As Filed with the Securities and Exchange Commission on June 10, 1999
Registration No. 333-73051
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------------
AMENDMENT NO. 1 TO FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
INTELLIGROUP, INC.
-----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
New Jersey 11-2880025
- --------------------------------- ------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
499 Thornall Street
Edison, New Jersey 08837
(732) 590-1600
-------------------------------------------------------------------
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
ASHOK PANDEY
Co-Chief Executive Officer
Intelligroup, Inc.
499 Thornall Street
Edison, New Jersey 08837
(732) 590-1600
-------------------------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-------------------------------------
COPY TO:
DAVID J. SORIN, ESQ.
DAVID S. MATLIN, ESQ.
Buchanan Ingersoll Professional Corporation
College Centre
500 College Road East
Princeton, New Jersey 08540
(609) 987-6800
-------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this Registration Statement becomes effective.
-------------------------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
<PAGE>
- --------------------------------------------------------------------------------
CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<CAPTION>
Proposed
Amount Maximum Proposed Maximum Amount Of
Title of Shares To Be Aggregate Price Aggregate Registration
To Be Registered Registered Per Share Offering Price Fee
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common Stock,
$.01 par value....... 980,532 $15.47(1) $15,168,830 $4,216.94(2)
Common Stock,
$.01 par value....... 1,648,025 $6.63(3) $10,926,406 $3,037.54
- -------------------------------------------------------------------------------------------------
Total 2,628,557 $26,095,236 $7,254.48
=================================================================================================
<FN>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c). Such price is based upon the average of the high and
low price per share of the Registrant's Common Stock as reported on the Nasdaq
National Market on February 22, 1999.
(2) The registration fee was paid at the time of the initial filing of this
Registration Statement.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c). Such price is based upon the average of the high and
low price per share of the Registrant's Common Stock as reported on the Nasdaq
National Market on June 8, 1999.
</FN>
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
The information in this prospectus is not complete and may be changed. The
Selling Shareholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
<PAGE>
PROSPECTUS (Not Complete)
Issued: June 10, 1999
2,628,557 SHARES
INTELLIGROUP, INC.
499 THORNALL STREET
EDISON, NEW JERSEY 08837
(732) 590-1600
COMMON STOCK
The Selling Shareholders, may offer and sell, from time to time, an
aggregate of 2,628,557 Shares of the Common Stock of Intelligroup, Inc. See
"Selling Shareholders" for information relating to the names and number of
shares offered hereby by each individual Selling Shareholder. The Selling
Shareholders may sell all or a portion of their Shares through public or private
transactions, at prevailing market prices, or at privately negotiated prices.
The Company will not receive any part of the proceeds from sales of these
Shares.
Our Common Stock is listed on the Nasdaq National Market under the symbol
"ITIG". The last reported sale price of the Common Stock on June 8, 1999 on the
Nasdaq National Market was $6.66 per share.
----------------------------------------
INVESTING IN THE SHARES OF COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 5.
----------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
June , 1999
<PAGE>
INTELLIGROUP, INC.
TABLE OF CONTENTS
-----------------
Page
----
About Intelligroup .................................................... 3
Additional Information ................................................ 4
Risk Factors .......................................................... 5
Use of Proceeds ...................................................... 16
Selected Financial Data................................................ 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 18
Selling Shareholders................................................... 27
Plan of Distribution................................................... 29
Legal Matters.......................................................... 30
Experts ............................................................... 30
Indemnification of Directors and Officers.............................. 30
Securities and Exchange Commission Position on Indemnification
for Securities Act Liabilities....................................... 31
Financial Statements................................................... F-1
- 2 -
<PAGE>
ABOUT INTELLIGROUP
The Company provides a wide range of information technology services,
including management consulting, enterprise-wide business process solutions,
internet applications services, applications outsourcing and maintenance, web
site design and customization, IT training solutions, systems integration and
custom software development based on leading technologies. The Company provides
its services directly to end-user organizations or as a member of consulting
teams assembled by other information technology consulting firms. The Company's
customers are Fortune 1000 and other large and mid-sized companies in the United
States and abroad.
The Company was incorporated in New Jersey in October 1987 under the name
Intellicorp, Inc. The Company's name was changed to Intelligroup, Inc. in July
1992. The Company's principal executive offices are located at 499 Thornall
Street, Edison, New Jersey 08837 and its telephone number is (732) 590-1600.
- 3 -
<PAGE>
ADDITIONAL INFORMATION
The Company files annual, quarterly and special reports, proxy statements
and other information with the Securities and Exchange Commission ("SEC"). You
may read and copy any document the Company files at the SEC's public reference
room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room. The
Company's SEC filings are also available to the public from the SEC's website at
http://www.sec.gov. For additional information, please visit the Company's
website at http://www.intelligroup.com.
The SEC allows the Company to "incorporate by reference" the information
the Company files with the SEC, which means that the Company can disclose
important information to you by referring you to those documents. The
information incorporated by reference is considered to be part of this
prospectus, and later information that the Company files with the SEC will
automatically update and supersede this information.
The Company incorporates by reference the documents listed below and any
future filings made with the SEC under Sections 13(a), 13(c), 14, or 15(d) of
the Securities Exchange Act of 1934 until the Selling Shareholders sell all the
Shares registered hereunder.
1. Annual Report on Form 10-K for the year ended December 31, 1998;
2. Quarterly Report on Form 10-Q for the quarter ended March 31, 1999;
3. Current Reports on Form 8-K dated and filed with the SEC on January 20,
1999, February 24, 1999, May 3, 1999 and May 27, 1999;
4. The description of the Company's Common Stock, $.01 par value, which is
contained in the Company's Registration Statement on Form 8-A filed
pursuant to Section 12(g) of the Securities Exchange Act of 1934, as
amended, in the form declared effective by the SEC on September 26, 1996,
including any subsequent amendments or reports filed for the purpose of
updating such description.
The Company will provide, without charge, to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any or all of the information
incorporated herein by reference. Exhibits to any of such documents, however,
will not be provided unless such exhibits are specifically incorporated by
reference into such documents. The requests should be made to:
Gerard E. Dorsey, Chief Financial Officer
Intelligroup, Inc.
499 Thornall Street
Edison, New Jersey 08837
(732) 590-1600
This prospectus is part of a registration statement we filed with the SEC.
You should rely only on the information or representations provided in this
prospectus. The Company has authorized no one to provide you with different
information. Neither the Company nor the Selling Shareholders are making an
offer of these securities in any state where the offer is not permitted. You
should not assume that the information in this prospectus is accurate as of any
date other than the date on the front of the document.
- 4 -
<PAGE>
RISK FACTORS
SOME INFORMATION IN THIS PROSPECTUS MAY CONTAIN "FORWARD-LOOKING
STATEMENTS". SUCH STATEMENTS CAN BE IDENTIFIED BY THE USE OF WORDS SUCH AS
"BELIEVE," "ANTICIPATE" AND "EXPECT." THESE STATEMENTS DISCUSS FUTURE
EXPECTATIONS, CONTAIN PROJECTIONS OR STATE OTHER "FORWARD-LOOKING" INFORMATION.
THE FACTORS DISCUSSED BELOW COULD CAUSE ACTUAL RESULTS AND DEVELOPMENTS TO BE
MATERIALLY DIFFERENT FROM THOSE EXPRESSED IN OR IMPLIED BY SUCH STATEMENTS. IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, YOU SHOULD
CONSIDER THE FOLLOWING FACTORS CAREFULLY BEFORE DECIDING TO PURCHASE SHARES OF
OUR COMMON STOCK.
SUBSTANTIAL VARIABILITY OF QUARTERLY OPERATING RESULTS
In the past, the Company's operating results have varied substantially from
quarter to quarter. The Company's operating results also may vary in the future.
Due to the relatively fixed nature of certain of the Company's costs, including
personnel and facilities costs, a decline in revenue in any fiscal quarter would
result in lower profitability in that quarter. The Company's quarterly operating
results are influenced by:
o seasonal patterns of hardware and software capital spending by
customers;
o information technology outsourcing trends;
o the timing, size and stage of projects;
o new service introductions by the Company or its competitors;
o levels of market acceptance for the Company's services;
o the hiring of additional staff;
o changes in the Company's billing and employee utilization rates; and
o timing and integration of acquired businesses.
The Company believes, therefore, that past operating results and
period-to-period comparisons should not be relied upon as an indication of
future performance. Demand for the Company's services generally is lower in the
fourth quarter. This decrease is due to reduced activity during the holiday
season and fewer working days for those customers which curtail operations
during such period. The Company anticipates that its business will continue to
be subject to such seasonal variations.
MANAGEMENT OF GROWTH
The Company's growth has placed significant demands on its management,
administrative and operational resources. The Company's revenue increased from
$61.7 million in 1996 to $98.3 million in 1997 and $162.8 million in 1998. From
January 1, 1995 through December 31, 1998,
- 5 -
<PAGE>
the Company's total number of employees increased from 113 to 1,319 persons. In
addition, at December 31, 1998, the Company engaged 107 independent contractors
to perform information technology services. To manage its growth effectively,
the Company must continue to develop and improve its operational, financial and
other internal systems, as well as its business development capabilities. The
Company must also continue to attract, train, retain, motivate and manage its
employees.
The Company's future success will depend in large part on its ability to:
o continue to maintain high rates of employee utilization at profitable
billing rates;
o maintain project quality, particularly if the size and scope of the
Company's projects increase; and
o integrate the service offerings, operations and employees of acquired
businesses.
The inability of the Company to manage its growth and projects effectively
could have a material adverse effect on:
o the quality of the Company's services and products;
o its ability to retain key personnel; and
o its ability to report financial results in an accurate and timely
manner.
WEAKNESSES IN INTERNAL CONTROLS
Following the audit of the Company's consolidated financial statements for
the year ended December 31, 1995, the Company received a management letter from
its independent public accountants, Arthur Andersen LLP. The management letter
described significant deficiencies and material weaknesses in the Company's
internal control structure. Arthur Andersen LLP noted that, during 1995, the
Company's internal control structure had two material weaknesses:
o the Company did not reconcile its supporting records to the general
ledger or perform meaningful account analysis; and
o the Company did not maintain, summarize or reconcile any books or
records for its foreign operations.
The Company first hired a Chief Financial Officer in January 1996. In March
1996 it implemented an accounting system capable of generating information and
reports necessary to appropriately manage the Company. In February 1998, the
Company's Chief Financial Officer resigned and on April 29, 1998, the Company
appointed a new Chief Financial Officer. The Company continues to develop and
implement a system of internal controls and otherwise develop an appropriate
administrative infrastructure. Following the audit for the year ended December
31, 1996, Arthur Andersen LLP issued a management letter which, although it
- 6 -
<PAGE>
did set forth significant deficiencies, did not specify any material weaknesses
in the Company's internal control structure. In addition, Arthur Andersen LLP
informed the Company that no material weaknesses in the Company's internal
control structure were noted during the audits of the Company's consolidated
financial statements for the years ended December 31, 1997 and 1998. The failure
to continue to develop and maintain an effective internal control structure
could have a material adverse effect on the Company's business.
DEPENDENCE ON SAP, ORACLE AND PEOPLESOFT
During the years ended December 31, 1997 and 1998, approximately 56% and
52%, respectively, of the Company's revenue (including the Company's
acquisitions of the CPI Companies, the Azimuth Companies and Empower Solutions,
L.L.C. and its affiliate Empower, Inc. (the "Empower Companies"), see
"Acquisition Risks") was derived from projects in which the Company implemented
software developed by SAP. SAP is a major international German-based software
company and a leading vendor of client/server application software for business
applications. The Company's future success in its SAP-related consulting
services depends largely on its continued:
o relationship with SAP America, SAP's United States affiliate; and
o status as a SAP National Logo Partner.
The Company executed its SAP National Logo Partner Agreement in April 1997
and previously had been a SAP National Implementation Partner since 1995. In
July 1997, the Company achieved Accelerated SAP Partner Status with SAP by
meeting certain performance criteria established by SAP. Such status is awarded
by SAP on an annual basis pursuant to contract. The Company's current contract
expires on December 31, 1999 and is automatically renewed for successive
one-year periods, unless terminated by either party.
During the years ended December 31, 1997 and 1998, approximately 12% and
11%, respectively, of the Company's total revenue (including the Company's
acquisitions of the CPI Companies, the Azimuth Companies and the Empower
Companies) was derived from projects in which the Company implemented software
developed by Oracle. Oracle is a leading vendor of client/server application
software for business applications. The Company's current contract with Oracle
expires on July 26, 1999 and is automatically renewed for a successive one-year
period, unless terminated by either party. The Company expanded its relationship
with Oracle by entering into an agreement, effective October 26, 1998. The
agreement is expected to help the Company meet the demands of mid-size to large
companies using Oracle. The agreement is terminable by either party upon 30 days
notice.
Additionally, the Company has increased its PeopleSoft implementation
projects. During 1998, the Company consummated acquisitions of companies whose
practices consist primarily of PeopleSoft implementation projects which will add
to its current PeopleSoft practice. During the years ended December 31, 1997 and
1998, approximately 12% and 19%, respectively, of the Company's revenue
(including the Company's acquisitions of the CPI Companies, the Azimuth
Companies and the Empower Companies) was derived from projects in which the
Company implemented software developed by PeopleSoft. The Company's current
contract with PeopleSoft expires on July 15, 1999. In addition, the Company
acquired Empower Solutions, Inc., a PeopleSoft implementation company, in
February 1999.
