale dated as of May 21, 1998, among the Company, Sub
and Mr. Fenner. Pursuant to the terms of the Agreement, the Company agreed to
file a registration statement covering the Shares held by Mr. Fenner with the
Commission.
The following table sets forth, as of September 30, 1998, certain
information with respect to the Selling Shareholder.
Number of
Beneficial Ownership of Shares Beneficial
Name of Selling Shareholder Offered Ownership of Shares
Selling Shareholder Prior to Offering(1) Hereby(2) After Offering(2)
- ------------------- -------------------- --------- -----------------
Number Percent Number Percent
------ ------- ------ -------
Tim Fenner 371,000 3.0 185,500 185,500(3) 1.5%
- ------------
(1) Applicable percentage of ownership is based on 12,667,875 shares of Common
Stock outstanding, plus any Common Stock equivalents held by such holder.
(2) Assumes that all Shares are sold pursuant to this offering and that no
other shares of Common Stock are acquired or disposed of by the Selling
Shareholders prior to the termination of this offering. Because the Selling
Shareholders may sell all, some or none of their Shares or may acquire or
dispose of other shares of Common Stock, no reliable estimate can be made
of the aggregate number of Shares that will be sold pursuant to this
offering or the number or percentage of shares of Common Stock that each
Selling Shareholder will own upon completion of this offering.
(3) Represents shares held by Mr. Fenner which were previously registered on a
Registration Statement on Form S-3 and filed with Securities and Exchange
Commission on June 5, 1998.
Under agreements with the Selling Shareholder, all offering expenses are
borne by the Company except the fees and expenses of any counsel and other
advisors that the Selling Shareholder may employ to represent them in connection
with the offering and all brokerage or underwriting discounts or commissions
paid to broker-dealers in connection with the sale of the Shares.
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<PAGE>
PLAN OF DISTRIBUTION
The Selling Shareholder has not advised the Company of any specific plan
for distribution of the Shares offered hereby, but it is anticipated that the
Shares will be sold from time to time by the Selling Shareholder or by pledgees,
donees, transferees or other successors in interest. Such sales may be made
over-the-counter on the Nasdaq National Market at prices and at terms then
prevailing or at prices related to the then current market price, or in
negotiated transactions. The Shares may be sold by one or more of the following:
(i) a block trade in which the broker or dealer so engaged will attempt to sell
the Shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction; (ii) purchases by a broker or dealer
for its account pursuant to this Prospectus; or (iii) ordinary brokerage
transactions and transactions in which the broker solicits purchases. In
effecting sales, brokers or dealers engaged by the Selling Shareholder may
arrange for other brokers or dealers to participate. Brokers or dealers will
receive commissions or discounts from the Selling Shareholder in amounts to be
negotiated immediately prior to the sale. Such brokers or dealers and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales, and any commissions
received by them and any profit realized by them on the resale of Shares as
principals may be deemed underwriting compensation under the Securities Act. The
expenses of preparing this Prospectus and the related Registration Statement
with the Commission will be paid by the Company. Shares of Common Stock covered
by this Prospectus also may qualify to be sold pursuant to Rule 144 under the
Securities Act, rather than pursuant to this Prospectus. The Selling Shareholder
has been advised that he is subject to the applicable provisions of the Exchange
Act, including without limitation, Rules 10b-5 and Regulation M thereunder.
LEGAL MATTERS
The validity of the issuance of the Shares of Common Stock offered hereby
will be passed upon for the Company by Buchanan Ingersoll Professional
Corporation, 500 College Road East, Princeton, New Jersey.
EXPERTS
The consolidated financial statements included in this Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
-25-
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
The Company files annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any document the
Company files at the SEC's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference room. The Company's SEC filings are also
available to the public from the SEC's web site at http://www.sec.gov. For
additional information, please visit the Company's website at
http://www.intelligroup.com.
The SEC allows the Company to "incorporate by reference" the information
the Company files with them, which means that the Company can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this prospectus, and later
information that the Company files with the SEC will automatically update and
supersede this information. The Company incorporates by reference the documents
listed below and any future filings made with the SEC under Sections 13(a),
13(c), 14, or 15(d) of the Securities Exchange Act of 1934 until the Selling
Shareholder sells all the Shares.
1. Annual Report on Form 10-KSB for the year ended December 31, 1997;
2. Quarterly Report on Form 10-Q for the quarters ended March 31, 1998, June
30, 1998 and September 30, 1998;
3. Current Reports on Form 8-K dated May 4, 1998, May 27, 1998 and November 9,
1998; and
4. The description of the Company's Common Stock, $.01 par value, which is
contained in the Company's Registration Statement on Form 8-A filed
pursuant to Section 12(g) of the Securities Exchange Act of 1934, as
amended, in the form declared effective by the SEC on September 26, 1996,
including any subsequent amendments or reports filed for the purpose of
updating such description.
The Company will provide, without charge, to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any or all of the information
incorporated herein by reference. Exhibits to any of such documents, however,
will not be provided unless such exhibits are specifically incorporated by
reference into such documents. The requests should be made to:
Gerard E. Dorsey, Chief Financial Officer
Intelligroup, Inc.
499 Thornall Street
Edison, New Jersey 08837
(732) 590-1600
-26-
<PAGE>
This prospectus is part of a registration statement we filed with the SEC.
You should rely only on the information or representations provided in this
prospectus. The Company has authorized no one to provide you with different
information. The Company is not making an offer of these securities in any state
where the offer is not permitted. You should not assume that the information in
this prospectus is accurate as of any date other than the date on the front of
the document
--------------------------------------------------
-27-
<PAGE>
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 14A:3-5 of the New Jersey Business Corporation Act permits each New
Jersey business corporation to indemnify its directors, officers, employees and
agents against expenses and liabilities in connection with:
o any proceeding involving such persons by reason of his or her serving
or having served in such capacities; or
o each such person's acts taken in such capacity if such actions were
taken in good faith and in a manner which he or she reasonably
believed to be in or not opposed to the best interests of the
corporation.
