As Filed with the Securities and Exchange Commission on January 28, 2000
Registration No. 333-94285
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------------
AMENDMENT NO. 1 FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Intelligroup, Inc.
----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
New Jersey 11-2880025
- --------------------------------- ---------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization Identification Number)
499 Thornall Street
Edison, New Jersey 08837
(732) 590-1600
-------------------------------------------------------------
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
ASHOK PANDEY
Co-Chief Executive Officer
Intelligroup, Inc.
499 Thornall Street
Edison, New Jersey 08837
(732) 590-1600
-------------------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------------------------------
Copy to:
DAVID J. SORIN, ESQ.
DAVID S. MATLIN, ESQ.
Buchanan Ingersoll Professional Corporation
650 College Road East
Princeton, New Jersey 08540
(609) 987-6800
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Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective.
----------------------------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. |X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
<PAGE>
<TABLE>
<CAPTION>
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CALCULATION OF REGISTRATION FEE
=============================================================================================
Proposed
Amount Maximum Proposed Maximum Amount Of
Title of Shares To Be Aggregate Price Aggregate Registration
To Be Registered Registered Per Share Offering Price Fee
- -------------------- --------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Common Stock,
$.01 par value..... 440,281 $22.06(1) $9,712,599 $2,564.13(2)
Common Stock,
$.01 par value..... 99,558 $31.88(3) $3,173,909 $ 837.91
- ---------------------------------------------------------------------------------------------
Total 539,839 $12,886,508 $3,402.04
=============================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c). Such price is based upon the average of the high
and low price per share of the Registrant's Common Stock as reported on the
Nasdaq National Market on January 4, 2000.
(2) The registration fee was paid at the time of the initial filing of this
Registration Statement.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c). Such price is based upon the average of the high
and low price per share of the Registrant's Common Stock as reported on the
Nasdaq National Market on January 25, 2000.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
********************************************************************************
* The information in this prospectus is not complete and may be changed. The *
* Selling Shareholders may not sell these securities until the registration *
* statement filed with the Securities and Exchange Commission is effective. *
* This prospectus is not an offer to sell these securities and it is not *
* soliciting an offer to buy these securities in any state where the offer or *
* sale is not permitted. *
********************************************************************************
PROSPECTUS (Not Complete)
Issued: January 28, 2000
539,839 Shares
INTELLIGROUP, INC.
499 Thornall Street
Edison, New Jersey 08837
(732) 590-1600
COMMON STOCK
The Selling Shareholders may offer and sell, from time to time, an
aggregate of 539,839 shares of the common stock of Intelligroup, Inc. See
"Selling Shareholders" for information relating to the names and number of
shares offered hereby by each individual selling shareholder. The selling
shareholders may sell all or a portion of their shares through public or private
transactions, at prevailing market prices, or at privately negotiated prices. We
will not receive any part of the proceeds from sales of these shares.
Our common stock is listed on the Nasdaq National Market under the
symbol "ITIG". The last reported sale price of the Common Stock on January 27,
2000 on the Nasdaq National Market was $38.75 per share.
----------------------------------------
INVESTING IN THE SHARES OF COMMON STOCK INVOLVES CERTAIN RISKS. SEE
"RISK FACTORS" BEGINNING ON PAGE 5.
----------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
January , 2000
<PAGE>
INTELLIGROUP, INC.
TABLE OF CONTENTS
Page
----
About Intelligroup ............................................... 3
Where You Can Find More Information .............................. 4
Risk Factors ..................................................... 5
Use of Proceeds ................................................. 16
Selected Financial Data........................................... 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 18
Selling Shareholders.............................................. 28
Plan of Distribution.............................................. 31
Legal Matters..................................................... 31
Experts .......................................................... 31
Indemnification of Directors and Officers......................... 31
Securities and Exchange Commission Position on Indemnification
for Securities Act Liabilities.................................... 33
Financial Statements.............................................. F-1
<PAGE>
ABOUT INTELLIGROUP
We provide a wide range of information technology services, including
management consulting, enterprise-wide business process solutions, internet
applications services, applications outsourcing and maintenance, web site design
and customization, information technology training solutions, systems
integration and custom software development based on leading technologies. We
provide our services directly to end-user organizations or as a member of
consulting teams assembled by other information technology consulting firms. Our
customers are Fortune 1000 and other large and mid-sized companies in the United
States and abroad.
We were incorporated in New Jersey in October 1987 under the name
Intellicorp, Inc. Our name was changed to Intelligroup, Inc. in July 1992. Our
principal executive offices are located at 499 Thornall Street, Edison, New
Jersey 08837 and our telephone number is (732) 590-1600. Additional information
about us may be obtained at our website at http:/www.intelligroup.com. The
information contained at our website is not incorporated into and does not
constitute part of this prospectus, and the only information that you should
rely on in making your decision whether to invest in our common stock is the
information contained in or specifically incorporated by referenced into this
prospectus.
All references to "we, "us," "our," or Intelligroup in this prospectus
means Intelligroup, Inc. and its subsidiaries.
- 3 -
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission ("SEC"). You may
read and copy any document the Company files at the SEC's public reference room
at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room. Our SEC
filings are also available to the public from the SEC's website at
http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with the SEC, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and later information that we file
with the SEC will automatically update and supersede this information.
We incorporate by reference the documents listed below and any future
filings made with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the
Securities Exchange Act of 1934 until the Selling Shareholders sell all the
shares registered hereunder.
1. Annual Report on Form 10-K for the year ended December 31, 1998;
2. Quarterly Report on Form 10-Q for the quarters ended March 31, 1999,
June 30, 1999 and September 30, 1999;
3. Current Reports on Form 8-K dated and filed with the SEC on January 20,
1999, February 24, 1999, May 3, 1999 and May 27, 1999; and
4. The description of our common stock, $.01 par value, which is contained
in our Registration Statement on Form 8-A filed pursuant to Section
12(g) of the Securities Exchange Act of 1934, as amended, in the form
declared effective by the SEC on September 26, 1996, including any
subsequent amendments or reports filed for the purpose of updating such
description.
We will provide, without charge, to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any or all of the information
incorporated herein by reference. Exhibits to any of such documents, however,
will not be provided unless such exhibits are specifically incorporated by
reference into such documents. The requests should be made to:
Nicholas Visco, Vice President - Finance
Intelligroup, Inc.
499 Thornall Street
Edison, New Jersey 08837
(732) 590-1600
This prospectus is part of a registration statement we filed with the
SEC. You should rely only on the information or representations provided in this
prospectus. We have not authorized anyone to provide you with different
information. Neither Intelligroup nor the Selling Shareholders are making an
offer of these securities in any state where the offer is not permitted. You
should not assume that the information in this prospectus is accurate as of any
date other than the date on the front of the document.
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<PAGE>
RISK FACTORS
SOME INFORMATION SET FORTH IN OR INCORPORATED BY REFERENCE INTO THIS
PROSPECTUS MAY CONTAIN "FORWARD-LOOKING STATEMENTS." SUCH STATEMENTS CAN BE
IDENTIFIED BY THE USE OF WORDS SUCH AS "BELIEVE," "ANTICIPATE" AND "EXPECT."
THESE STATEMENTS DISCUSS FUTURE EXPECTATIONS, CONTAIN PROJECTIONS OR STATE OTHER
"FORWARD-LOOKING" INFORMATION. THE FACTORS DISCUSSED BELOW COULD CAUSE ACTUAL
RESULTS AND DEVELOPMENTS TO BE MATERIALLY DIFFERENT FROM THOSE EXPRESSED IN OR
IMPLIED BY SUCH STATEMENTS. IN ADDITION TO THE OTHER INFORMATION CONTAINED IN
THIS PROSPECTUS, YOU SHOULD CONSIDER THE FOLLOWING FACTORS CAREFULLY BEFORE
DECIDING TO PURCHASE SHARES OF OUR COMMON STOCK.