- 7 -
<PAGE>
The Company has no reason to believe that its contracts with SAP, Oracle
and PeopleSoft will not be renewed or that the scope of such contracts will be
modified or limited in a manner adverse to the Company. However, there can be no
assurance that such contracts will be renewed on terms acceptable to the
Company, if at all. In addition, there could be a material adverse effect on the
Company's business if:
o SAP, Oracle or PeopleSoft are unable to maintain their respective
leadership positions within the business applications software market;
o the Company's relationship with SAP, Oracle or PeopleSoft
deteriorates; or
o SAP, Oracle or PeopleSoft elects to compete directly with the Company.
SUBSTANTIAL RELIANCE ON KEY CUSTOMERS AND INFORMATION TECHNOLOGY PARTNERS
The Company has derived and believes that it will continue to derive a
significant portion of its revenue from a limited number of customers and
projects. For the years ended December 31, 1997 and 1998, the Company's ten
largest customers accounted for in the aggregate approximately 44% and 38% of
its revenue. In 1996 PricewaterhouseCoopers LLP and Bristol-Myers Squibb each
accounted for more than 10% of revenue. During 1997, PricewaterhouseCoopers LLP
accounted for approximately 10% of revenue. During 1998, no single customer
accounted for more than 10% of revenue. For the years ended December 31, 1997
and 1998, approximately 31% and 19% of the Company's revenue was generated by
serving as a member of consulting teams assembled by other information
technology consulting firms, which also may be competitors of the Company. There
can be no assurance that such information technology consulting firms will
continue to use the Company in the future and at current levels of retention, if
at all. In addition, the amount of work performed for specific customers is
likely to vary from year to year. The loss of any large customer or project
could have a material adverse effect on the Company's business.
Most of the Company's contracts can be canceled by the customer on short
notice and without significant penalty, with the exception of fixed price
contracts. The cancellation or significant reduction in the scope of a large
contract could have a material adverse effect on the Company's business.
The Company provides services to its customers primarily on a time and
materials basis. Recently, however, the Company has bid on certain fixed price
projects. For the year ended December 31, 1998, fixed price contracts
represented 4% of the total revenues of the Company. The Company believes that,
as it pursues its strategy of making turnkey project management a larger portion
of its business, it will likely be required to offer more fixed price projects.
The Company has had limited prior experience in pricing and performing under
fixed price arrangements. There can be no assurance that the Company will be
able to complete such projects within the fixed price and required timeframes.
The failure to perform within such fixed price contracts could have a material
adverse effect on the Company's business.
- 8 -
<PAGE>
Many of the Company's engagements involve projects that are critical to the
operations of its customers' businesses and provide benefits that may be
difficult to quantify. The Company's failure or inability to meet a customer's
expectations could result in a material adverse change to the customer's
operations. Such failure could give rise to claims for damages against the
Company or cause damage to the Company's reputation. Such claims could adversely
affect the Company's business. In some of its agreements, the Company has agreed
to indemnify the customer for damages arising from services provided to, or on
behalf of, such customer. Such indemnification could have a material adverse
effect on the Company's financial condition and results of operations. In some
of its contracts, the Company warrants that it will repair errors or defects in
its deliverables without additional charge to the customer. To date, the Company
has not experienced any material claims against such warranties. The Company has
insurance for damages and expenses incurred in connection with alleged negligent
acts, errors or omissions. There can be no assurance that such insurance will
continue to be available to the Company on acceptable terms.
ACQUISITION RISKS
A key element of the Company's strategy is growth by acquisition. From May
1998 through the date of this Prospectus, the Company has completed the
following four significant acquisitions of businesses with services
complementary to those offered by the Company:
<TABLE>
<CAPTION>
Companies Acquired Primary Location Services Date
------------------ ---------------- -------- ----
<S> <C> <C> <C>
CPI Consulting Limited and United Kingdom PeopleSoft May 1998
CPI Resources Limited Implementation
Azimuth Consulting Limited, New Zealand IT Management November 1998
Azimuth Holdings Limited, Consulting
Braithwaite Richmond Limited
and Azimuth Corporation Limited
Network Publishing, Inc. Provo, Utah Web site design January 1999
and customized IT
training solutions
Empower Solutions, L.L.C. and Plymouth, PeopleSoft February 1999
Empower, Inc. Michigan Implementation
</TABLE>
The Company expects to undertake additional acquisitions in the future,
although none are planned or being negotiated as of the date of this Prospectus.
- 9 -
<PAGE>
Risks associated with acquisitions may include:
o possible adverse effects on the Company's operating results;
o diversion of management's attention;
o risks associated with unanticipated liabilities or contingencies;
o risks associated with financing;
o integration of service offerings, operations and employees of acquired
businesses; and
o management of growth issues.
HIGHLY COMPETITIVE INFORMATION TECHNOLOGY SERVICES INDUSTRY
The Company's business is highly competitive. Many of the Company's
competitors have longer operating histories, possess greater industry and name
recognition and have significantly greater financial, technical and marketing
resources. Additionally, the Company has faced, and expects to continue to face,
additional competition from new entrants into its markets.
The Company believes that competitive factors in its markets include:
Principal Factors
-----------------
o quality of service and deliverables;
o speed of development and implementation;
o price;
o project management capability; and
o technical and business expertise.
External Factors
----------------
o the ability of its competitors to hire, retain and motivate project
managers and other senior technical staff;
o the development by others of services that are competitive with the
Company's services; and
o the extent of its competitors' responsiveness to customer needs.
- 10 -
<PAGE>
The Company also believes that it competes based on its level of expertise
in SAP, Oracle, PeopleSoft and Baan products and a wide variety of other
technologies. There can be no assurance that the Company will be able to
continue to compete successfully with existing and new competitors.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW SOLUTIONS
The Company's success depends in part on its ability to develop solutions
that keep pace with:
o continuing changes in information technology;
o evolving industry standards; and
o changing customer objectives and preferences.
There can be no assurance that the Company will be successful in adequately
addressing these developments on a timely basis. Even if these developments are
addressed, the Company may not be successful in the marketplace. In addition,
competitor's products or technologies may make the Company's services less
competitive or obsolete. The Company's failure to address these developments
could have a material adverse effect on its business.
DEPENDENCE ON KEY PERSONNEL
The Company believes that its success now and in the future will depend
largely on the continued services of its key executive officers and leading
technical personnel. Each executive officer and leading technical professional
has entered into an employment agreement with the Company which contains
non-competition, non-disclosure and non-solicitation covenants. The departure of
one or more of such key personnel may have a material adverse effect on the
Company's business.
COMPETITIVE MARKET FOR TECHNICAL PERSONNEL
The Company believes that its success will depend in large part upon its
ability to attract, retain, train and motivate highly-skilled employees,
particularly project managers and other senior technical personnel. Such
qualified personnel are in great demand, there is significant competition for
such employees and it is likely that access to such personnel will remain
limited for the foreseeable future. There can be no assurance that the Company
will be successful in attracting a sufficient number of such personnel in the
future, or that it will be successful in retaining, training and motivating the
employees it is able to attract. The failure to do so could:
o impair the Company's ability to adequately manage and complete its
existing projects;
o impair the Company's ability to bid for or obtain new projects; and
o adversely affect the Company's business.
- 11 -
<PAGE>
RELIANCE ON INTELLECTUAL PROPERTY RIGHTS
The Company's future success is dependent, in part, upon its proprietary
implementation methodology and toolset, development tools and other intellectual
property rights. In order to protect its proprietary rights, the Company:
o relies upon trade secrets, nondisclosure and other contractual
arrangements;
o relies on copyright and trademark laws;
o enters into confidentiality agreements with employees, consultants and
customers;
o limits access to and distribution of its proprietary information; and
o requires almost all employees and consultants to assign to the
Company their rights in intellectual property developed during their
employment or engagement by the Company.
There can be no assurance that the steps taken by the Company will be
adequate to deter misappropriation of its proprietary information or that the
Company will be able to detect unauthorized use of and take appropriate steps to
enforce its intellectual property rights.
The Company believes that its trademarks, service marks, services,
methodology and development tools do not infringe on the intellectual property
rights of others. There can be no assurance, however, that such a claim will not
be asserted against the Company in the future, or that if asserted, any such
claim will be successfully defended.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company's international operations have been increased in recent years.
During 1997 and 1998, approximately 25% and 23% of the Company's revenues were
derived from international operations. The Company's recent acquisitions of (i)
CPI Consulting Limited and CPI Resources Limited (the "CPI Companies") and (ii)
Azimuth Consulting Limited, Azimuth Holdings Limited, Braithwaite Richmond
Limited and Azimuth Corporation Limited (the "Azimuth Companies") have resulted
and should continue to result in greater revenues being derived internationally.
To date, the Company has established or acquired foreign operations in
Australia, Denmark, India, Japan, New Zealand, the Philippines, Singapore,
Thailand and the United Kingdom. In order to expand international sales, the
Company may establish or acquire additional foreign operations. Increasing
foreign operations has required and likely will continue to require significant
management attention and financial resources and could materially adversely
affect the Company's business. Accordingly, in October 1998, the Company hired a
Managing Director of International Operations. In addition, there can be no
assurance that the Company will be able to increase international market demand
for its services. The risks in the Company's international business activities
include:
o unexpected changes in regulatory environments;
- 12 -
<PAGE>
o foreign currency fluctuations;
o tariffs and other trade barriers;
o longer accounts receivable payment cycles;
o difficulties in managing international operations;
o potential foreign tax consequences including restrictions on the
repatriation of earnings; and
o the burdens of complying with a wide variety of foreign laws and
regulations.
There can be no assurance that such factors will not have a material
adverse effect on the Company's future international sales, if any, and,
consequently, on the Company's business.
RISKS ASSOCIATED WITH OPERATIONS IN INDIA
The Company, through Intelligroup Asia Private Limited, is subject to the
risks associated with doing business in India. India's central and state
governments heavily regulate the Indian economy. In the recent past, the
government of India has provided significant tax incentives and relaxed certain
regulatory restrictions in order to encourage foreign investment in certain
sectors of the economy. Certain of these benefits that directly affect
Intelligroup Asia include:
o tax holidays;
o liberalized import and export duties; and
o preferential rules on foreign investment and repatriation.
Changes in the business, political or regulatory climate of India could
have a material adverse effect on Intelligroup Asia's business. In addition,
India has experienced significant inflation, shortages of foreign exchange and
has been subject to civil unrest. Further, the United States and Japan have
recently imposed sanctions on India in response to certain nuclear testing
conducted by the Indian government. Changes in the following factors could have
a material adverse effect on the Company's business:
o inflation;
o interest rates;
o taxation; or
o other social, political, economic or diplomatic developments affecting
India in the future.
- 13 -
<PAGE>
RISK OF INCREASED GOVERNMENT REGULATION OF IMMIGRATION
In the United States, the Company has relied and in the future expects to
continue to rely increasingly upon attracting and retaining personnel with
technical and project management skills from other countries. The Immigration
and Naturalization Service limits the number of new petitions it approves each
year. Accordingly, the Company may be unable to obtain visas necessary to bring
critical foreign employees to the United States. Any difficulty in hiring or
retaining foreign nationals in the United States could increase competition for
technical personnel and have a material adverse effect on the Company's
business.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Common Stock in the public market following this offering,
or the perception that such sales could occur, may adversely affect the market
price of the Common Stock. As of June 7, 1999, the Company had an aggregate of
15,558,751 shares of Common Stock issued and outstanding. Upon completion of
this offering, an aggregate of 10,155,030 shares, including 1,341,473 shares
issuable upon the exercise of stock options, will be freely tradable by persons
other than "affiliates" of the Company without restriction. In addition, an
aggregate of 6,484,524 shares held by the founders of the Company may be sold
pursuant to the provisions of Rule 144 (subject to volume limitations) under the
Securities Act.
Shortly after this offering, the Company intends to register an additional
750,000 shares of Common Stock (3,250,000 shares of Common Stock if the proposal
to amend the Company's 1996 Stock Plan to increase the number of shares of
Common Stock available under such plan is approved by the shareholders at the
Company's next Annual Meeting of Shareholders) issuable upon stock options
granted or to be granted under its 1996 Stock Plan. Additionally, in connection
with the Company's acquisition of Empower Solutions, L.L.C. and its affiliate
Empower, Inc. (the "Empower Companies"), the Company agreed to register an
aggregate of 1,831,091 shares of its Common Stock. Of the 1,831,091 shares,
1,648,025 shares are being registered herewith and the remainder of such shares
are anticipated to be registered no later than February 16, 2000. In addition,
the Company may be required to register additional shares of its Common Stock
which may be issued in connection with a net worth adjustment to be conducted
subsequent to the date of this Prospectus.
CONTROL BY CERTAIN SHAREHOLDERS
Upon completion of this offering, the founders of the Company, Ashok
Pandey, Rajkumar Koneru and Nagarjun Valluripalli, together will beneficially
own approximately 42% of the outstanding shares of Common Stock. As a result,
these shareholders, acting together, will be able to influence significant
control of matters requiring approval by the shareholders of the Company,
including the election of directors. Such a concentration of ownership may have
the effect of delaying or preventing a change in control of the Company,
including transactions in which shareholders might otherwise receive a premium
for their shares over then current market prices.
- 14 -
<PAGE>
CERTAIN ANTI-TAKEOVER PROVISIONS; PREFERRED STOCK
Certain Provisions of the Certificate of Incorporation and the Shareholder
Protection Rights Agreement could make it more difficult for a third party to
acquire control of the Company, even if such change in control would be
beneficial to stockholders. The Certificate of Incorporation allows the Company
to issue preferred stock without shareholder approval. Such issuances could make
it more difficult for a third party to acquire the Company.