With respect to any criminal proceeding, indemnity is permitted if such
person had no reasonable cause to believe his or her conduct was unlawful,
provided that any such proceeding is not by or in the right of the corporation.
Section 14A:2-7(3) of the New Jersey Business Corporation Act enables a
corporation in its certificate of incorporation to limit the liability of
directors and officers of the corporation to the corporation or its
shareholders. Specifically, the certificate of incorporation may provide that
directors and officers of the corporation will not be personally liable for
money damages for breach of a duty as a director or an officer, except for
liability for:
o any breach of the director's or officer's duty of loyalty to the
corporation or its shareholders;
o acts or omissions not in good faith or which involve a knowing
violation of law; or
o any transaction from which the director or officer derived an improper
personal benefit.
The Company's Certificate of Incorporation limits the liability of its
directors and officers as authorized by Section 14A:2-7(3). The affirmative vote
of the holders of at least 80% of the voting power of all outstanding shares of
the capital stock of the Company is required to amend such provisions.
Article 11 of the Registrant's Amended and Restated By-laws specifies that
the Company shall indemnify its directors and officers to the extent such
parties are involved in or made a party to any action, suit or proceeding
because he or she was a director or officer of the Company. The Company has
agreed to indemnify such parties for their actual and reasonable expenses if
such party:
o acted in good faith and in a manner he or she reasonably believed to
be in the best interests of the Company; and
o had no reasonable cause to believe his conduct was unlawful.
-28-
<PAGE>
This provision of the By-laws is deemed to be a contract between the
Company and each director and officer who serves in such capacity at any time
while such provision and the relevant provisions of the New Jersey Business
Corporation Act are in effect. Any repeal or modification shall not offset any
action, suit or proceeding brought or threatened based in whole or in part upon
any such state of facts. The affirmative vote of the holders of at least 80% of
the voting power of all outstanding shares of capital stock of the Company is
required to adopt, amend or repeal such provision of the By-laws.
The Company has executed indemnification agreements with each of its
directors and executive officers. Such agreements require the Company to
indemnify such parties to the full extent permitted by law, subject to certain
exceptions, if such party becomes subject to an action because such party is a
director, officer, employee, agent or fiduciary of the Company.
The Company has liability insurance for the benefit of its directors and
officers. The insurance covers claims against such persons due to any:
o breach of duty; o misleading statement;
o neglect; o omission; or
o error; o act done.
o misstatement;
The insurance covers such claims, except as prohibited by law, or otherwise
excluded by such insurance policy.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
-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 Operations for the years ended
December 31, 1997, 1996 and 1995.................... F-4
Consolidated Statements of Shareholders' Equity (Deficit) for
the years ended December 31, 1997, 1996 and 1995.... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995................... F-6
Notes to Consolidated Financial Statements....................... F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Shareholders of Intelligroup, Inc.:
We have audited the accompanying consolidated balance sheets of
Intelligroup, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Intelligroup, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ARTHUR ANDERSEN LLP
Princeton, New Jersey
February 5, 1998 (except for the
matters discussed in Note 9, as to
which the date is May 21, 1998)
F-2
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
Assets
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents ............................................................... $ 8,391,000 $ 7,479,000
Accounts receivable, less allowance for doubtful accounts of $799,000 and
$546,000 at December 31, 1997 and 1996, respectively
17,668,000 8,538,000
Unbilled services ....................................................................... 7,834,000 2,916,000
Deferred income taxes ................................................................... 404,000 331,000
Other current assets .................................................................... 668,000 492,000
------------ ------------
Total current assets ................................................................ 34,965,000 19,756,000
Equipment, net ............................................................................. 3,366,000 1,281,000
Other assets ............................................................................... 337,000 225,000
------------ ------------
$ 38,668,000 $ 21,262,000
============ ============
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities:
Accounts payable ........................................................................ $ 1,353,000 $ 406,000
Accrued payroll and related taxes ....................................................... 2,636,000 1,814,000
Accrued expenses and other liabilities .................................................. 1,074,000 1,268,000
Income taxes payable .................................................................... 901,000 535,000
Current portion of obligations under capital leases ..................................... 20,000 20,000
------------ ------------
Total current liabilities ........................................................... 5,984,000 4,043,000
Obligations under capital leases, less current portion ..................................... 51,000 57,000
Deferred income taxes ...................................................................... 171,000 --
Commitments and contingencies
Shareholders' Equity
Preferred stock, $.01 par value, 5,000,000 shares authorized, none
issued or outstanding ................................................................. -- --
Common stock, $.01 par value, 25,000,000 shares authorized, 11,987,981 and
10,735,600 shares issued and outstanding at
December 31, 1997 and 1996, respectively .............................................. 120,000 107,000
Additional paid-in capital .............................................................. 30,175,000 19,201,000
Retained earnings (deficit) ............................................................. 2,325,000 (2,146,000)
Currency translation adjustments ........................................................ (158,000) --
------------ ------------
Total shareholders' equity .......................................................... 32,462,000 17,162,000
------------ ------------
$ 38,668,000 $ 21,262,000
============ ============
See notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
Revenue ................................................................ $ 80,189,000 $ 47,189,000 $ 24,589,000
Cost of sales .......................................................... 55,976,000 33,605,000 20,021,000
------------ ------------ ------------
Gross profit .................................................... 24,213,000 13,584,000 4,568,000
Selling, general and administrative expenses ........................... 18,041,000 9,908,000 4,452,000
------------ ------------ ------------
Operating income ................................................ 6,172,000 3,676,000 116,000
------------ ------------ ------------
Other expenses:
Interest (income) expense, net ...................................... (338,000) 236,000 4,000
Factor charges ...................................................... -- 999,000 1,171,000
------------ ------------ ------------
(338,000) 1,235,000 1,175,000
------------ ------------ ------------
Income before provision for income taxes and extraordinary
charge .............................................................. 6,510,000 2,441,000 (1,059,000)
Provision for income taxes ............................................. 2,039,000 500,000 --
------------ ------------ ------------
Income before extraordinary charge ..................................... 4,471,000 1,941,000 (1,059,000)
Extraordinary charge-Loss on early extinguishment of debt,
net of income tax benefit of $296,000 ............................... -- 1,148,000 --
------------ ------------ ------------
Net income ............................................................. $ 4,471,000 $ 793,000 $ (1,059,000)
============ ============ ============
Earnings per share:
Basic earnings per share:
Income before extraordinary charge .............................. $ 0.39 $ 0.20 $ (0.09)
Extraordinary charge, net of income tax benefit ................. -- (0.12) --
------------ ------------ ------------
Net income per share .......................................... $ 0.39 $ 0.08 $ (0.09)
============ ============ ============
Weighted average number of common shares - Basic ................ 11,362,000 9,729,000 12,203,000
============ ============ ============
Diluted earnings per share:
Income before extraordinary charge .............................. $ 0.38 $ 0.17 $ (0.09)
Extraordinary charge, net of income tax benefit ................. -- (0.10) --
------------ ------------ ------------
Net income per share .......................................... $ 0.38 $ 0.07 $ (0.09)
============ ============ ============
Weighted average number of common shares - Diluted ..............
