SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
Commission File No. 0-20943
Intelligroup, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
New Jersey 11-2880025
- ---------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
499 Thornall Street, Edison, New Jersey 08837
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(Address of Principal Executive Offices) (Zip Code)
(732) 590-1600
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(Issuer's Telephone Number,
Including Area Code)
Indicate by checkmark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
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Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of April 30, 1999:
Class Number of Shares
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Common Stock, $.01 par value 15,558,751
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INTELLIGROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements..................... 1
Consolidated Balance Sheets
as of March 31, 1999 (unaudited)
and December 31, 1998 (unaudited)..................... 2
Consolidated Statements of Income and Comprehensive
Income (Loss) for the Three Months Ended March 31,
1999 and 1998 (unaudited)............................. 3
Consolidated Statements of Cash Flows
for the Three Months Ended
March 31, 1999 and 1998 (unaudited)................... 4
Notes to Consolidated Financial Statements
(unaudited)........................................... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 7
PART II. OTHER INFORMAATION
Item 1. Legal Proceedings..................................... 15
Item 2. Changes in Securities and Use of Proceeds............. 16
Item 5. Other Information..................................... 17
Item 6. Exhibits and Reports on Form 8-K...................... 19
SIGNATURES............................................................. 20
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
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<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
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ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................................ $ 3,923,000 $ 4,245,000
Accounts receivable, less allowance for doubtful accounts
of $1,060,000 at March 31, 1999 and $1,053,000 at
December 31, 1998............................................. 36,169,000 33,622,000
Unbilled services................................................ 14,385,000 10,842,000
Deferred income taxes............................................ 823,000 808,000
Other current assets............................................. 4,429,000 4,197,000
----------- -----------
Total current assets...................................... 59,729,000 53,714,000
Property and equipment, net ......................................... 10,270,000 9,506,000
Costs in excess of fair value of net assets acquired, net............ 7,130,000 5,629,000
Other assets......................................................... 844,000 716,000
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$77,973,000 $69,565,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................. $ 4,694,000 $ 5,347,000
Accrued payroll and related taxes................................ 6,620,000 6,254,000
Accrued expenses and other liabilities........................... 6,860,000 2,999,000
Accrued acquisition costs........................................ 1,014,000 3,302,000
Income taxes payable............................................. 2,575,000 3,160,000
Line of credit................................................... 7,300,000 --
Current portion of long-term debt and obligations under
capital leases................................................ 131,000 11,000
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Total current liabilities................................. 29,194,000 21,073,000
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Long-term debt and obligations under capital leases, less
current portion..................................................... 708,000 60,000
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Deferred income taxes ............................................... 533,000 483,000
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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;
15,559,000 and 13,572,000 shares issued and outstanding
at March 31, 1999 and December 31, 1998, respectively........ 154,000 154,000
Additional paid-in capital....................................... 35,272,000 35,263,000
Retained earnings ............................................... 12,986,000 13,077,000
Currency translation adjustment.................................. (874,000) (545,000)
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Total shareholders' equity ............................... 47,538,000 47,949,000
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$77,973,000 $69,565,000
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
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INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended March 31, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenue.................................................. $46,795,000 $33,633,000
Cost of sales............................................ 31,175,000 21,173,000
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Gross profit...................................... 15,620,000 12,460,000
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Selling, general and administrative expenses............. 12,931,000 7,977,000
Acquisition expenses..................................... 2,115,000 --
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Total selling, general and administrative expenses... 15,046,000 7,977,000
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Operating income..................................... 574,000 4,483,000
Other income (expense), net.............................. (61,000) 1,000
Interest income (expense), net........................... (60,000) 66,000
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Income before provision for income taxes................. 453,000 4,550,000
Provision for income taxes............................... 544,000 804,000
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Net (loss) income........................................ $ (91,000) $ 3,746,000
=========== ===========
Earnings per share:
Basic earnings per share:
Net (loss) income per share...................... $ (0.01) $ 0.25
=========== ===========
Weighted average number of common shares - Basic. 15,548,000 15,247,000
=========== ===========
Diluted earnings per share:
Net (loss) income per share...................... $ (0.01) $ 0.24
=========== ===========
Weighted average number of common shares -
Diluted......................................... 15,548,000 15,669,000
=========== ===========
Comprehensive Income (Loss)
- ---------------------------
Net income (loss)........................................ $ (91,000) $ 3,746,000
Other comprehensive income -
Currency translation adjustments................ (329,000) (251,000)
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Comprehensive income (loss).............................. $ (420,000) $ 3,495,000
=========== ===========
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these statements.