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the shares of Common Stock has been and in the future
may be highly volatile. Some factors that may affect the market price include:
o actual or anticipated fluctuations in the Company's operating results;
o announcements of technological innovations or new commercial products
or services by the Company or its competitors;
o market conditions in the computer software and hardware industries and
IT services industry generally;
o changes in recommendations or earnings estimates by securities
analysts; and
o actual or anticipated quarterly fluctuations in financial results.
Furthermore, the stock market historically has experienced volatility which
has particularly affected the market prices of securities of many technology
companies and which sometimes has been unrelated to the operating performances
of such companies.
ABSENCE OF DIVIDENDS
The Company has never paid, and does not anticipate paying any dividends on
its Common Stock in the foreseeable future.
- 15 -
<PAGE>
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Shares offered by the Selling Shareholders set forth in this Prospectus.
SELECTED FINANCIAL DATA
The selected statement of operations data for the years ended December 31,
1996, 1997 and 1998 and the selected balance sheet data as of December 31, 1997
and 1998 are derived from and are qualified by reference to, and should be read
in conjunction with, the more detailed audited consolidated financial statements
and the related notes thereto included elsewhere herein. The selected statement
of operations data for the year ended December 31, 1994 and 1995 and the
selected balance sheet data as of December 31, 1994, 1995 and 1996 have been
derived from the financial statements of the Company which are not included
elsewhere herein. Prior period financial information has been revised to reflect
the Company's acquisitions of CPI Resources, the Azimuth Companies and the
Empower Companies, during 1998 and 1999 which were accounted for in accordance
with the pooling of interests method under generally accepted accounting
principles.
- 16 -
<PAGE>
The following should be read in conjunction with the consolidated financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus:
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
--------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................................... $19,438 $39,283 $61,699 $98,301 $162,840
Cost of sales............................... 13,528 29,263 43,142 67,452 104,984
------- ------- ------- ------- --------
Gross profit............................... 5,910 10,020 18,557 30,849 57,856
------- ------- ------- ------- --------
Selling, general and administrative
expenses.................................. 4,670 8,401 14,544 22,449 38,074
Acquisition expenses........................ -- -- -- -- 2,118
------- ------- ------- ------- --------
Total selling, general and administrative
expenses................................ 4,670 8,401 14,544 22,449 40,192
------- ------- ------- ------- --------
Operating income.......................... 1,240 1,619 4,013 8,400 17,664
Factor charges/interest expense (income),
net....................................... 463 1,327 1,335 (265) (187)
------- ------- ------- ------- --------
Income before provision for
income taxes and extraordinary
charge.................................. 777 292 2,678 8,665 17,851
Provision for income taxes.................. 409 587 748 2,327 4,451
------- ------- ------- ------- --------
Income (loss) before extraordinary charge... 368 (295) 1,930 6,338 13,400
Extraordinary charge, net of income tax
benefit of $296........................... -- -- 1,148 -- --
------- ------- ------- ------- --------
Net income (loss)........................ $ 368 $ (295) $ 782 $ 6,338 $ 13,400
======= ======= ======= ======= ========
Earnings (loss) per share(1):
Basic earnings per share:
Income (loss) before extraordinary charge $ 0.02 $ (0.02) $ 0.18 $ 0.44 $ 0.88
Extraordinary charge, net of income tax
benefit................................. -- -- 0.11 -- --
------- ------- ------- ------- --------
Net income (loss)........................ $ 0.02 $ (0.02) $ 0.07 $ 0.44 $ 0.88
======= ======= ======= ======= ========
Weighted average number of common shares -
Basic...................................... 15,011 15,011 11,003 14,457 15,207
======= ======= ======= ======= ========
Diluted earnings per share:
Income (loss) before extraordinary charge. $ 0.02 $ (0.02) $ 0.16 $ 0.42 $ 0.85
Extraordinary charge, net of income tax
benefit................................. -- -- 0.10 -- --
------- ------- ------- ------- --------
Net income (loss)........................ $ 0.02 $ (0.02) $ 0.06 $ 0.42 $ 0.85
======= ======= ======= ======= ========
Weighted average number of common shares -
Diluted.................................... 15,011 15,011 12,263 14,937 15,789
======= ======= ======= ======= ========
AS OF DECEMBER 31,
------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- ------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 1,399 $ 1,412 $ 8,301 $ 8,825 $ 4,245
Working capital surplus (deficit)......... (492) (991) 16,246 30,500 32,640
Total assets.............................. 7,599 12,571 24,945 43,064 69,565
Short-term debt, including subordinated
debentures.............................. 1,304 3,608 226 386 11
Long-term debt and obligations under
capital leases, less current portion... 141 206 108 355 60
Shareholders' equity...................... 557 128 18,280 34,036 47,949
- -------------
<FN>
(1)Basic and diluted earnings per share have replaced primary and fully diluted
earnings per share in accordance with SFAS No. 128.
</FN>
</TABLE>
- 17 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company provides a wide range of information technology services,
including management consulting, enterprise-wide business process solutions,
Internet applications services, applications outsourcing and maintenance, web
site design and customization, IT training solutions, systems integration and
custom software development based on leading technologies. The Company has grown
rapidly since 1994 when it made a strategic decision to diversify its customer
base by expanding the scope of its integration and development services and to
utilize software developed by SAP as a primary tool to implement enterprise-wide
business process solutions. In 1995, the Company achieved the status of a SAP
National Implementation Partner. In the same year, the Company also began to
utilize Oracle's ERP application products to diversify its service offerings. In
1997, the Company enhanced its partner status with SAP, by first achieving
National Logo Partner status and then AcceleratedSAP Partner Status. Also, in
1997, the Company further diversified its ERP-based service offerings, by
beginning to provide PeopleSoft and Baan implementation services. In July 1997,
the Company was awarded PeopleSoft implementation partnership status. In
September 1997, the Company was awarded Baan international consulting
partnership status. 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.
During 1998, the Company expanded its operations through 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. The value of the
liability has been determined as of December 31, 1998 to be $2.5 million, which
is payable by the issuance of an additional 155,208 shares of the Company's
Common Stock. Such shares were issued by the Company on March 22, 1999. The
excess of the purchase price over the fair value of the net assets acquired was
attributed to intangible assets, amounting in the aggregate to $5.8 million.
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 results for all periods 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.
The CPI Companies provide consulting and implementation services related to
PeopleSoft applications.
On November 25, 1998, the Company consummated the acquisition of all of the
outstanding capital stock of each of Azimuth Consulting Limited, Azimuth
Holdings Limited,
- 18 -
<PAGE>
Braithwaite Richmond Limited and Azimuth Corporation Limited (collectively the
"Azimuth Companies"). The acquisition of the Azimuth Companies was accounted for
as a pooling of interests. Prior results for all periods have been restated in
accordance with pooling of interests accounting. As consideration for this
acquisition, the Company issued 902,928 shares of the Company's Common Stock.
The Azimuth Companies provide business and management consulting services.
Founded in 1984, Azimuth has built a strong IT management consulting
organization with operations in New Zealand, Australia, the Philippines and
Southeast Asian countries.
In January 1999, in order to augment the Internet/Advanced Technology
Practice, the Company acquired the outstanding capital stock of NPI located in
Provo, Utah. The purchase price included an initial cash payment in the
aggregate of $1,800,000 together with a cash payment of $200,000 to be held in
escrow. In addition, the purchase price included an earn-out payment of up to
$2,212,650 in restricted shares of the Company's Common Stock payable on or
before April 15, 2000 and a potential lump sum cash payment of $354,024 payable
no later than March 31, 2000. This acquisition has been accounted for in 1999
under the purchase method of accounting. NPI provides web site design and
front-end application solutions services. NPI has built a strong track record in
designing web-sites that enable clients to achieve the desired sales and
marketing impact.
In addition, by way of merger, the Company augmented its PeopleSoft
practice in North America by acquiring the Empower Companies located in
Plymouth, Michigan on February 16, 1999. The acquisition of the Empower
Companies has been accounted for as pooling of interest. Prior results for all
periods have been restated in accordance with pooling of interests accounting.
Founded in 1997, the Empower Companies provide business process reengineering,
system design and development, project management and training services. The
purchase price consisted of the issuance of an aggregate of 1,831,091 restricted
shares of the Company's Common Stock. The Company may be required to issue
additional shares of its restricted Common Stock in connection with a net worth
adjustment determined as of the closing date, as defined.
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. For the year
ended December 31, 1998, revenues
- 19 -
<PAGE>
derived from projects under fixed price contracts represented approximately 5%
of the Company's total revenue. No single fixed price project was material to
the Company's business during 1998. However, one fixed price project, which
began late in 1998, is expected be material to the Company during 1999. The
Company believes that, as it pursues its strategy of making turnkey project
management a larger portion of its business, it will continue to offer fixed
price projects. The Company has had limited prior experience in pricing and
performing under fixed price arrangements and believes that there are certain
risks related thereto and thus prices such arrangements to reflect the
associated risk. There can be no assurance that the Company will be able to
complete such projects within the fixed price timeframes. The failure to perform
within such fixed price contracts, if entered into, could have a material
adverse effect on the Company's business.
The Company has derived and believes that it will continue to derive a
significant portion of its revenue from a limited number of customers and
projects. For the years ended December 31, 1996, 1997 and 1998, the Company's
ten largest customers accounted for in the aggregate, approximately 50%, 44% and
38% of its revenue, respectively. In 1996 PricewaterhouseCoopers LLP and
Bristol-Myers Squibb each accounted for more than 10% of revenue. During 1997,
PricewaterhouseCoopers LLP accounted for approximately 10% of revenue. During
1998, no customer accounted for more than 10% of revenue. For the years ended
December 31, 1996, 1997 and 1998, 34%, 31% and 19%, respectively, of the
Company's revenue was generated by serving as a member of consulting teams
assembled by other information technology consulting firms. There can be no
assurance that such information technology consulting firms will continue to
engage the Company in the future at current levels of retention, if at all.
During the years ended December 31, 1996, 1997 and 1998, 57%, 56% and 52%,
respectively, of the Company's total revenue was derived from projects in which
the Company implemented software developed by SAP. For the years ended December
31, 1997 and 1998, approximately 12% and 11% of the Company's total revenue was
derived from projects in which the Company implemented software developed by
Oracle. For each of the years ended December 31, 1998, 1997 and 1996,
approximately 19%, 12% and 9%, respectively, of the Company's total revenue was
derived from projects in which the Company implemented software developed by
PeopleSoft. During the year ended December 31, 1998, approximately 58% of the
Company's revenue was derived from engagements at which the Company had project
management responsibilities, compared to 31% and 12% during the years ended
December 31, 1997 and 1996, respectively.
The Company's most significant cost is project personnel expenses, which
consist of consultant salaries, benefits and payroll-related expenses. Thus, the
Company's financial performance is based primarily upon billing margin (billable
hourly rate less the cost to the Company of a consultant on an hourly basis) and
personnel utilization rates (billable hours divided by paid hours). The Company
believes that turnkey project management assignments typically carry higher
margins. The Company has been shifting to such higher-margin turnkey management
assignments and more complex projects by leveraging its reputation, existing
capabilities, proprietary implementation methodology, development tools and
offshore development capabilities with expanded sales and marketing efforts and
new service offerings to develop turnkey project sales opportunities with both
new and existing customers. The Company's inability
- 20 -
<PAGE>
to continue its shift to higher-margin turnkey management assignments and more
complex projects may adversely impact the Company's future growth.
Since late 1994, the Company has made substantial investments in its
infrastructure in order to support its rapid growth. For example, in 1994, the
Company established and funded an operations facility in India, the Advance
Development Center (the "ADC"), and in 1995 established a sales office in
California. In addition, from 1994 to date, the Company has incurred expenses to
develop proprietary development tools and its proprietary accelerated
implementation methodology and toolset. Since 1995, the Company has also been
increasing its sales force and its marketing, finance, accounting and
administrative staff, in order to manage its growth. The Company currently
maintains its headquarters in Edison, New Jersey, and branch offices in Chicago,
Detroit, Foster City (California), Reston (Virginia), Edison (New Jersey),
Dallas, Atlanta, Phoenix and Washington, D.C. The Company also currently
maintains offices in Europe (the United Kingdom, Denmark, and Belgium), and Asia
Pacific (Australia, India, New Zealand, the Philippines, and Singapore). The
Company leases its headquarters in Edison, New Jersey, totaling approximately
48,475 square feet. Such lease has an initial term of ten (10) years, which
commenced in September 1998. In October 1998, the Company finalized an agreement
to sublet the space used for its prior headquarters for the remainder of the
term of its sublease, which expires November 15, 1999.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data expressed as a percentage of total revenue:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
---------------------
YEAR ENDED
DECEMBER 31,
------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenue.......................................... 100.0% 100.0% 100.0%
Cost of sales.................................... 64.5 68.6 69.9
------- ------- -------
Gross profit................................... 35.5 31.4 30.1
Selling, general and administrative expenses..... 23.4 22.8 23.6
Acquisition expenses............................. 1.3 -- --
------- ------- -------
Operating income............................... 10.8 8.6 6.5
Interest and other (expense) income, net......... 0.1 0.3 (2.2)
------- ------- -------
Income before provision for income taxes and
extraordinary charge........................... 10.9 8.9 4.3
Provision for income taxes....................... 2.7 2.4 1.2
------- ------- -------
Income before extraordinary charge............... 8.2 6.5 3.1
Extraordinary charge, net of income tax benefit.. -- -- 1.8
------- ------- -------
Net income .................................... 8.2 6.5 1.3
======= ======= =======
</TABLE>
- 21 -
<PAGE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue. Revenue increased by 65.7% or $64.5 million, from $98.3 million in
1997 to $162.8 million in 1998. This increase was attributable primarily to
increased demand for the Company's ERP implementation consulting services and,
to a lesser extent, to increased demand for the Company's systems integration
and Internet 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 55.6%, or $37.5 million, from $67.5 million
in 1997 to $105.0 million in 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 87.5%, or $27.0 million, from $30.8 million in 1997 to $57.9
million in 1998. Gross profit margin increased from 31.4% of revenue in 1997 to
35.5% of revenue in 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 consist primarily of administrative salaries, and
related benefits costs, occupancy costs, sales person compensation, travel and
entertainment, costs associated with the ADC and related development costs and
professional fees. Selling, general and administrative expenses increased by
69.6%, or $15.6 million, from $22.4 million in 1997 to $38.1 million in 1998,
and increased as a percentage of revenue from 22.8% to 23.4%, respectively. 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. The
Company's occupancy costs increased as a result of the relocation of its
corporate headquarters into approximately 48,000 square feet of office space,
from its former location which consisted of approximately 17,000 square feet. 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.