11,842,000 10,989,000 12,203,000
============ ============ ============
See notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1997, 1996 and 1995
Cumulative
Retained Foreign Total
Additional Earnings Currency Shareholders's
Common Stock Paid in (Accumulated Translation Equity
Shares Amount Capital Deficit) Adjustments (Deficit)
------ ------ ------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ........... 12,202,666 $ 122,000 $ -- (429,000) $ -- $ (307,000)
Net loss ............................... -- -- -- (1,059,000) -- (1,059,000)
----------- --------- ----------- ----------- --------- ------------
Balance at December 31, 1995 ........... 12,202,666 122,000 -- (1,488,000) -- (1,366,000)
Repurchase and retirement
of common stock ........................ (4,881,066) (49,000) -- (1,451,000) -- (1,500,000)
Issuance of common stock,
net of related costs ................... 2,050,000 20,000 17,815,000 -- -- 17,835,000
Exercise of warrants ................... 1,364,000 14,000 1,386,000 -- -- 1,400,000
Net income ............................. -- -- -- 793,000 -- 793,000
----------- --------- ----------- ----------- --------- ------------
Balance at December 31, 1996 ........... 10,735,600 107,000 19,201,000 (2,146,000) -- 17,162,000
Issuance of common stock,
net of related costs ................... 1,150,000 12,000 9,888,000 -- -- 9,900,000
Exercise of stock options .............. 102,381 1,000 838,000 -- -- 839,000
Tax benefit from exercise
of stock options ....................... -- -- 248,000 -- -- 248,000
Currency Translation ................... -- -- -- -- (158,000) (158,000)
adjustments
Net income ............................. -- -- -- 4,471,000 -- 4,471,000
----------- --------- ----------- ----------- --------- ------------
Balance at December 31, 1997 ........... 11,987,981 $ 120,000 $30,175,000 $ 2,325,000 $(158,000) $ 32,462,000
=========== ========= =========== =========== ========= ============
See notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------ ------------ -----------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) ........................................................... $ 4,471,000 $ 793,000 $(1,059,000)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization ........................................... 392,000 214,000 51,000
Provision for doubtful accounts ......................................... 765,000 590,000 411,000
Extraordinary charge .................................................... -- 1,444,000 --
Deferred income taxes ................................................... 98,000 (331,000) --
Tax benefit from exercise of stock options .............................. 248,000 -- --
Changes in operating assets and liabilities:
Restricted cash deposited in escrow ..................................... -- 100,000 (100,000)
Accounts receivable ..................................................... (9,895,000) (4,399,000) (3,339,000)
Unbilled services ....................................................... (4,918,000) (1,347,000) (1,386,000)
Other current assets .................................................... (176,000) (489,000) 27,000
Other assets ............................................................ (112,000) (197,000) (30,000)
Cash overdraft .......................................................... -- (83,000) 83,000
Accounts payable ........................................................ 947,000 (1,074,000) 1,480,000
Accrued payroll and related taxes ....................................... 822,000 (754,000) 1,035,000
Accrued expenses and other liabilities .................................. (194,000) 736,000 478,000
Income taxes payable .................................................... 366,000 535,000 --
------------ ------------ -----------
Net cash used in operating activities ............................... (7,186,000) (4,262,000) (2,349,000)
------------ ------------ -----------
Cash flows from investing activities:
Purchases of equipment ...................................................... (2,477,000) (1,143,000) (142,000)
------------ ------------ -----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of
issuance costs ............................................................ 9,900,000 17,835,000 --
Proceeds from exercise of stock options ..................................... 839,000 -- --
Proceeds from subordinated debentures and warrants,
net of issuance costs ..................................................... -- 5,888,000 --
Repayment of subordinated debentures ........................................ -- (6,000,000) --
Repurchase of common stock .................................................. -- (1,500,000) --
Loans from (repayments to) factors, net ..................................... -- (3,343,000) 2,349,000
Proceeds from (repayments of) lines of credit, net .......................... -- (45,000) 6,000
Principal payments under capital leases ..................................... (6,000) (22,000) (2,000)
------------ ------------ -----------
Net cash provided by financing activities ........................... 10,733,000 12,813,000 2,353,000
------------ ------------ -----------
Effect of foreign currency exchange rate changes on
cash ..................................................................... (158,000) -- --
------------ ------------ -----------
Net increase (decrease) in cash and cash
equivalents ......................................................... 912,000 7,408,000 (138,000)
Cash and cash equivalents at beginning of year ................................. 7,479,000 71,000 209,000
------------ ------------ -----------
Cash and cash equivalents at end of year ....................................... $ 8,391,000 $ 7,479,000 $ 71,000
============ ============ ===========
Supplemental disclosures of cash flow information:
Cash paid for interest ...................................................... $ -- $ 1,264,000 $ 1,175,000
============ ============ ===========
Cash paid for income taxes .................................................. $ 1,795,000 $ -- $ --
============ ============ ===========
Noncash transactions:
Capital lease obligations ................................................... $ -- $ -- $ 102,000
============ ============ ===========
See notes to consolidated financial statements.