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INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
----------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................... $ (91,000) $ 3,746,000
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization.............................. 773,000 195,000
Provision for doubtful accounts............................ 344,000 250,000
Deferred income taxes...................................... (15,000) --
Changes in assets and liabilities:
Accounts receivable........................................ (1,980,000) (4,693,000)
Unbilled services.......................................... (3,543,000) (1,502,000)
Other current assets....................................... (175,000) (500,000)
Other assets............................................... (128,000) (863,000)
Accounts payable........................................... (658,000) 1,009,000
Accrued payroll and related taxes.......................... 293,000 324,000
Accrued expenses and other liabilities..................... 1,175,000 69,000
Income taxes payable....................................... (773,000) (302,000)
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Net cash used in operating activities.................. (4,778,000) (2,267,000)
---------- ------------
Cash flows from investing activities:
Purchase of equipment.......................................... (791,000) (2,081,000)
Acquisition of businesses...................................... (1,682,000) --
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Net cash used in investing activities.................. (2,473,000) (2,081,000)
Cash flows from financing activities:
Proceeds from the exercise of stock options.................... 9,000 302,000
Proceeds from line of credit borrowings, net................... 7,300,000 --
Principal payments under capital leases........................ (3,000) --
Repayments of other loans...................................... (48,000) (307,000)
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Net cash provided by (used in) financing activities.... 7,258,000 (5,000)
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Effect of foreign currency exchange rate changes on cash....... (329,000) (251,000)
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Net decrease in cash and cash equivalents ............. (322,000) (4,604,000)
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Cash and cash equivalents at beginning of period................... 4,245,000 8,825,000
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Cash and cash equivalents at end of period......................... $3,923,000 $ 4,221,000
========== ============
Supplemental disclosures of cash flow information:
Cash paid for income taxes................................. $ 650,000 $ 933,000
========== ============
Cash paid for interest..................................... $ 88,000 $ --
========== ============
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these statements.
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<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) BASIS OF PRESENTATION
The consolidated financial statements and accompanying financial
information as of March 31, 1999 and for the three months ended March 31, 1999
and 1998 are unaudited and, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the financial position of the
Company at such dates and the operating results and cash flows for those
periods. The financial statements included herein have been prepared in
accordance with generally accepted accounting principles and the instructions of
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. These financial statements should be read in conjunction with the
Company's audited financial statements for the year ended December 31, 1998,
which were included as part of the Company's Form 10-K.
The Company's 1998 Financial Statements have been restated to include the
results of the acquisitions of each of (i) CPI Resources Limited; (ii) Azimuth
Consulting Limited, Azimuth Holdings Limited, Braithwaite Richmond Limited and
Azimuth Corporation Limited; and (iii) Empower Solutions, LLC and its affiliate
Empower, Inc. (the "Empower Companies") in accordance with pooling of interests
accounting.
Results for interim periods are not necessarily indicative of results for
the entire year.
(2) EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common stock outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock, unless they are antidilutive.
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<PAGE>
A reconciliation of weighted average number of common shares outstanding to
weighted average common shares outstanding assuming dilution is as follows as of
March 31:
1999 1998
---- ----
Weighted average number of common
shares 15,548,000 15,247,000
Common share equivalents of outstanding
stock options -- 422,000
---------- ----------
Weighted average number of common
shares assuming dilution 15,548,000 15,669,000
========== ==========
All stock options outstanding as of March 31, 1999 were excluded from the
computation of net loss per common share, as they are antidilutive. Certain
stock options outstanding at March 31, 1998 were not included in the
computations of earnings per share assuming dilution because the options'
exercise prices were greater than the average trading price of the Company's
common shares.
