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 September 30, 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 November 3, 2000:
Class Number of Shares
----- ----------------
Common Stock, $.01 par value 16,630,125
<PAGE>
INTELLIGROUP, INC. and SUBSIDIARIES
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements............................. 1
Consolidated Balance Sheets
as of September 30, 2000 and December 31, 1999 (unaudited).... 2
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the Three Months and Nine Months Ended
September 30, 2000 and 1999 (unaudited)....................... 3
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999 (unaudited)................. 4
Notes to Consolidated Financial Statements (unaudited)........ 5
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 21
PART II. OTHER INFORMATION
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
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
------------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents.................................... $ 2,013,000 $ 5,510,000
Accounts receivable, less allowance for doubtful accounts
of $2,861,000 at September 30, 2000 and $2,939,000 at
December 31, 1999.......................................... 18,326,000 27,607,000
Unbilled services............................................ 5,773,000 7,692,000
Income tax receivable........................................ 2,533,000 3,612,000
Deferred tax asset........................................... 2,481,000 2,481,000
Other current assets......................................... 9,375,000 2,699,000
Note receivable - SeraNova................................... 12,618,000 --
Net current assets of discontinued operations................ -- 7,621,000
----------- -----------
Total current assets.................................... 53,119,000 57,222,000
Note receivable - SeraNova...................................... -- 8,397,000
Property and equipment, net..................................... 7,747,000 7,744,000
Capitalized software solutions, net............................. 2,770,000 813,000
Intangible assets, net.......................................... 4,846,000 5,189,000
Deferred tax asset.............................................. 1,370,000 --
Other assets.................................................... 1,125,000 835,000
----------- -----------
$ 70,977,000 $ 80,200,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................. $ 6,007,000 $ 3,800,000
Accrued payroll and related taxes............................ 9,544,000 5,527,000
Accrued expenses and other liabilities....................... 8,269,000 4,273,000
Income taxes payable......................................... 1,270,000 3,904,000
Current portion of long-term debt and obligations under
capital leases............................................. 3,294,000 10,585,000
----------- -----------
Total current liabilities............................... 28,384,000 28,089,000
Deferred tax liability.......................................... -- 806,000
Long-term debt and obligations under capital leases............. 748,000 --
Net non-current liabilities of discontinued operations.......... -- 2,651,000
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;
16,630,000 and 15,949,000 shares issued and outstanding
at September 30, 2000 and December 31, 1999, respectively.. 166,000 160,000
Additional paid-in capital................................... 41,360,000 43,356,000
Retained earnings ........................................... 2,640,000 6,317,000
Currency translation adjustments............................. (2,321,000) (1,179,000)
----------- -----------
Total shareholders' equity ............................... 41,845,000 48,654,000
----------- -----------
$ 70,977,000 $ 80,200,000
=========== ===========
</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 AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue..................................... $ 27,599,000 $ 37,879,000 $ 84,340,000 $ 114,506,000
Cost of sales............................... 18,159,000 24,539,000 55,834,000 76,018,000
----------- ----------- ----------- -----------
Gross profit.......................... 9,440,000 13,340,000 28,506,000 38,488,000
----------- ----------- ----------- -----------
Selling, general and administrative
expenses.................................. 9,406,000 10,447,000 33,546,000 30,730,000
Depreciation and amortization............... 836,000 541,000 2,406,000 1,929,000
Acquisition expenses........................ -- -- -- 2,115,000
Restructuring and other special charges..... -- -- -- 7,328,000
----------- ----------- ----------- -----------
Total operating expenses.............. 10,242,000 10,988,000 35,952,000 42,102,000
----------- ----------- ----------- -----------
Operating income (loss)............... (802,000) 2,352,000 (7,446,000) (3,614,000)
Other income, net........................... 71,000 69,000 95,000 147,000
Interest income (expense), net.............. 145,000 (241,000) 305,000 (508,000)
----------- ----------- ----------- -----------
Income (loss) from continuing operations
before income tax provision (benefit)..... (586,000) 2,180,000 (7,046,000) (3,975,000)
Income tax provision (benefit).............. 596,000 597,000 (865,000) (1,002,000)
----------- ----------- ----------- -----------
Income (loss) from continuing operations.... (1,182,000) 1,583,000 (6,181,000) (2,973,000)
Income (loss) from discontinued operations,
net of tax expense (benefit) of $0,
$205,000, $(2,095,000) and $450,000,
respectively ............................. -- 122,000 (4,891,000) 559,000
----------- ----------- ----------- -----------
Net income (loss)........................... $ (1,182,000) $ 1,705,000 $ (11,072,000) $ (2,414,000)
=========== =========== =========== ===========
Earnings per share:
Basic earnings per share:
Continuing operations ............... $ (0.07) $ 0.10 $ (0.38) $ (0.19)
Discontinued operations.............. -- 0.01 (0.30) 0.03
----------- ----------- ----------- -----------
Net income (loss) per share........ $ (0.07) $ 0.11 $ (0.68) $ (0.16)
=========== =========== =========== ===========
Weighted average number of
Common shares - Basic................ 16,630,000 15,549,000 16,441,000 15,549,000
=========== =========== =========== ===========
Diluted earnings per share:
Continuing operations................ $ (0.07) $ 0.10 $ (0.38) $ (0.19)
Discontinued operations.............. -- 0.01 (0.30) 0.03
----------- ----------- ----------- -----------
