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 September 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
----------------------------
(Issuer's Telephone Number,
Including Area Code)
Indicate by checkmark 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 November 9, 1998:
Class Number of Shares
----- ----------------
Common Stock, $.01 par value 12,668,175
<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 November
12, 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
September 30, 1998 and December 31, 1997
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ -----------
(unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................. $ 5,439,000 $ 8,503,000
Accounts receivable, less allowance for doubtful
accounts of $1,800,000 at September 30, 1998
and $799,000 at December 31, 1997................... 23,572,000 18,995,000
Unbilled services..................................... 14,115,000 7,834,000
Deferred income taxes................................. 404,000 404,000
Other current assets.................................. 1,907,000 676,000
------------ ------------
Total current assets............................ 45,437,000 36,412,000
Equipment, net .......................................... 7,186,000 3,484,000
Cost in excess of fair value of net assets acquired, net. 4,398,000 --
Other assets............................................. 946,000 337,000
------------ ------------
$ 57,967,000 $ 40,233,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable...................................... $ 3,662,000 $ 1,701,000
Accrued payroll and related taxes..................... 6,486,000 2,636,000
Accrued expenses and other liabilities................ 3,191,000 1,465,000
Income taxes payable.................................. 1,469,000 1,253,000
Current portion of obligations under capital leases... 18,000 20,000
------------ ------------
Total current liabilities....................... 14,826,000 7,075,000
Obligations under capital leases, less current portion... 54,000 51,000
Other liabilities........................................ -- 126,000
Deferred income taxes ................................... 171,000 171,000
Commitments and contingencies
Shareholders' Equity
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued or outstanding............. -- --
Common stock, $.01 par value, 25,000,000 shares
authorized; 12,667,875 and 12,358,981 shares
issued and outstanding at September 30, 1998
and December 31, 1997, respectively................ 127,000 124,000
Additional paid-in capital............................ 34,634,000 30,175,000
Retained earnings .................................... 8,847,000 2,592,000
Currency translation adjustment....................... (692,000) (159,000)
------------ ------------
Minority Interest in CPI Consulting................... -- 78,000
------------ ------------
Total shareholders' equity ...................... 42,916,000 32,810,000
------------ ------------
$ 57,967,000 $ 40,233,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME For the
Three Months and Nine Months Ended September 30, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue.......................... $ 35,769,000 $ 23,727,000 $ 98,527,000 $ 61,663,000
Cost of sales.................... 22,899,000 15,902,000 63,554,000 42,857,000
------------ ------------ ------------ ------------
Gross profit............... 12,870,000 7,825,000 34,973,000 18,806,000
Selling, general and
administrative expenses......... 9,284,000 5,323,000 25,061,000 13,034,000
Acquisition expenses............. -- -- 434,000 --
------------ ------------ ------------ ------------
Operating expenses......... 9,284,000 5,323,000 25,495,000 13,034,000
------------ ------------ ------------ ------------
Operating income........... 3,586,000 2,502,000 9,478,000 5,772,000
Interest - net................... 181,000 136,000 278,000 251,000
Minority interest................ -- (24,000) (82,000) (40,000)
------------ ------------ ------------ ------------
Income before provision for
income taxes.................... 3,767,000 2,614,000 9,674,000 5,983,000
Provision for income taxes....... 1,149,000 957,000 2,909,000 2,230,000
------------ ------------ ------------ ------------
Net income....................... $ 2,618,000 $ 1,657,000 $ 6,765,000 $ 3,753,000
============ ============ ============ ============
Earnings per share:
Basic earnings per share:
Net income per share....... $ 0.21 $ 0.14 $ 0.54 $ 0.33
============ ============ ============ ============
Weighted average number of
common shares - Basic..... 12,647,000 12,029,000 12,481,000 11,477,000
============ ============ ============ ============
Diluted earnings per share:
Net income per share....... $ 0.20 $ 0.13 $ 0.52 $ 0.31
============ ============ ============ ============
Weighted average number of
common shares - Diluted... 13,157,000 12,698,000 12,978,000 11,926,000