</TABLE>
F-6
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
- ---------------------------------------------------
Business
Intelligroup, Inc., and its subsidiaries (the "Company") provide a wide
range of information technology services, including enterprise-wide business
process solutions, systems integration and custom software development based on
leading technologies. The Company markets its services to a wide variety of
industries primarily in the United States. The majority of the Company's
business is with large established companies, including consulting firms serving
numerous industries.
Principles of Consolidation and Use of Estimates
The accompanying financial statements include the accounts of
Intelligroup, Inc. and its majority owned subsidiaries. Minority interests were
not significant at December 31, 1997 and 1996. All significant intercompany
balances and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the recorded amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of investments in highly liquid
short-term instruments, with maturities of three months or less from the date of
purchase.
Equipment
Equipment is stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets (five years). Costs of maintenance and repairs are
charged to expense as incurred.
Revenue Recognition
The Company generates revenue from professional services rendered.
Revenue is recognized as services are performed with the corresponding cost of
providing those services reflected as cost of sales. Substantially all customers
are billed on a per diem basis whereby actual time is charged directly to the
customer. Billings to customers for out-of-pocket expenses are recorded as a
reduction of expenses incurred. Unbilled services at December 31, 1997 and
F-7
<PAGE>
Note 1 - Summary of Significant Accounting Policies - (cont'd)
- --------------------------------------------------------------
1996 represent services provided which are billed subsequent to year-end. All
such amounts are anticipated to be realized in the following year.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts arising from
services, which is based upon a review of outstanding receivables as well as
historical collection information. In determining the amount of the allowance,
management is required to make certain estimates and assumptions. The provision
for doubtful accounts totaled $765,000, $590,000 and $411,000 in 1997, 1996 and
1995, respectively. Credit is granted to substantially all customers on an
unsecured basis.
Recoverability of Long-Lived Assets
The Company reviews the recoverability of its long-lived assets on a
periodic basis in order to identify business conditions which may indicate a
possible impairment. The assessment for potential impairment is based primarily
on the Company's ability to recover the unamortized balance of its long-lived
assets from expected future cash flows from its operations on an undiscounted
basis.
Stock-Based Compensation
Stock-based compensation is recognized using the intrinsic value
method. For disclosure purposes, pro forma net income and earnings per share
impacts are provided as if the fair market value method had been applied.
Currency Translation
Assets and liabilities relating to foreign operations are translated
into U.S. dollars using exchange rates in effect at the balance sheet date;
income and expenses are translated into U.S. dollars using monthly average
exchange rates during the year. Translation adjustments associated with assets
and liabilities are excluded from income and credited or charged directly to
shareholders' equity. Translation adjustments for 1996 and 1995 were not
material.
Concentrations
For the years ended December 31, 1997, 1996 and 1995, approximately
68%, 74% and 69% of revenue, respectively, was derived from projects in which
the Company's personnel implemented software developed by SAP. The Company's
future success in its SAP-related consulting services depends largely on its
continued relationship with SAP and on its continued status as a SAP National
Implementation Partner, which was first obtained in 1995. The Company's
agreement with SAP (the "Agreement") is awarded on an annual basis. The
Company's current contract expires on December 31, 1998. This Agreement contains
no
F-8
<PAGE>
Note 1 - Summary of Significant Accounting Policies - (cont'd)
- --------------------------------------------------------------
minimum revenue requirements or cost sharing arrangements and does not provide
for commissions or royalties to either party. In February 1997, the Company
achieved a National Logo Partner relationship with SAP. For the year ended
December 31, 1997, approximately 14% of revenue was derived from projects in
which the Company's personnel implemented software developed by Oracle.
A substantial portion of the Company's revenue is derived from projects
in which an information technology consulting firm other than the Company has
been retained by the end-user organization to manage the overall project. For
years ended December 31, 1997, 1996 and 1995, 38%, 44% and 50%, respectively, of
the Company's revenue was generated by serving as a member of consulting teams
assembled by other information technology consulting firms.
One customer accounted for approximately 11% and 13% of revenue in 1997
and 1996, respectively. Accounts receivable due from this customer was
approximately $1,628,000 and $2,268,000 as of December 31, 1997 and 1996,
respectively. Another customer accounted for approximately 12%, 20% and 10% of
revenue for 1997, 1996 and 1995, respectively. Accounts receivable due from this
customer was approximately $2,049,000, $988,000 and $611,000 as of December 31,
1997, 1996 and 1995, respectively. Another customer accounted for approximately
12% of revenue for 1995. Accounts receivable due from this customer was
$1,400,000 as of December 31, 1995.
Foreign Operations
Revenues and identifiable assets from foreign operations were not
significant in 1997, 1996 and 1995. During 1997, approximately $2,100,000 of
income from operations was generated from foreign operations while during 1996
and 1995 income from foreign operations was not significant.
Income Taxes
The Company accounts for income taxes pursuant to the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," ("SFAS No. 109") which utilizes the liability method and results in the
determination of deferred taxes based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities, using enacted tax rates currently in effect. The Company does not
provide for additional U.S. income taxes on undistributed earnings
(approximately $1,855,000) considered to be permanently invested in foreign
subsidiaries.
