INTELLIGROUP INC, 10-Q, 2000-05-15

INTELLIGROUP INC
10-Q, 2000-05-15
COMPUTER INTEGRATED SYSTEMS DESIGN

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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

---------------

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, 2000
Commission File No. 0-20943

Intelligroup, Inc.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)

New Jersey 11-2880025
- ------------------------------------ ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)

499 Thornall Street, Edison, New Jersey 08837
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)

(732) 590-1600
---------------------------------
(Registrant's Telephone Number,
Including Area Code)

Indicate by checkmark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes: X No:
----- -----

Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of April 28, 2000:

Class Number of Shares
----- ----------------

Common Stock, $.01 par value 16,617,404

<PAGE>

INTELLIGROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS
-----------------

Page
----
PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements........................... 1

Consolidated Balance Sheets
as of March 31, 2000 (unaudited)
and December 31, 1999....................................... 2

Consolidated Statements of Operations and
Comprehensive Income (Loss) for the
Three Months Ended March 31, 2000 and 1999 (unaudited)...... 3

Consolidated Statements of Cash Flows
for the Three Months Ended
March 31, 2000 and 1999 (unaudited)......................... 4

Notes to Consolidated Financial Statements (unaudited)...... 5

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 11

Item 3. Quantitative and Qualitative Disclosures about Market Risk.. 19

PART II. OTHER INFORMATION

Item 1. Legal Proceedings........................................... 20

Item 2. Changes in Securities and Use of Proceeds................... 20

Item 3. Defaults Upon Senior Securities............................. 21

Item 5. Other Information........................................... 22

Item 6. Exhibits and Reports on Form 8-K............................ 23

SIGNATURES................................................................ 24

- i -
<PAGE>

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

- 1 -
<PAGE>

INTELLIGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
March 31, 2000 and December 31, 1999
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................................ $ 4,827,000 $ 6,121,000
Accounts receivable, less allowance for doubtful accounts of $3,800,000
at March 31, 2000 and $3,292,000 at December 31, 1999.................. 31,302,000 35,063,000
Unbilled services........................................................ 12,828,000 11,372,000
Income taxes receivable.................................................. 3,612,000 3,612,000
Deferred tax assets...................................................... 2,481,000 2,481,000
Other current assets..................................................... 3,391,000 3,468,000
----------- -----------
Total current assets.............................................. 58,441,000 62,117,000

Property and equipment, net ................................................. 13,812,000 11,420,000
Intangible assets, net....................................................... 8,364,000 8,681,000
Deferred tax assets.......................................................... 641,000 --
Other assets................................................................. 1,457,000 844,000
----------- -----------
$82,715,000 $83,062,000
=========== ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable......................................................... $ 5,212,000 $4,672,000
Accrued payroll and related taxes........................................ 10,703,000 7,078,000
Accrued expenses and other liabilities................................... 5,677,000 5,599,000
Accrued acquisition costs................................................ 710,000 810,000
Income taxes payable..................................................... 2,111,000 4,120,000
Current portion of long-term debt and obligations under capital leases... 127,000 10,705,000
----------- -----------
Total current liabilities......................................... 24,540,000 32,984,000
----------- -----------

Long-term debt and obligations under capital leases, less current portion.... 639,000 618,000
----------- -----------
Deferred tax liability ...................................................... -- 806,000
----------- -----------

Minority interest............................................................ 742,000 --
----------- -----------

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; 16,427,000
and 15,949,000 shares issued and outstanding at March 31, 2000
and December 31, 1999, respectively.................................... 164,000 160,000
Additional paid-in capital............................................... 56,550,000 43,356,000
Retained earnings ....................................................... 1,238,000 6,317,000
Currency translation adjustment.......................................... (1,158,000) (1,179,000)
----------- -----------
Total shareholders' equity ......................................... 56,794,000 48,654,000
----------- -----------
$82,715,000 $83,062,000
=========== ===========
</TABLE>

The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.

- 2 -
<PAGE>

INTELLIGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended March 31, 2000 and 1999
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
----------- -------

<S> <C> <C>
Revenue.................................................... $45,228,000 $46,795,000
Cost of sales.............................................. 27,573,000 31,175,000
----------- -----------

Gross profit....................................... 17,655,000 15,620,000
----------- -----------

Selling, general and administrative expenses............... 23,217,000 12,158,000
Depreciation and amortization.............................. 1,319,000 773,000
Acquisition expenses....................................... -- 2,115,000
Spin-off costs............................................. 192,000 --
----------- -----------
Total operating expenses............................... 24,728,000 15,046,000
----------- -----------

Operating (loss) income................................ (7,073,000) 574,000

Other expense, net......................................... (31,000) (61,000)
Interest expense, net...................................... (183,000) (60,000)
----------- -----------