============ ============ ============ ============
Comprehensive Income
- --------------------
Net income....................... $ 2,618,000 $ 1,657,000 $ 6,765,000 $ 3,753,000
Other comprehensive income -
Currency translation
adjustments................ (173,000) -- (533,000) --
------------ ------------ ------------ ------------
Comprehensive income............. $ 2,445,000 $ 1,657,000 $ 6,232,000 $ 3,753,000
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1998 and
September 30, 1997
(unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................... $6,765,000 $3,753,000
Adjustments to reconcile net income to net cash
provided by(used in) operating activities:
Depreciation and amortization...................... 850,000 287,000
Provision for doubtful accounts.................... 923,000 340,000
Minority interest in income of subsidiary.......... 78,000 --
Changes in assets and liabilities:
Accounts receivable................................ (5,500,000) (5,988,000)
Unbilled services.................................. (6,281,000) (5,111,000)
Other current assets............................... (1,231,000) (99,000)
Other assets....................................... (609,000) (68,000)
Accounts payable................................... 1,961,000 1,207,000
Accrued payroll and related taxes.................. 3,850,000 782,000
Accrued expenses and other liabilities............. 174,000 (161,000)
Income taxes payable............................... 216,000 374,000
---------- ----------
Net cash provided by (used in) operating
activities.................................... 1,196,000 (4,684,000)
---------- ----------
Cash flows from investing activities:
Purchase of equipment................................. (5,013,000) (2,234,000)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of
issuance costs....................................... -- 9,900,000
Proceeds from the exercise of stock options........... 1,319,000 721,000
Principal payments under capital leases............... (33,000) (6,000)
---------- ---------
Net cash provided by financing activities...... 1,286,000 10,615,000
---------- ----------
Effect of foreign currency exchange rate changes
on cash............................................ (533,000) --
---------- ---------
Net increase (decrease) in cash and cash
equivalents................................ (3,064,000) 3,697,000
Cash and cash equivalents at beginning of period......... 8,503,000 7,479,000
---------- ---------
Cash and cash equivalents at end of period............... $5,439,000 $11,176,000
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) BASIS OF PRESENTATION
The consolidated financial statements and accompanying financial
information as of September 30, 1998 and for the three and nine months ended
September 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 calculated under SFAS 128 are not materially different from
those computed under the former accounting standard.
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<PAGE>
A reconciliation of weighted average number of common shares outstanding to
weighted average common shares outstanding assuming dilution is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average number of common
shares 12,647,000 12,029,000 12,481,000 11,477,000
Common share equivalents of
outstanding stock options 510,000 669,000 497,000 449,000
---------- ---------- ---------- ----------
Weighted average number of common
shares assuming dilution 13,157,000 12,698,000 12,978,000 11,926,000
========== ========== ========== ==========
</TABLE>
Certain stock options outstanding at September 30, 1998 were not included
in the computations of earnings per share assuming dilution because the options'
exercise prices were greater than the average trading price of the Company's
common shares.
(3) NEW ACCOUNTING PRONOUNCEMENTS
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.
- 6 -
<PAGE>
(5) FOLLOW-ON PUBLIC OFFERING
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 a price to the public of $9.50 per share were issued and sold
by the Company to cover overallotments. The net proceeds to the Company from the
Offering, after underwriting discounts and commissions and other expenses of the
Offering, were approximately $9.9 million.
(6) STOCK RIGHTS
In October 1998 the Company's Board of Directors declared a dividend
distribution of one Preferred Share Purchase Right for each outstanding share of
the Company's Common Stock. These Rights will expire in November 2008 and trade
with the Company's Common Stock. Such Rights are not presently exercisable and
have no voting power. In the event a person or affiliated group of persons,
acquires 20% or more, or makes a tender or exchange offer for 20% or more of the
Company's Common Stock, the Rights detach from the Common Stock and become
exercisable and entitle a holder to buy one one-hundredth (1/100) of a share of
Preferred Stock at $100.00.