WE HAVE EXPERIENCED SUBSTANTIAL VARIABILITY OF OUR QUARTERLY OPERATING RESULTS
WHICH WE EXPECT WILL CONTINUE
In the past, our operating results have varied substantially from
quarter to quarter. Our operating results also may vary in the future. Due to
the relatively fixed nature of certain of our costs, including personnel and
facilities costs, a decline in revenue in any fiscal quarter would result in
lower profitability in that quarter. Our quarterly operating results are
influenced by:
o seasonal patterns of hardware and software capital spending by
customers;
o information technology outsourcing trends;
o the timing, size and stage of projects;
o new service introductions by us or our competitors;
o levels of market acceptance for our services;
o our hiring of additional staff;
o changes in our billing and employee utilization rates; and
o timing and integration of acquired businesses.
We believe, therefore, that past operating results and period-to-period
comparisons should not be relied upon as an indication of future performance.
Demand for our services generally is lower in the fourth quarter. This decrease
is due to reduced activity during the holiday season and fewer working days for
those customers which curtail operations during such period. We anticipate that
our business will continue to be subject to such seasonal variations.
WE ANTICIPATE QUARTERLY LOSSES THROUGH AT LEAST THE SECOND QUARTER OF 2000
We have made, and expect to continue to make, significant investments to
implement a strategic plan to spin off our Internet services subsidiary,
SeraNova, Inc., and to realign Intelligroup's core business around the
application services provider market. As a result of such investments, we expect
to have quarterly losses through at least the second quarter of 2000. Our
investments include the addition of key executives and direct sales force
personnel at SeraNova
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<PAGE>
and Intelligroup as well as the engagement of a high-technology,
business-to-business marketing organization. Such marketing organization will
focus its efforts on conducting extensive market research, and assisting us in
implementing strategic sales and marketing programs. In order to achieve
profitability during 2000, we will need to control costs associated with
building an infrastructure to support both divisions as well as increase our
revenues. We cannot assure you that we will be able to contain costs, grow
revenue or increase profitability.
OUR FAILURE TO MANAGE GROWTH MAY HAVE A NEGATIVE EFFECT ON OUR BUSINESS
Our growth has placed significant demands on our management,
administrative and operational resources. Our revenue increased from $61.7
million in 1996 to $98.3 million in 1997 and $162.8 million in 1998. Our revenue
was $141.5 million for the nine months ended September 30, 1999. From January 1,
1995 through December 31, 1998, our total number of employees increased from 113
to 1,319 persons. In addition, at December 31, 1998, we engaged 107 independent
contractors to perform information technology services. At September 30, 1999,
we had 1,509 employees and 128 independent contractors. To manage our growth
effectively, we must continue to develop and improve our operational, financial
and other internal systems, as well as our business development capabilities. We
must also continue to attract, train, retain, motivate and manage our employees.
Our future success will depend in large part on our ability to:
o continue to maintain high rates of employee utilization at profitable
billing rates;
o maintain project quality, particularly if the size and scope of our
projects increase; and
o integrate the service offerings, operations and employees of acquired
businesses.
Our inability to manage our growth and projects effectively could have a
material adverse effect on:
o the quality of our services and products;
o our ability to retain key personnel;
o our operating results; and
o our ability to report financial results in an accurate and timely
manner.
OUR PROPOSED SPIN-OFF OF OUR INTERNET SOLUTIONS BUSINESS COULD NEGATIVELY AFFECT
OUR BUSINESS AND STOCK PRICE
On November 4, 1999, we announced our intention to spin off our Internet
solutions business to our shareholders. Such business was contributed to our
wholly-owned subsidiary, SeraNova, effective January 1, 2000. On January 27,
2000, SeraNova filed a Registration Statement on Form 10 in connection with the
proposed spin-off. The spin-off is subject to certain conditions and approvals.
SeraNova had revenues of approximately $15 million during
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<PAGE>
1998 and approximately $27 million in the first nine months of 1999. There can
be no assurance that the spin-off will be consummated or that we will be able to
implement our plan to refocus our core business as an application services
provider. Additionally, if such spin-off is consummated, we cannot assure you
that a market for shares of our common stock and the common stock of SeraNova
will be maintained or developed, that the spin-off will enhance shareholder
value or that the market price of the shares of common stock of Intelligroup
will not be adversely affected.
RISKS ASSOCIATED WITH OUR CURRENT CREDIT FACILITY
On January 29, 1999, we entered into an unsecured three-year $30 million
Revolving Credit Loan Agreement (the "Loan Agreement") with PNC Bank, N.A. (the
"Bank"). As a result of the restructuring and other special charges incurred
during the quarter ended June 30, 1999, at June 30, 1999, we were not in
compliance with the consolidated cash flow leverage ratio and consolidated net
worth financial covenants included in the Loan Agreement. On August 12, 1999,
the Bank notified us that such non-compliance constituted an event of default
under the Loan Agreement. At September 30, 1999, while we were in compliance
with the consolidated net worth financial covenant, we were not in compliance
with the consolidated cash flow leverage ratio and minimum fixed charge coverage
ratio financial covenants. On January 26, 2000, we finalized with the Bank the
terms of a waiver and amendment to the Loan Agreement to remedy defaults which
existed under the Loan Agreement. There can be no assurance that we will remain
in compliance with each of the financial and other covenants imposed upon us by
the Loan Agreement, as amended. If we are unable to maintain compliance, we will
again be in an event of default position under such Loan Agreement. The terms of
the waiver and amendment include, among other things, (i) a $15 million
reduction in availability under the Loan Agreement, (ii) a first priority
perfected security interest on all of the assets of the Company and its domestic
subsidiaries and (iii) modification of certain financial covenants and a waiver
of prior covenant defaults. In the event of a future event of default, there can
be no assurance that we will obtain a waiver and amendment on terms acceptable
to us, if at all. In the event that the Bank calls the outstanding loan, we
would be required to find a substitute source of working capital quickly in
order to meet our cash needs. There can be no assurance, in such case, that we
will be able to reach agreement with an alternative lender.
WE DEPEND ON SAP, ORACLE AND PEOPLESOFT
During the years ended December 31, 1997 and 1998 and the nine months
ended September 30, 1999, approximately 56%, 52% and 43%, respectively, of our
revenue (including our acquisitions of the CPI Companies, the Azimuth Companies
and Empower Solutions, L.L.C. and its affiliate Empower, Inc. (the "Empower
Companies"), see "Acquisition Risks") was derived from projects in which we
implemented software developed by SAP. SAP is a major international German-based
software company and a leading vendor of client/server application software for
business applications. Our future success in our SAP-related consulting services
depends largely on our continued:
o relationship with SAP America, SAP's United States affiliate; and
o status as a SAP National Logo Partner.
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<PAGE>
We executed our SAP National Logo Partner Agreement in April 1997 and
previously had been a SAP National Implementation Partner since 1995. In July
1997, we achieved Accelerated SAP Partner Status with SAP by meeting certain
performance criteria established by SAP. Such status is awarded by SAP on an
annual basis pursuant to contract. Our contract expires on December 31, 1999 and
will be automatically renewed for a successive one-year period. Thereafter, our
agreement is automatically renewed for successive one-year periods unless
terminated by either party.
During the years ended December 31, 1997 and 1998 and the nine months
ended September 30, 1999, approximately 12%, 11% and 8%, respectively, of our
total revenue (including our acquisition of the CPI Companies, the Azimuth
Companies and the Empower Companies) was derived from projects in which we
implemented software developed by Oracle. Oracle is a leading vendor of
client/server application software for business applications. Our current
contract with Oracle expires on July 26, 2000 and is automatically renewed for a
successive one-year period, unless terminated by either party. We expanded our
relationship with Oracle by entering into an agreement, effective October 26,
1998. The agreement is expected to help us meet the demands of mid-sized to
large companies using Oracle. The agreement is terminable by either party upon
30 days notice.