(Loss) income before provision for income taxes............ (7,287,000) 453,000

Income tax (benefit) provision ............................ (2,100,000) 544,000
----------- -----------

Net loss................................................... $(5,187,000) $ (91,000)
=========== ===========

Earnings (loss) per share:
Basic earnings per share:
Net loss per share................................. $ (0.32) $ (0.01)
=========== ===========

Weighted average number of common shares - Basic... 16,162,000 15,548,000
=========== ===========

Diluted earnings per share:
Net loss per share................................. $ (0.32) $ (0.01)
=========== ===========

Weighted average number of common shares -
Diluted 16,162,000 15,548,000
=========== ===========

Comprehensive Income (Loss)
- ---------------------------
Net loss................................................... $(5,187,000) $ (91,000)
Other comprehensive income (loss) -
Currency translation adjustments................... 21,000 (329,000)
----------- -----------
Comprehensive loss......................................... $(5,166,000) $ (420,000)
=========== ===========
</TABLE>

The accompanying notes to consolidated financial
statements are an integral part of these statements.

- 3 -

<PAGE>

INTELLIGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2000 and 1999
(unaudited)

<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss....................................................... $ (5,187,000) $ (91,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.............................. 1,319,000 773,000
Provision for doubtful accounts............................ 1,700,000 344,000
Deferred income taxes...................................... (1,447,000) (15,000)
Changes in operating assets and liabilities:

Accounts receivable........................................ 2,061,000 (1,980,000)
Unbilled services.......................................... (1,456,000) (3,543,000)
Other current assets....................................... 77,000 (175,000)
Other assets............................................... ( 613,000) (128,000)
Accounts payable........................................... 540,000 (658,000)
Accrued payroll and related taxes.......................... 3,625,000 293,000
Accrued expenses and other liabilities..................... (22,000) 1,175,000
Income taxes payable....................................... (2,009,000) (773,000)
------------ ------------
Net cash used in operating activities.................. (1,412,000) (4,778,000)
------------ ------------

Cash flows from investing activities:
Purchase of equipment.......................................... (3,394,000) (791,000)
Acquisition of businesses...................................... -- (1,682,000)
------------ ------------
Net cash used in investing activities.................. (3,394,000) (2,473,000)
------------ ------------

Cash flows from financing activities:
Proceeds from issuance of SeraNova common stock................ 10,000,000 --
Proceeds from the exercise of stock options.................... 4,048,000 9,000
(Repayments) borrowing on line of credit, net.................. (10,585,000) 7,300,000
Principal payments under capital leases........................ (3,000) (3,000)
Proceeds from (repayments of) other loans...................... 31,000 (48,000)
------------ ------------
Net cash provided by financing activities.............. 3,491,000 7,258,000
------------ ------------

Effect of foreign currency exchange rate changes on cash....... 21,000 (329,000)
------------ ------------
Net decrease in cash and cash equivalents ............. (1,294,000) (322,000)
------------ ------------
Cash and cash equivalents at beginning of period................... 6,121,000 4,245,000
------------ ------------
Cash and cash equivalents at end of period......................... $ 4,827,000 $ 3,923,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid for income taxes................................. $ 2,009,000 $ 650,000
============ ============
Cash paid for interest..................................... $ 234,000 $ 88,000
============ ============
</TABLE>

The accompanying notes to consolidated financial
statements are an integral part of these statements.

- 4 -

<PAGE>

INTELLIGROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(1) BASIS OF PRESENTATION

The consolidated financial statements and accompanying financial
information as of March 31, 2000 and for the three months ended March 31, 2000
and 1999 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, 1999,
which were included as part of the Company's Form 10-K.

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 (loss) 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.

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:

2000 1999
---- ----

Weighted average number of common shares 16,182,000 15,548,000

Common share equivalents of outstanding
stock options -- --
---------- ----------
Weighted average number of common
shares assuming dilution 16,182,000 15,548,000
============ ==========

Stock options, which would be antidilutive (3,492,834 as of March 31, 2000)
have been excluded from the calculations of diluted shares outstanding and
diluted earnings per share.

- 5 -
<PAGE>

(3) ACQUISITIONS

On January 8, 1999, the Company acquired Network Publishing, Inc., based 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
not later than March 31, 2000. The value of the earn-out was determined to be
$2,430,000 which was payable by the issuance of an additional 99,558 shares of
the Company's Common Stock and $340,000 in cash. The Company issued such shares
on January 11, 2000. This acquisition has been accounted for utilizing the
purchase method of accounting. The excess of the purchase price over the fair
value of the net assets acquired was attributed to intangible assets amounting
to $4,061,471. Pro-forma financial information has not been presented as this
acquisition was immaterial to the Company's operations.