Acquisition expense. During the year ended 1998, the Company incurred costs
of $2,118,000 in connection with the acquisitions of the CPI Companies and the
Azimuth Companies, each of which was accounted for as a pooling of interests.
These costs primarily consisted of professional fees associated with such
acquisitions.
Provision for income taxes. The Company's effective income tax rate was 24%
and 27% for the years ended December 31, 1998 and 1997. During 1997, the Company
reduced its valuation allowance by $207,000 as management determined that it was
more likely than not, that the applicable portion of the net deferred tax asset
would be or had been realized. The 1997 valuation allowance reduction favorably
impacted the effective income tax rate by 3%. In 1996, the Company elected a
five year tax holiday in India in accordance with a local tax incentive
- 22 -
<PAGE>
program whereby no income tax will be due during such period. For the year ended
December 31, 1998 and 1997, the tax holiday favorably impacted the effective tax
rate by approximately 7% and 6%, respectively. Based on current and anticipated
profitability, management believes all net deferred tax assets are more likely
than not to be realized.
As discussed in Note 11 to the consolidated financial statements, on
February 16, 1999, the Company acquired Empower Solution, L.L.C. and Empower,
Inc. (a corporation organized under subchapter S of the Internal Revenue Code).
The acquisitions were accounted for as poolings of interests and thus prior year
financial statements have been restated in accordance with the pooling of
interests rules. The Empower Companies were pass-through entities for tax
reporting purposes, thus their income was not taxed at the corporate level.
Accordingly, the Company's federal statutory tax rate was reduced by 13% and 6%
for 1998 and 1997, respectively.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenue. Revenue increased by 59.3%, or $36.6 million, from $61.7 million
in 1996 to $98.3 million in 1997. This increase was attributable primarily to
increased demand for the Company's SAP related implementation consulting
services and, to a lesser extent, to increased demand for the Company's systems
integration and custom software development services.
Gross profit. The Company's cost of sales increased by 56.3%, or $24.3
million, from $43.1 million in 1996 to $67.4 million in 1997. The increase was
due to increased personnel costs resulting from the hiring of additional
consultants to support the increase in demand for the Company's services. The
Company's gross profit increased by 66.2%, or $12.3 million, from $18.6 million
in 1996 to $30.8 million in 1997. Gross profit margin increased from 30.1% of
revenue in 1996 to 31.4% of revenue in 1997. The increase in such gross profit
margin was attributable to the increase in implementation services projects and
a combination of improved billing margins, greater consultant utilization and
achieving certain customer performance incentives.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 54.4%, or $7.9 million, from $14.5 million
in 1996 to $22.4 million in 1997, and decreased as a percentage of revenue from
23.6% to 22.8%, respectively. The increases in such expenses in absolute dollars
were due primarily to the expansion of the Company's sales and marketing
activities in 1997 and increased travel and entertainment expenses due to the
growth of the business and the employee base. Such expenses were increased to
support the continued revenue growth of the Company in the United States and
abroad. In addition, such expenses increased due to increased sales and
management recruiting costs, support services, and an increase in the provision
for doubtful accounts.
Factor fees/Interest (income) expense, net. Factor fees in the 1996 period
were the charges incurred by the Company to finance its accounts receivable. On
October 10, 1996, the Company repaid the factor with a portion of the proceeds
from the Company's initial public offering, approximately $4.4 million,
consisting of all amounts outstanding under the agreement with its factor and
terminated its factor agreement. Subsequent to the Company's initial public
offering, interest income has been earned on interest bearing cash accounts and
short term investments.
- 23 -
<PAGE>
Provision for Income Taxes. The Company's effective income tax rate was 27%
and 28% for the years ended December 31, 1997 and 1996. During 1997 and 1996,
the Company reduced their valuation allowance by $207,000 and $461,000,
respectively as management determined that it was more likely than not, that the
applicable portion of the net deferred tax asset would be or had been realized.
The 1997 and 1996 valuation allowance reduction favorably impacted the effective
income tax rate by 3% and 14%, respectively. In 1996, the Company elected a five
year tax holiday in India in accordance with a local tax incentive program
whereby no income tax will be due during such period. For the year ended
December 31, 1997, the tax holiday favorably impacted the effective tax rate by
approximately 6%. There was no significant impact for 1996. Based on current and
anticipated profitability, management believes all net deferred tax assets are
more likely than not to be realized.
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 prior to 1998 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 $4.2 million at December 31,
1998 and $8.8 million at December 31, 1997. The Company had working capital of
$32.6 million at December 31, 1998 and $30.5 million at December 31, 1997.
Cash provided by operating activities was $6.1 million during the year
ended December 31, 1998, resulting primarily from net income of $13.4 million
during the year ended December 31, 1998, an increase of $8.2 million in accounts
payable, accrued payroll and accrued expenses, offset by an increase of $16.8
million in accounts receivable and unbilled services. Cash used in operating
activities for the years ended December 31, 1997 and 1996 was $6.6 million and
$4.6 million, respectively.
In accordance with investment guidelines approved by the Company's Board of
Directors, cash balances in excess of those required to fund operations have
been invested in short-term U.S. Treasury securities and commercial paper with a
credit rating no lower than A1/P1.
The Company invested $7.1 million, $2.4 million and $1.0 million in
computer equipment and office furniture and fixtures in 1998, 1997 and 1996,
respectively. The increase reflects purchases of computer and telecommunications
equipment for consultants and administrative staff and office furniture and
fixtures related to the Company's new headquarters in Edison, New Jersey, and
other offices opened during 1998.
- 24 -
<PAGE>
During 1996 the Company's factoring agreement required that the Company
offer all of its trade accounts receivable to the factor for financing; however,
the factor was under no obligation to accept any or all of such receivables. For
a variety of reasons, including the rapid growth of the Company, the lack of
available tangible security to utilize as collateral and the absence of
historical operating profits prior to 1996, the Company was unable to obtain
more traditional financing. On October 10, 1996, the Company repaid
approximately $4.4 million consisting of all amounts outstanding under the
agreement with the factor and terminated the factoring agreement.
In March 1996, in anticipation of the debenture financing described below,
the Company obtained a $750,000 line of credit, payable on demand, from a bank.
The line of credit carried interest at the federal funds rate plus 1%.
Borrowings under the line totaled $200,000 at March 31, 1996 and $300,000 in
April 1996, when the Company repaid all amounts outstanding under such line in
connection with the debenture financing described below. The line of credit has
been terminated in accordance with the terms of such debenture financing.
In April 1996, the Company issued and sold five-year 9% subordinated
debentures in the aggregate principal amount of $6.0 million to Summit Ventures
IV, L.P. and Summit Investors III, L.P. The subordinated debentures were issued
to raise funds for working capital and general corporate purposes, to repurchase
from the then-current shareholders, Messrs. Pandey, Koneru and Valluripalli, an
aggregate of 4,881,066 shares of Common Stock for an aggregate of $1.5 million,
to repay approximately $300,000 outstanding under a $750,000 credit facility and
to satisfy approximately $358,000 of cash overdrafts. Upon receipt of the net
proceeds from the Company's initial public offering in October 1996, the Company
prepaid approximately $6.3 million, representing all amounts outstanding under
such debentures, including interest.
Subsequent to December 31, 1995, the Company determined that it had
unrecorded and unpaid federal and state payroll-related taxes for certain
employees. As a result of the Company's voluntary disclosure to the Internal
Revenue Service of certain unpaid tax liabilities, on June 5, 1996, the Company
received an audit assessment from the Internal Revenue Service for unpaid 1994
and 1995 federal income tax withholding, FICA and FUTA taxes in the aggregate
amount of approximately $800,000 which was paid in full in August 1996. No
interest or penalties were assessed. Reserves, aggregating $1.0 million,
including the amount of the Internal Revenue Service audit assessment, were
recorded at December 31, 1995. No assurance may be given, however, that
interest, penalties or additional state or federal taxes will not be assessed in
the future. The Company's principal shareholders, Messrs. Pandey, Koneru and
Valluripalli, have agreed to indemnify the Company for any and all losses which
the Company may sustain, in excess of the $1.0 million reserve, net of any tax
benefits realized by the Company, arising from or relating to federal or state
tax, interest or penalty payment obligations resulting from the above subject
matter. The Company believes that its failure to record and pay 1994 and 1995
federal and state payroll-related taxes for certain employees resulted from a
combination of factors, including lack of internal controls and lack of
financial expertise and oversight.
From January 1997 until January 1999, the Company had a credit facility
with a bank, which included a revolving line of credit and a component for
equipment term loans. As of December 31, 1998, there were no amounts outstanding
under the revolving line of credit and no equipment term loans outstanding.
On January 29, 1999, the Company entered into an unsecured three-year $30
million Revolving Credit Loan Agreement (the "Loan Agreement") with PNC Bank
(the "Bank").
- 25 -
<PAGE>
Subject to certain post-closing conditions, the proceeds of the credit facility
may be used by the Company for financing acquisitions and general corporate
purposes. At the Company's option, for each loan, interest shall be computed
either at the Bank's prime rate per annum or the Adjusted Libo Rate plus the
Applicable Margin, as such terms are defined in the Loan Agreement. The
Company's obligations under the credit agreement are payable at the expiration
of such facility on January 29, 2002.
The Company believes that its available funds, together with current credit
arrangements and the cash flow expected to be generated from operations, will be
adequate to satisfy its current and planned operations for at least the next 12
months.
RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997.
This statement is effective for the Company's fiscal year ending December 31,
1998. This statement addresses the reporting and displaying of comprehensive
income and its components. Adoption of SFAS No. 130 relates to disclosure within
the financial statements and is not expected to have a material effect on the
Company's consolidated financial statements. The Company adopted the provisions
of SFAS No. 130 on January 1, 1998.
SFAS No. 131, "Disclosures about Segments of and Enterprise and Related
Information" was issued in June 1997. This statement is effective for the
Company's fiscal year ending December 31, 1998. This statement changes the way
public companies report information about segments of their business in their
annual financial statements and requires them to report selected segment
information in their quarterly reports. The Company adopted the provisions in
1998.
In April, 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities." The SOP requires all costs incurred as start-up costs or
organization costs be expenses as incurred. Adoption of the SOP is required for
fiscal years beginning after December 15, 1998. The Company does not believe
that the new standard will have a material impact on the Company's consolidated
financial statements.
In March, 1998, the Accounting Standards Executive Committee issued SOP
98-1. Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This SOP required that computer software costs that are incurred
in the preliminary project stage be expensed as incurred and that criteria be
met before capitalization of costs to develop or obtain internal use computer
software. Adoption of the SOP is required for fiscal years beginning after
December 15, 1998. The Company does not believe that the new standard will have
a material impact on the Company's consolidated financial statements.
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
- 26 -
<PAGE>
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. Based upon its assessment,
the Company has established no reserve nor instituted any contingency plans.
However, 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 was introduced on January 1, 1999, at which time the eleven
participating EMU member countries established 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.
SELLING SHAREHOLDERS
The Shares to be offered under this Prospectus are owned by David Anthony
Stott, Alexander Graham Wilson, Bandele Attah, Paul Grant, Michael J. Hirst,
Richard M. Lucy, Christopher J.J. Smith, Robert Wilson, Patrick J. Kavanaugh,
Kurt A. Collins, Marcelo J. Casas and Jay D. Hiller. Messrs. Stott and A. Wilson
acquired their Shares in connection with the acquisition by the Company of their
equity interests in each of Azimuth Consulting Limited, Azimuth Holdings
Limited, Braithwaite Richmond Limited and Azimuth Corporation Limited,
- 27 -
<PAGE>
pursuant to the terms of an Agreement of Purchase and Sale dated as of November
25, 1998, among the Company and Messrs. Stott and A. Wilson. Pursuant to the
terms of such agreement, the Company is required to file a registration
statement covering the Shares held by Messrs. Stott and A. Wilson with the SEC.
Messrs. Attah, Grant, Hirst, Lucy, Smith and R. Wilson acquired their Shares in
connection with the acquisition by the Company, through its wholly-owned
subsidiary, of their equity interests in CPI Consulting Limited, pursuant to the
terms of an Agreement of Purchase and Sale dated as of May 7, 1998, among the
Company, the Company's wholly-owned subsidiary and Messrs. Attah, Grant, Hirst,
Lucy, Smith and R. Wilson. Pursuant to the terms of such agreement, the Company
is required to file a registration statement covering the Shares held by Messrs.