Net income (loss) per share........ $ (0.07) $ 0.11 $ (0.68) $ (0.16)
=========== =========== =========== ===========
Weighted average number of
Common shares - Diluted.............. 16,630,000 15,551,000 16,441,000 15,549,000
=========== =========== =========== ===========
Comprehensive Income (Loss)
---------------------------
Net income (loss)........................... $ (1,182,000) $ 1,705,000 $ (11,072,000) $ (2,414,000)
Other comprehensive loss -
Currency translation adjustments.... (708,000) (15,000) (842,000) (578,000)
----------- ----------- ----------- -----------
Comprehensive income (loss)................. $ (1,890,000) $ 1,690,000 $ (11,914,000) $ (2,992,000)
=========== =========== =========== ===========
</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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended
--------------------------------
September 30, September 30,
2000 1999
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................ $ (11,072,000) $ (2,414,000)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Loss (income) from discontinued operations, net of tax...... 4,891,000 (559,000)
Depreciation and amortization............................... 2,406,000 1,929,000
Provision for doubtful accounts............................. 2,725,000 2,912,000
Deferred income taxes....................................... (2,176,000) 33,000
Changes in operating assets and liabilities:
Accounts receivable........................................... 6,556,000 (1,501,000)
Unbilled services............................................. 1,919,000 95,000
Other current assets.......................................... (4,812,000) (354,000)
Other assets.................................................. (290,000) 716,000
Accounts payable.............................................. 2,207,000 (1,562,000)
Accrued payroll and related taxes............................. 4,017,000 2,955,000
Accrued restructuring charges................................. (524,000) 1,742,000
Accrued expenses and other liabilities........................ 4,520,000 1,182,000
Income taxes payable.......................................... (2,634,000) (2,964,000)
----------- -----------
Cash provided by operating activities of continuing operations.. 7,733,000 2,210,000
Cash used in operating activities of discontinued operations.... (5,879,000) (2,440,000)
----------- -----------
Net cash provided by (used in) operating activities....... 1,854,000 (230,000)
----------- -----------
Cash flows from investing activities:
Purchase of equipment and capitalized software solutions
by continuing operations...................................... (3,774,000) (2,134,000)
Purchase of equipment by discontinued operations................ (5,270,000) (394,000)
Acquisition of businesses by discontinued operations ........... -- (1,682,000)
----------- -----------
Net cash used in investing activities..................... (9,044,000) (4,210,000)
----------- -----------
Cash flows from financing activities:
Principal payments under capital leases......................... (19,000) (6,000)
Proceeds from exercise of stock options......................... 5,745,000 2,509,000
Shareholder dividends .......................................... -- (170,000)
Other borrowings................................................ 30,000 --
Net change in line of credit borrowings......................... (7,588,000) 10,647,000
Net change in note receivable-SeraNova prior to spin-off date... (7,707,000) (3,099,000)
Payment on note receivable-SeraNova subsequent to spin-off date. 3,000,000 --
----------- -----------
Net cash (used in) provided by financing activities of
continuing operations....................................... (6,539,000) 9,881,000
Net cash provided by (used in) financing activities of
discontinued operations..................................... 11,149,000 (201,000)
----------- -----------
Net cash provided by financing activities................. 4,610,000 9,680,000
----------- -----------
Effect of foreign currency exchange rate changes on cash........ (917,000) (579,000)
----------- -----------
Net (decrease) increase in cash and cash equivalents...... (3,497,000) 4,661,000
Cash and cash equivalents at beginning of period................... 5,510,000 3,568,000
----------- -----------
Cash and cash equivalents at end of period......................... $ 2,013,000 $ 8,229,000
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for income taxes...................................... $ 2,512,000 $ 2,464,000
Cash paid for interest.......................................... 409,000 508,000
</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 September 30, 2000 and for the three and nine months ended
September 30, 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 income (loss) 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
would 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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average number of common
shares................................ 16,630,000 15,549,000 16,441,000 15,549,000
Common share equivalents of
outstanding stock options............. -- 2,000 -- --
---------- ---------- ---------- ----------
Weighted average number of common
shares assuming dilution.............. 16,630,000 15,551,000 16,441,000 15,549,000
========== ========== ========== ==========
</TABLE>
- 5 -
<PAGE>
Stock options, which would be antidilutive (3,652,000 outstanding as of
September 30, 2000) have been excluded from the calculations of diluted shares
outstanding and diluted earnings per share.
(3) LINES OF CREDIT
On May 31, 2000, the Company entered into a three-year revolving credit
facility agreement with PNC Bank, N.A. (the "Bank"). The credit facility
agreement is comprised of a revolving line of credit pursuant to which the
Company can borrow up to $20,000,000 either at the Bank's prime rate per annum
or the EuroRate plus 2.5% to 1.75% based upon the Company's ratio of debt to
EBITDA. The credit facility is collateralized by substantially all of the assets
of the United States based operations. The maximum borrowing availability under
the line of credit is based upon a percentage of eligible billed and unbilled
accounts receivable. As of September 30, 2000, the Company had outstanding
borrowings under the credit facility of approximately $3.0 million. The Company
estimates undrawn availability under the credit facility to be approximately
$7.3 million as of September 30, 2000.