(4) LINES OF CREDIT

On January 29, 1999, the Company entered into a three-year revolving credit
facility agreement with PNC Bank, N.A. (the "Bank"). The credit agreement with
the Bank was comprised of a revolving line of credit pursuant to which the
Company could borrow up to $30,000,000 either at the Bank's prime rate per annum
or the EuroRate plus 2% (at the Company's option).

As a result of the restructuring and other special charges incurred during
the quarter ended June 30, 1999, the Company was not in compliance with the
consolidated cash flow leverage ratio and consolidated net worth financial
covenants at June 30, 1999. On August 12, 1999, the Bank notified the Company
that such non-compliance constituted an event of default under the credit
agreement. At September 30, 1999, while the Company was in compliance with the
consolidated net worth financial covenant, it was not in compliance with the
consolidated cash flow leverage ratio and minimum fixed charge coverage ratio
financial covenants. On January 26, 2000, the Company finalized with the Bank
the terms of a waiver and amendment to the credit agreement to remedy defaults
which existed under the credit agreement. The terms of the waiver and amendment
included, among other things, (i) a $15,000,000 reduction in availability under
the credit agreement, (ii) a first priority perfected security interest on all
assets of the Company and its domestic subsidiaries and (iii) modification of
certain financial covenants and a waiver of prior covenant defaults. Under the
Company's credit agreement, it must maintain the following financial covenants
among others. The Company must maintain a minimum consolidated net worth of
$45.4 million at March 31, 2000, $47.8 million at June 30, 2000 and $50.2
million at September 30, 2000. Additionally, the Company must maintain
consolidated cash flow leverage ratios equal to or less than 2.50 to 1.0 for the
period of four consecutive fiscal quarters immediately preceding the date of
determination taken together as one accounting period. The Company also must not
cause or permit a fixed charge coverage ratio, calculated on the basis of a
rolling four quarters of (a) consolidated earnings before interest, taxes,
depreciation and amortization ("EBITDA") to (b) the sum of cash income tax
expense plus interest expense (including, without limitation, the interest
component of capitalized lease obligations), plus scheduled principal payments
under any indebtedness (including, without limitation, the

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<PAGE>

(4) LINES OF CREDIT (CONTINUED)

principal component of capitalized lease obligations but excluding principal
payments, if any, due under the loan agreement), plus dividends or distributions
paid or declared to be less than 1.4 to 1.0 as at the end of each fiscal
quarter. Further the Company must have consolidated EBITDA of $0 at March 31,
2000, $4.5 million at June 30, 2000 and each quarter thereafter. The
requirements for the consolidated cash flow leverage ratio and fixed charge
coverage ratio have been waived by the Bank through and including September 30,
2000. There were no borrowings under this line of credit as of March 31, 2000.

As a result of the current quarter operating losses, the Company was not in
compliance with the minimum consolidated net worth covenant and the minimum
consolidated EBITDA financial covenant as of March 31, 2000. On May 9, 2000, the
Bank issued to the Company a waiver of the defaults which existed under the
credit agreement for the quarter ended March 31, 2000. The terms of the waiver
included, among other things, (i) the waiver of events of default noted above
for the quarter ending March 31, 2000, and (ii) the agreement that the Company
must maintain a minimum consolidated EBITDA of $3.0 million as of May 31, 2000.

The Company is in the process of negotiating a credit facility for
Intelligroup relating to Intelligroup on a post-SeraNova spin-off basis.
SeraNova is also in the process of negotiating a credit facility relating to its
business on a post-SeraNova spin-off basis. There can be no assurance that
either Intelligroup or SeraNova will be able to consummate such a credit
facility.

(5) PROPOSED SPIN-OFF OF SERANOVA, INC.

On January 1, 2000, the Company transferred its Internet applications
services and management consulting businesses to SeraNova, Inc., a wholly-owned
subsidiary of the Company on such date. SeraNova's revenues and net income
(loss) totaled $16.2 million and $(3.1) million for the quarter ended March 31,
2000, respectively, and $8.0 million and $0.3 million for the quarter ended
March 31, 1999, respectively. Total assets of SeraNova were $21.1 million as of
March 31, 2000. In connection with the spin-off, the Company incurred a
non-recurring charge of $0.2 million related to professional fees during the
quarter ended March 31, 2000.

(6) EQUITY INVESTMENT IN SERANOVA, INC.

On March 14, 2000, SeraNova, a wholly-owned subsidiary of the Company,
entered into an agreement with four institutional investors pursuant to which
such investors purchased an aggregate of 50 shares of SeraNova's common stock as
a price per share of $200,000, for an aggregate purchase price of $10 million.
The investment represented approximately 4.8% of SeraNova's then issued and
outstanding shares of common stock. In connection with such sale of its common
stock, SeraNova granted certain demand and piggyback registration rights to such
investors. In addition, at its option, SeraNova may sell an additional 25 shares
of its common stock for an additional $5 million to another investor.