If, after the Rights become exercisable, the Company is acquired or merged,
each Right will entitle its holder to purchase $200.00 market value of the
surviving company's stock for $100.00, based upon the current exercise price of
the Rights. The Company may redeem the Rights, at its option, at $.01 per Right
prior to a public announcement that any person has acquired beneficial ownership
of at least 20% of the Company's Common Stock. These Rights are designed
primarily to encourage anyone interested in acquiring the Company to negotiate
with the Board of Directors.
- 7 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The Company provides a wide range of information technology services,
including enterprise-wide business process solutions, internet applications
services, systems integration and custom software development based on leading
technologies. The Company has grown rapidly since 1994 when it made a strategic
decision to diversify its customer base by expanding the scope of its
integration and development services and to utilize SAP software as a primary
tool to implement enterprise-wide business process solutions. In 1995, the
Company became 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. 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. In June, 1998, the Company
also 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, financial
condition and results of operations. The Company believes that, as it pursues
its strategy of making turnkey project management a larger portion of its
business, it will likely be required to offer fixed price projects to a greater
degree. The Company has had limited prior experience in pricing and performing
under fixed price arrangements and believes that there are certain risks related
thereto, and thus prices such arrangements to reflect the associated risk. There
can be no assurance that the Company will be able to complete such projects
within 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.
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<PAGE>
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 nine months ended September 30, 1998 and the year ended
December 31, 1997, the Company's ten largest customers accounted for in the
aggregate approximately 41% and 46% of its revenue, respectively. During the
nine months ended September 30, 1998, no customer 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
nine months ended September 30, 1998 and the year ended December 31, 1997, 37%
and 32%, 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 nine months ended September 30, 1998 and the
year ended December 31, 1997, approximately 63% and 58%, respectively, of the
Company's total revenue was derived from projects in which the Company
implemented software developed by SAP. During the nine months ended September
30, 1998 and the year ended December 31, 1997, approximately 14% and 12%,
respectively, 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 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
consists 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 towards a
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. Since 1995, the Company has also been increasing its
sales force and its marketing, finance, accounting and administrative staff, in
order to effectively 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 has offices in Australia,
Denmark, Japan, New Zealand, Singapore and the United Kingdom. The
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<PAGE>
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.
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) general economic conditions, (g) the hiring of
additional staff and (h) fixed price contracts; (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; (xiv) the
Company's ability to protect its intellectual property rights; and (xv) Year
2000 compliance of vendors' products and related issues, including impact of the
Year 2000 problem on customer buying patterns. The Company's actual results may
differ materially from the results disclosed in such forward-looking statements.
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<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 Nine Months Ended
September 30, September 30,
------------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue............................. 100.0% 100.0% 100.0% 100.0%
Cost of sales....................... 64.0 67.0 64.5 69.5
----- ------ ----- -----
Gross profit..................... 36.0 33.0 35.5 30.5
Selling, general and administrative
expenses......................... 26.0 22.5 25.5 21.1
Acquisition expenses................ 0.0 0.0 0.4 0.0
----- ------ ----- -----
Operating income................. 10.0 10.5 9.6 9.4
Other income........................ 0.5 0.5 0.2 0.3
----- ------ ----- -----
Income before provision for income
taxes............................ 10.5 11.0 9.8 9.7
Provision for income taxes.......... 3.2 4.0 2.9 3.6
----- ------ ----- -----
Net income.......................... 7.3% 7.0% 6.9% 6.1%
===== ====== ===== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1997
Revenue. Revenue increased by 51%, or $12.1 million, from $23.7 million
during the three months ended September 30, 1997, to $35.8 million during the
three months ended September 30, 1998. This increase is attributable primarily
to increased demand for the Company's SAP and Oracle-related Implementation
Consulting Services, as well as 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 44%, or $7.0 million, from $15.9 million
during the three months ended September 30, 1997 to $22.9 million during the
three months ended September 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 65%, or $5.1 million, from $7.8 million during the three months
ended September 30, 1997 to $12.9 million during the three months ended
September 30, 1998. Gross profit margin increased from 33.0% of revenue during
the three months ended September 30, 1997 to 36.0% of revenue during the three
months ended September 30, 1998. The increase in such gross profit margin was
primarily attributable to both the expanded utilization of the Company's
offshore development facility in India, and the increase in implementation
service projects where the Company has project management responsibilities,
which typically carry higher gross margins than those in which the Company
provides supplemental staffing for client managed projects.