(3) ACQUISITIONS
On January 8, 1999, the Company consummated the acquisition of all of the
shares of outstanding capital stock of Network Publishing, Inc. The acquisition
was accounted for utilizing purchase accounting. 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, and resulted in costs in excess of fair value
of net assets acquired of $1.6 million. In addition, the purchase price includes
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. Pro-forma financial
information has not been presented as this acquisition was deemed immaterial to
the Company's operations as a whole.
On February 16, 1999, the Company, by way of merger transactions,
consummated the acquisition of the Empower Companies. Such mergers were
accounted for as a pooling of interests. 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 which may be issued in connection with the net worth adjustment as
of the closing date. The pre-merger results of the Empower Companies were
revenues of $7.7 million and net income of $1.8 million for the three months
ended March 31, 1999 and revenues of $3.0 million and net income of $1.8 million
for the three months ended March 31, 1998. 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.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The Company provides a wide range of information technology services,
including 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 the first quarter of 1999, the Company expanded its operations
through acquisitions. On January 8, 1999, in order to augment the
Internet/Advanced Technology Practice, the Company acquired the outstanding
capital stock of Network Publishing, Inc. ("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 transactions, the Company augmented its
PeopleSoft practice in North America by acquiring the Empower Solutions, L.L.C.
and its affiliate Empower, Inc. (the "Empower Companies") located in Plymouth,
Michigan on February 16, 1999. 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 which may be issued in connection with a net worth adjustment determined
as of the closing date. The amount of such adjustment is in the process of being
finalized by the parties. The acquisition has been accounted for as pooling of
interests and thus prior financial statements have been revised to reflect the
activities of such companies for all periods in accordance with generally
accepted accounting principles. The Empower Companies provide business process
reengineering, system design and development, project management and training
services.
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<PAGE>
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 derived from projects under fixed price
contracts represented approximately 4% 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 and is expected to be
completed in early 2000, represented 5% of the Company's total revenue during
the quarter ended March 31, 1999. Fixed price contracts, in the aggregate,
represented 14% of the Company's total revenue during such quarter. 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 three months ended March 31, 1999 and the year ended December
31, 1998, the Company's ten largest customers accounted for in the aggregate
approximately 37% and 38% of its revenue, respectively. For the year ended
December 31, 1998, no customer accounted for more than 10% of revenue. For the
three months ended March 31, 1999, one customer, Puerto Rico Department of the
Treasury, accounted for 11% of revenue. During the three months ended March 31,
1999 and the year ended December 31, 1998, 17% and 19% of the Company's revenue,
respectively, 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 three months
ended March 31, 1999 and the year ended December 31, 1998, approximately 46% and
52%, respectively, of the Company's total revenue was derived from projects in
which the Company implemented software developed by SAP. During the three months
ended March 31, 1999 and the year ended December 31, 1998, approximately 8% and
11% was derived from projects in which the Company implemented software
developed by Oracle. During the three months ended March 31, 1999 and the year
ended December 31, 1998, 26% and 19%, respectively, of the Company's total
revenue was derived from projects in which the Company
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<PAGE>
implemented software developed by PeopleSoft. During the three months ended
March 31, 1999, approximately 62% of the Company's revenue was derived from
engagements in which the Company had project management responsibilities,
compared to 58% during the year ended December 31, 1998.
The Company's most significant cost is project personnel expenses, which
consist of consultant salaries, benefits and payroll-related expenses. Thus, the
Company's financial performance is based primarily upon billing margin (billable
hourly rate less the cost to the Company of a consultant on an hourly basis) and
personnel utilization rates (billable hours divided by paid hours). The Company
believes that turnkey project management assignments typically carry higher
margins. The Company has been shifting to such higher-margin turnkey management
assignments and more complex projects by leveraging its reputation, existing
capabilities, proprietary implementation methodology, development tools and
offshore development capabilities with expanded sales and marketing efforts and
new service offerings to develop turnkey project sales opportunities with both
new and existing customers. The Company's inability to continue its shift to
higher-margin turnkey management assignments and more complex projects may
adversely impact the Company's future growth.