- 7 -
<PAGE>

(7) RESTRUCTURING AND OTHER SPECIAL CHARGES

In connection with the Company's plan to reduce certain costs and improve
operating efficiencies, the Company incurred a non-recurring charge of
approximately $5.6 million related to restructuring initiatives during the year
ended December 31, 1999. The restructuring charge included settlement of the
former Chief Executive Officer's employment agreement and additional severance
payment, expenses associated with the termination of certain employees in the
United States and United Kingdom, the closing of certain satellite offices in
the United States and an additional office in Belgium, and costs to exit certain
contractual obligations.

Activity in accrued costs for restructuring and other special charges
during the year ended December 31, 1999, and the quarter ended March 31, 2000,
is as follows:

<TABLE>
<CAPTION>
CHARGES TO COSTS COSTS
OPERATIONS PAID ACCRUED COSTS PAID ACCRUED COSTS
DURING DURING DECEMBER 31, DURING MARCH 31,
1999 1999 1999 2000 2000
---------- -------- ------------- ------ -------------
<S> <C> <C> <C> <C> <C>
Severance and related
costs....................... $5,027,000 $4,162,000 $865,000 $169,000 $696,000

Other costs primarily to
exit facilities, contracts
and certain activities ..... 601,000 517,000 84,000 -- 84,000
---------- ---------- -------- -------- --------
$5,628,000 $4,679,000 $949,000 $169,000 $780,000
========== ========== ======== ======== ========
</TABLE>

(8) SEGMENT DATA AND GEOGRAPHIC INFORMATION

The Company operates in one industry, information technology services. The
Company's service lines share similar customer bases. The Company's identifiable
business segments can be categorized into two groups:

o Enterprise Applications Services group 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 Internet Applications Services group provides Internet professional
services to businesses. Such services enable clients to communicate
and conduct commerce between a company and its customers, suppliers
and partners over the Internet.

- 8 -
<PAGE>

(8) SEGMENT DATA AND GEOGRAPHIC INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
Enterprise Internet
Applications Applications
Quarter ended March 31, 2000 Services Services Total
- ---------------------------- ------------ ------------ -----------
<S> <C> <C> <C>
Revenue........................... $29,052,000 $16,176,000 $45,228,000

Depreciation and amortization..... 847,000 472,000 1,319,000

Operating loss.................... (3,069,000) (4,004,000) (7,073,000)

Capital expenditures.............. 1,160,000 2,234,000 3,394,000

Total assets...................... 61,654,000 21,061,000 82,715,000

Quarter ended March 31, 1999
- ----------------------------

Revenue........................... $38,807,000 $7,988,000 $46,795,000

Depreciation and amortization..... 638,000 135,000 773,000

Operating income.................. 96,000 478,000 574,000

Capital expenditures.............. 165,000 626,000 791,000

Total assets...................... 65,780,000 12,193,000 77,973,000
</TABLE>

Included in the Enterprise Applications Services segment are application
maintenance and support revenues of $3.5 million and $0 for the quarters ended
March 31, 2000 and 1999, respectively. Other information related to the
application maintenance and support business is not available and the Company
determined that it would be impractical to calculate such data.

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<PAGE>

(8) SEGMENT DATA AND GEOGRAPHIC INFORMATION (CONTINUED)

The following table presents financial information based upon the Company's
geographic segments for the quarters ended March 31, 2000 and 1999.

<TABLE>
<CAPTION>
UNITED STATES ASIA-PACIFIC EUROPE INDIA TOTAL

2000
<S> <C> <C> <C> <C> <C>
Revenue................. $32,523,000 $4,624,000 $4,884,000 $3,197,000 $45,228,000

Depreciation and
amortization............ 941,000 50,000 174,000 154,000 1,319,000

Operating income (loss). (6,180,000) (1,196,000) (812,000) 1,115,000 (7,073,000)

Total assets............ 61,896,000 6,972,000 6,011,000 7,836,000 82,715,000

1999

Revenue................. $34,960,000 $4,687,000 $5,867,000 $1,281,000 $46,795,000

Depreciation and
amortization............ 619,000 39,000 50,000 65,000 773,000

Operating income (loss). (294,000) 497,000 (264,000) 635,000 574,000

Total assets............ 60,750,000 7,827,000 6,732,000 2,664,000 77,973,000
</TABLE>

- 10 -
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

OVERVIEW

The Company provides a wide range of information technology services,
including enterprise-wide business process solutions, IT training solutions,
systems integration and custom software development based on leading
technologies. Such services include 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. The
Company has also recently dedicated resources to developing application service
provider offerings, including web hosting services. In November 1999, the
Company announced its intentions to spin off its Internet applications services
business ("SeraNova"), subject to certain conditions. Through SeraNova, the
Company provides Internet professional services to businesses. SeraNova's
services enable its clients to communicate and conduct commerce between a
company and its customers, suppliers and partners. SeraNova offers a
comprehensive set of services, including strategic consulting, creative design,
technology implementation and management of Internet applications.

