SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission File No. 0-20943
Intelligroup, Inc.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
New Jersey 11-2880025
- -------------------------------- -----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
499 Thornall Street, Edison, New Jersey 08837
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(732) 590-1600
-------------------------------
(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
--- ---
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of August 3, 1998:
Class Number of Shares
----- ----------------
Common Stock, $.01 par value 12,587,258
<PAGE>
EXPLANATORY NOTE
Intelligroup, Inc., a New Jersey corporation (the "Company"), hereby amends
Items 1 and 2 of Part I and Item 6 of Part II of its Quarterly Report on Form
10-Q, which was filed with the Securities and Exchange Commission on August 13,
1998. Items 1 and 2 of Part I are hereby amended to reflect the restated
financial information of the Company as a result of the CPI Resources
transaction, which has been accounted for as a pooling of interests. Item 6 of
Part II is hereby amended to reflect such restated financial information on the
financial data schedule.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
-1-
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and December 31, 1997
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents...................................................... $ 2,610,000 $ 8,503,000
Accounts receivable, less allowance for doubtful accounts of $1,470,000
at June 30, 1998 and $799,000 at December 31, 1997......................... 27,341,000 18,995,000
Unbilled services.............................................................. 8,915,000 7,834,000
Deferred income taxes.......................................................... 404,000 404,000
Other current assets........................................................... 1,768,000 676,000
------------- -------------
Total current assets....................................................... 41,038,000 36,412,000
Equipment, net...................................................................... 5,738,000 3,484,000
Cost in excess of fair value of net assets acquired, net............................ 4,458,000 --
Other assets........................................................................ 1,230,000 337,000
------------- -------------
$ 52,464,000 $ 40,233,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................................... $ 3,294,000 $ 1,701,000
Accrued payroll and related taxes.............................................. 3,959,000 2,636,000
Accrued expenses and other liabilities......................................... 4,476,000 1,465,000
Income taxes payable........................................................... 767,000 1,253,000
Current portion of obligations under capital leases............................ 21,000 20,000
------------- -------------
Total current liabilities.................................................. 12,517,000 7,075,000
Obligations under capital leases, less current portion.............................. 26,000 51,000
Deferred income taxes............................................................... 203,000 171,000
Other liabilities................................................................... -- 126,000
Commitments and contingencies
Shareholders' Equity
Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued
or outstanding............................................................. -- --
Common stock, $.01 par value, 25,000,000 shares authorized;
12,571,392 and 12,358,981 shares issued and outstanding at
June 30, 1998 and December 31, 1997, respectively.......................... 126,000 124,000
Additional paid-in capital..................................................... 33,682,000 30,175,000
Retained earnings.............................................................. 6,429,000 2,592,000
Currency translation adjustments............................................... (519,000) (159,000)
Minority interest in CPI Consulting............................................ -- 78,000
------------- -------------
Total shareholders' equity ................................................ 39,718,000 32,810,000
------------- -------------
$ 52,464,000 $ 40,233,000
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three Months and Six Months Ended June 30, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue ........................................ $ 34,005,000 $ 20,777,000 $ 62,759,000 $ 37,934,000
Cost of sales.................................... 21,460,000 14,377,000 40,654,000 26,953,000
------------- -------------- ------------- -------------
Gross profit............................ 12,545,000 6,400,000 22,105,000 10,981,000
Selling, general and administrative expenses..... 8,775,000 4,517,000 15,778,000 7,712,000
Acquisition expenses............................. 434,000 -- 434,000 --
------------- -------------- ------------- -------------
Operating expenses...................... 9,209,000 4,517,000 16,212,000 7,712,000
------------- -------------- ------------- -------------
Operating income........................ 3,336,000 1,883,000 5,893,000 3,269,000
Interest - net................................... 18,000 36,000 98,000 114,000
Minority interest................................ (78,000) (12,000) (82,000) (17,000)
------------- -------------- ------------- -------------
Income before provision for income taxes......... 3,276,000 1,907,000 5,909,000 3,366,000
Provision for income taxes....................... 1,005,000 700,000 1,761,000 1,273,000
------------- -------------- ------------- -------------
Net income....................................... $ 2,271,000 $ 1,207,000 $ 4,148,000 $ 2,093,000
============= ============== ============= =============