Attah, Grant, Hirst, Lucy, Smith and R. Wilson with the SEC. Messrs. Kavanaugh,
Collins, Casas and Hiller acquired their Shares in connection with the
acquisition by the Company of their equity interests in the Empower Companies,
pursuant to the terms of an (i) Agreement and Plan of Merger dated February 16,
1999, among the Company, ES Merger Corp., Empower Solutions, L.L.C. and Messrs.
Kavanaugh, Collins, Casas and Hiller; and (ii) Agreement and Plan of Merger
dated February 16, 1999, among the Company, ES Merger Corp., Empower, Inc. and
Messrs. Kavanaugh and Collins. Pursuant to that certain Registration Rights
Agreement dated as of February 16, 1999, among the Company and Messrs.
Kavanaugh, Collins, Casas and Hiller, the Company is required to file a
registration statement covering the Shares held by Messrs. Kavanaugh, Collins,
Casas and Hiller.
The following table sets forth, as of June 7, 1999, certain information
with respect to the Selling Shareholders.
<TABLE>
<CAPTION>
Number of
Beneficial Ownership of Shares Beneficial
Name of Selling Shareholders Offered Ownership of Shares
Selling Shareholders Prior to Offering(1) Hereby(2) After Offering(2)
- ------------------------------------ ----------------------- ----------- --------------------
Number Percent Number Percent
------ ------- ------ -------
<S> <C> <C> <C>
David Anthony Stott 451,464(3) 2.9 451,464 -- --
Alexander Graham Wilson 451,464(3) 2.9 451,464 -- --
Bandele Attah 54,234(4) * 12,934 41,300 *
Paul Grant 54,234(4) * 12,934 41,300 *
Michael J. Hirst 53,734(5) * 12,934 40,800 *
Richard M. Lucy 54,234(4) * 12,934 41,300 *
Christopher J.J. Smith 54,234(4) * 12,934 41,300 *
Robert J. Wilson 41,734(4) * 12,934 28,800 *
Patrick J. Kavanaugh 676,364(6) 4.3 608,749 67,615 *
Kurt A. Collins 676,364(6) 4.3 608,749 67,615 *
Marcelo J. Casas 282,692(7) 1.8 254,423 28,269 *
Jay D. Hiller 195,671(8) 1.2 176,104 19,567 *
- ---------------
* Less than one percent
<FN>
(1) Applicable percentage of ownership is based on 15,558,751 shares of Common
Stock issued and outstanding.
(2) Assumes that all Shares are sold pursuant to this offering and that no
other shares of Common Stock are acquired or disposed of by the Selling
Shareholders prior to the termination of this offering. Because the Selling
Shareholders may sell all, some or none of their Shares or may acquire or
dispose of other shares of Common Stock, no reliable estimate can be made
of the aggregate number of Shares that will be sold pursuant to this
offering or the number or percentage of shares of Common Stock that each
Selling Shareholder will own upon completion of this offering.
</FN>
- 28 -
<PAGE>
<FN>
(3) Includes, as to each such Selling Shareholder, 45,147 shares held in escrow
pending settlement of any claims relating to the acquisition of the Azimuth
Companies by the Company and expiration of the escrow agreement on November
25, 1999. Such Selling Shareholder does not hold any common stock
equivalents of the Company.
(4) Such number includes 27,616 shares held by Messrs. Attah, Grant, Lucy and
Smith and 15,116 shares held by Mr. Wilson which were previously registered
on a Registration Statement on Form S-3 (Registration No. 333-56143) and
filed with the Securities and Exchange Commission on June 5, 1998. Also
includes 750 shares subject to options granted pursuant to the Company's
1996 Stock plan which are exercisable within 60 days from June 7, 1999.
Does not include options to purchase 2,250 shares of Common Stock granted
to such holder pursuant to the Company's 1996 Stock Plan exercisable after
such date.
(5) Such number includes 25,616 shares held by Mr. Hirst which were previously
registered on a Registration Statement on Form S-3 (Registration Statement
No. 333-56143) and filed with the Securities and Exchange Commission on
June 5, 1998. Also includes 1,500 shares purchased on the open market and
750 shares subject to options granted pursuant to the Company's 1996 Stock
plan which are exercisable within 60 days from June 7, 1999. Does not
include options to purchase 2,250 shares of Common Stock granted to such
holder pursuant to the Company's 1996 Stock Plan exercisable after such
date.
(6) Includes, as to each such Selling Shareholder, 67,615 shares held in escrow
pending settlement of any claims relating to the acquisition of the Empower
Companies by the Company and expiration of the escrow agreement on February
16, 2000. Such Selling Shareholder does not hold any common stock
equivalents.
(7) Includes, as to such Selling Shareholder, 28,269 shares held in escrow
pending settlement of any claims relating to the acquisition of the Empower
Companies by the Company and expiration of the escrow agreement on February
16, 2000. Such Selling Shareholder does not hold any common stock
equivalents.
(8) Includes, as to such Selling Shareholder, 19,567 shares held in escrow
pending settlement of any claims relating to the acquisition of the Empower
Companies by the Company and expiration of the escrow agreement on February
16, 2000. Such Selling Shareholder does not hold any common stock
equivalents.
</FN>
</TABLE>
All offering expenses are being paid by the Company except the fees and
expenses of any counsel and other advisors that the Selling Shareholders may
employ to represent them in connection with the offering and all brokerage or
underwriting discounts or commissions paid to broker-dealers in connection with
the sale of the Shares.
PLAN OF DISTRIBUTION
The Selling Shareholders have not advised the Company of any specific plan
for distribution of the Shares offered hereby, but it is anticipated that the
Shares will be sold from time to time by the Selling Shareholders or by
pledgees, donees, transferees or other successors in interest. Such sales may be
made over-the-counter on the Nasdaq National Market at prices and at terms then
prevailing or at prices related to the then current market price, or in
negotiated transactions. The Shares may be sold by one or more of the following:
(i) a block trade in which the broker or dealer so engaged will attempt to sell
the Shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction; (ii) purchases by a broker or dealer
for its account pursuant to this Prospectus; or (iii) ordinary brokerage
transactions and transactions in which the broker solicits purchases. In
effecting sales, brokers or dealers engaged by the Selling Shareholders may
arrange for other brokers or dealers to participate. Brokers or dealers will
receive commissions or discounts from the Selling Shareholders in amounts to be
negotiated immediately prior to the sale. Such brokers or dealers and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales, and any commissions
received by them and any profit realized by them on the resale of Shares as
principals may be deemed underwriting compensation under the Securities Act. The
expenses of preparing this Prospectus and the related Registration Statement
with the Commission will be paid by the Company. Shares of Common Stock covered
by this Prospectus also may qualify to be sold pursuant to Rule 144 (subject to
the holding periods
- 29 -
<PAGE>
thereunder) under the Securities Act, rather than pursuant to this Prospectus.
The Selling Shareholders have been advised that they are subject to the
applicable provisions of the Exchange Act, including without limitation, Rules
10b-5 and Regulation M thereunder.
LEGAL MATTERS
The validity of the Shares of Common Stock offered hereby will be passed
upon for the Company by Buchanan Ingersoll Professional Corporation, 500 College
Road East, Princeton, New Jersey.
EXPERTS
The consolidated financial statements included in this Prospectus and
elsewhere in the Registration Statement to the extent and for the periods
indicated in their report have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said report.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 14A:3-5 of the New Jersey Business Corporation Act permits each New
Jersey business corporation to indemnify its directors, officers, employees and
agents against expenses and liabilities in connection with:
o any proceeding involving such persons by reason of his or her serving
or having served in such capacities; or
o each such person's acts taken in such capacity if such actions were
taken in good faith and in a manner which he or she reasonably
believed to be in or not opposed to the best interests of the
corporation.
With respect to any criminal proceeding, indemnity is permitted if such
person had no reasonable cause to believe his or her conduct was unlawful,
provided that any such proceeding is not by or in the right of the corporation.
Section 14A:2-7(3) of the New Jersey Business Corporation Act enables a
corporation in its certificate of incorporation to limit the liability of
directors and officers of the corporation to the corporation or its
shareholders. Specifically, the certificate of incorporation may provide that
directors and officers of the corporation will not be personally liable for
money damages for breach of a duty as a director or an officer, except for
liability for:
o any breach of the director's or officer's duty of loyalty to the
corporation or its shareholders;
o acts or omissions not in good faith or which involve a knowing
violation of law; or
o any transaction from which the director or officer derived an improper
personal benefit.
- 30 -
<PAGE>
The Company's Certificate of Incorporation limits the liability of its
directors and officers as authorized by Section 14A:2-7(3). The affirmative vote
of the holders of at least 80% of the voting power of all outstanding shares of
the capital stock of the Company is required to amend such provisions.
Article 11 of the Registrant's Amended and Restated By-laws specifies that
the Company shall indemnify its directors and officers to the extent such
parties are involved in or made a party to any action, suit or proceeding
because he or she was a director or officer of the Company. The Company has
agreed to indemnify such parties for their actual and reasonable expenses if
such party:
o acted in good faith and in a manner he or she reasonably believed to
be in the best interests of the Company; and
o had no reasonable cause to believe his or her conduct was unlawful.
This provision of the By-laws is deemed to be a contract between the
Company and each director and officer who serves in such capacity at any time
while such provision and the relevant provisions of the New Jersey Business
Corporation Act are in effect. Any repeal or modification shall not offset any
action, suit or proceeding brought or threatened based in whole or in part upon
any such state of facts. The affirmative vote of the holders of at least 80% of
the voting power of all outstanding shares of capital stock of the Company is
required to adopt, amend or repeal such provision of the By-laws.
The Company has executed indemnification agreements with each of its
directors and executive officers. Such agreements require the Company to
indemnify such parties to the full extent permitted by law, subject to certain
exceptions, if such party becomes subject to an action because such party is a
director, officer, employee, agent or fiduciary of the Company.
The Company has liability insurance for the benefit of its directors and
officers. The insurance covers claims against such persons due to any breach of
duty, neglect, error, misstatement, misleading statement, omission or act done.
The insurance covers such claims, except as prohibited by law, or otherwise
excluded by such insurance policy.
SECURITIES AND EXCHANGE COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
- 31 -
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants............................ F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998
and 1997.. ......................................................... F-3
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996.................................... F-4
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1998, 1997 and 1996.................... F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996.............................. F-6
Notes to Consolidated Financial Statements.......................... F-7
Financial Statement Schedules
Financial Statement Schedules required by the Securities and Exchange
Commission have been omitted as the required information is included
in the Notes to the Consolidated Financial Statements or are not
applicable.