The Company generates revenue from professional services rendered to
customers. Revenue is recognized as services are performed. The Company's
services range from providing customers with a single consultant to
multi-personnel, full-scale projects. The Company provides these services to its
customers primarily on a time and materials basis and pursuant to written
contracts which can be terminated with limited advance notice, typically not
more than 30 days, and without significant penalty, generally limited to fees
earned and expenses incurred by the Company through the date of termination. The
Company provides its services directly to end-user organizations or as a member
of a consulting team assembled by another information technology consulting firm
to Fortune 1000 and other large and mid-sized companies. The Company generally
bills its customers semi-monthly for the services provided by its consultants at
contracted rates. Where contractual provisions permit, customers also are billed
for reimbursement of expenses incurred by the Company on the customers' behalf.

The Company has provided services on certain projects in which it, at the
request of the clients, offers a fixed price for its services. For the year
ended December 31, 1999, revenues derived from projects under fixed price
contracts represented approximately 9% of the Company's total revenue. Fixed
price contracts, in the aggregate, represented 11% of the Company's total
revenue during the quarter ended March 31, 2000. No single fixed price project
was material to the Company's business during 1999 or during the quarter ended
March 31, 2000. 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, financial condition and results of
operations.

- 11 -
<PAGE>

The Company has derived and believes that it will continue to derive a
significant portion of its revenue from a limited number of customers and
projects. For the three months ended March 31, 2000 and the year ended December
31, 1999, the Company's ten largest customers accounted for in the aggregate
approximately 44% and 38% of its revenue, respectively. For the three months
ended March 31, 2000, one customer accounted for approximately 14% of revenues.
For the year ended December 31, 1999, another customer accounted for more than
10% of revenue. During the three months ended March 31, 2000 and the year ended
December 31, 1999, approximately 35% and 42%, 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, 2000 and the
year ended December 31, 1999, approximately 5% and 7% of the Company's total
revenue was derived from projects in which the Company implemented software
developed by Oracle. During the three months ended March 31, 2000 and the year
ended December 31, 1999, approximately 24% and 26%, respectively, of the
Company's total revenue was derived from projects in which the Company
implemented software developed by PeopleSoft.

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.

The Company currently maintains its headquarters in Edison, New Jersey, and
branch offices in Houston, Fayetteville (Georgia), Rosemont (Illinois), Auburn
Hills (Michigan), Foster City (California), Atlanta, Phoenix, Washington, D.C.
and Provo (Utah). The Company also currently maintains offices in Europe (the
United Kingdom, Denmark and Sweden), and Asia Pacific (Australia, India, Japan,
New Zealand, the Philippines, Singapore and Thailand). 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.

FORWARD-LOOKING STATEMENTS

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 and the Company's
intent to spin off its Internet services business are also forward-looking
statements. Such forward-looking

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<PAGE>

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 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;

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<PAGE>

o the Company's ability to protect its intellectual property rights; and

o the Company's ability to successfully spin off its Internet services
business. The risks relating to such spin-off are set forth more
specifically in the Registration Statement filed by SeraNova in
connection with the proposed spin-off. See also Item 5. Other
Information.

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.

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,
-----------------------
2000 1999
---- ----
Revenue........................................ 100.0% 100.0%

Cost of sales.................................. 61.0 66.6
------ ------
Gross profit................................ 39.0 33.4

Selling, general and administrative expenses... 51.3 27.6

Depreciation and amortization expenses......... 2.9 --

Acquisition expenses........................... -- 4.5

Spin-Off costs................................. 0.4 --
------ ------
Operating (loss) income..................... (15.6) 1.3

Interest and other expense, net................ (0.4) (0.3)
------ ------
(Loss) income before provision for income
taxes....................................... (16.0) 1.0

Income tax (benefit) provision................. (4.6) 1.2
------ ------
Net loss....................................... (11.4)% (0.2)%
------ ------

THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999

Revenue. Total revenue decreased by 3.3%, or $1.6 million, from $46.8
million during the three months ended March 31, 1999, to $45.2 million during
the three months ended March 31, 2000. Enterprise applications services ("EAS")
revenue declined by 25.1%, or $9.8 million, from $38.8 million during the three
months ended March 31, 1999 to $29.0 million during the three months ended March
31, 2000. This decrease was primarily attributable the strategic refocusing of
our core enterprise resource planning implementation operations into the
emerging application service provider market. Internet applications services
("IAS") revenue increased by 102.5%, or $8.2 million, from $8.0 million during
the three months ended March 31, 1999 to $16.2 million during the three months
ended March 31, 2000. The increase in revenue is due to

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<PAGE>

both increases in the number of clients and increases in the size of engagements
from expansion of U.S. operations plus the continued development of Indian
operations which began in the fourth quarter of 1999. Total revenue for the
three months ended March 31, 2000 included a fixed price project which accounted
for approximately 6% of revenue.