Additionally, we have increased our PeopleSoft implementation projects.
During 1998, we consummated acquisitions of companies whose practices consisted
primarily of PeopleSoft implementation projects which added to our PeopleSoft
practice. In addition, we acquired The Empower Companies, PeopleSoft
implementation companies, in February 1999. During the years ended December 31,
1997 and 1998 and the nine months ended September 30, 1999, approximately 12%,
19% and 26%, respectively, of our revenue (including our acquisitions of the CPI
Companies, the Azimuth Companies and the Empower Companies) was derived from
projects in which we implemented software developed by PeopleSoft. Our current
contract with PeopleSoft expired on October 30, 1999. We currently are
negotiating our contractual arrangement with PeopleSoft and expect to renew our
contract. We cannot assure you that we will enter into a contract with
PeopleSoft on terms acceptable to us, if at all.
We have no reason to believe that our contracts with SAP, Oracle and
PeopleSoft will not be renewed or that the scope of such contracts will be
modified or limited in a manner adverse to us. However, there can be no
assurance that such contracts will be renewed on terms acceptable to us, if at
all. In addition, there could be a material adverse effect on our business if:
o SAP, Oracle or PeopleSoft are unable to maintain their respective
leadership positions within the business applications software market;
o Sales of SAP, Oracle or PeopleSoft software products decline;
o our relationship with SAP, Oracle or PeopleSoft deteriorates; or
o SAP, Oracle or PeopleSoft elects to compete directly with us.
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<PAGE>
WE RELY SUBSTANTIALLY ON KEY CUSTOMERS AND INFORMATION TECHNOLOGY PARTNERS
We have derived and believe that we will continue to derive a
significant portion of our revenue from a limited number of customers and
projects. For the years ended December 31, 1997 and 1998 and the nine months
ended September 30, 1999, our ten largest customers accounted for in the
aggregate approximately 44%, 38% and 26% of our revenue. In 1996
PricewaterhouseCoopers LLP and Bristol-Myers Squibb each accounted for more than
10% of revenue. During 1997, PricewaterhouseCoopers LLP accounted for
approximately 10% of revenue. During 1998 and the nine months ended September
30, 1999, no single customer accounted for more than 10% of revenue. Most of our
contracts can be canceled by the customer on short notice and without
significant penalty, with the exception of fixed price contracts. The
cancellation or significant reduction in the scope of a large contract could
have a material adverse effect on our business. In addition, the amount of work
performed for specific customers is likely to vary from year to year. The loss
of any large customer or project could have a material adverse effect on our
business. We also serve as a member of consulting teams assembled by other
information technology consulting firms, some of which may also be our
competitors. There can be no assurance that such information technology
consulting firms will continue to use us in the future and at current levels of
retention, if at all.
RISKS RELATING TO FIXED PRICE CONTRACTS MAY NEGATIVELY IMPACT OUR OPERATING
RESULTS
While we provide services to our customers primarily on a time and
materials basis, we also bid on an increasing number of fixed price projects.
For the year ended December 31, 1998, fixed price contracts represented
approximately 5% of our total revenues. For the nine months ended September 30,
1999, approximately 10% of our total revenues were derived from fixed price
contracts. We believe that, as we pursue our strategy of making turnkey project
management a larger portion of our business, we will likely be required to offer
more fixed price projects. We have had limited prior experience in pricing and
performing under fixed price arrangements. There can be no assurance that we
will be able to complete such projects within the fixed price and required
timeframes. The failure to perform within such fixed price contracts could have
a material adverse effect on our business.
WE COULD BE LIABLE TO OUR CUSTOMERS FOR DAMAGES
Many of our engagements involve projects that are critical to the
operations of our customers' businesses and provide benefits that may be
difficult to quantify. Our failure or inability to meet a customer's
expectations could result in a material adverse change to the customer's
operations. Such failure could give rise to claims for damages against us or
cause damage to our reputation. Such claims could adversely affect our business.
In some of our agreements, we have agreed to indemnify the customer for damages
arising from services provided to, or on behalf of, such customer. Such
indemnification could have a material adverse effect on our financial condition
and results of operations. In some of our contracts, we agree that we will
repair errors or defects in our deliverables without additional charge to the
customer. To date, we have not experienced any material claims against such
warranties. We have insurance for damages and expenses incurred in connection
with alleged negligent acts, errors or omissions. There can be no assurance that
we will not experience material claims in the future or that such insurance will
continue to be available to us on acceptable terms.
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<PAGE>
WE MAY ACQUIRE OR MAKE INVESTMENTS IN COMPANIES OR TECHNOLOGIES THAT COULD CAUSE
LOSS OF VALUE TO OUR SHAREHOLDERS AND DISRUPTION OF OUR BUSINESS
A key element of our strategy has been growth by acquisition. From May
1998 through the date of this Prospectus, we have completed the following four
significant acquisitions of businesses with services complementary to those
offered by us:
Companies Acquired Primary Location Services Date
------------------ ---------------- -------- ----
CPI Consulting Limited and United Kingdom PeopleSoft May 1998
CPI Resources Limited Implementation
Azimuth Consulting Limited, New Zealand IT Management November 1998
Azimuth Holdings Limited, Consulting
Companies Acquired Primary Location Services Date
------------------ ---------------- -------- ----
Braithwaite Richmond Limited
and Azimuth Corporation Limited
Network Publishing, Inc. Provo, Utah Web site design January 1999
and customized
IT training
solutions
Empower Solutions, L.L.C. Plymouth, PeopleSoft February 1999
and Empower, Inc. Michigan Implementation
We expect to undertake additional acquisitions in the future, although
none are planned or being negotiated as of the date of this Prospectus.
Risks associated with acquisitions may include:
o possible adverse effects on our operating results;
o diversion of management's attention;
o risks associated with unanticipated liabilities or contingencies;
o risks associated with financing;
o integration of service offerings, operations and employees of acquired
businesses; and
o management of growth issues.
THERE IS INTENSE COMPETITION IN THE INFORMATION TECHNOLOGY SERVICES INDUSTRY
The information technology services industry is highly competitive. Many
of our competitors have longer operating histories, possess greater industry and
name recognition and have significantly greater financial, technical and
marketing resources. Additionally, we have faced, and expect to continue to
face, additional competition from new entrants into our markets.
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<PAGE>
We believe that competitive factors in our markets include:
Principal Competitive Factors
-----------------------------
o quality of service and deliverables;
o speed of development and implementation;
o price;
o project management capability; and
o technical and business expertise.
External Factors
----------------
o the ability of our competitors to hire, retain and motivate project
managers and other senior technical staff;
o the development by others of services that are competitive with our
services; and
o the extent of our competitors' responsiveness to customer needs.
We also believe that we compete in large part based on our level of
expertise in implementing and integrating SAP, Oracle, PeopleSoft and Baan
products and a wide variety of other technologies. There can be no assurance
that we will be able to continue to compete successfully with existing and new
competitors.
WE MAY NOT BE ABLE TO KEEP PACE WITH ANTICIPATED RAPID TECHNOLOGICAL CHANGE
Our success depends in part on our ability to develop solutions that
keep pace with:
o continuing changes in information technology;
o evolving industry standards; and
o changing customer objectives and preferences.
There can be no assurance that we will be successful in adequately
addressing these developments on a timely basis. Even if these developments are
addressed, we may not be successful in the marketplace. In addition,
competitor's products or technologies may make our services less competitive or
obsolete. Our failure to address these developments could have a material
adverse effect on our business.