Earnings per share:
Basic earnings per share:
Net income per share.................... $ 0.18 $ 0.11 $ 0.33 $ 0.19
============= ============== ============= =============
Weighted average number of
common shares - Basic.................. 12,498,000 11,158,000 12,434,000 11,132,000
============= ============== ============= =============
Diluted earnings per share:
Net income per share.................... $ 0.18 $ 0.11 $ 0.32 $ 0.19
============= ============== ============= =============
Weighted average number of
common shares - Diluted................ 12,922,000 11,255,000 12,854,000 11,230,000
============ ============== ============= =============
Comprehensive Income
Net income....................................... $ 2,271,000 $ 1,207,000 $ 4,148,000 $ 2,093,000
Other comprehensive income -
Currency translation adjustments........ (289,000) -- (360,000) --
------------- -------------- ------------- -------------
Comprehensive income............................. $ 1,982,000 $ 1,207,000 $ 3,788,000 $ 2,093,000
============= ============== ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income...................................................................... $ 4,148,000 $ 2,093,000
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization............................................... 427,000 182,000
Provision for doubtful accounts............................................. 610,000 75,000
Minority interest in income of subsidiary................................... 78,000 --
Deferred income taxes....................................................... 32,000 --
Changes in operating assets and liabilities:
Accounts receivable......................................................... (8,956,000) (3,284,000)
Unbilled services........................................................... (1,081,000) (2,533,000)
Other current assets........................................................ (1,092,000) (154,000)
Other assets................................................................ (893,000) (217,000)
Accounts payable............................................................ 1,593,000 481,000
Accrued payroll and related taxes........................................... 1,323,000 749,000
Accrued expenses and other liabilities...................................... 1,458,000 (385,000)
Income taxes payable........................................................ (486,000) (535,000)
-------------- --------------
Net cash provided by (used in) operating activities..................... (2,839,000) (3,528,000)
Cash flows from investing activities:
Purchase of equipment........................................................... (3,052,000) (1,651,000)
Cash flows from financing activities:
Proceeds from exercise of stock options......................................... 382,000 342,000
Principal payments under capital leases......................................... (24,000) (4,000)
-------------- -------------
Net cash provided by financing activities............................... 358,000 338,000
Effect of foreign currency exchange rate changes on cash........................ (360,000) --
-------------- -------------
Net decrease in cash and cash equivalents .............................. (5,893,000) (4,841,000)
Cash and cash equivalents at beginning of period..................................... 8,503,000 7,479,000
-------------- -------------
Cash and cash equivalents at end of period........................................... $ 2,610,000 $ 2,638,000
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
INTELLIGROUP, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) BASIS OF PRESENTATION
The consolidated financial statements and accompanying financial
information as of June 30, 1998 and for the three and six months ended June 30,
1998 and 1997 are unaudited and, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the financial position of the
Company at such dates and the operating results and cash flows for those
periods. The financial statements included herein have been prepared in
accordance with generally accepted accounting principles and the instructions of
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. These financial statements should be read in conjunction with the
Company's audited financial statements for the year ended December 31, 1997,
which were included as part of the Company's Form 10-KSB.
Management of the Company, after consultation with its auditors, determined
that the acquisition of CPI Resources Limited in May 1998, in a transaction
accounted for as a pooling of interests, was not material to prior period
consolidated financial statements and thus did not restate them. However, as a
result of a subsequent SEC staff interpretation of materiality, management of
the Company has elected to restate prior period consolidated financial
statements in accordance with pooling of interests accounting. The consolidated
financial statements for all periods presented in this amended report have been
restated to include the results of operations and financial position of CPI
Resources Limited.
Results for interim periods are not necessarily indicative of results for
the entire year.
(2) EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128")
which has replaced the former rules for earnings per share computations,
presentation and disclosure. Under the new standard, basic earnings per share is
computed by dividing income available to common shareholders by the weighted
average number of common stock outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
The Company has adopted SFAS 128 and, as required by the standard, has
restated all prior period earnings per share data. The Company's new earnings
per share amounts as
-5-
<PAGE>
calculated under SFAS 128 are not materially different from those computed under
the former accounting standard.