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 decreased by 11.6%, or $3.6 million, from $31.2 million
during the three months ended March 31, 1999 to $27.6 million during the three
months ended March 31, 2000. The overall decrease in cost of sales was due to
the increase in IAS revenues, which generally have carried higher margins. The
Company's gross profit increased by 13.1%, or $2.1 million, from $15.6 million
during the three months ended March 31, 1999 to $17.7 million during the three
months ended March 31, 2000. Gross profit margin increased from 33.4% of revenue
during the three months ended March 31, 1999 to 39.0% of revenue during the
three months ended March 31, 2000. The EAS cost of sales decreased 27.7%, or
$7.3 million, from $26.5 million during the three months ended March 31, 1999 to
$19.2 million during the three months ended March 31, 2000. The EAS gross profit
margin increased from 31.6% during the three months ended March 31, 1999 to
34.0% during the three months ended March 31, 2000. The increase in gross profit
margin was primarily attributable to higher consultant utilization. IAS cost of
sales increased by 80.4%, or $3.8 million from $4.7 million during the three
months ended March 31, 1999 to $8.4 million during the three months ended March
31, 2000. The increase was due to additional personnel costs resulting from the
hiring of consultants to support the increase in demand for IAS. IAS gross
profit margins increased from 41.8% during the three months ended March 31, 1999
to 48.1% during the three months ended March 31, 2000, primarily attributable to
the impact of higher margins from Indian operations and higher utilization rates
for U.S. personnel.

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 Advanced Development Center and the
Internet Development Center and related development costs and professional fees.
Selling, general and administrative expenses increased by 91.0%, or $11.0
million, from $12.2 million during the three months ended March 31, 1999 to
$23.2 million during the three months ended March 31, 2000, and increased as a
percentage of revenue from 26.0% to 51.3%, respectively. EAS selling, general
and administrative expenses increased by 28.2%, or $2.7 million, from $9.4
million during the three months ended March 31, 1999 to $12.1 million during the
three months ended March 31, 2000. IAS selling, general, and administrative
expenses increased by 308.2%, or $8.4 million, from $2.7 million during the
three months ended March 31, 1999 to $11.1 million during the three months ended
March 31, 2000. The increases in such expenses is primarily due to substantial
investments in marketing and in the development of sales and administrative
infrastructures for the U.S. and overseas operations. The Company has also
entered into an agreement with a strategic marketing consulting company, which
is intended to generate sales leads, support sales force, and build a sales
systems infrastructure, for both the EAS and IAS businesses. The Company
anticipates continued increases in selling, general and administrative expenses
during the second quarter of 2000 relative to its Internet Services business.

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<PAGE>

Depreciation and amortization. Depreciation and amortization expenses
increased 70.6% to $1.3 million during the three months ended March 31, 2000,
compared to $0.8 million during the three months ended March 31, 1999. The
increase was primarily due to additional computers, equipment and software
placed in service since March 31, 1999, as well as amortization expense
associated with the January 1999 Network Publishing, Inc. acquisition.

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 approximately $183,000 in interest expense during
the three months ended March 31, 2000, primarily related to borrowings under its
line of credit. Borrowings under the line of credit were used to fund operating
activities.

Spin-off costs. During the three months ended March 31, 2000, the Company
incurred costs of $192,000 in connection with the proposed spin-off of SeraNova
from the Company. These costs primarily consisted of professional fees.

(Benefit) provision for income taxes. The Company's effective tax rate was
(28.8)% and 120.1% for the three months ended March 31, 2000 and 1999,
respectively. In 1996, the Company elected a five year tax holiday in India, in
accordance with a local tax incentive program whereby no income tax will be due
in such period. Such tax holiday was extended an additional five years in 1999.
For the three months ended March 31, 2000, the tax holiday unfavorably impacted
the Company's effective tax rate by approximately 5%, while the favorable effect
in the three months ended March 31, 1999 was 49%. Based on current and
anticipated profitability, management believes all recorded 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 had cash and cash equivalents of $4.8 million at March 31,
2000, and $6.1 million at December 31, 1999. The Company had working capital of
$33.9 million at March 31, 2000 and $29.1 million at December 31, 1999.

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<PAGE>

Cash used in operating activities was $1.4 million during the three months
ended March 31, 2000, resulting primarily from the net loss, increase in
unbilled services and payments of income taxes. This was partially offset by
depreciation and amortization and the provision for doubtful accounts, a
decrease in accounts receivable, as well as increases in accounts payable and
accrued payroll and related taxes. Cash used in operating activities for the
three months ended March 31, 1999 was $4.8 million.