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<PAGE>
OUR SUCCESS IS DEPENDENT UPON OUR KEY MANAGEMENT AND TECHNICAL PERSONNEL
We believe that our success now and in the future will depend largely on
the continued services of our key executive officers and leading technical
personnel. Each executive officer and leading technical professional has entered
into an employment agreement with us which contains non-competition,
non-disclosure and non-solicitation covenants. The departure of one or more of
such key personnel may have a material adverse effect on our business.
WE MAY NOT BE ABLE TO HIRE AND RETAIN QUALITY TECHNICAL PERSONNEL DUE TO A
COMPETITIVE MARKET
We believe that our success will depend in large part upon our ability
to attract, retain, train and motivate highly-skilled employees, particularly
project managers and other senior technical personnel. Since such qualified
personnel are in great demand, there is significant competition for such
employees and it is likely that access to such personnel will remain limited for
the foreseeable future. There can be no assurance that we will be successful in
attracting a sufficient number of such personnel in the future, or that we will
be successful in retaining, training and motivating the employees we are able to
attract. The failure to do so could:
o impair our ability to adequately manage and complete our existing
projects;
o impair our ability to bid for or obtain new projects; and
o adversely affect our business.
OUR INTELLECTUAL PROPERTY RIGHTS MAY BE INSUFFICIENT
Our future success is dependent, in part, upon our proprietary
implementation methodology and toolset, development tools and other intellectual
property rights. In order to protect our proprietary rights, we:
o rely upon trade secrets, nondisclosure and other contractual
arrangements;
o rely on copyright and trademark laws;
o enter into confidentiality agreements with employees, consultants and
customers;
o seek to limit access to and distribution of our proprietary information;
and
o require almost all employees and consultants to assign to us their
rights in intellectual property developed during their employment or
engagement.
There can be no assurance that the steps we take will be adequate to
deter misappropriation of our proprietary information or that we will be able to
detect unauthorized use of and take appropriate steps to enforce our
intellectual property rights.
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<PAGE>
We believe that our trademarks, service marks, services, methodology and
development tools do not infringe on the intellectual property rights of others.
There can be no assurance, however, that such a claim will not be asserted
against us in the future, or that if asserted, any such claim will be
successfully defended. If we are not successful in defending such claim, we may
be precluded from using certain marks or technologies or may incur royalty or
licensing expenses.
WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS
A significant portion of our business is derived from our international
operations. During 1997 and 1998 and the nine months ended September 30, 1999,
approximately 25%, 23% and 27% of our revenues were derived from international
operations. We have established or acquired foreign operations in Australia,
Denmark, India, Japan, New Zealand, the Philippines, Singapore, Thailand and the
United Kingdom. In order to expand international sales, we may establish or
acquire additional foreign operations. Increasing foreign operations has
required and likely will continue to require significant management attention
and financial resources and could materially adversely affect our business.
There can be no assurance that we will be able to increase international market
demand for our services. The risks relating to our international business
activities include:
o unexpected changes in regulatory environments;
o foreign currency fluctuations;
o tariffs and other trade barriers;
o longer accounts receivable payment cycles;
o difficulties in managing international operations;
o potential foreign tax consequences including restrictions on the
repatriation of earnings; and
o the burdens of complying with a wide variety of foreign laws and
regulations.
There can be no assurance that such factors will not have a material
adverse effect on our future international sales, if any, and, consequently, on
our business and operating results.
RISKS ASSOCIATED WITH OUR OPERATIONS IN INDIA
Through our subsidiaries, Intelligroup Asia Private Limited and
Intelligroup India Private Limited, we are subject to the risks associated with
doing business in India. India's central and state governments heavily regulate
the Indian economy. In the recent past, the government of India has provided
significant tax incentives and relaxed certain regulatory restrictions in order
to
- 13 -
<PAGE>
encourage foreign investment in certain sectors of the economy. Certain of these
benefits that directly affect our Indian operations include:
o tax holidays;
o liberalized import and export duties; and
o preferential rules on foreign investment and repatriation.
Changes in the business, political or regulatory climate of India could
have a material adverse effect on our Indian business. In addition, India has
experienced significant inflation, shortages of foreign exchange and has been
subject to civil unrest. Further, the United States has recently imposed
sanctions on India in response to certain nuclear testing conducted by the
Indian government. Changes in the following factors could have a material
adverse effect on our business and operating results:
o inflation;
o interest rates;
o taxation; or
o other social, political, economic or diplomatic developments affecting
India in the future.
RISK OF INCREASED GOVERNMENT REGULATION OF IMMIGRATION
In the United States, we have relied and in the future expect to
continue to rely increasingly upon attracting and retaining personnel with
technical and project management skills from other countries. The Immigration
and Naturalization Service limits the number of new petitions it approves each
year. Accordingly, we may be unable to obtain visas necessary to bring critical
foreign employees to the United States. Any difficulty in hiring or retaining
foreign nationals in the United States could increase competition for technical
personnel and have a material adverse effect on our business and operating
results.
SHARES ELIGIBLE FOR FUTURE SALE COULD AFFECT OUR STOCK PRICE
Future sales of common stock in the public market following this
offering, or the perception that such sales could occur, may adversely affect
the market price of the common stock. As of January 11, 2000, we had an
aggregate of 16,053,540 shares of Common Stock issued and outstanding. Upon
completion of this offering, an aggregate of 12,535,449 shares, including
2,966,433 shares issuable upon the exercise of stock options, will be freely
tradable by persons other than our "affiliates" without restriction. In
addition, an aggregate of 6,484,524 shares held by our founders may be sold
pursuant to the provisions of Rule 144 (subject to volume limitations) under the
Securities Act.
- 14 -
<PAGE>
Shortly after this offering, we intend to register an additional
3,250,000 shares of common stock issuable upon stock options granted or to be
granted under our 1996 Stock Plan.
OUR FOUNDERS OWN A SIGNIFICANT PORTION OF OUR OUTSTANDING COMMON STOCK AND ARE
ABLE TO INFLUENCE CORPORATE MATTERS
The founders of Intelligroup, Ashok Pandey, Rajkumar Koneru and Nagarjun
Valluripalli, together beneficially own approximately 41% of the outstanding
shares of our common stock. As a result, these shareholders, acting together,
are able to influence significant control of matters requiring approval by our
shareholders, including the election of directors. Such a concentration of
ownership may have the effect of delaying or preventing a change in control of
Intelligroup, including transactions in which shareholders might otherwise
receive a premium for their shares over then current market prices.
WE HAVE TAKEN CERTAIN ANTI-TAKEOVER MEASURES WHICH MAY MAKE AN ACQUISITION MORE
DIFFICULT
Certain provisions of our Certificate of Incorporation, By-laws and
Shareholder Protection Rights Agreement could make it more difficult for a third
party to acquire control of Intelligroup, even if such change in control would
be beneficial to our shareholders. For example, our Certificate of Incorporation
eliminates the rights of shareholders to call a special meeting of shareholders
or take action by written consent. In addition, our Certificate of Incorporation
allows our Board of Directors to issue preferred stock without shareholder
approval. Such issuances could make it more difficult for a third party to
acquire us. Our Shareholder Protection Rights Agreement is designed to deter
coercive or unfair takeover attempts of Intelligroup. As a New Jersey
corporation, we are also subject to the New Jersey Shareholders Protection Act
contained in Section 14A:10A-1. In general, Section 14A:10A-1 prohibits a
publicly-held New Jersey corporation from engaging in a "business combination"
with an "interested stockholder" for a period of five years following the date
the person became an interested stockholder, unless, among other things:
o the board of directors approved the transaction in which such
stockholder became an interested stockholder prior to the date the
interested stockholder attained such status; and
o the business combination is approved by the affirmative vote of the
holders of at least 66 2/3% of the corporation's voting stock not
beneficially owned by the interested stockholder at a meeting called
for such purpose.