The credit agreement provides for the following financial covenants
(exclusive of SeraNova), among other things, (1) the Company must maintain
consolidated net worth, as defined ("consolidated net worth") of (a) $42.0
million at each of June 30, 2000, September 30, 2000, and December 31, 2000; (b)
not less than 95% of consolidated net worth of the immediately preceding fiscal
year-end as at each such fiscal quarter after December 31, 2000; and (c) at
least 105% of consolidated net worth as of the immediately preceding fiscal
year-end as at each such fiscal year-end subsequent to December 31, 2000;
provided, however, the foregoing covenant shall not be tested for any quarter so
long as the Company maintains, at all times during such fiscal quarter, undrawn
availability of more than $5.0 million and (2) the Company must maintain
unconsolidated net worth, as defined ("unconsolidated net worth") of (a) $39.0
million at each of June 30, 2000, September 30, 2000, and December 31, 2000; (b)
not less than 95% of unconsolidated net worth of the immediately preceding
fiscal year-end as at each such fiscal quarter after December 31, 2000; and (c)
at least 105% of unconsolidated net worth as of the immediately preceding fiscal
year-end as at each such fiscal year-end subsequent to December 31, 2000;
provided, however, the foregoing covenant shall not be tested for any quarter so
long as the Company maintains, at all times during such fiscal quarter, undrawn
availability of more than $5.0 million. Additionally, the credit facility
contains material adverse change clauses with regards to the financial condition
of the assets, liabilities and operations of the Company. As of September 30,
2000, the Company was in compliance with all financial covenants.
- 6 -
<PAGE>
(4) DISCONTINUED OPERATIONS
On January 1, 2000, the Company transferred its Internet applications
services and management consulting businesses to SeraNova, Inc. ("SeraNova"), a
wholly-owned subsidiary of the Company on such date. On January 27, 2000,
SeraNova filed a Registration Statement with the Securities and Exchange
Commission (the "SEC") relating to the proposed spin-off of SeraNova from the
Company. On June 29, 2000, the SEC declared SeraNova's Registration Statement
effective. On July 5, 2000, the Company distributed all of the outstanding
shares of the common stock of SeraNova then held by the Company to holders of
record of the Company's common stock as of the close of business on May 12, 2000
(or to their subsequent transferees) in accordance with the terms of a
Distribution Agreement dated as of January 1, 2000 between the Company and
SeraNova. Accordingly, the assets, liabilities and results of operations of
SeraNova have been reported as discontinued operations for all periods
presented.
The following unaudited selected financial data for SeraNova is presented
for informational purposes only.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $19,843,000 $8,614,000 $36,019,000 $16,602,000
Pre-tax income/(loss) (2,797,000) 217,000 (6,986,000) 676,000
Income tax expense/(benefit) (985,000) 65,000 (2,095,000) 244,000
Net income/(loss) (1,812,000) 152,000 (4,891,000) 432,000
</TABLE>
June 30, 2000 December 31, 1999
------------- -----------------
Accounts receivable, net $13,052,000 $7,456,000
Unbilled services 7,419,000 3,680,000
Property and equipment, net 7,408,000 2,863,000
Intangible assets, net 3,365,000 3,492,000
All other assets 5,630,000 1,389,000
Note payable-Intelligroup 15,059,000 8,397,000
All other liabilities 11,111,000 5,513,000
Total shareholders' equity 10,704,000 4,970,000
(5) NOTE RECEIVABLE - SERANOVA
On May 31, 2000, SeraNova and the Company formalized a $15.1 million
unsecured promissory note ("Note") relating to net borrowings by SeraNova from
the Company through such date. The Note bears interest at the prime rate plus
1/2%. A mandatory pre-payment of $3.0 million was made on September 29, 2000
with the balance being due on July 31, 2001. The Note has certain mandatory
prepayment provisions based on future debt or equity financings by SeraNova.
- 7 -
<PAGE>
(5) NOTE RECEIVABLE - SERANOVA (CONTINUED)
In September 2000, SeraNova consummated an $8.0 million preferred stock
financing with two institutional investors. According to the mandatory
prepayment provisions of the Note, SeraNova would be required to make a
prepayment on the Note as a result of the stock financing. Subsequently, the
Company finalized with SeraNova the terms of an agreement and waiver to the Note
to waive, subject to certain conditions, certain of the mandatory prepayment
obligations arising as a result of the financing. The terms of the agreement and
waiver included, among other things, that SeraNova pay the Company (i) $500,000
upon execution of the agreement; (ii) $500,000 on or before each of January 31,
2001, February 28, 2001, March 31, 2001, April 30, 2001 and May 31, 2001; and
(iii) $400,000 on or before December 15, 2000 to be applied either as (a) an
advance payment towards a contemplated services arrangement for hosting services
to be provided to SeraNova by Company (the "Hosting Agreement"); or (b) in the
event that no such Hosting Agreement is executed on or before December 15, 2000,
an additional advance prepayment toward the principal of the Note.
(6) RESTRUCTURING AND OTHER SPECIAL CHARGES
In connection with management's plan to reduce 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
the 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 nine month period ended September 30, 2000 is as follows:
<TABLE>
<CAPTION>
Charges to Accrued Costs Accrued Costs
Operations Costs Paid December 31, Costs Paid September 30,
during 1999 during 1999 1999 During 2000 2000
----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Severance and related costs.. $5,027,000 $4,162,000 $865,000 $524,000 $341,000
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 $524,000 $425,000
========== ========== ======== ======== ========
</TABLE>
Additionally, in 1999 the Company recorded a reserve of $1.7 million
against an outstanding receivable from a large account, whose parent corporation
filed for protection under Chapter 11 of the U.S. bankruptcy laws.