Earnings Per Share
In the fourth quarter of 1997, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings per share," which
requires certain changes to the manner in which earnings per share ("EPS") is
reported. SFAS No. 128 is effective for fiscal years
F-9
<PAGE>
Note 1 - Summary of Significant Accounting Policies - (cont'd)
- --------------------------------------------------------------
ending after December 15, 1997, and, requires restatement of previously reported
earnings per share. The computation of basic earnings per share and diluted
earnings per share were as follows:
1997 1996 1995
----------- ----------- ------------
Net Income $ 4,471,000 $ 793,000 $(1,095,000)
----------- ----------- ------------
Denominator:
Weighted average number of common
shares 11,362,000 9,729,000 12,203,000
----------- ----------- ------------
Basic earnings per share $ 0.39 $ 0.08 $ (0.09)
=========== =========== ============
Denominator:
Weighted average number of common
shares 11,362,000 9,729,000 12,203,000
Common share equivalents of
outstanding stock options 480,000 1,260,000 --
----------- ----------- ------------
Total shares 11,842,000 10,989,000 12,203,000
----------- ----------- ------------
Diluted earnings per share $ 0.38 $ 0.07 $ (0.09)
=========== =========== ============
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," which establishes standards for reporting
comprehensive income and its components, and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes revised
reporting and disclosure requirements for operating segments. These standards
increase financial reporting disclosures and will have no impact on the
Company's financial position or results from operations.
Financial Instruments
Financial instruments that potentially subject the Company to credit
risk consist principally of trade receivables and unbilled services. Management
of the Company believes the fair value of accounts receivable and unbilled
services approximates the carrying value.
F-10
<PAGE>
Note 2 - Equipment
- ------------------
Equipment consists of the following as of December 31:
1997 1996
---- ----
Vehicles.......................... $ 26,000 $ 26,000
Furniture......................... 285,000 98,000
Equipment......................... 3,690,000 1,400,000
----------- -----------
4,001,000 1,524,000
Less-Accumulated depreciation..... (635,000) (243,000)
------------ -----------
$ 3,366,000 $ 1,281,000
=========== ===========
Included in the above is $102,000 of equipment held under capital
leases at December 31, 1997 and 1996. Depreciation expense was $392,000,
$144,000 and $51,000 in 1997, 1996 and 1995, respectively.
Note 3 - Lines of Credit and Subordinated Debentures
- ----------------------------------------------------
In January 1997, and as later amended on August 18, 1997, the Company
entered into a two-year credit agreement with a bank (the "Bank"). The credit
facility with the Bank has two components comprised of (i) a revolving line of
credit pursuant to which the Company may borrow up to $7.5 million either at the
Bank's prime rate per annum or the EuroRate plus 2% (at the Company's option),
and (ii) equipment term loans pursuant to which the Company may borrow up to an
aggregate of $350,000 (at the Bank's prime rate plus 1/4 of 1% per annum) to
purchase equipment. The credit agreement contains covenants which require the
Company to (i) maintain its working capital during the year at no less than 90%
of the working capital at the end of the immediately preceding fiscal year and
at the end of each fiscal year at no less than 105% of its working capital at
the end of the immediately preceding fiscal year; and (ii) maintain its tangible
net worth during the year at no less than 95% of its tangible net worth at the
end of the immediately preceding fiscal year and at the end of each fiscal year
at no less than 108% of tangible net worth at the end of the immediately
preceding fiscal year. The Company's obligations under the credit agreement are
collateralized by substantially all of the Company's assets, including its
accounts receivable and intellectual property. The Company's obligations under
the credit facility are payable at the expiration of such facility on January
22, 1999. These terms are subject to the Company maintaining an unsubordinated
debt to tangible net worth ratio of no greater than one to one and an earnings
before interest and taxes to interest expense ratio of no less than three to
one. The Bank also agreed to release the collateral securing the revolving line
of credit if the Company meets certain financial criteria at December 31, 1997.
At December 31, 1997, the Company failed to meet such certain financial
criteria, and as a result, the Bank did not release the collateral securing the
revolving line of credit. The Company has not utilized this credit facility
since its inception.
F-11
<PAGE>
Note 3 - Lines of Credit and Subordinated Debentures (cont'd)
- -------------------------------------------------------------
In March 1996, in anticipation of the debenture financing described
below, the Company obtained a $750,000 line of credit, payable on demand, from a
bank. The line of credit carried interest at the federal funds rate plus 1%.
Borrowings under the line totaled $300,000 in April, 1996, when the Company
repaid all amounts outstanding under such line in connection with the debenture
financing described below. The line of credit has been terminated in accordance
with the terms of such debenture financing. The Company has not utilized this
credit facility since its inception.
In April 1996, the Company issued and sold five-year 9% subordinated
debentures in the aggregate principal amount of $6.0 million to Summit Ventures
IV, L.P. and Summit Investors III, L.P. The subordinated debentures were issued
to raise funds for working capital and general corporate purposes, to repurchase
from the then-current shareholders, Messrs. Pandey, Koneru and Valluripalli, an
aggregate of 4,881,066 shares of Common Stock for an aggregate of $1.5 million,
to repay approximately $300,000 outstanding under the $750,000 credit facility
described above and to satisfy approximately $358,000 of cash overdrafts. Upon
receipt of the net proceeds from the Company's initial public offering in
October 1996, the Company prepaid approximately $6.3 million, representing all
amounts outstanding under such debentures, including interest.
Note 4 - Loans Payable to Factors
- ---------------------------------
On October 20, 1995, the Company entered into a factoring agreement
with a financing institution (the "Factor") under which the Company was required
to offer all its trade accounts receivable to the Factor for financing; however,
the Factor was not obligated to accept them. The agreement had a term of one
year with automatic one-year renewals unless the Company or the Factor gave
notice of cancellation. The Factor charged an administration fee of 0.75% on
each invoice plus an additional 0.75% for each 15-day increment the invoice
remained unpaid, to a maximum of 120 days, or 6.5%. If the amount of a factored
receivable was not paid by reason of financial inability of the customer, the
Company was not liable to reimburse the Factor. If, however, the Factor, through
legal action or otherwise, settled, compromised or assigned the claim for any
receivable, the amount of any reduction resulting from such settlement,
compromise or assignment reduced the balance due to the Company. The Company
used approximately $4.4 million of the net proceeds from the Company's initial
public offering to repay loans from the Factor (See Note 8). The Factor
agreement was terminated in October 1996.