A "business combination" generally includes a merger, sale of assets or stock,
or other transaction resulting in a financial benefit to the interested
stockholder. In general, an interested stockholder is a person who, together
with affiliates and associates, owns, or within five years prior to the
determination of interested stockholder status, did own, 10% or more of the
corporation's voting stock.
- 15 -
<PAGE>
POTENTIAL VOLATILITY OF OUR STOCK PRICE
The market price of the shares of our common stock has been and in the
future may be highly volatile. Some factors that may affect the market price
include:
o actual or anticipated fluctuations in our operating results;
o announcements of technological innovations or new commercial products or
services by us or our competitors;
o market conditions in the computer software and hardware industries and
IT services industry generally;
o changes in recommendations or earnings estimates by securities analysts;
and
o actual or anticipated quarterly fluctuations in financial results.
Furthermore, the stock market historically has experienced volatility
which has particularly affected the market prices of securities of many
technology companies and which sometimes has been unrelated to the operating
performances of such companies.
WE DO NOT EXPECT TO PAY CASH DIVIDENDS ON OUR COMMON STOCK
We have never paid, and do not anticipate paying any dividends on our
common stock in the foreseeable future.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares
offered by the Selling Shareholders set forth in this Prospectus.
SELECTED FINANCIAL DATA
The selected statement of operations data for the years ended December
31, 1996, 1997 and 1998 and the selected balance sheet data as of December 31,
1997 and 1998 are derived from and are qualified by reference to, and should be
read in conjunction with, the more detailed audited consolidated financial
statements and the related notes thereto included elsewhere herein. The selected
statement of operations data for the year ended December 31, 1994 and 1995 and
the selected balance sheet data as of December 31, 1994, 1995 and 1996 have been
derived from our financial statements which are not included elsewhere herein.
Prior period financial information has been revised to reflect our acquisitions
of CPI Resources, the Azimuth Companies and the Empower Companies, during 1998
and 1999 which were accounted for in accordance with the pooling of interests
method under generally accepted accounting principles. The financial data
included herein should be read in conjunction with our periodic filings with the
SEC relating to subsequent periods which are incorporated herein by reference.
- 16 -
<PAGE>
The following data has been derived from the consolidated financial
statements of the Company and should be read in conjunction with those
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" which are included or incorporated by reference in this
Prospectus.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- -------- -------- --------
(unaudited)
STATEMENT OF OPERATIONS DATA: (In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue....................................... $19,438 $39,283 $61,699 $98,301 $162,840 $116,639 $141,528
Cost of sales................................. 13,528 29,263 43,142 67,452 104,984 73,165 91,562
------- ------- ------- ------- -------- -------- --------
Gross profit................................ 5,910 10,020 18,557 30,849 57,856 43,474 49,966
------- ------- ------- ------- -------- -------- --------
Selling, general and administrative
expenses.................................... 4,670 8,401 14,544 22,449 38,074 28,563 43,091
Acquisition expenses.......................... -- -- -- -- 2,118 434 2,115
Restructuring and other special charges....... -- -- -- -- -- -- 7,328
------- ------- ------- ------- -------- -------- --------
Total operating expenses.................... 4,670 8,401 14,544 22,449 40,192 28,997 52,534
------- ------- ------- ------- -------- -------- --------
Operating income (loss)..................... 1,240 1,619 4,013 8,400 17,664 14,477 (2,568)
Other (income) expense, net................... -- -- -- -- -- (121) (110)
Factor charges/interest expense (income), net. 463 1,327 1,335 (265) (187) (100) 508
------- ------- ------- ------- -------- -------- --------
Income (loss) before provision for income
taxes and extraordinary charge.............. 777 292 2,678 8,665 17,851 14,698 (2,966)
Provision (benefit) for income taxes.......... 409 587 748 2,327 4,451 3,529 (552)
------- ------- ------- ------- -------- -------- --------
Income (loss) before extraordinary charge..... 368 (295) 1,930 6,338 13,400 11,169 (2,414)
Extraordinary charge, net of income tax
benefit of $296........................... -- -- 1,148 -- -- -- --
------- ------- ------- ------- -------- -------- --------
Net income (loss)......................... $ 368 $ (295) $ 782 $ 6,338 $ 13,400 $ 11,169 $ (2,414)
======= ======= ======= ======= ======== ======== ========
Earnings (loss) per share(1):
Basic earnings per share:
Income (loss) before extraordinary charge. $ 0.02 $ (0.02) $ 0.18 $ 0.44 $ 0.88 $ 0.73 $ (0.16)
Extraordinary charge, net of income tax
benefit............................... -- -- (0.11) -- -- -- --
------- ------- ------- ------- -------- -------- --------
Net income (loss)....................... $ 0.02 $ (0.02) $ 0.07 $ 0.44 $ 0.88 $ 0.73 $ (0.16)
======= ======= ======= ======= ======== ======== ========
Weighted average number of common shares -
Basic....................................... 15,011 15,011 11,003 14,457 15,207 15,205 15,549
======= ====== ======= ======= ======== ======== ========
Diluted earnings per share:
Income (loss) before extraordinary charge... $ 0.02 $ (0.02) $ 0.16 $ 0.42 $ 0.85 $ 0.71 $ (0.16)
Extraordinary charge, net of income tax
benefit................................... -- -- (0.10) -- -- -- --
------- ------- ------- ------- -------- -------- --------
Net income (loss)....................... $ 0.02 $ (0.02) $ 0.06 $ 0.42 $ 0.85 $ 0.71 $ (0.16)
======= ======= ======= ======= ======== ======== ========
Weighted average number of common shares -
Diluted...................................... 15,011 15,011 12,263 14,937 15,789 15,702 15,549
======= ======= ======= ======= ======== ======== ========
As of December 31, As of September 30,
------------------------------------------------ -------------------
1994 1995 1996 1997 1998 1999
------- ------- ------- ------- -------- --------
(In thousands) (unaudited)
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 1,399 $ 1,412 $ 8,301 $ 8,825 $ 4,245 $ 8,550
Working capital surplus (deficit).......... (492) (991) 16,246 30,500 32,640 29,840
Total assets............................... 7,599 12,571 24,945 43,064 69,565 82,238
Short-term debt, including subordinated
debentures............................... 1,304 3,608 226 386 11 10,706
Long-term debt and obligations under
capital leases, less current portion...... 141 206 108 355 60 653
Shareholders' equity....................... 557 128 18,280 34,036 47,949 47,295
</TABLE>
(1) Basic and diluted earnings per share have replaced primary and fully
diluted earnings per share in accordance with SFAS No. 128.
- 17 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
- -------
We provide a wide range of information technology services, including
management consulting, enterprise-wide business process solutions, Internet
applications services, applications outsourcing and maintenance, web site design
and customization, IT training solutions, systems integration and custom
software development based on leading technologies. We have grown rapidly since
1994 when we made a strategic decision to diversify our customer base by
expanding the scope of our integration and development services and to utilize
software developed by SAP as a primary tool to implement enterprise-wide
business process solutions. In 1995, we achieved the status of a SAP National
Implementation Partner. In the same year, we also began to utilize Oracle's ERP
application products to diversify our service offerings. In 1997, we enhanced
our partner status with SAP, by first achieving National Logo Partner status and
then AcceleratedSAP Partner Status. Also, in 1997, we further diversified our
ERP-based service offerings, by beginning to provide PeopleSoft and Baan
implementation services. In July 1997, we were awarded PeopleSoft implementation
partnership status. In September 1997, we were awarded Baan international
consulting partnership status. In June 1998, we also expanded our Oracle
applications implementation services practice and added upgrade services to meet
market demand of mid-size to large companies that are implementing or upgrading
Oracle applications.