- 8 -
<PAGE>
(7) SEGMENT DATA AND GEOGRAPHIC INFORMATION
The Company operates in one industry, information technology services. The
Company had been reporting two business segments as follows:
o Enterprise Applications Services group - the largest business segment
of the Company's operations which includes the implementation,
integration, development, and customization of solutions for clients
utilizing a class of application products known as Enterprise Resource
Planning software. This class of products includes software developed
by such companies as SAP, Oracle, PeopleSoft, and Baan. The segment
also includes application service provider offerings including the
development, customization, and integration of enterprise and
e-commerce applications, hosted externally, and made accessible to
customers over a secure network, on a monthly, per seat, subscription
basis.
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.
The Internet Applications Services group represented the assets,
liabilities and results of operations of SeraNova, which has been reported as
discontinued operations for all periods presented. Accordingly, the Company's
Enterprise Applications Services group is presented as one business segment in
the following geographic areas for the three and nine months ended September 30,
2000 and 1999.
- 9 -
<PAGE>
(7) SEGMENT DATA AND GEOGRAPHIC INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
United
States Asia-Pacific Europe India Total
----------- ------------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Three months ended
------------------
September 30, 2000
------------------
Revenue $18,978,000 $2,923,000 $ 4,385,000 $1,313,000 $ 27,599,000
Depreciation and
amortization 529,000 31,000 177,000 99,000 836,000
Operating income (loss) (418,000) 247,000 (369,000) (262,000) (802,000)
Total assets 50,995,000 4,628,000 10,365,000 4,989,000 70,977,000
Three months ended
------------------
September 30, 1999
------------------
Revenue $27,320,000 $2,065,000 $6,692,000 $1,802,000 $ 37,879,000
Depreciation and
amortization 399,000 31,000 49,000 62,000 541,000
Operating income (loss) 849,000 8,000 773,000 722,000 2,352,000
Total assets 54,081,000 3,244,000 7,583,000 4,732,000 69,640,000
Nine months ended
-----------------
September 30, 2000
------------------
Revenue $59,611,000 $7,490,000 $13,678,000 $3,561,000 $ 84,340,000
Depreciation and
amortization 1,501,000 87,000 520,000 298,000 2,406,000
Operating income (loss) (5,461,000) (33,000) (1,099,000) (853,000) (7,446,000)
Nine months ended
-----------------
September 30, 1999
------------------
Revenue $84,347,000 $6,565,000 $19,135,000 $4,459,000 $114,506,000
Depreciation and
amortization 1,504,000 85,000 151,000 189,000 1,929,000
Operating income (loss) (5,304,000) (299,000) 151,000 1,838,000 (3,614,000)
</TABLE>
Included above are application maintenance and support revenues of $5.0
million and $655,000 for the three months ended September 30, 2000 and 1999,
respectively. The application maintenance and support revenues for the nine
months ended September 30, 2000 and 1999 are $15.8 million and $1.1 million
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.
- 10 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
OVERVIEW
We provide a range of information technology solutions and services
including the development, integration, implementation, hosting and full
lifecycle support of e-commerce and enterprise applications to companies of all
sizes. Our industry-specific knowledge and expertise in a wide range of
technologies, coupled with our ability to provide timely and cost-effective
integrated technology solutions, are intended to provide our customers with
substantial improvements in the efficiency and performance of their businesses.
Our mission is to develop, deploy, and host customized, scalable technology
solutions that integrate seamlessly into our customers' existing environment,
maximize the return on customers' technology investment, and provide a faster
time-to-market and lower total cost of ownership.
Since the Company's inception in 1987, we have built our reputation on the
design, development, implementation and support of complex technology solutions
based primarily on SAP, Oracle and PeopleSoft products, utilizing our best
business practices, methodologies and toolsets. In 1999, we made the strategic
decision to leverage our "traditional" application integration and consulting
experience and reposition Intelligroup for future growth by focusing on the
emerging Application Service Provider ("ASP") market.
As a global ASP of customized, scalable enterprise and e-commerce
solutions, we have focused our development and marketing efforts on the vertical
industries in which we have built expertise and which we believe are ready for
adoption of the ASP model. These specific industries include: process and
discrete manufacturing, professional services, and the public sector. As a
full-service, single-source ASP, Intelligroup's ASPPlus(SM) Hosting service
bundles the key ASP components and core competencies, combining leading
e-commerce and enterprise software and a global technology infrastructure, with
our application implementation, management and support resources and
capabilities. Utilizing the ASP model, our "software-to-service" solutions are
contracted on a predictable subscription basis and delivered to customers over a
secure global network. As the single point of accountability to the customer, we
support and manage every component of the ASP - from servers to software, data
centers to data storage. By taking responsibility for the Service Level
Agreements associated with the ASP model, we can help assure the on-going
reliability of security, performance, service and long-term support for the
customer.
Our ASPPlus Hosting provides customers with e-commerce and enterprise
software selected by Intelligroup to closely match the business needs of
specific market segments, such as pharmaceutical manufacturers, IT professional
services organizations, high tech and educational institutions. Our strategic
alliances with such software leaders as SAP, PeopleSoft, Niku, MicroStrategy,
Onyx, Vignette and Ariba give our customers access to the latest developments in
technology-based business solutions, including enterprise resources planning,
customer relationship management, business intelligence, content management, and
supply chain management. To provide the global infrastructure on which we
deliver and support solutions for customers worldwide, Intelligroup became a
founding Platinum member of AT&T's Ecosystem for ASPs. As our strategic partner
and infrastructure provider, AT&T provides the data center, hardware and
operating systems, and requisite bandwidth and communications capabilities.