F - 1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Intelligroup, Inc.:
We have audited the accompanying consolidated balance sheets of
Intelligroup, Inc. (a New Jersey corporation) and subsidiaries as of December
31, 1998 and 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Intelligroup, Inc. and its
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
May 7, 1999
F - 2
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
-------------- ------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................... $ 4,245,000 $ 8,825,000
Accounts receivable, less allowance for doubtful
accounts of $1,053,000 and $799,000 at December 31,
1998 and 1997, respectively............................... 33,622,000 21,065,000
Unbilled services......................................... 10,842,000 7,840,000
Deferred tax asset........................................ 808,000 404,000
Other current assets...................................... 4,197,000 790,000
------------ ------------
Total current assets.................................... 53,714,000 38,924,000
Property and equipment, net................................. 9,506,000 3,781,000
Costs in excess of fair value of net assets acquired, net... 5,629,000 --
Other assets................................................. 716,000 359,000
------------ ------------
$ 69,565,000 $ 43,064,000
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................ $ 5,347,000 $1,960,000
Accrued payroll and related taxes........................... 6,254,000 3,569,000
Accrued expenses and other liabilities...................... 2,999,000 1,430,000
Accrued acquisition costs................................... 3,302,000 --
Income taxes payable........................................ 3,160,000 1,079,000
Current portion of long term debt and
obligations under capital leases.......................... 11,000 386,000
------------ ------------
Total current liabilities............................... 21,073,000 8,424,000
------------ ------------
Long term debt and obligations under capital
leases, less current portion................................ 60,000 355,000
------------ ------------
Deferred income taxes........................................ 483,000 171,000
------------ ------------
Minority interest............................................ -- 78,000
------------ ------------
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, 15,393,000 and 15,083,000
shares issued and outstanding at December 31,
1998 and 1997, respectively............................... 154,000 151,000
Additional paid-in capital.................................. 35,263,000 30,814,000
Retained earnings........................................... 13,077,000 3,170,000
Currency translation adjustments............................ (545,000) (99,000)
------------ ------------
Total shareholders' equity ............................. 47,949,000 34,036,000
------------ ------------
$ 69,565,000 $ 43,064,000
============ ===========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
</TABLE>
F - 3
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Revenue.......................................... $ 162,840,000 $ 98,301,000 $ 61,699,000
Cost of sales.................................... 104,984,000 67,452,000 43,142,000
------------- ------------- -------------
Gross profit................................ 57,856,000 30,849,000 18,557,000
------------- ------------- -------------
Selling, general and administrative expenses..... 38,074,000 22,449,000 14,544,000
Acquisition expenses............................. 2,118,000 -- --
------------- ------------- -------------
Total selling, general and administrative
expenses.................................... 40,192,000 22,449,000 14,544,000
------------- ------------- -------------
Operating income................................. 17,664,000 8,400,000 4,013,000
------------- ------------- -------------
Other expenses:
Interest (income) expense, net................. (187,000) (265,000) 336,000
Factor charges................................. -- -- 999,000
------------- ------------- -------------
(187,000) (265,000) 1,335,000
------------- ------------- -------------
Income before provision for income taxes and
extraordinary charge.......................... 17,851,000 8,665,000 2,678,000
Provision for income taxes..................... 4,451,000 2,327,000 748,000
------------- ------------- -------------
Income before extraordinary charge............. 13,400,000 6,338,000 1,930,000
Extraordinary charge-Loss on early
extinguishment of debt, net of income tax
benefit of $296,000........................... -- -- 1,148,000
------------- ------------- -------------
Net income..................................... $ 13,400,000 $ 6,338,000 $ 782,000
============= ============= =============
Earnings per share:
Basic earnings per share:
Income before extraordinary charge.......... $ 0.88 $ 0.44 $ 0.18
Extraordinary charge, net of income tax
benefit..................................... -- -- (0.11)
------------- ------------- -------------
Net income per share...................... $ 0.88 $ 0.44 $ 0.07
Weighted average number of common shares -
Basic...................................... 15,207,000 14,457,000 11,003,000
============= ============= =============
Diluted earnings per share:
Income before extraordinary charge............. $ 0.85 $ 0.42 $ 0.16
Extraordinary charge, net of income tax
benefit........................................ -- -- (0.10)
------------- ------------- -------------
Net income per share...................... $ 0.85 $ 0.42 $ 0.06
============= ============= =============
Weighted average number of common shares -
Diluted...................................... 15,789,000 14,937,000 12,263,000
============= ============= =============
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
F - 4
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Cumulative
Retained Foreign Comprehensive
Common Stock Additional Earnings Currency Total Income
------------ Paid-in (Accumulated Translation Shareholders' for the
Shares Amount Capital Deficit) Adjustments Equity Period
------ ------ ------- -------- ----------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995...... 15,298,000 $153,000 $ 639,000 $ (719,000) $ 17,000 $ 90,000 --
Repurchase and retirement of
common stock..................... (4,881,000) (49,000) -- (1,451,000) -- (1,500,000) --
Issuance of common stock, net of
related costs..................... 2,050,000 20,000 17,815,000 -- -- 17,835,000 --
Exercise of warrants.............. 1,364,000 14,000 1,386,000 -- -- 1,400,000 --
Currency transactions
adjustments....................... -- -- -- -- 68,000 68,000 $ 68,000
Shareholder dividends............. -- -- -- (931,000) -- (931,000) --
Net income........................ -- -- -- 782,000 -- 782,000 782,000
----------- -------- ----------- ----------- --------- ----------- -----------
Balance at December 31, 1996...... 13,831,000 138,000 19,840,000 (2,319,000) 85,000 17,744,000 $ 850,000
Issuance of common stock,
net of related costs.............. 1,150,000 12,000 9,888,000 -- -- 9,900,000 --
Exercise of stock options......... 102,000 1,000 838,000 -- -- 839,000 --
Tax benefit from exercise
of stock options.................. -- -- 248,000 -- -- 248,000 --
Shareholder dividends............. -- -- -- (849,000) -- (849,000) --
Currency translation adjustments. -- -- -- -- (184,000) (184,000) $ (184,000)
Net income........................ -- -- -- 6,338,000 -- 6,338,000 6,338,000
----------- -------- ----------- ----------- --------- ----------- -----------
Balance at December 31, 1997...... 15,083,000 151,000 30,814,000 3,170,000 (99,000) 34,036,000 $ 6,154,000
Issuance of common stock
in connection with acquisitions... 166,000 2,000 3,126,000 -- -- 3,128,000 --
Exercise of stock options......... 144,000 1,000 1,021,000 -- -- 1,022,000 --
Tax benefit from exercise of
stock options..................... -- -- 302,000 -- -- 302,000 --
Adjustment for difference in
Azimuth fiscal periods............ -- -- -- 32,000 -- 32,000 --
Shareholder dividends............. -- -- -- (3,525,000) -- (3,525,000) --
Currency translation adjustments.. -- -- -- -- (446,000) (446,000) $ (446,000)
Net income........................ -- -- -- 13,400,000 -- 13,400,000 13,400,000
----------- -------- ----------- ----------- --------- ----------- -----------
Balance at December 31, 1998...... 15,393,000 $154,000 $35,263,000 $13,077,000 $(545,000) $47,949,000 $12,954,000
=========== ======== =========== =========== ========= =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
F - 5
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................... $ 13,400,000 $ 6,338,000 $ 782,000
Adjustments to reconcile net income to
net cash (provided by) used in operating
activities:
Depreciation and amortization........... 1,538,000 571,000 362,000
Provision for doubtful accounts......... 1,268,000 765,000 590,000
Extraordinary charge.................... -- -- 1,148,000
Deferred income taxes................... (92,000) 98,000 (331,000)
Tax benefit from exercise of stock
options................................ 302,000 248,000 --
Minority interest....................... -- 78,000 --
Changes in operating assets and liabilities:
Accounts receivable..................... (13,826,000) (11,194,000) (3,691,000)
Unbilled services....................... (3,002,000) (4,920,000) (1,208,000)
Other current assets.................... (3,406,000) (255,000) 52,000
Other assets............................ (357,000) (134,000) (193,000)
Cash overdraft.......................... -- -- (83,000)
Accounts payable........................ 3,388,000 1,086,000 (1,252,000)
Accrued payroll and related taxes....... 2,685,000 743,000 (1,137,000)
Accrued expenses and other
liabilities............................ 2,130,000 (563,000) 313,000
Income taxes payable.................... 2,081,000 521,000 61,000
------------ ------------ ------------
Net cash provided by (used in)
operating activities................ 6,109,000 (6,618,000) (4,587,000)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of equipment....................... (7,116,000) (2,436,000) (984,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock,
net of issuance costs -- 9,918,000 17,835,000
Proceeds from exercise of stock options.... 1,022,000 839,000 --
Proceeds from subordinated debentures
and warrants, net of issuance costs....... -- -- 5,888,000
Repayment of subordinated debentures......... -- -- (6,000,000)
Repurchase of common stock................... -- -- (1,500,000)
Repayments to factors, net................... -- -- (3,343,000)
Proceeds from shareholder loans.............. -- 235,000 944,000
Repayments of shareholders' loans............ (618,000) (375,000) (434,000)
Shareholder dividends........................ (3,525,000) (849,000) (931,000)
Repayments of lines of credit, net........... -- -- (45,000)
Principal payments under capital leases...... (6,000) (6,000) (22,000)
------------ ------------ ------------
Net cash (used in) provided by
financing activities.................... (3,127,000) 9,762,000 12,392,000
------------ ------------ ------------
Effect of foreign currency exchange rate
changes on cash.............................. (446,000) (184,000) 68,000
------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents.................... (4,580,000) 524,000 6,889,000
Cash and cash equivalents at beginning of
year......................................... 8,825,000 8,301,000 1,412,000
------------ ------------ ------------
Cash and cash equivalents at end of year...... $ 4,245,000 $ 8,825,000 $ 8,301,000
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest........................... $ 24,000 $ -- $ 1,264,000
============ ============ ============
Cash paid for income taxes....................... $ 2,428,000 $ 1,707,000 $ 1,109,000
============ ============ ============
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
F - 6
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Intelligroup, Inc., and its subsidiaries (the "Company") provide a wide
range of information technology services, including management consulting,
enterprise-wide business process solutions, Internet application services,
applications outsourcing and maintenance, systems integration and custom
software development based on leading technologies. The Company markets its
services to a wide variety of industries primarily in the United States. The
majority of the Company's business is with large established companies,
including consulting firms serving numerous industries.
Principles of Consolidation and Use of Estimates
The accompanying financial statements include the accounts of Intelligroup,
Inc. and its majority owned subsidiaries. Minority interests were not
significant at December 31, 1998 and 1997. All significant intercompany balances
and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the recorded amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of investments in highly liquid
short-term instruments, with original maturities of three months or less from
the date of purchase.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the related assets (five years). Leasehold improvements are
amortized over the shorter of the lease term or the estimated useful life (ten
years). Costs of maintenance and repairs are charged to expense as incurred.
Other Assets
Other assets at December 31, 1998 include goodwill and other intangibles
totaling $5,629,000, that were attributable to the acquisition of the minority
interest of CPI Consulting (See Note 9). These intangible assets are being
amortized over the estimated useful lives ranging from 6 to 15 years using the
straight-line method. Amortization expense was $147,000 in 1998.
F - 7
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Revenue Recognition
The Company generates revenue from professional services rendered. Revenue
is recognized as services are performed with the corresponding cost of providing
those services reflected as cost of sales. Substantially all customers are
billed on an hourly or per diem basis whereby actual time is charged directly to
the customer. Billings to customers for out-of-pocket expenses are recorded as a
reduction of expenses incurred. Unbilled services at December 31, 1998 and 1997
represent services provided which are billed subsequent to year-end. All such
amounts are anticipated to be realized in the following year.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts arising from
services, which is based upon a review of outstanding receivables as well as
historical collection information. Credit is granted to substantially all
customers on an unsecured basis. In determining the amount of the allowance,
management is required to make certain estimates and assumptions. The provision
for doubtful accounts totaled $1,397,000, $765,000 and $590,000 in 1998, 1997
and 1996, respectively. Accounts written off totaled $1,143,000, $512,000 and
$575,000 in 1998, 1997 and 1996, respectively.
Recoverability of Long-Lived Assets
The Company reviews the recoverability of its long-lived assets on a
periodic basis in order to identify business conditions which may indicate a
possible impairment. The assessment for potential impairment is based primarily
on the Company's ability to recover the carrying value of its long-lived assets
from expected future cash flows from its operations on an undiscounted basis.
The Company does not believe that any such impairment existed at December 31,
1998.
Stock-Based Compensation
Stock-based compensation is recognized using the intrinsic value method
under APB No. 25. For disclosure purposes, pro forma net income and earnings per
share impacts are provided as if the fair market value method had been applied.
Currency Translation
Assets and liabilities relating to foreign operations are translated into
U.S. dollars using exchange rates in effect at the balance sheet date; income
and expenses are translated into U.S. dollars using monthly average exchange
rates during the year. Translation adjustments associated with assets and
liabilities are excluded from income and credited or charged directly to
shareholders' equity.
Concentrations
For the years ended December 31, 1998, 1997 and 1996, approximately 52%,
56% and 57% of revenue, respectively, was derived from projects in which the
Company's personnel implemented software developed by SAP. The Company's future
success in its SAP-related
F - 8
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
consulting services depends largely on its continued relationship with SAP and
on its continued status as a SAP National Implementation Partner, which was
first obtained in 1995. The Company's agreement with SAP (the "Agreement") is
awarded on an annual basis. The Company's current contract expires on December
31, 1999 and is automatically renewed for successive one-year periods, unless
terminated by either party. This Agreement contains no minimum revenue
requirements or cost sharing arrangements and does not provide for commissions
or royalties to either party. In February 1997, the Company achieved a National
Logo Partner relationship with SAP. Additionally, for each of the years ended
December 31, 1998 and 1997, approximately 12% and 11%, respectively, and less
than 10% during 1996 of revenue was derived from projects in which the Company's
personnel implemented software developed by Oracle. For each of the years ended
December 31, 1998, 1997 and 1996, approximately 19%, 12% and 9%, respectively,
of the Company's total revenue was derived from projects in which the Company
implemented software developed by PeopleSoft.
A substantial portion of the Company's revenue is derived from projects in
which an information technology consulting firm other than the Company has been
retained by the end-user organization to manage the overall project. For years
ended December 31, 1998, 1997 and 1996, 19%, 31% and 34%, respectively, of the
Company's revenue was generated by serving as a member of consulting teams
assembled by other information technology consulting firms.
One customer accounted for approximately 6%, 9% and 10% of revenue in 1998,
1997 and 1996, respectively. Accounts receivable due from this customer was
approximately $2,045,000, $1,628,000 and $2,268,000 as of December 31, 1998,
1997 and 1996, respectively. Another customer accounted for approximately 4%,
10% and 15% of revenue for 1998, 1997 and 1996, respectively. Accounts
receivable due from this customer was approximately $1,395,000, $2,049,000 and
$988,000 as of December 31, 1998, 1997 and 1996, respectively.
During 1998, the Company derived revenue totaling $1.7 million from
contracts with an entity whose chief executive officer is a director of the
Company.
Income Taxes
The Company accounts for income taxes pursuant to the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," ("SFAS No. 109") which utilizes the liability method and results in the
determination of deferred taxes based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities, using enacted tax rates currently in effect. The Company does not
provide for additional U.S. income taxes on undistributed earnings considered to
be permanently invested in foreign subsidiaries.
F - 9
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Earnings Per Share
Basic earnings per share is computed by dividing income attributable to
common stockholders by the weighted average number of common shares outstanding.
Diluted earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding,
adjusted for the incremental dilution of outstanding stock options. The
computation of basic earnings per share and diluted earnings per share were as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- ------------- --------------
<S> <C> <C> <C>
Net Income................................. $13,400,000 $ 6,338,000 $ 782,000
---------- ---------- ----------
Denominator:
Weighted average number of common
shares.................................. 15,207,000 14,457,000 11,003,000
Basic earnings per share................ $ 0.88 $ 0.44 $ 0.07
========== ========== ==========
Denominator:
Weighted average number of common
shares.................................. 15,207,000 14,457,000 11,003,000
Common share equivalents of
outstanding stock options............... 582,000 480,000 1,260,000
---------- ---------- ----------
Total shares............................... 15,789,000 14,937,000 12,263,000
---------- ---------- ----------
Diluted earnings per share................. $ 0.85 $ 0.42 $ 0.06
========== ========== ==========
</TABLE>
Vested stock options which would be antidilutive have been excluded from
the calculations of diluted shares outstanding and diluted earnings per share.