F-12
<PAGE>
Note 5 - Income Taxes
- ---------------------
Income tax attributable to income from continuing operations consists
of the following:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
Current:
<S> <C> <C> <C>
Federal ........................ $ 1,384,000 $ 631,000 $ --
State .......................... 389,000 200,000 --
Foreign ........................ 168,000 -- --
----------- --------- ---------
1,941,000 831,000 --
----------- --------- ---------
Deferred:
Federal ........................ 76,000 (259,000) --
State .......................... 22,000 (72,000) --
----------- --------- ---------
98,000 (331,000) --
----------- --------- ---------
Total ............................ $ 2,039,000 $ 500,000 $ --
=========== ========= =========
</TABLE>
The provision for income taxes differs from the amount computed by
applying the statutory rate of 35% to income (loss) before income taxes. The
principal reasons for this difference are:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Tax at federal statutory rate .................. 35% 35% (35%)
Nondeductible expenses ......................... 1 1 --
State income tax, net of federal benefit ....... 4 (3) --
Utilization of net operating loss carryforwards -- (8) --
Foreign losses for which no benefit is available -- 9 --
Changes in valuation allowance ................. (3) (14) 35
Foreign Operations taxed at less than U.S. .....
statutory rate, primarily India .............. (9) -- --
Other .......................................... 3 -- --
---------- --------- ----------
Effective tax rate ............................. 31% 20% --%
========== ========= ==========
</TABLE>
In 1996, the Company elected a five year tax holiday in India in
accordance with a local tax incentive program whereby no income taxes will be
due for such period.
F-13
<PAGE>
Note 5 - Income Taxes - (cont'd)
- --------------------------------
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities under SFAS No.
109 as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
Deferred tax assets:
<S> <C> <C>
Allowance for doubtful accounts ................ $327,000 $ 224,000
Certain accrued liabilities .................... 77,000 146,000
Net operating losses ........................... -- 131,000
Other .......................................... -- 37,000
-------- ---------
Total deferred tax assets ........................ 404,000 538,000
Deferred tax liability-accelerated depreciation .. 171,000 --
Valuation allowance for deferred tax assets ...... -- (207,000)
-------- ---------
Net deferred tax assets .......................... $233,000 $ 331,000
======== =========
</TABLE>
Realization of the net deferred tax assets is dependent on the timing
of the reversal of temporary differences. Although realization is not assured,
management believes it is more likely than not, that the 1997 net deferred tax
assets will be realized. The Company reduced their valuation allowance in 1997
and 1996. The 1996 reduction was as a result of current and anticipated future
profitability. The Company's 1996 valuation allowance related primarily to the
net operating loss of a foreign subsidiary which was not yet profitable,
however, such subsidiary was able to utilize their net operating loss in 1997.
Note 6 - Commitments and Contingencies
- --------------------------------------
Employment Agreements
As of December 31, 1997, the Company had two year employment agreements
with five key employees with remaining aggregate compensation of approximately
$360,000.
Payroll and Related Taxes
As of December 31, 1995, the Company had $1,000,000 included in accrued
payroll and related taxes resulting from unpaid federal and state payroll taxes
for certain employees. As a result of the Company's voluntary disclosure to the
Internal Revenue Service ("IRS") on June 5, 1996, the IRS issued an audit
assessment to the Company for $814,000 which had been included in the above
accrual. The assessment was paid in 1996. The Company's principal shareholders
have agreed to indemnify the Company for any and all losses which the Company
may sustain in excess of the amounts accrued as of December 31, 1995 arising
from or relating to federal or
F-14
<PAGE>
Note 6 - Commitments and Contingencies - (cont'd)
- -------------------------------------------------
state tax, interest or penalty payment obligations, net of any tax benefits
realized by the Company, resulting from the subject matter discussed above.
Leases
The Company leases office space and office equipment under capital and
operating leases that have initial or remaining non-cancelable lease terms in
excess of one year as of December 31, 1997. Future minimum aggregate annual
lease payments are as follows:
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
========
In March 1998, the Company entered into a ten year lease for its new
corporate headquarters. Annual rent expense is anticipated to approximate
$1,200,000. Rent expense for the years ended December 31, 1997, 1996 and 1995
was $388,000, $176,000 and $74,000, respectively.
Legal
The Company is engaged in certain other legal and administrative
proceedings. Management believes the outcome of these proceedings will not have
a material adverse effect on the Company's financial position or results of
operations.
Note 7 - Stock Option Plans and Warrants
- ----------------------------------------
The Company's stock option plans permit the granting of options to
employees, non-employee directors and consultants. The Option Committee of the
Board of Directors generally has the authority to select individuals who are to
receive options and to specify the terms and conditions of each option so
granted, including the number of shares covered by the option, the type of
option (incentive stock option or non-qualified stock option), the exercise
price, vesting provisions, and the overall option term. As of December 31, 1997,
a total of 1,590,000 shares of Common Stock were reserved for issuance under the
plans. Subsequent to December 31, 1997, the Company's shareholders approved a
proposal to amend the Company's 1996 Stock Plan to increase the number of shares
of Common Stock under such plan from 1,450,000 to 2,200,000 shares. Accordingly,
a total of 2,340,000 shares of Common Stock have been reserved for
F-15
<PAGE>
Note 7 - Stock Option Plans and Warrants (cont'd)
- -------------------------------------------------
issuance under the plans. In addition, subsequent to December 31, 1997, the
Company granted options to purchase an aggregate of 226,850 shares of its Common
Stock to certain employees at a weighted average exercise price of $16.12 per
share. All of the options issued pursuant to these plans expire ten years from
the date of grant.