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<PAGE>
These strategic alliances and hosting partnerships not only support our ASP
model, they present strong cross-selling opportunities and multiple points of
entry into a customer's enterprise.
By customizing, configuring and integrating core business systems such as
human resources and financials with business-to-business and
business-to-customer applications, we can create for our customers an end-to-end
technology value chain that delivers e-commerce and enterprise solutions across
the entire enterprise.
Key to our strategy is the ASPPlus Advanced Development Center in
Hyderabad, India which provides 24 x 365 development and support using the
technical expertise of its developers and technical staff. In May 2000, the
center was awarded Level 2 of the People Capability Maturity Model(R) by the
Carnegie Mellon Software Engineering Institute (SEI). The achievement recognizes
Intelligroup for its ability to attract, develop, motivate, organize and retain
the talent needed to continuously improve its software development capability.
Intelligroup is among the first in the IT industry to integrate SEI workforce
improvement with software process improvement, for which we have achieved the
SEI Capability Maturity Model for Software(R) (CMM)(SM) Level 5 certification
for continuous improvement of our software engineering. In addition, we are ISO
9001-certified for software development, support and optimization.
Intelligroup's ASPPlus eSourcing Services are focused on the delivery and
support of outsourced ERP and Internet implementation and maintenance services.
ASPPlus eSourcing Services provide full life cycle support of ERP and Internet
applications through our offshore facilities and resources.
The majority of our revenues continue to be generated from traditional
professional information technology services rendered to customers. These
services range from providing customers with a single consultant to
multi-personnel, full-scale projects. We provide these services to our 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. We provide these
services either 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. In general, the Company
bills its customers semi-monthly for the services provided by our 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 traditional professional 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
16% of the Company's total revenue during the nine months ended September 30,
2000. No single fixed price project was material to the Company's business
during the nine months ended September 30, 1999 and 2000. The Company believes
that 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
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<PAGE>
such fixed price contracts, if entered into, could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company has derived and believes that it will continue to derive a
significant portion of its revenue from a limited number of customers and
projects. For the nine months ended September 30, 2000, and the year ended
December 31, 1999, the Company's ten largest customers accounted for in the
aggregate approximately 42% and 43% of its revenue, respectively. For the nine
months ended September 30, 2000, one customer accounted for approximately 12% of
revenue. For the year ended December 31, 1999, one customer accounted for
approximately 14% of revenue. During the nine months ended September 30, 2000,
and the year ended December 31, 1999, approximately 62% and 53%, respectively,
of the Company's total revenue was derived from projects in which the Company
implemented software developed by SAP. During the nine months ended September
30, 2000, and the year ended December 31, 1999, approximately 26% and 33%,
respectively, of the Company's total revenue was derived from projects in which
the Company implemented software developed by PeopleSoft. During the nine months
ended September 30, 2000, and the year ended December 31, 1999, approximately 9%
of the Company's total revenue was derived from projects in which the Company
implemented software developed by Oracle.
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's inability to continue winning such higher-margin turnkey
project management assignments and more complex projects may adversely impact
the Company's future revenue and growth.
The Company currently maintains its headquarters in Edison, New Jersey, and
branch offices in Houston, Rosemont (Illinois), Foster City (California) and
Atlanta. The Company also currently maintains offices in Europe (the United
Kingdom, Denmark and Sweden), and Asia Pacific (Australia, India, Japan, New
Zealand, Hong Kong and Singapore). The Company leases its headquarters in
Edison, New Jersey. 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
comprehensive ASPPlus solutions and higher margin turnkey management assignments
and more complex projects and to utilize its proprietary implementation and
upgrade 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
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<PAGE>
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 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 the continued uncertainty of the application service provider ("ASP")
market and revenues derived from anticipated ASP business.
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<PAGE>
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:
<TABLE>
<CAPTION>
Percentage of Revenue
-----------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue.................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales............................ 65.8 64.8 66.2 66.4
------ ------ ------ ------
Gross profit......................... 34.2 35.2 33.8 33.6
Selling, general and administrative
expenses............................... 34.1 27.6 39.8 26.8
Depreciation and amortization expenses... 3.0 1.4 2.8 1.7
Acquisition expenses..................... -- -- -- 1.8
Restructuring and other special charges.. -- -- -- 6.4
------ ------ ------ ------
Operating income (loss).............. (2.9) 6.2 (8.8) (3.1)
Interest and other income (expense), net. 0.8 (0.5) 0.5 (0.3)
------ ------ ------ ------
Income (loss) from continuing operations
before income tax expense (benefit)..... (2.1) 5.7 (8.3) (3.4)
Income tax expense (benefit)............. 2.2 1.6 (1.0) (0.9)
------ ------ ------ ------
Income (loss) from continuing operations. (4.3)% 4.1% (7.3)% (2.5)%
====== ====== ====== ======
</TABLE>
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<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
The following discussion compares the quarters ended September 30, 2000 and
September 30, 1999, in each case without SeraNova, Inc. ("SeraNova") which was
treated as discontinued operations as of the quarter ended June 30, 2000.
Revenue. Total revenue decreased by 27.1%, or $10.3 million, from $37.9
million during the three months ended September 30, 1999, to $27.6 million
during the three months ended September 30, 2000. This decrease was primarily
attributable to the anticipated decline in sales of traditional implementation
services offerings and slower than expected growth in outsourcing and hosting
revenues as the Company refocuses resources into the application service
provider market.