-6-
<PAGE>
A reconciliation of weighted average number of common shares outstanding to
weighted average common shares outstanding assuming dilution is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average number of common
shares 12,498,000 11,158,000 12,434,000 11,132,000
Common share equivalents of outstanding
stock options 424,000 97,000 420,000 98,000
--------------- --------------- -------------- -------------
Weighted average number of common
shares assuming dilution 12,922,000 11,255,000 12,854,000 11,230,000
=============== =============== ============== =============
</TABLE>
Certain stock options outstanding at June 30, 1998 were not included in the
computations of earnings per share assuming dilution because the options'
exercise prices were greater than the average price of the common shares.
(3) COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income," which establishes standards for reporting
comprehensive income and its components. In June 1997, the FASB issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which establishes revised reporting and disclosure requirements for operating
segments. These standards increase financial reporting disclosures and have no
impact on the Company's financial position or results from operations.
(4) ACQUISITIONS
On May 7, 1998, the Company acquired thirty percent of the outstanding
share capital of CPI Consulting Limited. The acquisition of CPI Consulting
Limited was accounted for utilizing purchase accounting. The consideration paid
by the Company included the issuance of 165,696 shares of the Company's Common
Stock with a fair market value of $3.1 million, and a future liability to the
sellers predicated upon operating results for the balance of 1998, which is
currently estimated at $1.2 million. The excess of purchase price over the fair
value of the net assets acquired was attributed to intangible assets, amounting
in the aggregate to $4.5 million, which was recorded at the time of the
purchase.
On May 21, 1998, the Company acquired all of the outstanding share capital
of CPI Resources Limited. The acquisition of CPI Resources Limited was accounted
for as a pooling of interests. Prior year results have been restated in
accordance with pooling of interests accounting. As consideration for this
acquisition, the Company issued 371,000 shares of the Company's Common Stock. At
the time of the acquisition, CPI Resources Limited owned seventy percent of the
outstanding share capital of CPI Consulting Limited. In connection with this
acquisition, the Company incurred one-time costs of $434,000.
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
GENERAL
The Company provides a wide range of information technology services,
including enterprise-wide business process solutions, internet applications
services, systems integration and custom software development based on leading
technologies. The Company has grown rapidly since 1994 when it made a strategic
decision to diversify its customer base by expanding the scope of its
integration and development services and to utilize SAP software as a primary
tool to implement enterprise-wide business process solutions. In 1995, the
Company became an SAP National Implementation Partner and also began to utilize
Oracle products to diversify its service offerings. In 1997, the Company
achieved National Logo Partner status with SAP. The Company's current contract
with SAP expires on December 31, 1998 and provides for an automatic one-year
renewal period unless either party provides at least six weeks prior written
notice of its intention not to renew. This agreement contains no minimum revenue
requirements or cost sharing arrangements and does not provide for commissions
or royalties to either party. In July 1997, the Company achieved AcceleratedSAP
Partner Status with SAP by meeting certain performance criteria established by
SAP. Also, in 1997, the Company began to provide implementation services to
PeopleSoft and Baan licensees to further diversify its service offerings. In
July 1997, the Company was awarded an implementation partnership status by
PeopleSoft. In September 1997, the Company was awarded an international
consulting partnership status by Baan. The Company recently expanded its Oracle
applications implementation services practice and added upgrade services to meet
market demand of mid-size to large companies that are implementing or upgrading
Oracle applications
The Company generates revenue from professional services rendered to
customers. Revenue is recognized as services are performed. The Company's
services range from providing customers with a single consultant to
multi-personnel full-scale projects. The Company provides these services to its
customers primarily on a time and materials basis and pursuant to written
contracts which can be terminated with limited advance notice, typically not
more than 30 days, and without significant penalty, generally limited to fees
earned and expenses incurred by the Company through the date of termination. The
Company provides its services directly to end-user organizations or as a member
of a consulting team assembled by another information technology consulting firm
to Fortune 1000 and other large and mid-sized companies. The Company generally
bills its customers semi-monthly for the services provided by its consultants at
contracted rates. Where contractual provisions permit, customers also are billed
for reimbursement of expenses incurred by the Company on the customers' behalf.