Since late 1994, the Company has made substantial investments in its
infrastructure in order to support its rapid growth. For example, in 1994, the
Company established and funded an operations facility in India, the Advance
Development Center (the "ADC"), and in 1995 established a sales office in
California. In addition, from 1994 to date, the Company has incurred expenses to
develop proprietary development tools and its proprietary accelerated
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.
This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, including,
without limitation, statements regarding the Company's intention to shift to
higher margin turnkey management assignments and more complex projects and to
utilize its proprietary implementation methodology in an increasing number of
projects. In addition, statements regarding the Company's intent to expand its
service offerings through internal growth and acquisitions are also
forward-looking statements. Such forward-looking statements include risks and
uncertainties, including, but not limited to:
o the substantial variability of the Company's quarterly operating
results caused by a variety of factors, many of which are not within
the Company's control, including (a) patterns of software and hardware
capital spending by customers, (b) information technology outsourcing
trends, (c) the timing, size and stage of projects, (d) timing and
impact of acquisitions, (e) new service introductions by the Company
or its competitors and the timing of new product introductions by the
Company's ERP partners, (f) levels of market
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acceptance for the Company's services, (g) general economic
conditions, (h) the hiring of additional staff and (i) fixed price
contracts;
o changes in the Company's billing and employee utilization rates;
o the Company's ability to manage its growth effectively, which will
require the Company (a) to continue developing and improving its
operational, financial and other internal systems, as well as its
business development capabilities, (b) to attract, train, retain,
motivate and manage its employees, (c) to continue to maintain high
rates of employee utilization at profitable billing rates, (d) to
successfully integrate the personnel and businesses acquired by the
Company, and (e) to maintain project quality, particularly if the size
and scope of the Company's projects increase;
o the Company's ability to maintain an effective internal control
structure;
o the Company's limited operating history within its current line of
business;
o the Company's reliance on a continued relationship with SAP America
and the Company's present status as a SAP National Logo Partner;
o the Company's substantial reliance on key customers and large
projects;
o the highly competitive nature of the markets for the Company's
services;
o the Company's ability to successfully address the continuing changes
in information technology, evolving industry standards and changing
customer objectives and preferences;
o the Company's reliance on the continued services of its key executive
officers and leading technical personnel;
o the Company's ability to attract and retain a sufficient number of
highly skilled employees in the future;
o the Company's ability to continue to diversify its offerings,
including growth in its Oracle, Baan and PeopleSoft services;
o uncertainties resulting from pending litigation matters and from
potential administrative and regulatory immigration and tax law
matters;
o the Company's ability to protect its intellectual property rights; and
o Year 2000 compliance of vendors' products and related issues,
including impact of the Year 2000 problem on customer buying patterns.
As a result of these factors and others, the Company's actual results may
differ materially from the results disclosed in such forward-looking statements.
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RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data as a percentage of revenue:
PERCENTAGE OF REVENUE
-----------------------------
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1999 1998
---- ----
Revenue.................................... 100.0% 100.0%
Cost of sales.............................. 66.6 63.0
----- -----
Gross profit............................ 33.4 37.0
Selling, general and administrative
expenses................................. 27.6 23.7
Acquisition expenses....................... 4.5 --
----- -----
Operating income........................ 1.3 13.3
Other income (expense)..................... (0.3) 0.2
------ ------
Income before provision for income taxes.. 1.0 13.5
Provision for income taxes................. 1.2 2.4
----- -----
Net (loss) income.......................... (0.2)% 11.1%
===== =====
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO
THREE MONTHS ENDED MARCH 31, 1998
Revenue. Revenue increased by 39.1%, or $13.2 million, from $33.6 million
during the three months ended March 31, 1998, to $46.8 million during the three
months ended March 31, 1999. This increase is attributable primarily to
increased demand for the Company's implementation services as compared with the
same period in the prior year. Revenue for the three months ended March 31,
1999, included a fixed price project which accounted for approximately 5% of
revenue, as well as revenues from the NPI acquisition completed in January 1999.