In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," which was effective January 1, 1996, the fair value of option
grants is estimated on the date of grant using the Black-Scholes option-pricing
model using the following weighted-average assumptions: expected volatility of
62% and 41%, risk-free interest rate of 7.0% and 5.6%; and expected lives of 4.5
and 3.1 years, in 1997 and 1996, respectively. The weighted average fair value
of options granted during 1997 and 1996 was $6.96 and $2.93, respectively.
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 - (cont'd)
- ---------------------------------------------------
The following table summarizes information about stock options
outstanding and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------- -----------
Weighted Weighted Weighted
Exercise Price Number of Average Average Number of Average
Range shares Remaining Exercise shares Exercise
Life (in years) Price Price
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$8 to 10 398,306 8.6 $8.20 73,402 $8.22
$10 to 12 554,440 9.3 $10.82 16,272 $10.99
$12 to 15 50,200 9.4 $13.33 4,000 $12.13
$15 to 22 40,000 9.8 $18.92 -- --
$8 to 22 1,042,946 9.0 $10.25 93,674 $8.87
</TABLE>
As permitted by SFAS 123, the Company has chosen to continue accounting
for stock options at their intrinsic value. Accordingly, no compensation cost
has been recognized for the stock option plans. Had compensation cost for the
Company's stock option plans been determined based on the fair value option
pricing method of accounting, the tax-effective impact would be as follows:
1997 1996
- --------------------------------------------------------------------------------
Net income:
as reported $ 4,471,000 $ 793,000
pro forma $ 3,469,000 $ 434,000
- --------------------------------------------------------------------------------
Basic Earnings per Share:
as reported $0.39 $0.08
pro forma $0.31 $0.04
- --------------------------------------------------------------------------------
Diluted Earnings per Share:
as reported $0.38 $0.07
pro forma $0.29 $0.04
The subordinated debenture holders (see Note 3) received warrants for
the purchase of up to 20.8% of the fully diluted Common Stock of the Company, as
defined, at a nominal exercise price (less than $0.25 in the aggregate). The
warrants were exercised in September 1996 which resulted in the issuance of
1,364,000 shares of the Company's Common Stock.
F-17
<PAGE>
Note 8 - Initial Public Offering, Stock Split and Preferred Stock Authorization
- -------------------------------------------------------------------------------
In July 1996, the Company's Board of Directors recommended and
shareholders approved an amendment to the Company's Certificate of Incorporation
to effect an 81,351.1111-for-1 stock split. All common shares and per share
amounts in the accompanying financial statements have been adjusted
retroactively to give effect to the stock split.
The Company's initial public offering for the sale of 2,050,000 shares
of its Common Stock became effective on September 26, 1996 and the net proceeds
of approximately $19,065,000 (before deducting expenses of the offering paid by
the Company) were received on October 2, 1996. A portion of the net proceeds was
used to prepay subordinated debentures and repay other debt (See Notes 3 and 4).
On July 2, 1997, the Company consummated a follow-on public offering
(the "Offering") of 1,000,000 shares of its Common Stock at a price to the
public of $9.50 per share. On July 15, 1997 and as part of the Offering, an
additional 150,000 shares at $9.50 per share were issued and sold by the Company
to cover over-allotments. The net proceeds to the Company from the Offering,
after underwriting discounts and commissions and other expenses of the Offering,
were approximately $9,900,000.
Note 9 - Subsequent Events
On May 7, 1998, the Company consummated the acquisition of the thirty
percent (30%) minority interest in CPI Consulting Limited, a corporation formed
pursuant to the laws of England and Wales ("Consulting"), in exchange for an
aggregate of 165,696 shares of the Company's Common Stock and a contingent
earn-out payment of up to (pound)1,573,200 payable in the Company's Common Stock
to be determined as of December 31, 1998. Such acquisition will be accounted for
using the purchase method of accounting. In the opinion of management, the
overall impact of this transaction is immaterial to the accompanying
consolidated financial statements of the Company.
On May 21, 1998, the Company consummated the acquisition of CPI
Resources Limited, a corporation formed pursuant to the laws of England and
Wales ("Resources"), in exchange for 371,000 shares of the Company's Common
Stock. As a result of such acquisition, the Company acquired Resources' seventy
percent (70%) interest in Consulting. Such acquisition will be accounted for
using the pooling of interests method of accounting. In the opinion of
management, the overall impact of this transaction is immaterial to the
accompanying consolidated financial statements of the Company.
F-18
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
SEC registration fee............................... $ 959.29
Counsel fees and expenses*......................... 60,000.00
Accounting fees and expenses*...................... 12,000.00
Miscellaneous expenses*............................ 2,040.71
------------
Total*......................................... $ 75,000.00
==========
------------
* Estimated
All expenses of issuance and distribution listed above will be borne by the
Company. The costs of fees and expenses of legal counsel and other advisors, if
any, that the Selling Shareholder employs in connection with the offering will
be borne by the Selling Shareholder.
Item 15. Indemnification of Directors and Officers.
Section 14A:3-5 of the New Jersey Business Corporation Act permits each New
Jersey business corporation to indemnify its directors, officers, employees and
agents against expenses and liabilities in connection with:
o any proceeding involving such persons by reason of his or her serving
or having served in such capacities; or
o each such person's acts taken in such capacity if such actions were
taken in good faith and in a manner which he or she reasonably
believed to be in or not opposed to the best interests of the
corporation.
With respect to any criminal proceeding, indemnity is permitted if such
person had no reasonable cause to believe his or her conduct was unlawful,
provided that any such proceeding is not by or in the right of the corporation.