Recently Issued Accounting Standards
In April, 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities." The SOP requires all costs incurred as start-up costs or
organization costs be expensed as incurred. Adoption of the SOP is required for
fiscal years beginning after December 15, 1998. The Company does not believe
that the new standard will have a material impact on the Company's consolidated
financial statements.
In March, 1998, the Accounting Standards Executive Committee issued SOP
98-1. Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This SOP required that computer software costs that are incurred
in the preliminary project stage be expensed as incurred and that criteria be
met before capitalization of costs to develop or obtain internal use computer
software. Adoption of the SOP is required for fiscal years beginning after
December 15, 1998. The Company does not believe that the new standard will have
a material impact on the Company's consolidated financial statements.
F - 10
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Financial Instruments
Financial instruments that potentially subject the Company to credit risk
consist principally of trade receivables and unbilled services. Management of
the Company believes the fair value of accounts receivable and unbilled services
approximates the carrying value.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31:
1998 1997
---- ----
Vehicles..................................... $ 109,000 $ 26,000
Furniture.................................... 2,459,000 785,000
Equipment.................................... 8,438,000 4,337,000
Computer software............................ 816,000 25,000
Leasehold improvements....................... 474,000 --
---------- ----------
12,296,000 5,173,000
Less-Accumulated depreciation................ (2,790,000) (1,392,000)
---------- ----------
$9,506,000 $3,781,000
========== ==========
Included in the above table is $102,000 of equipment held under capital
leases at December 31, 1998, 1997 and 1996. Depreciation expense was $1,391,000,
$571,000 and $362,000 in 1998, 1997 and 1996, respectively.
NOTE 3 - LINES OF CREDIT AND SUBORDINATED DEBENTURES
In January 1997, and as later amended on August 18, 1997, the Company
entered into a two-year credit agreement with a bank (the "Bank"). The credit
facility with the Bank has two components comprised of (i) a revolving line of
credit pursuant to which the Company may borrow up to $7.5 million either at the
Bank's prime rate per annum or the EuroRate plus 2% (at the Company's option),
and (ii) equipment term loans pursuant to which the Company may borrow up to an
aggregate of $350,000 (at the Bank's prime rate plus 1/4 of 1% per annum) to
purchase equipment. The credit agreement contains covenants which require the
Company to (i) maintain its working capital during the year at no less than 90%
of the working capital at the end of the immediately preceding fiscal year and
at the end of each fiscal year at no less than 105% of its working capital at
the end of the immediately preceding fiscal year; and (ii) maintain its tangible
net worth during the year at no less than 95% of its tangible net worth at the
end of the immediately preceding fiscal year and at the end of each fiscal year
at no less than 108% of tangible net worth at the end of the immediately
preceding fiscal year. The Company's obligations under the credit agreement are
collateralized by substantially all of the Company's assets, including its
accounts receivable and intellectual property. At December 31, 1998, the Company
was in compliance with all covenants. The facility was due to expire in January
1999, but was extended until a new three-year credit agreement took effect on
January 29, 1999. (See Note 11).
F - 11
<PAGE>
NOTE 4 - INCOME TAXES
Income tax attributable to income from continuing operations consists of
the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal................................. $ 2,878,000 $ 1,384,000 $ 631,000
State................................... 783,000 389,000 200,000
Foreign................................. 882,000 456,000 248,000
----------- ----------- ------------
4,543,000 2,229,000 1,079,000
----------- ----------- ------------
Deferred:
Federal................................. (71,000) 76,000 (259,000)
State................................... (21,000) 22,000 (72,000)
----------- ----------- ------------
(92,000) 98,000 (331,000)
----------- ----------- ------------
Total...................................... $ 4,451,000 $ 2,327,000 $ 748,000
=========== =========== ============
</TABLE>
The provision for income taxes differs from the amount computed by applying
the statutory rate of 34% to income before income taxes. The principal reasons
for this difference are:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Tax at federal statutory rate.............. 34% 34% 34%
Nondeductible expenses..................... 5 1 1
State income tax, net of federal benefit... 4 4 (3)
Utilization of net operating loss
carryforwards............................. (1) -- (8)
Foreign losses for which no benefit is
available................................. 7 -- 16
Changes in valuation allowance............. -- (3) (14)
Foreign operations taxed at less than
U.S. statutory rate, primarily India.... (11) (7) (1)
S Corp and L.L.C. income passed
through to shareholders................. (13) (6) --
Other................................... (1) 4 3
------ ------- ------
Effective tax rate......................... 24% 27% 28%
====== ====== =====
</TABLE>
In 1996, the Company elected a five year tax holiday in India in accordance
with a local tax incentive program whereby no income taxes will be due for such
period. The Empower Companies were pass-through entities for tax reporting
purposes, thus their income was not taxed at the corporate level. Accordingly,
the Company's federal statutory tax rate was reduced by 13% and 6% for 1998 and
1997, respectively.
F - 12
<PAGE>
NOTE 4 - INCOME TAXES - (CONTINUED)
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities as of December
31, 1998 and 1997 are as follows:
1998 1997
---------- ----------
Deferred tax assets:
Allowance for doubtful accounts...... $ 432,000 $ 327,000
Certain accrued liabilities.......... 376,000 77,000
---------- ----------
Total deferred tax assets............... 808,000 404,000
Deferred tax liability-accelerated
depreciation........................... (483,000) (171,000)
---------- ----------
Net deferred tax asset.................. $ 325,000 $ 233,000
========== ==========
Realization of the net deferred tax assets is dependent on the timing of
the reversal of temporary differences. Although realization is not assured,
management believes it is more likely than not, that the 1998 net deferred tax
assets will be realized.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Employment Agreements
As of December 31, 1998, the Company had employment agreements with
certain of its executives which provide for minimum payments in the event of
termination in other than for just cause. The aggregate amount of compensation
commitment in the event of termination under such agreements is approximately
$682,000.
Leases
The Company leases office space and office equipment and vehicles under
capital and operating leases that have initial or remaining non-cancelable lease
terms in excess of one year as of December 31, 1998. Future minimum aggregate
annual lease payments are as follows:
For the Years Ending December 31, Capital Operating
--------------------------------- ------- ---------
1999............................. $ 11,000 $ 3,160,000
2000............................. 9,000 2,913,000
2001............................. -- 2,192,000
2002............................. -- 1,658,000
2003............................. -- 1,346,000
--------- ----------
Subtotal 20,000 11,269,000
Thereafter....................... -- 5,702,000
Less-Interest.................... --
---------
20,000
Less-Current portion............. (11,000)
---------
$ 9,000
=========
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
$2,217,000, $713,000 and $444,000, respectively.
F - 13
<PAGE>
NOTE 5 - COMMITMENTS AND CONTINGENCIES - (CONTINUED)
Legal
The Company is engaged in certain legal and administrative proceedings.
Management believes the outcome of these proceedings will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
NOTE 6 - STOCK OPTION PLANS AND WARRANTS
The Company's stock option plans permit the granting of options to
employees, non-employee directors and consultants. The Option Committee of the
Board of Directors generally has the authority to select individuals who are to
receive options and to specify the terms and conditions of each option so
granted, including the number of shares covered by the option, the type of
option (incentive stock option or non-qualified stock option), the exercise
price, vesting provisions, and the overall option term. A total of 1,590,000
shares of Common Stock have been reserved for issuance under the plans.
Subsequent to December 31, 1998, the Company granted options to purchase an
aggregate of 388,100 shares of its Common Stock to certain employees. All of the
options issued pursuant to these plans expire ten years from the date of grant.
F - 14
<PAGE>
NOTE 6 - STOCK OPTION PLANS AND WARRANTS - (CONTINUED)
The fair value of option grants for disclosure purposes is estimated on the
date of grant using the Black-Scholes option-pricing model using the following
weighted-average assumptions: expected volatility of 78%, 62% and 41%, risk-free
interest rate of 5.4%, 7.0% and 5.6% and expected lives of 8.5, 4.5 and 3.1
years, in 1998, 1997 and 1996, respectively. The weighted average fair value of
options granted during 1998, 1997 and 1996 was $13.49, $6.96 and $2.93,
respectively.
Weighted
Number of Average
Shares Exercise Price
------------------------------------------------------------------------
Options Outstanding,
December 31, 1995 -- --
Granted 580,000 $ 8.38
Canceled (8,200) $ 8.00
------------------------------------------------------------------------
Options Outstanding,
December 31, 1996
(none exercisable) 571,800 $ 8.39
Granted 647,640 $11.52
Exercised (102,381) $ 8.20
Canceled (74,113) $ 9.78
------------------------------------------------------------------------
Options Outstanding,
December 31, 1997
(93,674 exercisable) 1,042,946 $10.25
Granted 1,257,630 $16.81
Exercised (143,297) $ 9.32
Canceled (258,138) $14.91
------------------------------------------------------------------------
Options Outstanding,
December 31, 1998
(262,156 exercisable) 1,899,141 $14.14
========= ======
F - 15
<PAGE>
NOTE 6 - STOCK OPTION PLANS AND WARRANTS - (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------- -----------
Weighted Weighted Weighted
Exercise Price Number of Average Average Number of Average
Range shares Remaining Exercise shares Exercise
Life (in years) Price Price
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$8 to 10 282,706 6.0 $8.14 156,944 $8.10
$10 to 12 448,605 5.8 $10.82 70,282 $10.92
$12 to 15 142,000 9.5 $14.11 8,000 $12.13
$15 to 22 1,020,830 8.2 $17.21 26,930 $16.40
$22 to 24 5,000 9.6 $23.38 -- --
--------- -------
$8 to 24 1,899,141 7.4 $14.14 262,156 $9.83
</TABLE>
As permitted by SFAS 123, the Company has chosen to continue accounting for
stock options at their intrinsic value. Accordingly, no compensation cost has
been recognized for the stock option plans. Had compensation cost for the
Company's stock option plans been determined based on the fair value option
pricing method, the tax-effective impact would be as follows:
1998 1997 1996
- -------------------------------------------------------------------------------
Net income:
as reported $13,400,000 $ 6,338,000 $ 782,000
pro forma $ 8,894,000 $ 5,336,000 $ 423,000
- -------------------------------------------------------------------------------
Basic Earnings per Share:
as reported $0.88 $0.44 $0.07
pro forma $0.56 $0.37 $0.04
- -------------------------------------------------------------------------------
Diluted Earnings per Share:
as reported $0.85 $0.42 $0.06
pro forma $0.54 $0.36 $0.03
F - 16
<PAGE>
NOTE 7 - 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.
NOTE 8 - INITIAL PUBLIC OFFERING, STOCK SPLIT AND PREFERRED STOCK AUTHORIZATION
In July 1996, the Company's Board of Directors recommended and shareholders
approved an amendment to the Company's Certificate of Incorporation to effect an
81,351.1111-for-1 stock split. All common shares and per share amounts in the
accompanying financial statements have been adjusted retroactively to give
effect to the stock split.
The Company's initial public offering for the sale of 2,050,000 shares of
its Common Stock became effective on September 26, 1996 and the net proceeds of
approximately $19,065,000 (before deducting expenses of the offering paid by the
Company) were received on October 2, 1996.
On July 2, 1997, the Company consummated a follow-on public offering (the
"Offering") of 1,000,000 shares of its Common Stock at a price to the public of
$9.50 per share. On July 15, 1997 and as part of the Offering, an additional
150,000 shares at $9.50 per share were issued and sold by the Company to cover
over-allotments. The net proceeds to the Company from the Offering, after
underwriting discounts and commissions and other expenses of the Offering, were
approximately $9,900,000.
NOTE 9 - ACQUISITIONS
On May 7, 1998, the Company acquired thirty percent of the outstanding
share capital of CPI Consulting Limited. This acquisition 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. The value of the liability has been
determined as of December 31, 1998 to be $2.5 million, which is payable by
issuance of additional 155,208 shares of the Company's Common Stock. The excess
of purchase price over the fair value of the net assets acquired was attributed
to intangible assets, amounting in the aggregate to $5.8 million.
F - 17
<PAGE>
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 results for all periods 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.
On November 25, 1998, the Company consummated the acquisition of all of the
outstanding capital stock of each of Azimuth Consulting Limited, Azimuth
Holdings Limited, Braithwaite Richmond Limited and Azimuth Corporation Limited
(collectively the "Azimuth Companies"). The acquisition of the Azimuth Companies
was accounted for as a pooling of interests. Prior results for all periods have
been restated in accordance with pooling of interests accounting. As
consideration for this acquisition, the Company issued 902,928 shares of the
Company's Common Stock.
The pre-merger results of CPI Resources Limited and the Azimuth Companies
were revenues of $14,137,000 and net income of $190,000 for 1997, and revenues
of $14,510,000 and a net loss after taxes of $11,000 for 1996. In connection
with these mergers, $2,118,000 of non-recurring acquisition related charges were
incurred and have been charged to expense during the year ended December 31,
1998. These costs primarily relate to professional fees incurred in connection
with the mergers.