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 47.2%, or $10.0 million, from $21.2 million
during the three months ended March 31, 1998 to $31.2 million during the three
months ended March 31, 1999. The increase was due to increased personnel costs
resulting from the hiring of additional consultants during 1998 to support the
increase in demand for the Company's services. The Company's gross profit
increased by 25.4%, or $3.2 million, from $12.5 million during the three months
ended March 31, 1998 to $15.6 million during the three months ended March 31,
1999. Gross profit margin decreased from 37.0% of revenue during the three
months ended March 31, 1998 to 33.4% of revenue during the three months ended
March 31, 1999. While revenue from implementation services increased from the
same period in 1998, the Company experienced a decline in its consultant staff
utilization during the first quarter of 1999, a result of changing ERP market
dynamics. As a consequence, gross margins were adversely affected during the
current period.
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
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development costs and professional fees. Selling, general and administrative
expenses increased by 62.1%, or $5.0 million, from $8.0 million during the three
months ended March 31, 1998 to $12.9 million during the three months ended March
31, 1999, and increased as a percentage of revenue from 23.7% to 27.6%,
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
our corporate headquarters into approximately 48,000 square feet of office
space, from our 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 first quarter of 1999, the Company incurred
costs of $2.1 million in connection with the acquisition of the Empower
Companies.
Interest income (expense). Interest income has been earned on interest
bearing cash accounts and short-term investments. In accordance with investment
guidelines approved by the Company's Board of Directors, cash balances in excess
of those required to fund operations have been invested in short-term U.S.
Treasury securities and commercial paper with a credit rating no lower than
A1/P1. The Company incurred $110,000 in interest expense during the three months
ended March 31, 1999, primarily related to borrowings under its line of credit.
Borrowings under the line of credit were used to fund operating activities, to
purchase NPI, and purchases of computer equipment and office furniture and
fixtures.
Provision for income taxes. The Company's effective tax rate was 120% and
18% for the three months ended March 31, 1999 and 1998, respectively. The
effective tax rate for the three months ended March 31, 1999, increased
significantly as a result of the non-deductibility of acquisition-related
expenses. Additionally, prior to acquisition the Empower Companies were
pass-through entities for income tax reporting purposes, thus their income was
not taxed at the corporate level. Accordingly, the Company's federal statutory
tax rate was decreased by 12% for the three months ended March 31, 1998.
Further, in 1996, the Company elected a five year tax holiday in India, in
accordance with a local tax incentive program whereby no income tax will be due
in such period. For the three months ended March 31, 1999, the tax holiday
favorably impacted the Company's effective tax rate by approximately 49%, while
the effect in the three months ended March 31, 1998 was 6%.
BACKLOG
The Company normally enters into written contracts with its customers at
the time it commences work on a project. These written contracts contain varying
terms and conditions and the Company does not generally believe it is
appropriate to characterize such written contracts as creating backlog. In
addition, because these written contracts often provide that the arrangement can
be terminated with limited advance notice and without significant penalty, the
Company does not believe that projects in process at any one time are a reliable
indicator or measure of expected future revenue. In the event that a customer
terminates a project, the customer remains obligated to pay the Company for
services performed by it through the date of termination.
- 12 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $3.9 million at March 31,
1999, and $4.2 million at December 31, 1998. The Company had working capital of
$30.5 million at March 31, 1999 and $32.6 million at December 31, 1998.
Cash used in operating activities was $4.8 million during the three months
ended March 31, 1999, resulting primarily from the net loss of $91,000 for the
three months ended March 31, 1999, and an increase of $5.5 million in accounts
receivable and unbilled services, a decrease in income taxes payable of $773,000
partially offset by an increase of $810,000 in accounts payable, accrued payroll
and other expenses, and depreciation and amortization expense of $773,000. Cash
used in operating activities for the three months ended March 31, 1998 was $2.3
million.
The Company invested $791,000 million and $2.1 million in computer
equipment and office furniture and fixtures during the three months ended March
31, 1999 and 1998, respectively. The increase reflects both the purchases of
computer and telecommunication equipment for consultants and administrative
staff, and office furniture and fixtures.
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 the date on which such credit facility was
terminated, 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,
N.A. (the "Bank"). 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. Approximately $7.3 million was outstanding under this credit facility
at March 31, 1999.