The Company invested $3.4 million and $791,000 in computer equipment and
office furniture and fixtures during the three months ended March 31, 2000 and
1999, respectively. The increase reflects both the purchases of computer and
telecommunication equipment for consultants and administrative staff, and office
furniture and fixtures.

On March 14, 2000, SeraNova, a subsidiary of the Company, entered into an
agreement with four institutional investors pursuant to which such investors
purchased an aggregate of 50 shares of SeraNova's common stock as a price per
share of $200,000, for an aggregate purchase price of $10 million. The
investment represents approximately 4.8% of SeraNova's issued and outstanding
shares of common stock. In connection with such sale of its common stock,
SeraNova granted certain demand and piggyback registration rights to such
investors. In addition, at its option, SeraNova may sell an additional 25 shares
of its common stock for an additional $5 million to another investor.

On January 29, 1999, the Company entered into a three-year revolving credit
facility agreement with the Bank. The credit agreement with the Bank was
comprised of a revolving line of credit pursuant to which the Company could
borrow up to $30,000,000 either at the Bank's prime rate per annum or the
EuroRate plus 2% (at the Company's option).

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<PAGE>

expense plus interest expense (including, without limitation, the interest
component of capitalized lease obligations), plus scheduled principal payments
under any indebtedness (including, without limitation, the principal component
of capitalized lease obligations but excluding principal payments, if any, due
under the loan agreement), plus dividends or distributions paid or declared to
be less than 1.4 to 1.0 as at the end of each fiscal quarter. Further the
Company must have consolidated EBITDA of $0 at March 31, 2000, $4.5 million at
June 30, 2000 and each quarter thereafter. The requirements for the consolidated
cash flow leverage ratio and fixed charge coverage ratio have been waived by the
Bank through and including September 30, 2000. There were no borrowings under
this line of credit as of March 31, 2000.

YEAR 2000 COMPLIANCE

The Company did not experience any significant computer or systems problems
relating to the Year 2000. Upon review of the Company's internal and external
systems during 1999, the Company determined that it did not have any material
exposure to such computer problems and that the software and systems required to
operate its business and provide its services were Year 2000 compliant. As a
result, the Company did not incur, and does not expect to incur, any material
expenditures relating to Year 2000 systems issues.

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

- 18 -
<PAGE>

the Company participates and the potential actions which may or may not be taken
by the Company's competitors and suppliers.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Although the Company cannot accurately determine the precise effect thereof
on its operations, it does not believe inflation, currency fluctuations or
interest rate changes have historically had a material effect on its revenues,
sales or results of operations. Any significant effects of inflation, currency
fluctuations and changes in interest rates on the economies of the United
States, Asia and Europe could adversely impact the Company's revenues, sales and
results of operations in the future. If there is a material adverse change in
the relationship between European currencies and/or Asian currencies and the
United States Dollar, such change would adversely affect the results of the
Company's European and/or Asian operations as reflected in the Company's
financial statements. The Company has not hedged its exposure with respect to
this currency risk, and does not expect to do so in the future, since it does
not believe that it is practicable for it to do so at a reasonable cost.

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<PAGE>

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

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. On May 19, 1999, the Company removed the action
from the California Superior Court to the United States District Court for the
Northern District of California. A discovery scheduling order was entered at the
case management conference held on December 2, 1999. On April 12, 2000, the
Company's motion for summary judgment, dismissing the complaint against all
defendants, was granted.

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, 2000 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 January 8, 1999, the Company consummated the acquisition
(the "NPI Acquisition") of all of the shares of outstanding
capital stock of Network Publishing, Inc. ("NPI"), a Utah
corporation located in Provo, Utah. As a result of the NPI
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.

In connection with the NPI Acquisition, on January 11, 2000,
the Company issued an aggregate of 99,558 restricted shares of
its Common Stock, $0.01 par value per share, to Richard Maw,
Richard Farr and Michael Donahue relating to the provisions of
the earn-out provision of the Stock Purchase Agreement. On
January 28, 2000, the Company filed an amendment to its
Registration Statement on Form S-3 to register such shares. The
Company did not and will not receive any of the proceeds from
sales of the shares by Messrs. Maw, Farr and Donahue.