Gross profit. The Company's cost of sales primarily includes the cost of
salaries to consultants and related employee benefits and payroll taxes. The
Company's cost of sales decreased by 26.0%, or $6.4 million, from $24.5 million
during the three months ended September 30, 1999 to $18.2 million during the
three months ended September 30, 2000. The Company's gross profit decreased by
29.4%, or $3.9 million, from $13.3 million during the three months ended
September 30, 1999 to $9.4 million during the three months ended September 30,
2000. These decreases were attributable to lower revenues. Gross margin
decreased to 34.2% during the three months ended September 30, 2000 from 35.2%
during the three months ended September 30, 1999. The Company was able to
maintain gross margins comparable to prior quarters by aggressively managing
non-billable consultant time.
Selling, general and administrative expenses. Selling, general and
administrative expenses primarily consist of administrative salaries, and
related benefits costs, occupancy costs, sales person compensation, travel and
entertainment, costs associated with the Advanced Development Center and related
development costs and professional fees. Selling, general and administrative
expenses decreased by 10.0%, or $1.0 million, from $10.4 million during the
three months ended September 30, 1999 to $9.4 million during the three months
ended September 30, 2000 but increased as a percentage of revenue from 27.6% to
34.1%, respectively. While the Company increased certain sales and marketing
expenditures to gain access to the application service provider market, it
aggressively managed other discretionary expenditures, resulting in an overall
decrease in selling, general and administrative expenses in absolute dollars.
The increase in selling, general and administrative expenses, as a percentage of
revenue, is primarily related to the decline in revenues.
Depreciation and amortization. Depreciation and amortization expenses
increased 54.5% to $836,000 during the three months ended September 30, 2000,
compared to $541,000 during the three months ended September 30, 1999. The
increase is primarily due to additional computers, equipment and software placed
in service since September 30, 1999, in support of the ASPPlus business model.
Interest income (expense). The Company earned approximately $415,000 in
interest income during the three months ended September 30, 2000, primarily
related to the note receivable with SeraNova. The Company incurred approximately
$270,000 in interest expense
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<PAGE>
during the three months ended September 30, 2000, primarily related to
borrowings under its line of credit. Borrowings under the line of credit were
used to fund operating activities.
(Benefit) provision for income taxes. While the Company experienced an
overall pre-tax loss, there were profits generated in certain foreign
jurisdictions, including Puerto Rico, which resulted in tax expense for the
quarter ended September 30, 2000. Although the Company expects foreign taxes to
produce foreign tax credits in the United States, the ability to apply these
credits may be limited and, therefore, the Company has provided a valuation
allowance against such tax credits, which has negatively impacted income tax
expense. The Company's effective tax rate was 101.7% and 27.4% for the three
months ended September 30, 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 September 30, 2000, the tax holiday unfavorably impacted the Company's
effective tax rate by approximately 5.7%, while the favorable effect in the
three months ended September 30, 1999 was 12.6%. Based on anticipated
profitability in the near future, management believes all recorded net deferred
tax assets are more likely than not to be realized.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
The following discussion compares the nine months ended September 30, 2000
and September 30, 1999, in each case without SeraNova, which was treated as
discontinued operations as of the quarter ended June 30, 2000.
Revenue. Total revenue decreased by 26.3%, or $30.2 million, from $114.5
million during the nine months ended September 30, 1999, to $84.3 million during
the nine months ended September 30, 2000. This decrease was primarily
attributable to the anticipated decline in sales of traditional implementation
services offerings and slower than expected growth in outsourcing and hosting
revenues as the Company refocuses resources into the application service
provider market.
Gross profit. The Company's cost of sales decreased by 26.6%, or $20.2
million, from $76.0 million during the nine months ended September 30, 1999 to
$55.8 million during the nine months ended September 30, 2000. The Company's
gross profit decreased by 25.9%, or $10.0 million, from $38.5 million during the
nine months ended September 30, 1999 to $28.5 million during the nine months
ended September 30, 2000. These decreases were attributable to lower revenues.
Gross margin increased to 33.8% during the nine months ended September 30, 2000
from 33.6% during the nine months ended September 30, 1999. The Company was able
to slightly improve gross margins compared to the prior period by aggressively
managing non-billable consultant time.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 9.2%, or $2.8 million, from $30.7 million
(excluding restructuring, acquisition and other special charges) during the nine
months ended September 30, 1999 to $33.5 million during the nine months ended
September 30, 2000 and increased as a percentage of revenue from 26.8% to 39.8%,
respectively. The increase in selling, general and administrative
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<PAGE>
expenses, in absolute dollars and as a percentage of revenue, is primarily
related to additional sales staff and expanded marketing efforts as the Company
focuses resources around the emerging application service provider market.
Depreciation and amortization. Depreciation and amortization expenses
increased 24.7% to $2.4 million during the nine months ended September 30, 2000,
compared to $1.9 million during the nine months ended September 30, 1999. The
increase is primarily due to additional computers, equipment and software placed
in service since September 30, 1999, in support of the ASPPlus business model.
Acquisition expense. During the nine months ended September 30, 1999, the
Company incurred costs of $2.1 million in connection with the acquisition of the
Empower Companies.
Restructuring and other special charges. For the nine months ended
September 30, 1999, the Company incurred a non-recurring charge of $5.6 million
related to restructuring initiatives in connection with management's plan to
reduce costs and improve operating efficiencies. 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 the 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. Additionally, the
Company recorded a reserve of approximately $1.7 million against an outstanding
receivable from a large ERP account, whose parent corporation filed for
protection under Chapter 11 of the U.S. bankruptcy laws.