The Company believes that its available funds, together with current
credit arrangements and the cash flows expected to be generated from operations,
will be adequate to satisfy its current and planned operations through at least
the next twelve months.
YEAR 2000 COMPLIANCE
Historically, certain computer programs have been written using two digits
rather than four to define the applicable year, which could result in the
computer recognizing a date using "00" as the year 1900 rather than 2000. This
in turn, could result in major system failures or miscalculations, and is
generally referred to as the "Year 2000 Problem". The Company believes that it
has sufficiently assessed its state of readiness with respect to its Year 2000
compliance. Based on its assessment, the Company does not believe that Year 2000
compliance will result in material investments by the Company, nor does the
Company anticipate that the Year 2000 Problem will have any adverse effects on
the business operations or financial performance of the Company. The Company
does not believe that it has any material exposure to the Year 2000 Problem with
respect to its own information systems and believes that all of its
business-critical
- 13 -
<PAGE>
systems correctly define the Year 2000 and subsequent years. Based upon its
assessment, theCompany has established no reserve nor instituted any contingency
plans. There can be no assurance, however, that the Year 2000 problem will not
adversely affect the Company's business operating results and financial
condition.
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.
- 14 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On February 16, 1996, the Company, as plaintiff, filed a complaint in the
Superior Court of New Jersey, Chancery Division, Middlesex County, against a
former consultant to the Company, seven former employees of the Company and
Pegasus Systems, Inc. ("Pegasus"), a corporation which currently employs certain
of such individuals (collectively, the "Defendants"). The complaint, which seeks
damages and injunctive relief against the Defendants, alleges, among other
things, misappropriation of proprietary information, unfair competition,
tortious interference, breach of employment agreements, breach of a consulting
agreement between the Company and Pegasus, and breach of duty of loyalty, good
faith and fair dealing. Upon the filing of its complaint, the Company obtained a
temporary restraining order and in May 1996 obtained a preliminary injunction
prohibiting the Defendants from using or disclosing the Company's proprietary
information, prohibiting the Defendants from contacting or soliciting certain of
the Company's customers and prohibiting the Defendants from recruiting or
attempting to recruit the Company's employees, agents or contractors. The
preliminary injunction remains in effect. The Defendants have filed an answer
and counterclaim. Pegasus has asserted a breach of contract counterclaim against
the Company alleging that the Company owes it $129,000 for consulting services.
Pegasus and two of the individual Defendants also asserted claims against the
Company and two of its officers for tortious interference and defamation. In
addition, one of the individual Defendants has asserted that the Company owes
him $70,000 in commissions. In addition to monetary damages the Defendants seek
injunctive relief. The Defendants unsuccessfully sought a temporary restraining
order against the Company. On October 13, 1998, the parties negotiated a
settlement to dispose of all claims asserted in this lawsuit as well as those
asserted in the claim against Sophien Bennaceur (discussed below). The Company
drafted and circulated a settlement agreement which has been executed by the
respective parties and disposed of both lawsuits and which has no material
impact on the Company's business, financial condition or results of operations.
On February 13, 1998, Russell Schultz, a former employee of the Company,
filed a complaint in the Superior Court of New Jersey, Law Division, Monmouth
County, naming the Company as a defendant. The complaint, which seeks damages,
alleges, among other things, that the Company misrepresented plaintiff's job
description in order to induce plaintiff to leave his prior employer, failed to
provide stock options to the plaintiff and violated plaintiff's written
employment contract. The Company was served with the complaint on March 16,
1998. Subsequently, on July 10, 1998, upon the Company's Motion to Compel
Arbitration, the court dismissed the plaintiff's complaint without prejudice.
Subsequently, the plaintiff's motion to reconsider the dismissal was denied. The
plaintiff filed his demand for Arbitration with the American Arbitration
Association on February 17, 1999 and the Company filed its answer on February
26, 1999. It is too early in the dispute process to determine the impact, if
any, that such dispute will have upon the Company's business, financial
condition or results of operations.