Section 14A:2-7(3) of the New Jersey Business Corporation Act enables a
corporation in its certificate of incorporation to limit the liability of
directors and officers of the corporation to the corporation or its
shareholders. Specifically, the certificate of incorporation may provide that
directors and officers of the corporation will not be personally liable for
money damages for breach of a duty as a director or an officer, except for
liability for:
o any breach of the director's or officer's duty of loyalty to the
corporation or its shareholders;
o acts or omissions not in good faith or which involve a knowing
violation of law; or
II-1
<PAGE>
o any transaction from which the director or officer derived an improper
personal benefit.
The Company's Certificate of Incorporation limits the liability of its
directors and officers as authorized by Section 14A:2-7(3). The affirmative vote
of the holders of at least 80% of the voting power of all outstanding shares of
the capital stock of the Company is required to amend such provisions.
Article 11 of the Registrant's Amended and Restated By-laws specifies that
the Company shall indemnify its directors and officers to the extent such
parties are involved in or made a party to any action, suit or proceeding
because he or she was a director or officer of the Company. The Company has
agreed to indemnify such parties for their actual and reasonable expenses if
such party:
o acted in good faith and in a manner he or she reasonably believed to
be in the best interests of the Company; and
o had no reasonable cause to believe his conduct was unlawful.
This provision of the By-laws is deemed to be a contract between the
Company and each director and officer who serves in such capacity at any time
while such provision and the relevant provisions of the New Jersey Business
Corporation Act are in effect. Any repeal or modification shall not offset any
action, suit or proceeding brought or threatened based in whole or in part upon
any such state of facts. The affirmative vote of the holders of at least 80% of
the voting power of all outstanding shares of capital stock of the Company is
required to adopt, amend or repeal such provision of the By-laws.
The Company has executed indemnification agreements with each of its
directors and executive officers. Such agreements require the Company to
indemnify such parties to the full extent permitted by law, subject to certain
exceptions, if such party becomes subject to an action because such party is a
director, officer, employee, agent or fiduciary of the Company.
The Company has liability insurance for the benefit of its directors and
officers. The insurance covers claims against such persons due to any:
o breach of duty; o misleading statement;
o neglect; o omission; or
o error; o act done.
o misstatement;
The insurance covers such claims, except as prohibited by law, or otherwise
excluded by such insurance policy.
II-2
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
II-3
<PAGE>
ITEM 16. EXHIBITS.
Exhibit No. Description of Exhibit
----------- ----------------------
5 Opinion of Buchanan Ingersoll Professional Corporation as to
validity of Common Stock.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Buchanan Ingersoll Professional Corporation
(contained in the opinion filed as Exhibit 5 to the
Registration Statement).
24 Powers of Attorney of certain officers and directors of the
Company (contained on the signature page of this
Registration Statement).
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement to include any
material information with respect to the plan of distribution not previously
disclosed in this Registration Statement or any material change to such
information in this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful
II-4
<PAGE>
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Township of Edison, State of New Jersey, on the 19th day of
November, 1998.
INTELLIGROUP, INC.
By: /s/ Stephen A. Carns
------------------------
President and Chief Executive Officer
II-6
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Stephen A. Carns and Alan Ziegler, Esq.,
and each of them, his true and lawful attorneys-in-fact and agents with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the same
with all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Stephen A. Carns President, Chief Executive Officer November 19, 1998
- ------------------------ and Director (principal executive officer)
Stephen A. Carns
/s/ Ashok Pandey Co-Chairman of the Board and Director November 19, 1998
- -------------------------
Ashok Pandey
/s/ Rajkumar Koneru Co-Chairman of the Board and Director November 19, 1998
- -------------------------
Rajkumar Koneru
/s/ Nagarjun Valluripalli Co-Chairman of the Board, President of November 19, 1998
- -------------------------- International Operations and Director
Nagarjun Valluripalli
/s/ Gerard E. Dorsey Senior Vice President - Finance and Chief November 19, 1998
- -------------------------- Financial Officer (principal financial and
Gerard E. Dorsey accounting officer)
Director November 19, 1998
- --------------------------
Klaus Besier
Director November 19, 1998
- --------------------------
David Finley
/s/ Kevin P. Mohan Director November 19, 1998
- --------------------------
Kevin P. Mohan
/s/ John E. Steuri Director November 19, 1998
- --------------------------
John E. Steuri
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
5 Opinion of Buchanan Ingersoll Professional Corporation as to validity
of Common Stock
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Buchanan Ingersoll Professional Corporation (contained in
the opinion filed as Exhibit 5 to the Registration Statement).
24 Powers of Attorney of certain officers and directors of the Company
(contained on the signature page of this Registration Statement).
BUCHANAN INGERSOLL PROFESSIONAL CORPORATION
(Incorporated in Pennsylvania)
Attorneys
500 College Road East
Princeton, New Jersey 08540
November 19, 1998
Intelligroup, Inc.
499 Thornall Street
Edison, New Jersey 08837
Gentlemen:
We have acted as counsel to Intelligroup, Inc., a New Jersey
corporation (the "Company"), in connection with the filing by the Company of a
registration statement on Form S-3 (the "Registration Statement"), under the
Securities Act of 1933, as amended, relating to the registration of an aggregate
of 351,196 shares (the "Shares") of the Company's common stock, $0.01 par value,
all of which are to be offered by certain Selling Shareholders as set forth
therein.
In connection with the Registration Statement, we have examined such
corporate records and documents, other documents, and such questions of law as
we have deemed necessary or appropriate for purposes of this opinion. On the
basis of such examination, it is our opinion that:
1. The issuance of the Shares has been duly and validly authorized; and
2. The Shares are legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Registration Statement.
Very truly yours,
/s/BUCHANAN INGERSOLL
PROFESSIONAL CORPORATION
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
To Intelligroup, Inc.:
As independent public accountants, we hereby consent to the use of our
report dated February 5, 1998, except with respect to the matters discussed in
Note 9, as to which the date is May 21, 1998 and to all references to our Firm
included in this Form S-3 registration statement.
/s/ARTHUR ANDERSEN LLP
Princeton, New Jersey
November 18, 1998