ACQUISITIONS
During 1998, we expanded our operations through acquisitions. On May 7,
1998, we acquired thirty percent of the outstanding share capital of CPI
Consulting Limited. The acquisition of CPI Consulting Limited was accounted for
utilizing purchase accounting. The consideration we paid included the issuance
of 165,696 shares of our common stock with a fair market value of $3.1 million,
and a future liability to the sellers predicated upon operating results for the
balance of 1998. The value of the liability has been determined as of December
31, 1998 to be $2.5 million, which is payable by the issuance of an additional
155,208 shares of our common stock. We issued such shares on March 22, 1999. The
excess of the purchase price over the fair value of the net assets acquired was
attributed to intangible assets, amounting in the aggregate to $5.8 million.
On May 21, 1998, we acquired all of the outstanding share capital of CPI
Resources Limited. The acquisition of CPI Resources Limited was accounted for as
a pooling of interests. Prior results for all periods have been restated in
accordance with pooling of interests accounting. As consideration for this
acquisition, we issued 371,000 shares of our Common Stock. At the time of the
acquisition, CPI Resources Limited owned seventy percent of the outstanding
share capital of CPI Consulting Limited.
The CPI Companies provide consulting and implementation services related
to PeopleSoft applications.
- 18 -
<PAGE>
On November 25, 1998, we consummated the acquisition of all of the
outstanding capital stock of each of Azimuth Consulting Limited, Azimuth
Holdings Limited, Braithwaite Richmond Limited and Azimuth Corporation Limited
(collectively the "Azimuth Companies"). The acquisition of the Azimuth Companies
was accounted for as a pooling of interests. Prior results for all periods have
been restated in accordance with pooling of interests accounting. As
consideration for this acquisition, we issued 902,928 shares of our common
stock.
The Azimuth Companies provide business and management consulting
services. Founded in 1984, Azimuth has a strong IT management consulting
organization with operations in New Zealand, Australia, the Philippines and
Southeast Asian countries.
In January 1999, in order to augment our Internet and advanced
technology practice, we acquired the outstanding capital stock of NPI located in
Provo, Utah. The purchase price included an initial cash payment in the
aggregate of $1,800,000 together with a cash payment of $200,000 to be held in
escrow. In addition, the purchase price included an earn-out payment of up to
$2,212,650 in restricted shares of our common stock payable on or before April
15, 2000 and a potential lump sum cash payment of $354,024 payable no later than
March 31, 2000. This acquisition has been accounted for in 1999 under the
purchase method of accounting. NPI provides web site design and front-end
application solutions services. NPI has built a strong track record in designing
web-sites that enable clients to achieve the desired sales and marketing impact.
In addition, by way of merger, we augmented our PeopleSoft practice in
North America by acquiring Empower Solutions, L.L.C. and its affiliate Empower,
Inc. (the "Empower Companies") located in Plymouth, Michigan on February 16,
1999. The acquisition of the Empower Companies has been accounted for as a
pooling of interests. Prior results for all periods have been restated in
accordance with pooling of interests accounting. Founded in 1997, the Empower
Companies provide business process reengineering, system design and development,
project management and training services. The purchase price consisted of the
issuance of an aggregate of 1,831,091 restricted shares of our common stock.
Additionally, on December 22, 1999, we issued an aggregate of 179,611 shares of
our restricted common stock in connection with a net worth adjustment determined
as of the closing date.
OPERATIONS
We generate revenue from professional services rendered to our
customers. We recognize revenue as our services are performed. Our 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 us through the date of termination. We provide our 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. We generally bill our 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 us on the customers' behalf.
- 19 -
<PAGE>
We also have provided services on certain projects in which we, at the
request of the clients, offered a fixed price for our services. For the year
ended December 31, 1998, revenues derived from projects under fixed price
contracts represented approximately 5% of our total revenue. No single fixed
price project was material to our business during 1998. However, one fixed price
project, which began late in 1998, is expected be material to us during 1999. We
believe that, as we pursue our strategy of making turnkey project management a
larger portion of our business, we will continue to offer fixed price projects.
We have had limited prior experience in pricing and performing under fixed price
arrangements and believe that there are certain risks related thereto and thus
price such arrangements to reflect the associated risk. There can be no
assurance that we 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 our business and operating
results.
We have derived and believe that we will continue to derive a
significant portion of our revenue from a limited number of customers and
projects. For the years ended December 31, 1996, 1997 and 1998, our ten largest
customers accounted for in the aggregate, approximately 50%, 44% and 38% of our
revenue, respectively. In 1996 PricewaterhouseCoopers LLP and Bristol-Myers
Squibb each accounted for more than 10% of revenue. During 1997,
PricewaterhouseCoopers LLP accounted for approximately 10% of revenue. During
1998, no customer accounted for more than 10% of revenue. For the years ended
December 31, 1996, 1997 and 1998, 34%, 31% and 19%, respectively, of our revenue
was generated by serving as a member of consulting teams assembled by other
information technology consulting firms. There can be no assurance that such
information technology consulting firms will continue to engage us in the future
at current levels of retention, if at all. During the years ended December 31,
1996, 1997 and 1998, 57%, 56% and 52%, respectively, of our total revenue was
derived from projects in which we implemented software developed by SAP. For the
years ended December 31, 1997 and 1998, approximately 12% and 11% of our total
revenue was derived from projects in which we implemented software developed by
Oracle. For each of the years ended December 31, 1998, 1997 and 1996,
approximately 19%, 12% and 9%, respectively, of our total revenue was derived
from projects in which we implemented software developed by PeopleSoft. During
the year ended December 31, 1998, approximately 58% of our revenue was derived
from engagements at which we had project management responsibilities, compared
to 31% and 12% during the years ended December 31, 1997 and 1996, respectively.
Our most significant cost is project personnel expenses, which consist
of consultant salaries, benefits and payroll-related expenses. Thus, our
financial performance is based primarily upon billing margin (billable hourly
rate less our cost of a consultant on an hourly basis) and personnel utilization
rates (billable hours divided by paid hours). We believe that turnkey project
management assignments typically carry higher margins. We have been shifting to
such higher-margin turnkey management assignments and more complex projects by
leveraging our 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. Our
inability to continue our shift to higher-margin turnkey management assignments
and more complex projects may adversely impact our future growth.
- 20 -
<PAGE>
Since late 1994, we have made substantial investments in our
infrastructure in order to support our rapid growth. For example, in 1994, we
established and funded an operations facility in India, the Advance Development
Center (the "ADC"), and in 1995 established a sales office in California. In
addition, from 1994 to date, we have incurred expenses to develop proprietary
development tools and our proprietary accelerated implementation methodology and
toolset. Since 1995, we have also been increasing our sales force and our
marketing, finance, accounting and administrative staff, in order to manage our
growth. We currently maintain our headquarters in Edison, New Jersey, and branch
offices in Chicago, Detroit, Foster City (California), Reston (Virginia), Edison
(New Jersey), Dallas, Atlanta, Phoenix and Washington, D.C. We also currently
maintain offices in Europe (the United Kingdom, Denmark, and Belgium), and Asia
Pacific (Australia, India, New Zealand, the Philippines, and Singapore). We
lease our headquarters in Edison, New Jersey, totaling approximately 48,475
square feet. Such lease has an initial term of ten (10) years, which commenced
in September 1998. In October 1998, we finalized an agreement to sublet the
space used for our prior headquarters for the remainder of the term of our
sublease, which expires November 15, 1999.