On May 28, 1998, the Company and Rajkumar Koneru, as plaintiffs, filed a
complaint in the United States District Court for the District of New Jersey,
against Sophien Bennaceur, a former employee and officer of the Company. The
complaint, which seeks damages and
- 15 -
<PAGE>
injunctive relief against the defendant, alleges among other things,
misappropriation of proprietary information, breach of employment agreement,
breach of fiduciary duty and duty of loyalty, unfair competition and tortious
interference. The defendant was served with the complaint and filed an answer on
July 9, 1998. On October 13, 1998, the parties negotiated a settlement to
dispose of all claims asserted in this lawsuit as well as those asserted in the
Pegasus litigation (discussed above). The Company drafted and circulated a
settlement agreement which, The Company drafted and circulated a settlement
agreement which has been executed by the respective parties and disposed of both
lawsuits and which has no material impact on the Company's business, financial
condition or results of operations..
On January 20, 1999, Tony Knight, a former employee of the Company,
filed a complaint in the Superior Court of the State of California, San Mateo
County, naming the Company, among others, as a defendant. The complaint, which
seeks damages, alleges, among other things, that the Company discriminated
against plaintiff because of his race, ancestry, religious creed and national
origin and thereafter wrongfully terminated the plaintiff's employment with the
Company. The Company, through its counsel, acknowledged receipt of the summons
and complaint on April 20, 1999. It is too early in the litigation process to
determine the impact, if any, that such litigation will have upon the Company's
business, financial condition or results of operations.
There is no other material litigation pending to which the Company is a
party or to which any of its property is subject.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
The following information relates to all securities of the Company sold by
the Company within the quarter ended March 31, 1999 which were not registered
under the Securities Act of 1933, as amended (the "Securities Act"), at the time
of grant, issuance and/or sale:
On February 16, 1999, the Company consummated (i) the merger
of Empower Solutions, L.L.C., a Michigan limited liability
company, with and into the Company's wholly-owned subsidiary ES
Merger Corp., a Michigan corporation ("ES Merger Corp."), and
(ii) the merger of ES Merger Corp. with and into Empower, Inc. a
Michigan corporation and an affiliate of Empower Solutions,
L.L.C. (the mergers of Empower Solutions, L.L.C. and its
affiliate Empower, Inc. shall be referred to herein collectively
as the "Merger"). As a result of the Merger, Empower, Inc.
("Empower") became a wholly-owned subsidiary of the Company.
Empower is an implementation partner of PeopleSoft and its
principle activities are business process reengineering, systems
design development, project management and training services. The
parties intend for the Merger to be accounted for as a pooling of
interests.
The purchase price consisted of the issuance of
approximately $33,200,000 in restricted Common Stock (the
"Restricted Stock") of the Company (1,831,091 shares). Of the
purchase price, $3,320,000 of restricted Common Stock of the
Company (186,066 shares) is being held in escrow for a period of
one year to satisfy any indemnification claims. In addition, the
purchase price may be adjusted
- 16 -
<PAGE>
upward or downward within ninety days of the date of the Merger
based on the audited calculation of Empower's closing net book
value at the date of the Merger (the "Net Book Value
Adjustment"). If positive, the Net Book Value Adjustment, if any,
shall result in a dollar for dollar increase of the purchase
price which shall be paid by the Company through the issuance of
additional shares of restricted Common Stock of the Company. If
negative, the Net Book Value Adjustment, if any, will result in
the cancellation of shares of Restricted Stock held in escrow.
As soon as practicable after the Merger, but in no event
later than the announcement of the Company's 1999 first quarter
financial results, the Company shall use its best efforts to
prepare and file a Registration Statement with the SEC (the
"First Registration Statement") registering for resale the
Restricted Stock issued in connection with the Merger, and use
its best efforts to, as promptly as possible thereafter, have
such Registration Statement declared effective for the purpose of
facilitating the public resale of such Restricted Stock. If, at
the time the Company is required to file the First Registration
Statement, the calculation of the Net Book Value has not yet been
completed, the Company shall use its best efforts to include in
the First Registration Statement 56% of the Restricted Stock
issued in connection with the Merger. (Subsequently, the Company
agreed to use its best efforts to include in the First
Registration Statement 90% of the Restricted Stock issued in
connection with the Merger.) Not later than the first anniversary
after the date of Merger, the Company shall use its best efforts
to prepare and file a Registration Statement with the SEC
registering any remaining shares of the Restricted Stock.