The Company has provided services on certain projects in which it, at the
request of the clients, offered a fixed price for its services, however, none of
these projects is currently material to the Company's business, financial
condition and results of operations. The Company believes that, as it pursues
its strategy of making turnkey project management a larger portion of its
business, it will continue to offer fixed price projects. The Company has had
limited prior experience in pricing and performing under fixed price
arrangements and believes that there are certain risks related thereto, and thus
prices such arrangements to reflect the associated risk.
-8-
<PAGE>
There can be no assurance that the Company will be able to complete such
projects within the fixed price timeframes. The failure to perform within such
fixed price contracts, if entered into, could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company has derived and believes that it will continue to derive a
significant portion of its revenue from a limited number of customers and
projects. For the six months ended June 30, 1998 and the year ended December 31,
1997, the Company's ten largest customers accounted for in the aggregate
approximately 42% and 46% of its revenue, respectively. During the six months
ended June 30, 1998, Bristol-Myers Squibb accounted for more than 10% of
revenue. During the year ended December 31, 1997, PricewaterhouseCoopers LLP
(formerly Price Waterhouse LLP) accounted for more than 10% of revenue. For the
six months ended June 30, 1998 and the year ended December 31, 1997, 34% and 32%
of the Company's revenue was generated by serving as a member of consulting
teams assembled by other information technology consulting firms. There can be
no assurance that such information technology consulting firms will continue to
engage the Company in the future at current levels of retention, if at all.
During the six months ended June 30, 1998 and the year ended December 31, 1997,
62% and 58% of the Company's total revenue was derived from projects in which
the Company implemented software developed by SAP. During the six months ended
June 30, 1998 and the year ended December 31, 1997, 13% and 12% of the Company's
total revenues, respectively, were derived from projects in which the Company
implemented software developed by Oracle. During the six months ended June 30,
1998, approximately 46% of the Company's revenue was derived from engagements in
which the Company had project management responsibilities, compared to 28%
during the year ended December 31, 1997.
The Company's most significant cost is project personnel expenses, which
consist of consultant salaries, benefits and payroll-related expenses. Thus, the
Company's financial performance is based primarily upon billing margin (billable
hourly rate less the cost to the Company of a consultant on an hourly basis) and
personnel utilization rates (billable hours divided by paid hours). The Company
believes that turnkey project management assignments typically carry higher
margins. The Company has been shifting to such higher-margin turnkey management
assignments and more complex projects by leveraging its reputation, existing
capabilities, proprietary implementation methodology, development tools and
offshore development capabilities with expanded sales and marketing efforts and
new service offerings to develop turnkey project sales opportunities with both
new and existing customers. The Company's inability to continue its shift to
higher-margin turnkey management assignments and more complex projects may
adversely impact the Company's future growth.
Since late 1994, the Company has made substantial investments in its
infrastructure in order to support its rapid growth. For example, in 1994, the
Company established and funded an Advanced Development Center (the "ADC") in
India, and in 1995 established a sales office in Northern California. In
addition, from 1994 to date, the Company has incurred expenses to develop
proprietary development tools and its proprietary accelerated implementation
methodology and toolset. Commencing in 1995, the Company has been increasing its
sales force and its marketing, finance, accounting and administrative staff.
-9-
<PAGE>
The Company currently maintains sales and operations offices in Chicago,
Detroit, Foster City (California), Reston (Virginia) and Washington, D.C. In
addition to the ADC and sales offices in India, the Company also has offices in,
Australia, Denmark, Japan, New Zealand, Singapore and the United Kingdom. The
Company has reviewed the adequacy of its leased facilities in light of its
expanded staff and has executed a lease for approximately 48,475 square feet, in
Edison, New Jersey for an initial term of 10 years. The Company expects to move
its headquarters to such location in September 1998. The Company expects to be
able to sublet its current headquarters for the remainder of the term of its
sublease, which expires November 15, 1999; and is currently negotiating a
sub-lease agreement which it expects will become effective in September.