Interest income (expense). The Company earned approximately $773,000 in
interest income during the nine months ended September 30, 2000, primarily
related to the note receivable with SeraNova. The Company incurred approximately
$468,000 in interest expense during the nine months ended September 30, 2000,
primarily related to borrowings under its line of credit. Borrowings under the
line of credit were used to fund operating activities.
(Benefit) provision for income taxes. While the Company experienced an
overall pre-tax loss for the nine months ended September 30, 2000, there were
profits generated in foreign jurisdictions, including Puerto Rico, which
resulted in tax expense. Although the Company expects payment of such foreign
taxes to produce foreign tax credits in the United States, the ability to apply
these credits may be limited and, therefore, the Company has provided a
valuation allowance against such tax credits, which has negatively impacted
income tax expense. The Company's effective tax rate was (12.3)% and (25.2)% for
the nine months ended September 30, 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 nine months ended
September 30, 2000, the tax holiday unfavorably impacted the Company's effective
tax rate by approximately 3.1%, while the favorable effect in the nine months
ended September 30, 1999 was 16.5%. Based on current and anticipated
profitability, management believes all recorded net deferred tax assets are more
likely than not to be realized.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of approximately $2.0 million at
September 30, 2000, and $5.5 million at December 31, 1999. The Company had
working capital of $24.7 million at September 30, 2000 and $29.1 million at
December 31, 1999.
Cash provided by operating activities of continuing operations was $7.7
million during the nine months ended September 30, 2000, resulting primarily
from the decreases in accounts receivable and unbilled services and increases in
accrued payroll and related taxes and accrued expenses and other liabilities,
partially offset by the net loss from continuing operations. The decreases in
accounts receivable and unbilled services result from enhanced credit and
collection efforts as well as a decrease in revenues. The increase in accrued
payroll and related taxes results from bonus and commission payment timing
differences. The increase in accrued expenses and other liabilities results from
accruals for costs associated with the Company's strategic hosting alliances.
Cash provided by operating activities of continuing operations for the nine
months ended September 30, 1999 was $2.2 million.
The Company invested $3.8 million and $2.1 million in computer equipment,
office furniture and fixtures and capitalized software solutions during the nine
months ended September 30, 2000 and 1999, respectively. The increase reflects
the purchases of computer equipment and office furniture and fixtures for
consultants and administrative staff, purchases of software solutions and
internally-developed software costs for customers.
On May 31, 2000, the Company entered into a three-year revolving credit
facility agreement with PNC Bank, N.A. (the "Bank"). The credit facility
agreement is comprised of a revolving line of credit pursuant to which the
Company can borrow up to $20,000,000 either at the Bank's prime rate per annum
or the EuroRate plus 2.5% to 1.75% based upon the Company's ratio of debt to
EBITDA. The credit facility is collateralized by substantially all of the assets
of the United States based operations. The maximum borrowing availability under
the line of credit is based upon a percentage of eligible billed and unbilled
accounts receivable. As of September 30, 2000, the Company had outstanding
borrowings under the credit facility of approximately $3.0 million. The Company
estimates undrawn availability under the credit facility to be approximately
$7.3 million as of September 30, 2000.
The credit agreement provides for the following financial covenants
(exclusive of SeraNova), among other things, (1) the Company must maintain
consolidated net worth, as defined ("consolidated net worth") of (a) $42.0
million at each of June 30, 2000, September 30, 2000, and December 31, 2000; (b)
not less than 95% of consolidated net worth of the immediately preceding fiscal
year-end as at each such fiscal quarter after December 31, 2000; and (c) at
least 105% of consolidated net worth as of the immediately preceding fiscal
year-end as at each such fiscal year-end subsequent to December 31, 2000;
provided, however, the foregoing covenant shall not be tested for any quarter so
long as the Company maintains, at all times during such fiscal quarter, undrawn
availability of more than $5.0 million and (2) the Company must maintain
unconsolidated net worth, as defined ("unconsolidated net worth") of (a) $39.0
million at each of June 30, 2000, September 30, 2000, and December 31, 2000; (b)
not less than 95% of unconsolidated net worth of the immediately preceding
fiscal year-end as at each such fiscal quarter after December 31, 2000; and (c)
at least 105% of unconsolidated net worth as of the immediately preceding fiscal
year-end as at each such fiscal year-end subsequent to
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<PAGE>
December 31, 2000; provided, however, the foregoing covenant shall not be tested
for any quarter so long as the Company maintains, at all times during such
fiscal quarter, undrawn availability of more than $5.0 million. Additionally,
the credit facility contains material adverse change clauses with regards to the
financial condition of the assets, liabilities and operations of the Company. As
of September 30, 2000, the Company was in compliance with all financial
covenants.
On May 31, 2000, SeraNova and the Company formalized a $15.1 million
unsecured promissory note ("Note") relating to net borrowings by SeraNova from
the Company through such date. The Note bears interest at the prime rate plus
1/2%. A mandatory pre-payment of $3.0 million was made on September 29, 2000
with the balance being due on July 31, 2001. The Note has certain mandatory
prepayment provisions based on future debt or equity financings by SeraNova.