If at any time following the date of the Merger or prior to
the first anniversary of the date of Merger the Company proposes
to file a registration statement under the Securities Act (except
with respect to registration statements on Forms S-4, S-8, or any
other form not available for registering the Common Stock for
sale to the public), with respect to an offering of Common Stock
for its own account or the account of another holder thereof,
then the Company shall in each case give written notice of such
proposed filing to the holders of the Restricted Stock at least
30 days before the anticipated filing date of the registration
statement with respect thereto (the "Piggyback Registration") and
use its best efforts to include in such Piggyback Registration
33.33% of the Restricted Stock not then subject to an effective
Registration Statement.
ITEM 5. OTHER INFORMATION.
Acquisitions
On January 8, 1999, the Company consummated the acquisition (the
"Acquisition") of all of the shares of outstanding capital stock of NPI, a Utah
corporation located in Provo, Utah. As a result of the Acquisition, NPI became a
wholly-owned subsidiary of the Company. The principal activities of NPI are web
site design and front-end application solutions services.
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
pursuant to an escrow agreement
- 17 -
<PAGE>
entered into between the Company and the shareholders of NPI. In addition, the
purchase price includes an earn-out payment of up to $2,212,650 in restricted
shares of the Company's Common Stock, $0.01 par value per share, (the "Earn-Out
Payment"), payable on or before April 15, 2000 and a potential lump sum cash
payment of $354,024 (the "Kicker Payment"), payable no later than March 31,
2000. The Company has agreed to use commercially reasonable efforts to register
the shares of the Company's Common Stock issued in connection with the Earn-Out
Payment pursuant to a registration statement on Form S-3 (or any successor or
similar form) on or before April 30, 2000.
No Earn-Out Payment shall be paid unless NPI's fiscal 1999 revenue and
income before provision for income taxes exceeds $2,350,000 and $188,000,
respectively. The Kicker Payment shall be paid if, and only if, NPI's fiscal
1999 income before provision for income taxes exceeds $450,000.
On February 16, 1999, by way of merger transactions, the Company
consummated the acquisition of Empower Solutions, L.L.C. and its affiliate
Empower, Inc. See Item 2. "Changes in Securities and Use of Proceeds" for more
detailed information concerning such acquisition.
Changes in the Board of Directors
On April 27, 1999, Klaus P. Besier, a member of the Board since 1996,
resigned from the Board. As a result of such resignation, there is currently one
vacancy on the Board. Additionally, Mr. Besier has declined to stand for
re-election to the Board at the Company's upcoming annual shareholders' meeting
scheduled for Tuesday, May 25, 1999. The Board currently expects to designate a
substitute nominee.
On April 27, 1999, David A. Finley, a member of the Board since 1997, was
named Chairman of the Board, a non-executive officer, non-employee position.
- 18 -
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27.1 Financial Data Schedule for the period ended March 31, 1999.
27.2 Financial Data Schedule for the year ended December 31,
1998.
27.3 Financial Data Schedule for the period ended March 31, 1998.
(b) Reports on Form 8-K.
On January 20, 1999, the Company filed a report on Form 8-K
relating to the Company's acquisition of Network Publishing, Inc.
On February 24, 1999, the Company filed a report on Form 8-K
relating to the Company's acquisition of Empower Solutions,
L.L.C. and its affiliate Empower, Inc.
Subsequent to the quarter ended March 31, 1999, the Company
filed, on May 3, 1999, a report of Form 8-K/A relating to the
Company's acquisition of Empower Solutions, L.L.C. and its
affiliate Empower, Inc.
- 19 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Intelligroup, Inc.
DATE: May 17, 1999 By: /s/ Stephen A. Carns
-------------------------------------
Stephen A. Carns,
President and Chief Executive Officer
(Principal Executive Officer)
DATE: May 17, 1999 By: /s/ Gerard E. Dorsey
-------------------------------------
Gerard E. Dorsey,
Senior Vice President-Finance and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
- 20 -
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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