This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, including,
without limitation, statements regarding the Company's intention to shift to
higher margin turnkey management assignments and more complex projects and to
utilize its proprietary implementation methodology in an increasing number of
projects. Such forward-looking statements include risks and uncertainties,
including, but not limited to: (i) the substantial variability of the Company's
quarterly operating results caused by a variety of factors, many of which are
not within the Company's control, including (a) seasonal patterns of hardware
and software capital spending by customers, (b) information technology
outsourcing trends, (c) the timing, size and stage of projects, (d) new service
introductions by the Company or its competitors and the timing of new product
introductions by the Company's ERP partners, (e) levels of market acceptance for
the Company's services, (f) the hiring of additional staff; (ii) changes in the
Company's billing and employee utilization rates; (iii) the Company's ability to
manage its growth effectively, which will require the Company (a) to continue
developing and improving its operational, financial and other internal systems,
as well as its business development capabilities, (b) to attract, train, retain,
motivate and manage its employees, (c) to continue to maintain high rates of
employee utilization at profitable billing rates and, (d) to maintain project
quality, particularly if the size and scope of the Company's projects increase;
(iv) the Company's ability to maintain an effective internal control structure;
(v) the Company's limited operating history within its current line of business;
(vi) the Company's reliance on a continued relationship with SAP America and the
Company's present status as a SAP National Logo Partner; (vii) the Company's
substantial reliance on key customers and large projects; (viii) the highly
competitive nature of the markets for the Company's services; (ix) the Company's
ability to successfully address the continuing changes in information
technology, evolving industry standards and changing customer objectives and
preferences; (x) the Company's reliance on the continued services of its key
executive officers and leading technical personnel; (xi) the Company's ability
to attract and retain a sufficient number of highly skilled employees in the
future; (xii) the progress the Company may have at continuing to diversify its
offerings, including growth in its Oracle, Baan and PeopleSoft services; (xiii)
uncertainties resulting from pending litigation matters and from potential
administrative and regulatory immigration and tax law matters; and (xiv) the
Company's ability to protect its intellectual property rights. The Company's
actual results may differ materially from the results disclosed in such
forward-looking statements.
-10-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data as a percentage of revenue:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ --------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue..................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales............................... 63.1 69.2 64.8 71.1
------- ------- ------- -------
Gross profit............................ 36.9 30.8 35.2 28.9
Selling, general and administrative
expenses.................................... 25.8 21.7 25.1 20.3
Acquisition expenses........................ 1.3 0.0 0.7 0.0
------- ------- ------- -------
Operating income........................ 9.8 9.1 9.4 8.6
Other income (expense)...................... (0.2) 0.1 0.0 0.3
------- ------- ------- -------
Income before provision for income taxes.... 9.6 9.2 9.4 8.9
Provision for income taxes.................. 2.9 3.4 2.8 3.4
------- ------- ------- -------
Net income ................................. 6.7% 5.8% 6.6% 5.5%
======= ======= ======= =======
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Revenue. Revenue increased by 63.7%, or $13.2 million, from $20.8 million
during the three months ended June 30, 1997 to $34.0 million during the three
months ended June 30, 1998. This increase was attributable primarily to
increased demand for the Company's SAP-related implementation consulting
services and, to a lesser extent, to increased demand for the Company's systems
integration and custom software development services.
Gross profit. The Company's cost of sales includes primarily the cost of
salaries to consultants and related employee benefits and payroll taxes. The
Company's cost of sales increased by 49.3%, or $7.1 million, from $14.4 million
during the three months ended June 30, 1997 to $21.5 million during the three
months ended June 30, 1998. The increase was due to increased personnel costs
resulting from the hiring of additional consultants to support the increase in
demand for the Company's services. The Company's gross profit increased by
96.0%, or $6.1 million, from $6.4 million during the three months ended June 30,
1997 to $12.5 million during the three months ended June 30, 1998. Gross profit
margin increased from 30.8% of revenue during the three months ended June 30,
1997 to 36.9% of revenue during the three months ended June 30, 1998. The
increase in such gross profit margin was attributable to the increase in
implementation service projects, an increase in utilization and improved billing
margins.
Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of administrative salaries, sales
personnel compensation, travel and entertainment, some of the costs associated
with the ADC and related development costs and professional fees. Selling,
general and administrative expenses increased by 94.3%, or $4.3 million, from
$4.5 million during the three months ended June 30, 1997 to $8.8 million during
the three months ended June 30, 1998, and increased as a percentage of revenue
from 21.7% to
-11-
<PAGE>
25.8% of revenue. The increases in such expenses in absolute dollars and as a
percentage of revenue were due primarily to the expansion of the Company's sales
and marketing activities, and increased travel and entertainment expenses due to
the growth of the business and the employee base. These expenses were incurred
to support the continued revenue growth of the Company in the United States and
abroad. In addition, such expenses increased due to increased sales and
management recruiting costs, support services and an increase in the provision
for doubtful accounts.
Acquisition expense. During the three months ended June 30, 1998, the
Company incurred costs of $434,000 in connection with the acquisition of CPI
Resources Limited, which was accounted for as a pooling of interests. These
costs primarily consisted of professional fees associated with the acquisition.
Interest income. Interest income has been earned on interest bearing cash
accounts and short term investments. In accordance with investment guidelines
approved by the Company's Board of Directors, cash balances in excess of those
required to fund operations have been invested in short-term U.S. Treasury
securities and commercial paper with a credit rating no lower than A1/P1.
Provision for Income Taxes. The Company's effective tax rate was 31% and
37% for the three months ended June 30, 1998, and June 30, 1997, respectively.
In 1996, the Company elected a five year tax holiday in India, in accordance
with a local tax incentive program whereby no income tax will be due in such
period. For the three months ended June 30, 1998, the tax holiday favorably
impacted the Company's effective tax rate by approximately 11%, while the effect
was not significant in the three months ended June 30, 1997.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Revenue. Revenue increased by 65.4%, or $24.9 million, from $37.9 million
during the six months ended June 30, 1997 to $62.8 million during the six months
ended June 30, 1998. This increase was attributable primarily to increased
demand for the Company's SAP-related implementation consulting services and, to
a lesser extent, to increased demand for the Company's systems integration and
custom software development services.
Gross profit. The Company's cost of sales increased by 50.8%, or $13.7
million, from $27.0 million during the six months ended June 30, 1997 to $40.7
million during the six months ended June 30, 1998. The increase was due to
increased personnel costs resulting from the hiring of additional consultants to
support the increase in demand for the Company's services. The Company's gross
profit increased by 101.3% or $11.1 million, from $11.0 million during the six
months ended June 30, 1997 to $22.1 million during the six months ended June 30,
1998. Gross profit margin increased from 28.9% of revenue during the six months
ended June 30, 1997 to 35.2% of revenue during the six months ended June 30,
1998. The increase in such gross profit margin was attributable to the increase
in implementation service projects, an increase in utilization and improved
billing margins.
-12-
<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 104.6% or $8.1 million, from $7.7 million
during the six months ended June 30, 1997 to $15.8 million during the six months
ended June 30, 1998, and increased as a percentage of revenue from 20.3% to
25.1% of revenue. The increases in such expenses in absolute dollars and as a
percentage of revenue were due primarily to the expansion of the Company's sales
and marketing activities, and increased travel and entertainment expenses due to
the growth of the business and the employee base. These expenses were incurred
to support the continued revenue growth of the Company in the United States and
abroad. In addition, such expenses increased due to increased sales and
management recruiting costs, support services and an increase in the provision
for doubtful accounts.
Acquisition expense. During the six months ended June 30, 1998, the Company
incurred costs of $434,000 in connection with the acquisition of CPI Resources
Limited, which was accounted for as a pooling of interests. These costs
primarily consisted of professional fees associated with the acquisition.
Interest income. Interest income has been earned on interest bearing cash
accounts and short term investments. In accordance with investment guidelines
approved by the Company's Board of Directors, cash balances in excess of those
required to fund operations have been invested in short-term U.S. Treasury
securities and commercial paper with a credit rating no lower than A1/P1.
Provision for Income Taxes. The Company's effective tax rate was 30% and
38% for the six months ended June 30, 1998, and June 30, 1997, respectively. In
1996, the Company elected a five year tax holiday in India, in accordance with a
local tax incentive program whereby no income tax will be due in such period.