In September 2000, SeraNova consummated an $8.0 million preferred stock
financing with two institutional investors. According to the mandatory
prepayment provisions of the Note, SeraNova would be required to make a
prepayment on the Note as a result of the stock financing. Subsequently, the
Company finalized with SeraNova the terms of an agreement and waiver to the Note
to waive, subject to certain conditions, certain of the mandatory prepayment
obligations arising as a result of the financing. The terms of the agreement and
waiver included, among other things, that SeraNova pay the Company (i) $500,000
upon execution of the agreement; (ii) $500,000 on or before each of January 31,
2001, February 28, 2001, March 31, 2001, April 30, 2001 and May 31, 2001; and
(iii) $400,000 on or before December 15, 2000 to be applied either as (a) an
advance payment towards a contemplated services arrangement for hosting services
to be provided to SeraNova by Company (the "Hosting Agreement"); or (b) in the
event that no such Hosting Agreement is executed on or before December 15, 2000,
an additional advance prepayment toward the principal of the Note.
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.
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<PAGE>
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 5. OTHER INFORMATION.
On January 1, 2000, the Company transferred its Internet applications
services and management consulting businesses to SeraNova, Inc. ("SeraNova") a
wholly-owned subsidiary of the Company on such date. On January 27, 2000,
SeraNova filed a Registration Statement with the Securities and Exchange
Commission (the "SEC") relating to the proposed spin-off of SeraNova from the
Company. On June 29, 2000, the SEC declared SeraNova's Registration Statement
effective. Accordingly, the assets, liabilities and results of operations of
SeraNova have been reported as discontinued operations for all periods
presented.
On July 5, 2000, the Company distributed all of the outstanding shares of
the common stock of SeraNova then held by the Company to holders of record of
the Company's common stock as of the close of business on May 12, 2000 (or to
their subsequent transferees) in accordance with the terms of a Distribution
Agreement dated as of January 1, 2000, between the Company and SeraNova.
Shares of the Company's common stock continue to trade on the Nasdaq
National Market under the ticker symbol ITIG. Shares of SeraNova common stock
trade on the Nasdaq National Market under the ticker symbol SERA.
As of July 6, 2000, the Company adjusted the exercise price of all employee
and director stock options to offset the reduction in option value caused by the
spin-off of SeraNova. The exercise price of each stock option grant outstanding
as of July 5, 2000, was adjusted based on the percentage change in the closing
price of the Company's stock on the distribution date of July 5, 2000, and the
ex-dividend date of July 6, 2000. In accordance with FASB Interpretation No. 44,
Accounting for Certain Transactions involving Stock Compensation, the Company
has concluded that there are no accounting consequences for changing the
exercise price of outstanding stock options as a result of the spin-off.
On May 31, 2000, SeraNova and the Company formalized a $15.1 million
unsecured promissory note ("Note") relating to net borrowings by SeraNova from
the Company through such date. The Note bears interest at the prime rate plus
1/2%. A mandatory pre-payment of $3.0 million was made on September 29, 2000
with the balance being due on July 31, 2001. The Note has certain mandatory
prepayment provisions based on future debt or equity financings by SeraNova.
In September 2000, SeraNova consummated an $8.0 million preferred stock
financing with two institutional investors. According to the mandatory
prepayment provisions of the Note, SeraNova would be required to make a
prepayment on the Note as a result of the stock financing. Subsequently, the
Company finalized with SeraNova the terms of an agreement and waiver to the Note
to waive, subject to certain conditions, certain of the mandatory prepayment
obligations arising as a result of the financing. The terms of the agreement and
waiver included, among other things, that SeraNova pay the Company (i) $500,000
upon execution of the agreement; (ii) $500,000 on or before each of January 31,
2001, February 28, 2001, March 31, 2001, April 30,
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<PAGE>
2001 and May 31, 2001; and (iii) $400,000 on or before December 15, 2000 to be
applied either as (a) an advance payment towards a contemplated services
arrangement for hosting services to be provided to SeraNova by Company (the
"Hosting Agreement"); or (b) in the event that no such Hosting Agreement is
executed on or before December 15, 2000, an additional advance prepayment toward
the principal of the Note.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.1 Agreement and Waiver with respect to Amended and Restated
Promissory Note by and between the Company and SeraNova, Inc.
dated as of September 29, 2000.
27.1 Financial Data Schedule for the nine-month period ended September
30, 2000.
27.2 Financial Data Schedule for the three-month period ended
September 30, 2000.
27.3 Financial Data Schedule for the nine-month period ended September
30, 1999.
27.4 Financial Data Schedule for the three-month period ended
September 30, 1999.
(b) Reports on Form 8-K.
On July 17, 2000, the Company filed a report on Form 8-K relating
to (i) the Company's distribution of all of the outstanding
shares of the common stock of SeraNova held by the Company to
holders of record of the Company's common stock as of the close
of business on May 12, 2000 (or to their subsequent transferees)
in accordance with the terms of that certain Distribution
Agreement dated as of January 1, 2000 between the Company and
SeraNova; and (ii) a $15,100,000 unsecured Promissory Note dated
May 31, 2000, between the Company and SeraNova relating to net
borrowings by SeraNova from the Company through such date.
On September 14, 2000, the Company filed a report on Form 8-K/A
to file the financial statements, related pro forma financial
statements and exhibits required pursuant to Item 7 of the Form
8-K filed on July 17, 2000.
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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: November 14, 2000 By: /s/ Nagarjun Valluripalli
---------------------------------------------
Nagarjun Valluripalli,
Chairman and Chief Executive Officer
(Principal Executive Officer)
DATE: November 14, 2000 By: /s/ Nicholas Visco
---------------------------------------------
Nicholas Visco,
Vice President-Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
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