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth for the periods indicated certain
financial data expressed as a percentage of total revenue:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
YEAR ENDED
---------------------------------
DECEMBER 31,
---------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenue ........................................... 100.0% 100.0% 100.0%
Cost of sales ..................................... 64.5 68.6 69.9
-------- -------- --------
Gross profit .................................... 35.5 31.4 30.1
Selling, general and administrative expenses ...... 23.4 22.8 23.6
Acquisition expenses .............................. 1.3 -- --
-------- -------- --------
Operating income ................................ 10.8 8.6 6.5
Interest and other (expense) income, net .......... 0.1 0.3 (2.2)
-------- -------- --------
Income before provision for income taxes and
extraordinary charge ............................ 10.9 8.9 4.3
Provision for income taxes ........................ 2.7 2.4 1.2
-------- -------- --------
Income before extraordinary charge ................ 8.2 6.5 3.1
Extraordinary charge, net of income tax benefit ... -- -- 1.8
-------- -------- --------
Net income ...................................... 8.2 6.5 1.3
======== ======== ========
</TABLE>
- 21 -
<PAGE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUE. Revenue increased by 65.7% or $64.5 million, from $98.3 million
in 1997 to $162.8 million in 1998. This increase was attributable primarily to
increased demand for the Company's ERP implementation consulting services and,
to a lesser extent, to increased demand for the Company's systems integration
and Internet development services.
GROSS PROFIT. The Company's cost of sales includes primarily the cost of
salaries to consultants and related employee benefits and payroll taxes. The
Company's cost of sales increased by 55.6%, or $37.5 million, from $67.5 million
in 1997 to $105.0 million in 1998. The increase was due to increased personnel
costs resulting from the hiring of additional consultants to support the
increase in demand for the Company's services. The Company's gross profit
increased by 87.5%, or $27.0 million, from $30.8 million in 1997 to $57.9
million in 1998. Gross profit margin increased from 31.4% of revenue in 1997 to
35.5% of revenue in 1998. The increase in such gross profit margin was primarily
attributable to both the expanded utilization of the Company's offshore
development facility in India, and the increase in implementation service
projects where the Company has project management responsibilities, which
typically carry higher gross margins, than those in which the Company provides
supplemental staffing for client managed projects.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of administrative salaries, and
related benefits costs, occupancy costs, sales person compensation, travel and
entertainment, costs associated with the ADC and related development costs and
professional fees. Selling, general and administrative expenses increased by
69.6%, or $15.6 million, from $22.4 million in 1997 to $38.1 million in 1998,
and increased as a percentage of revenue from 22.8% to 23.4%, respectively. The
increases in such expenses in absolute dollars and as a percentage of revenue
were due primarily to the increase in salaries and related benefits reflecting
headcount increases in the Company's sales force and its marketing, finance,
accounting and administrative staff, in order to manage its growth. The
Company's occupancy costs increased as a result of the relocation of its
corporate headquarters into approximately 48,000 square feet of office space,
from its former location which consisted of approximately 17,000 square feet. In
addition, the Company experienced increases in sales and management recruiting
costs, occupancy costs as additional offices were opened in the United States,
support services and the provision for doubtful accounts.
ACQUISITION EXPENSE. During the year ended 1998, the Company incurred
costs of $2,118,000 in connection with the acquisitions of the CPI Companies and
the Azimuth Companies, each of which was accounted for as a pooling of
interests. These costs primarily consisted of professional fees associated with
such acquisitions.
PROVISION FOR INCOME TAXES. The Company's effective income tax rate was
24% and 27% for the years ended December 31, 1998 and 1997. During 1997, the
Company reduced its valuation allowance by $207,000 as management determined
that it was more likely than not, that the applicable portion of the net
deferred tax asset would be or had been realized. The 1997 valuation allowance
reduction favorably impacted the effective income tax rate by 3%. In 1996, the
Company elected a five year tax holiday in India in accordance with a local tax
incentive
- 22 -
<PAGE>
program whereby no income tax will be due during such period. For the year ended
December 31, 1998 and 1997, the tax holiday favorably impacted the effective tax
rate by approximately 7% and 6%, respectively. Based on current and anticipated
profitability, management believes all net deferred tax assets are more likely
than not to be realized.
As discussed in Note 11 to the consolidated financial statements, on
February 16, 1999, the Company acquired Empower Solution, L.L.C. and Empower,
Inc. (a corporation organized under subchapter S of the Internal Revenue Code).
The acquisitions were accounted for as poolings of interests and thus prior year
financial statements have been restated in accordance with the pooling of
interests rules. The Empower Companies were pass-through entities for tax
reporting purposes, thus their income was not taxed at the corporate level.
Accordingly, the Company's federal statutory tax rate was reduced by 13% and 6%
for 1998 and 1997, respectively.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUE. Revenue increased by 59.3%, or $36.6 million, from $61.7
million in 1996 to $98.3 million in 1997. This increase was attributable
primarily to increased demand for the Company's SAP related implementation
consulting services and, to a lesser extent, to increased demand for the
Company's systems integration and custom software development services.
GROSS PROFIT. The Company's cost of sales increased by 56.3%, or $24.3
million, from $43.1 million in 1996 to $67.4 million in 1997. The increase was
due to increased personnel costs resulting from the hiring of additional
consultants to support the increase in demand for the Company's services. The
Company's gross profit increased by 66.2%, or $12.3 million, from $18.6 million
in 1996 to $30.8 million in 1997. Gross profit margin increased from 30.1% of
revenue in 1996 to 31.4% of revenue in 1997. The increase in such gross profit
margin was attributable to the increase in implementation services projects and
a combination of improved billing margins, greater consultant utilization and
achieving certain customer performance incentives.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by 54.4%, or $7.9 million, from $14.5 million
in 1996 to $22.4 million in 1997, and decreased as a percentage of revenue from
23.6% to 22.8%, respectively. The increases in such expenses in absolute dollars
were due primarily to the expansion of the Company's sales and marketing
activities in 1997 and increased travel and entertainment expenses due to the
growth of the business and the employee base. Such expenses were increased to
support the continued revenue growth of the Company in the United States and
abroad. In addition, such expenses increased due to increased sales and
management recruiting costs, support services, and an increase in the provision
for doubtful accounts.
FACTOR FEES/INTEREST (INCOME) EXPENSE, NET. Factor fees in the 1996
period were the charges incurred by the Company to finance its accounts
receivable. On October 10, 1996, the Company repaid the factor with a portion of
the proceeds from the Company's initial public offering, approximately $4.4
million, consisting of all amounts outstanding under the agreement with its
factor and terminated its factor agreement. Subsequent to the Company's initial
public offering, interest income has been earned on interest bearing cash
accounts and short term investments.
- 23 -
<PAGE>
PROVISION FOR INCOME TAXES. The Company's effective income tax rate was
27% and 28% for the years ended December 31, 1997 and 1996. During 1997 and
1996, the Company reduced their valuation allowance by $207,000 and $461,000,
respectively as management determined that it was more likely than not, that the
applicable portion of the net deferred tax asset would be or had been realized.
The 1997 and 1996 valuation allowance reduction favorably impacted the effective
income tax rate by 3% and 14%, respectively. In 1996, the Company elected a five
year tax holiday in India in accordance with a local tax incentive program
whereby no income tax will be due during such period. For the year ended
December 31, 1997, the tax holiday favorably impacted the effective tax rate by
approximately 6%. There was no significant impact for 1996. Based on current and
anticipated profitability, management believes all net deferred tax assets are
more likely than not to be realized.
BACKLOG
The Company normally enters into written contracts with its customers at
the time it commences work on a project. These written contracts contain varying
terms and conditions and the Company does not generally believe it is
appropriate to characterize such written contracts as creating backlog. In
addition, because these written contracts often provide that the arrangement can
be terminated with limited advance notice and without significant penalty, the
Company does not believe that projects in process at any one time are a reliable
indicator or measure of expected future revenue. In the event that a customer
terminates a project, the customer remains obligated to pay the Company for
services performed by it through the date of termination.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its operations primarily from cash flow generated from
operations, and prior to 1998 from cash balances generated from the Company's
initial and follow-on public offerings consummated in October 1996 and July
1997, respectively.