For the six months ended June 30, 1998, the tax holiday favorably impacted the
Company's effective tax rate by approximately 12%, while the effect was not
significant in the six months ended June 30, 1997.
BACKLOG
The Company normally enters into written contracts with its customers at
the time it commences work on a project. These written contracts contain varying
terms and conditions and the Company does not generally believe it is
appropriate to characterize such written contracts as creating backlog. In
addition, because these written contracts often provide that the arrangement can
be terminated with limited advance notice and without significant penalty, the
Company does not believe that projects in process at any one time are a reliable
indicator or measure of expected future revenue. In the event that a customer
terminates a project, the customer remains obligated to pay the Company for
services performed by it through the date of termination.
-13-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its operations primarily from cash flow generated from
operations, and to a lesser extent, from cash balances generated from the
Company's initial and follow-on public offerings consummated in October 1996 and
July 1997, respectively.
The Company had cash and cash equivalents of $2.6 million at June 30, 1998,
and $8.5 million at December 31, 1997. The Company had working capital of $28.5
million at June 30, 1998, and $29.3 million at December 31, 1997.
Cash used in operating activities was $2.8 million during the six months
ended June 30, 1998, resulting primarily from the growth in accounts receivable
and unbilled services. Cash used in operating activities for the six months
ended June 30, 1997 was $3.5 million.
The Company invested $3.1 million and $1.7 million in computer equipment
and furniture during the six months ended June 30, 1998 and 1997, respectively.
The Company has outstanding commitments of approximately $882,000 related to
furniture and fixtures for the new headquarters in Edison, New Jersey. The
Company made advance payments of $283,000 during the six months ended June 30,
1998 toward these commitments, which is presented in other current assets on the
June 30, 1998 balance sheet.
In January 1997, and as later amended on August 18, 1997, the Company
entered into a two-year credit agreement with a bank (the "Bank"). The credit
facility with the Bank has two components comprised of (i) a revolving line of
credit pursuant to which the Company may borrow up to $7.5 million either at the
Bank's prime rate per annum or the EuroRate plus 2% (at the Company's option),
and (ii) equipment term loans pursuant to which the Company may borrow up to an
aggregate of $350,000 (at the Bank's prime rate plus 1/4 of 1% per annum) to
purchase equipment. The credit agreement contains covenants which require the
Company to (i) maintain its working capital during the year at no less than 90%
of the working capital at the end of the immediately preceding fiscal year and
at the end of each fiscal year at no less than 105% of its working capital at
the end of the immediately preceding fiscal year; and (ii) maintain its tangible
net worth during the year at no less than 95% of its tangible net worth at the
end of the immediately preceding fiscal year and at the end of each fiscal year
at no less than 108% of tangible net worth at the end of the immediately
preceding fiscal year. As of June 30, 1998, the Company is in compliance with
all debt covenants. The Company's obligations under the credit agreement are
collateralized by substantially all of the Company's assets, including its
accounts receivable and intellectual property. The Company's obligations under
the credit facility are payable at the expiration of such facility on January
22, 1999. These terms are subject to the Company maintaining an unsubordinated
debt to tangible net worth ratio of no greater than one to one and an earnings
before interest and taxes to interest expense ratio of no less than three to
one.
As of June 30, 1998, there were no amounts outstanding under the revolving
line of credit and no equipment term loans outstanding.
-14-
<PAGE>
The Company believes that its available funds, together with current credit
arrangements and the cash flows expected to be generated from operations, will
be adequate to satisfy its current and planned operations through at least the
next 12 months.
-15-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27.1 Restated Financial Data Schedule for the period ended June 30,
1998.
27.2 Restated Financial Data Schedule for the year ended December 31,
1997.
27.3 Restated Financial Data Schedule for the period ended June 30,
1997.
(b) Reports on Form 8-K.
On May 4, 1998, the Company filed a report on Form 8-K to disclose
certain management changes.
On May 27, 1998, the Company filed a report on Form 8-K to disclose
the acquisitions of CPI Consulting Limited (No. 3316554) and CPI
Resources Limited (No. 2080824).
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Intelligroup, Inc.