Selling, general and administrative expenses Selling, general and
administrative expenses increased by 74%, or $4.0 million, from $5.3 million
during the three months ended September 30, 1997 to $9.3 million during the
three months ended September 30, 1998, and increased as a percentage of revenue
from 22.4% to 26.0%. The increases in such expenses in absolute dollars and as a
percentage of revenue were due primarily to the increase in salaries and related
benefits,
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<PAGE>
reflecting headcount increases in the Company's sales force and its marketing,
finance, accounting and administrative staff, in order to manage its growth. In
addition, the Company experienced increases in sales and management recruiting
costs, occupancy costs as additional offices were opened in the United States,
support services and the provision for doubtful accounts.
Other 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 30.5% and
36.6% for the three months ended September 30, 1998 and 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 September 30, 1998, the tax holiday favorably
impacted the Company's effective tax rate by approximately 9%, while the effect
was not significant in the three months ended September 30, 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1997
Revenue. Revenue increased by 60%, or $36.8 million, from $61.7 million
during the nine months ended September 30, 1997 to $98.5 million during the nine
months ended September 30, 1998. This increase was attributable primarily to
increased demand for the Company's 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 48%, or $20.7
million, from $42.9 million during the nine months ended September 30, 1997 to
$63.6 million during the nine months ended September 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 86%, or $16.2 million, from $18.8 million
during the nine months ended September 30, 1997 to $35.0 million during the nine
months ended September 30, 1998. Gross profit margin increased from 30.5% of
revenue during the nine months ended September 30, 1997 to 35.5% of revenue
during the nine months ended September 30, 1998. The increase in such gross
profit margin was primarily attributable to both the expanded utilization of the
Company's offshore development facility in India, and the increase in
implementation service projects where the Company has project management
responsibilities, which typically carry higher gross margins than those in which
the Company provides supplemental staffing for client managed projects.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 92%, or $12.1 million, from $13.0 million
during the nine months ended September 30, 1997 to $25.1 million during the nine
months ended September 30, 1998, and increased as a percentage of revenue from
21.1% to 25.5% of revenue. The increases in such expenses in absolute dollars
and as a percentage of revenue were due primarily to the increase in salaries
and related benefits, reflecting headcount increases in the Company's sales
force and its marketing, finance, accounting and administrative staff, in order
to manage its growth. In
- 12 -
<PAGE>
addition, the Company experienced increases in sales and management recruiting
costs, occupancy costs as additional offices were opened in the United States,
support services and the provision for doubtful accounts.
Acquisition expense. During the nine months ended September 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.
Other 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 income tax rate was
30.1% and 37.3% for the nine months ended September 30, 1998 and 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 nine months ended September 30, 1998, the tax holiday
favorably impacted the Company's effective tax rate by approximately 9%, while
the effect was not significant in the nine months ended September 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.
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.
- 13 -
<PAGE>
The Company had cash and cash equivalents of $5.4 million at September 30,
1998, and $8.5 million at December 31, 1997. The Company had working capital of
$30.6 million at September 30, 1998 and $29.3 million at December 31, 1997.