- 20 -
<PAGE>

shares of common stock. In connection with such sale of its
common stock, SeraNova granted certain demand and piggyback
registration rights to such investors. In addition, at its
option, SeraNova may sell an additional 25 shares of its common
stock for an additional $5 million to another investor. SeraNova
utilized $6.9 million of such proceeds to repay amounts
outstanding under the PNC Bank credit facility which were
attributable to SeraNova and intends to use the remainder of such
proceeds for working capital and general corporate purposes.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

As a result of the restructuring and other special charges incurred during
the quarter ended June 30, 1999, the Company was not in compliance with the
consolidated cash flow leverage ratio and consolidated net worth financial
covenants at June 30, 1999. On August 12, 1999, the Bank notified the Company
that such non-compliance constituted an event of default under the credit
agreement. At September 30, 1999, while the Company was in compliance with the
consolidated net worth financial covenant, it was not in compliance with the
consolidated cash flow leverage ratio and minimum fixed charge coverage ratio
financial covenants. On January 26, 2000, the Company finalized with the Bank
the terms of a waiver and amendment to the credit agreement to remedy defaults
which existed under the credit agreement. The terms of the waiver and amendment
included, among other things, (i) a $15,000,000 reduction in availability under
the credit agreement, (ii) a first priority perfected security interest on all
assets of the Company and its domestic subsidiaries and (iii) modification of
certain financial covenants and a waiver of prior covenant defaults. Under the
Company's credit agreement, it must maintain the following financial covenants
among others. The Company must maintain a minimum consolidated net worth of
$45.4 million at March 31, 2000, $47.8 million at June 30, 2000 and $50.2
million at September 30, 2000. Additionally, the Company must maintain
consolidated cash flow leverage ratios equal to or less than 2.50 to 1.0 for the
period of four consecutive fiscal quarters immediately preceding the date of
determination taken together as one accounting period. The Company also must not
cause or permit a 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 (including, without limitation, the interest
component of capitalized lease obligations), plus scheduled principal payments
under any indebtedness (including, without limitation, the principal component
of capitalized lease obligations but excluding principal payments, if any, due
under the loan agreement), plus dividends or distributions paid or declared to
be less than 1.4 to 1.0 as at the end of each fiscal quarter. Further the
Company must have consolidated EBITDA of $0 at March 31, 2000, $4.5 million at
June 30, 2000 and each quarter thereafter. The requirements for the consolidated
cash flow leverage ratio and fixed charge coverage ratio have been waived by the
Bank through and including September 30, 2000. There were no borrowings under
this line of credit as of March 31, 2000.

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<PAGE>

ITEM 5. OTHER INFORMATION.

In November 1999, the Company announced its intention to spin off its
Internet services business to the shareholders of the Company, subject to
certain conditions. On January 1, 2000, the Company transferred its Internet
Services business to SeraNova, Inc., a subsidiary of the Company. On January 27,
2000, SeraNova filed a Registration Statement with the Securities and Exchange
Commission relating to the proposed spin-off of SeraNova from the Company. The
Company established May 12, 2000 as the record date in connection with the
spin-off. Subject to transfers of the Company's common stock after such record
date, the Company's shareholders of record at the close of business on May 12,
2000, shall be entitled to one share of SeraNova common stock for each share of
the Company's common stock held by them. Such spin-off is expected to be
effective during the second quarter of 2000.

On March 14, 2000, SeraNova entered into a purchase agreement with four
institutional investors pursuant to which such investors purchased an aggregate
of 50 shares of SeraNova's common stock at a price per share of $200,000, for an
aggregate purchase price of $10 million. Such investors included Evansville,
Ltd., Ampal-American Israel Corporation, NSA Investments, Inc. and SSB, Ltd. The
investment represented approximately 4.8% of SeraNova's issued and outstanding
shares of common stock. In connection with such sale of its common stock,
SeraNova granted certain demand and piggyback registration rights to such
investors. In addition, at its option, SeraNova may sell an additional 25 shares
of its common stock for an additional $5 million to another investor. SeraNova
utilized $6.9 million of such proceeds to repay amounts outstanding under the
PNC Bank credit facility which were attributable to SeraNova and intends to use
the remainder of such proceeds for working capital and general corporate
purposes.

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<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits.

27 Financial Data Schedule for the period ended March 31, 2000.

(b) Reports on Form 8-K.

On March 22, 2000, the Company filed a report on Form 8-K
relating to the issuance and sale by SeraNova, Inc., the
Company's wholly-owned subsidiary, of approximately 4.8% of its
common stock to four institutional investors for an aggregate
purchase price of $10 million.

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<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 15, 2000 By: /s/ Ashok Pandey
--------------------------------
Ashok Pandey,
Co-Chief Executive Officer
(Principal Executive Officer)

DATE: May 15, 2000 By: /s/ Nicholas Visco
--------------------------------
Nicholas Visco,
Vice President-Finance and Chief
Financial Officer (Principal Financial
and Accounting Officer)

- 24 -

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS WHICH ARE INCLUDED IN THE
REGISTRANT'S FORM 10-Q FOR THE PERIOD ENDED 3/31/00 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> Intelligroup, Inc.
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