DATE: March 26, 1999 By: /s/ Stephen A. Carns
-----------------------
Stephen A. Carns,
President and Chief Executive Officer
(Principal Executive Officer)
DATE: March 26, 1999 By: /s/ Gerard E. Dorsey
------------------------
Gerard E. Dorsey,
Senior Vice President - Finance and Chief
Financial Officer
(Principal Financial and Accounting Officer)
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains restated summary financial information
extracted from the unaudited condensed consolidated financial
statements included in the registrant's Form 10-Q/A for the
period ended June 30, 1998 and is qualified in its entirety by
reference to such Form 10-Q/A.
</LEGEND>
<CIK> 0001016439
<NAME> Intelligroup, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Jun-30-1998
<EXCHANGE-RATE> 1
<CASH> 2,610
<SECURITIES> 0
<RECEIVABLES> 27,341
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 41,038
<PP&E> 5,738
<DEPRECIATION> 0
<TOTAL-ASSETS> 52,464
<CURRENT-LIABILITIES> 12,517
<BONDS> 0
0
0
<COMMON> 126
<OTHER-SE> 39,718
<TOTAL-LIABILITY-AND-EQUITY> 52,468
<SALES> 62,759
<TOTAL-REVENUES> 62,759
<CGS> 40,654
<TOTAL-COSTS> 40,654
<OTHER-EXPENSES> 16,212
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (16)
<INCOME-PRETAX> 5,909
<INCOME-TAX> 1,761
<INCOME-CONTINUING> 4,148
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,148
<EPS-PRIMARY> 0.33 <F1>
<EPS-DILUTED> 0.32 <F2>
<FN>
<F1> This amount represents Basic Earnings per Share in accordance with the
requirements of Statement of Financial Accounting Standards No. 128 -
"Earnings per Share".
<F2> This amount represents Diluted Earnings per Share in accordance with
the requirements of Statement of Financial Accounting Standards No.
128 - "Earnings per Share".
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains restated summary financial information
extracted from the unaudited condensed consolidated financial
statements included in the registrant's Form 10-Q/A for the
year ended December 31, 1997 and is qualified in its entirety by
reference to such Form 10-Q/A.
</LEGEND>
<CIK> 0001016439
<NAME> Intelligroup, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 8,503
<SECURITIES> 0
<RECEIVABLES> 18,995
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 36,412
<PP&E> 3,484
<DEPRECIATION> 0
<TOTAL-ASSETS> 40,233
<CURRENT-LIABILITIES> 7,075
<BONDS> 0
0
0
<COMMON> 124
<OTHER-SE> 32,810
<TOTAL-LIABILITY-AND-EQUITY> 40,233
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0 <F1>
<EPS-DILUTED> 0 <F2>
<FN>
<F1> This amount represents Basic Earnings per Share in accordance with the
requirements of Statement of Financial Accounting Standards No. 128 -
"Earnings per Share".
<F2> This amount represents Diluted Earnings per Share in accordance with
the requirements of Statement of Financial Accounting Standards No.
128 - "Earnings per Share".
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains restated summary financial information
extracted from the unaudited condensed consolidated financial
statements included in the registrant's Form 10-Q/A for the
period ended June 30, 1997 and is qualified in its entirety by
reference to such Form 10-Q/A.
</LEGEND>
<CIK> 0001016439
<NAME> Intelligroup, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Jun-30-1997
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 37,934
<TOTAL-REVENUES> 37,934
<CGS> 26,953
<TOTAL-COSTS> 26,953
<OTHER-EXPENSES> 7,712
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (97)
<INCOME-PRETAX> 3,366
<INCOME-TAX> 1,273
<INCOME-CONTINUING> 2,093
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,093
<EPS-PRIMARY> 0.19 <F1>
<EPS-DILUTED> 0.19 <F2>
<FN>
<F1> This amount represents Basic Earnings per Share in accordance with the
requirements of Statement of Financial Accounting Standards No. 128 -
"Earnings per Share".
<F2> This amount represents Diluted Earnings per Share in accordance with
the requirements of Statement of Financial Accounting Standards No.
128 - "Earnings per Share".
</FN>
</TABLE>