Cash provided by operating activities was $1.2 million during the nine
months ended September 30, 1998, resulting primarily from net income of $6.8
million for the nine months ended September 30, 1998, an increase of $5.8
million in accounts payable and accrued payroll, offset by an increase of $11.8
million in accounts receivable and unbilled services. Cash used in operating
activities for the nine months ended September 30, 1997 was $4.7 million.
The Company invested $5.0 million and $2.2 million in computer equipment
and office furniture and fixtures during the nine months ended September 30,
1998 and 1997, respectively. The increase reflects purchases of computer and
telecommunication equipment for consultants and administrative staff and office
furniture and fixtures related to the Company's new headquarters in Edison, New
Jersey, and other new offices opened during 1998.
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 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.
- 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 twelve months.
YEAR 2000 COMPLIANCE
Historically, certain computer programs have been written using two digits
rather than four to define the applicable year, which could result in the
computer recognizing a date using "00" as the year 1900 rather than 2000. This
in turn, could result in major system failures or miscalculations, and is
generally referred to as the "Year 2000 Problem". The Company believes that it
has sufficiently assessed its state of readiness with respect to its Year 2000
compliance. Based on its assessment, the Company does not believe that Year 2000
compliance will result in material investments by the Company, nor does the
Company anticipate that the Year 2000 Problem will have any adverse effects on
the business operations or financial performance of the Company. The Company
does not believe that it has any material exposure to the Year 2000 Problem with
respect to its own information systems.
The purchasing patterns of customers and potential customers may be
affected by issues associated with the Year 2000 Problem. As companies expend
significant resources to correct their current data storage solutions, these
expenditures may result in reduced funds to purchase products or undertake
projects such as those offered by the Company. There can be no assurance that
the Year 2000 Problem, as it relates to customers, potential customers and other
third-parties, will not adversely affect the Company's business, operating
results and financial condition. Conversely, the Year 2000 Problem may cause
other companies to accelerate purchases, thereby causing an increase in
short-term demand and a consequent decrease in long-term demand for the
Company's products.
EUROPEAN MONETARY UNION (EMU)
The euro is scheduled to be introduced on January 1, 1999, at which time
the eleven participating EMU member countries will establish fixed conversion
rates between their existing currencies (legacy currencies) and the euro. The
legacy currencies will continue to be used as legal tender through January 1,
2002; thereafter, the legacy currencies will be canceled and euro bills and
coins will be used for cash transactions in the participating countries. The
Company's European sales and operations offices affected by the euro conversion
have established plans to address the systems issues raised by the euro currency
conversion and are cognizant of the potential business implications of
converting to a common currency. The Company is unable to determine the ultimate
financial impact of the conversion on its operations, if any, given that the
impact will be dependent upon the competitive situations which exist in the
various regional markets in which the Company participates and the potential
actions which may or may not be taken by the Company's competitors and
suppliers.
- 15 -
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27.1 Restated Financial Data Schedule for the period ended
September 30, 1998.
27.2 Restated Financial Data Schedule for the period ended
September 30, 1997.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which
this report on Form 10-Q is filed.
Subsequent to the quarter ended September 30, 1998, the
Company filed, on November 9, 1998, a Current Report on Form
8-K with the Securities and Exchange Commission relating to
the Company's adoption of a Shareholder Rights Plan. See Item
2, Changes in Securities and Use of Proceeds.
- 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)
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<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 September 30, 1998 and is qualified in its entirety
by reference to such Form 10-Q/A.
</LEGEND>
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<NAME> Intelligroup, Inc.
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<FN>
<F1> This amount represents Basic Earnings per Share in accordance with the
requirements of Statement of Financial Accounting Standards No. 128 -
"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>
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<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 September 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> 9-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Sep-30-1997
<EXCHANGE-RATE> 1
<CASH> 0
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<FN>
<F1> This amount represents Basic Earnings per Share in accordance with the
requirements of Statement of Financial Accounting Standards No. 128 -
"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>