NOTE 10 - SEGMENT DATA AND GEOGRAPHIC INFORMATION
The Company operates in one industry, IT Services. The Company's service
lines share similar customer bases. The Company's identifiable business segments
can be categorized into three groups:
o ERP Implementation Services ("ERP") is the largest business segment
of the Company's operations, and includes the implementation,
integration, and development of solutions for clients utilizing a
class of application products known as Enterprise Resource Planning
software. This class of products include software developed by such
companies as SAP, Oracle, PeopleSoft, and Baan.
o Management Consulting ("MC") includes business consulting services,
such as Business Process Re-engineering, Change Management, IT
Strategy, and Software
Selection.
o Advanced Technology Practice ("ATP") includes Internet technology
solutions and custom application and enhancement development for
clients.
F - 18
<PAGE>
The following table presents financial information based upon the Company's
identifiable business segments for the year ended December 31, 1998. Information
on revenue, operating income and margins for these segments is not available for
the year ended December 31, 1997, and the Company determined that it would be
impractical to recreate such data. Substantially all of the Company's operations
for the year ended December 31, 1996 were in the ERP segment:
Year Ended December 31, 1998 ERP MC ATP
---------- ---------- ----------
Revenues $138,740,000 $ 8,873,000 $15,227,000
Operating Income $31,530,000 ($1,232,000) $2,304,000
Operating Margin 23.1% N/A 15.1%
The Company also incurred corporate expenses for selling, general and
administrative activities of $12,820,000 and non-recurring acquisition related
charges of $2,118,000 during the year ended December 31, 1998, resulting in
total operating income of $17,664,000. Other 1998 information is as follows:
Income before taxes $17,851,000
Total assets $69,565,000
Capital expenditures $ 7,116,000
Depreciation and amortization $ 1,538,000
The following table presents financial information based upon the Company's
geographic segments for the years ended December 31, 1998 and 1997. For the year
ended December 31, 1996, substantially all of the Company's revenues, operating
income, and assets were located within the United States.
Net Operating Identifiable
1998 Revenues Income Assets
-------------------------------------------------
United States $119,542,000 $ 13,889,000 $52,820,000
Asia-Pacific 19,466,000 2,299,000 8,475,000
Europe 23,832,000 1,952,000 8,270,000
-------------------------------------------------
Total $162,840,000 $18,140,000 $69,565,000
==================================================
Net Operating Identifiable
1997 Revenues Income Assets
-------------------------------------------------
United States $ 73,253,000 $ 5,744,000 $35,103,000
Asia-Pacific 12,438,000 1,875,000 3,849,000
Europe 12,610,000 781,000 4,112,000
--------------------------------------------------
Total $ 98,301,000 $ 8,400,000 $43,064,000
===================================================
F - 19
<PAGE>
NOTE 11 - SUBSEQUENT EVENTS
On January 8, 1999, the Company acquired Network Publishing, Inc., based in
Provo, Utah, for a purchase price of approximately $4.5 million consisting of
cash and Intelligroup common stock. NetPub shareholders will receive a portion
of this consideration as an earnout, payable at a later date subject to
operating performance. Pro-forma financial information has not been presented as
this acquisition was deemed immaterial to the Company's operations as a whole.
On January 29, 1999, the Company entered into a new three-year credit
agreement (the "Credit Agreement") with the PNC Bank N.A. (the "Bank"). The new
credit facility with the Bank is comprised of a revolving line of credit
pursuant to which the Company may borrow up to $30.0 million either at the
Bank's prime rate per annum or the EuroRate plus 2% (at the Company's option).
The Credit Agreement contains covenants which require the Company to (i)
maintain a consolidated cash flow leverage ratio equal to or less than 2.5 to
1.0 for the period of four fiscal quarters preceding the date of determination
taken together as one accounting period, (ii) maintain a consolidated net worth
of not less than 90% of the consolidated net worth as of September 30, 1998 plus
50% of positive net income commencing October 1, 1998, and thereafter at the end
of each fiscal year, to be not less than consolidated net worth of the prior
fiscal year plus 50% of positive net income for such fiscal year, (iii) not
enter into any agreement to purchase and/or pay for, or become obligated to pay
for capital expenditures, long term leases, capital leases or sale lease-backs,
in an amount at any time outstanding aggregating in excess of $5,000,000 during
any fiscal year, provided, however, in a one year carry-forward basis, the
Company may incur capital expenditures not to exceed $8,000,000 during any
fiscal year, and (iv) shall not cause or permit the minimum fixed charge
coverage ratio, calculated on the basis of a rolling four quarters of (a)
consolidated EBITDA to (b) the sum of cash income tax expense plus interest
expense, plus scheduled principal payments under any indebtedness, plus
dividends or distributions paid or declared, to be less than 1.4 to 1.0 as at
the end of each fiscal quarter. The proceeds of the Credit Agreement may be used
by the Company for financing acquisitions and general corporate purposes. At the
Company's option, for each loan, interest shall be computed either at the Bank's
prime rate per annum or the Adjusted Libo Rate plus the Applicable Margin, as
such terms are defined in the Loan Agreement. The Company's obligations under
the credit facility are payable at the expiration of such facility on January
29, 2002.
On February 16, 1999, the Company, by way of merger transactions, acquired
both Empower Solutions, L.L.C. and its affiliate Empower, Inc. (a corporation
organized under sub-chapter S of the Internal Revenue Code). The acquisitions
were accounted for as poolings of interests. The accompanying consolidated
financial statements as of December 31, 1998 and 1997 and each of the three
years in the period ended December 31, 1998, have been restated in accordance
with pooling of interests accounting. In connection with these acquisitions, the
Company issued approximately 1,831,000 shares of the Company's Common Stock.
Additional shares of its stock may be issued upon the completion of a net worth
calculation on the closing balance sheet, as defined. The pre-merger results of
the Empower Companies were revenues of $18.0 million and net income of $5.7
million for 1998 and revenues of $4.0 million and net income of $1.7 million for
1997. In connection with this merger, acquisition expenses of $2.1 million were
expensed during 1999. These costs primarily relate to professional fees incurred
in connection with the merger.
F - 20
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
SEC registration fee.............................. $ 7,254.48(1)
Counsel fees and expenses*........................ 60,000.00
Accounting fees and expenses*..................... 35,000.00
Miscellaneous expenses*........................... 2,745.52
---------
Total*............................................ $105,000.00
=========
---------
(1) $4,216.94 of such registration fee was paid by the Company at
the time of the initial filing of the Registration Statement.
* Estimated
All expenses of issuance and distribution listed above will be borne by the
Company. The costs of fees and expenses of legal counsel and other advisors, if
any, that the Selling Shareholders employ in connection with the offering will
be borne by the Selling Shareholders.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 14A:3-5 of the New Jersey Business Corporation Act permits each New
Jersey business corporation to indemnify its directors, officers, employees and
agents against expenses and liabilities in connection with:
o any proceeding involving such persons by reason of his or her serving
or having served in such capacities; or
o each such person's acts taken in such capacity if such actions were
taken in good faith and in a manner which he or she reasonably
believed to be in or not opposed to the best interests of the
corporation.
With respect to any criminal proceeding, indemnity is permitted if such
person had no reasonable cause to believe his or her conduct was unlawful,
provided that any such proceeding is not by or in the right of the corporation.
Section 14A:2-7(3) of the New Jersey Business Corporation Act enables a
corporation in its certificate of incorporation to limit the liability of
directors and officers of the corporation to the corporation or its
shareholders. Specifically, the certificate of incorporation may provide that
directors and officers of the corporation will not be personally liable for
money damages for breach of a duty as a director or an officer, except for
liability for:
o any breach of the director's or officer's duty of loyalty to the
corporation or its shareholders;
II - 1
<PAGE>
o acts or omissions not in good faith or which involve a knowing
violation of law; or
o any transaction from which the director or officer derived an improper
personal benefit.
The Company's Certificate of Incorporation limits the liability of its
directors and officers as authorized by Section 14A:2-7(3). The affirmative vote
of the holders of at least 80% of the voting power of all outstanding shares of
the capital stock of the Company is required to amend such provisions.
Article 11 of the Registrant's Amended and Restated By-laws specifies that
the Company shall indemnify its directors and officers to the extent such
parties are involved in or made a party to any action, suit or proceeding
because he or she was a director or officer of the Company. The Company has
agreed to indemnify such parties for their actual and reasonable expenses if
such party:
o acted in good faith and in a manner he or she reasonably believed to
be in the best interests of the Company; and
o had no reasonable cause to believe his or her conduct was unlawful.
This provision of the By-laws is deemed to be a contract between the
Company and each director and officer who serves in such capacity at any time
while such provision and the relevant provisions of the New Jersey Business
Corporation Act are in effect. Any repeal or modification shall not offset any
action, suit or proceeding brought or threatened based in whole or in part upon
any such state of facts. The affirmative vote of the holders of at least 80% of
the voting power of all outstanding shares of capital stock of the Company is
required to adopt, amend or repeal such provision of the By-laws.
The Company has executed indemnification agreements with each of its
directors and executive officers. Such agreements require the Company to
indemnify such parties to the full extent permitted by law, subject to certain
exceptions, if such party becomes subject to an action because such party is a
director, officer, employee, agent or fiduciary of the Company.
The Company has liability insurance for the benefit of its directors and
officers. The insurance covers claims against such persons due to any breach of
duty, neglect, error, misstatement, misleading statement, omission or act done.
The insurance covers such claims, except as prohibited by law, or otherwise
excluded by such insurance policy.
II - 2
<PAGE>
SECURITIES AND EXCHANGE COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
II - 3
<PAGE>
ITEM 16. EXHIBITS.
Exhibit No. Description of Exhibit
----------- ----------------------
5* Opinion of Buchanan Ingersoll Professional
Corporation as to legality of the Shares of Common
Stock.
23.1* Consent of Arthur Andersen LLP.
23.2 Consent of Buchanan Ingersoll Professional
Corporation (contained in the opinion filed as
Exhibit 5 to the Registration Statement)
24 Powers of Attorney of certain officers and
directors of the Company (contained on the
signature page of the initial filing of this
Registration Statement).
- -------------
* Filed herewith. All other Exhibits previously filed.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement to include any
material information with respect to the plan of distribution not previously
disclosed in this Registration Statement or any material change to such
information in this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the
II - 4
<PAGE>
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II - 5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this amendment to the
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the Township of Edison, State of New Jersey, on the 10th day
of June, 1999.
INTELLIGROUP, INC.
By: /s/ Ashok Pandey
--------------------------------------
Ashok Pandey
Co-Chief Executive Officer
II - 6
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Ashok Pandey and Gerard E. Dorsey, and
each of them, his true and lawful attorneys-in-fact and agents with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same with all
exhibits thereto, and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Ashok Pandey Co-Chief Executive Officer and June 10, 1999
- -------------------------- Director
Ashok Pandey
/s/ Rajkumar Koneru Co-Chief Executive Officer and June 10, 1999
- -------------------------- Director
Rajkumar Koneru
/s/ Nagarjun Valluripalli Chairman of the Board and June 10, 1999
- -------------------------- President of International
Nagarjun Valluripalli Operations
/s/ Gerard E. Dorsey Senior Vice President - Finance June 10, 1999
- -------------------------- and Chief Financial Officer
Gerard E. Dorsey (principal financial and
accounting officer)
Director June 10, 1999
- --------------------------
Klaus Besier
II - 7
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
5* Opinion of Buchanan Ingersoll Professional Corporation as to
legality of the Shares of Common Stock.
23.1* Consent of Arthur Andersen LLP.
23.2 Consent of Buchanan Ingersoll Professional Corporation
(contained in the opinion filed as Exhibit 5 to the
Registration Statement).
24 Powers of Attorney of certain officers and directors of the
Company (contained on the signature page of the initial
filing of this Registration Statement).
- -------------
* Filed herewith. All other Exhibits previously filed.
<PAGE>
EXHIBIT 5
BUCHANAN INGERSOLL PROFESSIONAL CORPORATION
(Incorporated in Pennsylvania)
Attorneys
500 College Road East
Princeton, New Jersey 08540
June 10, 1999
Intelligroup, Inc.
499 Thornall Street
Edison, New Jersey 08837
Gentlemen:
We have acted as counsel to Intelligroup, Inc., a New Jersey corporation
(the "Company"), in connection with the filing by the Company of an Amendment
No. 1 to Registration Statement on Form S-3 (the "Registration Statement"),
under the Securities Act of 1933, as amended, relating to the registration of an
aggregate of 2,628,557 shares (the "Shares") of the Company's common stock,
$0.01 par value, all of which are to be offered by a certain Selling
Shareholders as set forth therein.
In connection with the Registration Statement, we have examined such
corporate records and documents, other documents, and such questions of law as
we have deemed necessary or appropriate for purposes of this opinion. On the
basis of such examination, it is our opinion that:
1. The issuance of the Shares was duly and validly authorized; and
2. The Shares are legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Registration Statement.
Very truly yours,
BUCHANAN INGERSOLL
PROFESSIONAL CORPORATION
/s/David J. Sorin
----------------------------------
By: David J. Sorin, a member of the firm
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Intelligroup, Inc.:
As independent public accountants, we hereby consent to the use of our
report dated May 7, 1999 and to all references to our Firm included in this
registration statement. Our report dated February 4, 1999 (except with respect
to the third paragraph of Note 11 as to which the date is February 16, 1999)
included in Intelligroup, Inc.'s Form 10-K for the year ended December 31, 1998
is no longer appropriate since restated financial statements have been presented
giving effect to a business combination accounted for as a pooling-of-interests.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
June 9, 1999