The Company had cash and cash equivalents of $4.2 million at December
31, 1998 and $8.8 million at December 31, 1997. The Company had working capital
of $32.6 million at December 31, 1998 and $30.5 million at December 31, 1997.
Cash provided by operating activities was $6.1 million during the year
ended December 31, 1998, resulting primarily from net income of $13.4 million
during the year ended December 31, 1998, an increase of $8.2 million in accounts
payable, accrued payroll and accrued expenses, offset by an increase of $16.8
million in accounts receivable and unbilled services. Cash used in operating
activities for the years ended December 31, 1997 and 1996 was $6.6 million and
$4.6 million, respectively.
In accordance with investment guidelines approved by the Company's Board
of Directors, cash balances in excess of those required to fund operations have
been invested in short-term U.S. Treasury securities and commercial paper with a
credit rating no lower than A1/P1.
The Company invested $7.1 million, $2.4 million and $1.0 million in
computer equipment and office furniture and fixtures in 1998, 1997 and 1996,
respectively. The increase reflects purchases of computer and telecommunications
equipment for consultants and administrative staff and office furniture and
fixtures related to the Company's new headquarters in Edison, New Jersey, and
other offices opened during 1998.
- 24 -
<PAGE>
During 1996 the Company's factoring agreement required that the Company
offer all of its trade accounts receivable to the factor for financing; however,
the factor was under no obligation to accept any or all of such receivables. For
a variety of reasons, including the rapid growth of the Company, the lack of
available tangible security to utilize as collateral and the absence of
historical operating profits prior to 1996, the Company was unable to obtain
more traditional financing. On October 10, 1996, the Company repaid
approximately $4.4 million consisting of all amounts outstanding under the
agreement with the factor and terminated the factoring agreement.
In March 1996, in anticipation of the debenture financing described
below, the Company obtained a $750,000 line of credit, payable on demand, from a
bank. The line of credit carried interest at the federal funds rate plus 1%.
Borrowings under the line totaled $200,000 at March 31, 1996 and $300,000 in
April 1996, when the Company repaid all amounts outstanding under such line in
connection with the debenture financing described below. The line of credit has
been terminated in accordance with the terms of such debenture financing.
In April 1996, the Company issued and sold five-year 9% subordinated
debentures in the aggregate principal amount of $6.0 million to Summit Ventures
IV, L.P. and Summit Investors III, L.P. The subordinated debentures were issued
to raise funds for working capital and general corporate purposes, to repurchase
from the then-current shareholders, Messrs. Pandey, Koneru and Valluripalli, an
aggregate of 4,881,066 shares of Common Stock for an aggregate of $1.5 million,
to repay approximately $300,000 outstanding under a $750,000 credit facility and
to satisfy approximately $358,000 of cash overdrafts. Upon receipt of the net
proceeds from the Company's initial public offering in October 1996, the Company
prepaid approximately $6.3 million, representing all amounts outstanding under
such debentures, including interest.
Subsequent to December 31, 1995, the Company determined that it had
unrecorded and unpaid federal and state payroll-related taxes for certain
employees. As a result of the Company's voluntary disclosure to the Internal
Revenue Service of certain unpaid tax liabilities, on June 5, 1996, the Company
received an audit assessment from the Internal Revenue Service for unpaid 1994
and 1995 federal income tax withholding, FICA and FUTA taxes in the aggregate
amount of approximately $800,000 which was paid in full in August 1996. No
interest or penalties were assessed. Reserves, aggregating $1.0 million,
including the amount of the Internal Revenue Service audit assessment, were
recorded at December 31, 1995. No assurance may be given, however, that
interest, penalties or additional state or federal taxes will not be assessed in
the future. The Company's principal shareholders, Messrs. Pandey, Koneru and
Valluripalli, have agreed to indemnify the Company for any and all losses which
the Company may sustain, in excess of the $1.0 million reserve, net of any tax
benefits realized by the Company, arising from or relating to federal or state
tax, interest or penalty payment obligations resulting from the above subject
matter. The Company believes that its failure to record and pay 1994 and 1995
federal and state payroll-related taxes for certain employees resulted from a
combination of factors, including lack of internal controls and lack of
financial expertise and oversight.
From January 1997 until January 1999, the Company had a credit facility
with a bank, which included a revolving line of credit and a component for
equipment term loans. As of December 31, 1998, there were no amounts outstanding
under the revolving line of credit and no equipment term loans outstanding.
- 25 -
<PAGE>
On January 29, 1999, the Company entered into an unsecured three-year
$30 million Revolving Credit Loan Agreement (the "Loan Agreement") with PNC
Bank, N.A. (the "Bank"). The proceeds of the credit facility may be used by the
Company for financing acquisitions and general corporate purposes. At the
Company's option, for each loan, interest shall be computed either at the Bank's
prime rate per annum or the Adjusted Libor Rate plus the Applicable Margin, as
such terms are defined in the Loan Agreement. The Company's obligations under
the credit agreement are payable at the expiration of such facility on January
29, 2002. Approximately $10.6 million was outstanding under this credit facility
at September 30, 1999.
The credit agreement contains financial covenants which require the
Company to (i) maintain a consolidated cash flow leverage ratio equal to or less
than 2.5 to 1.0 for the period of four fiscal quarters preceding the date of
determination taken together as one accounting period ("Consolidated Cash Flow
Leverage Ratio"), (ii) maintain a consolidated net worth of not less than
consolidated net worth of the prior fiscal year plus 50% of positive net income
for such fiscal year ("Consolidated Net Worth"), (iii) not enter into any
agreement to purchase and/or pay for, or become obligated to pay for capital
expenditures, long term leases, capital leases or sale lease-backs, in an amount
at any time outstanding aggregating in excess of $5,000,000 during any fiscal
year, provided, however, in a one year carry-forward basis, the Company may
incur capital expenditures not to exceed $8,000,000 during any fiscal year, and
(iv) not cause or permit the minimum fixed charge coverage ratio, calculated on
the basis of a rolling four quarters to be less than 1.4 to 1.0 as at the end of
each fiscal quarter ("Minimum Fixed Charge Coverage Ratio").
As a result of the restructuring and other special charges incurred
during the quarter ended June 30, 1999, at June 30, 1999, the Company was not in
compliance with the Consolidated Cash Flow Leverage Ratio and Consolidated Net
Worth financial covenants. On August 12, 1999, the Bank notified the Company
that such non-compliance constituted an Event of Default under the Loan
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, we finalized with the Bank the terms
of a waiver and amendment to the Loan Agreement to remedy defaults which existed
under the Loan Agreement. The terms of the waiver and amendment include, among
other things, (i) a $15 million reduction in availability under the Loan
Agreement, (ii) a first priority perfected security interest on all of the
assets of the Company and its domestic subsidiaries and (iii) modification of
certain financial covenants and a waiver of prior covenant defaults.
The Company believes that its available funds, together with current
credit arrangements and the cash flow expected to be generated from operations,
will be adequate to satisfy its current and planned operations for at least the
next 12 months.
RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997.
This statement is effective for the Company's fiscal year ending December 31,
1998. This statement addresses the reporting and displaying of comprehensive
income and its components. Adoption of SFAS No. 130 relates to disclosure within
the financial statements and is not expected to have
- 26 -
<PAGE>
a material effect on the Company's consolidated financial statements. The
Company adopted the provisions of SFAS No. 130 on January 1, 1998.
SFAS No. 131, "Disclosures about Segments of and Enterprise and Related
Information" was issued in June 1997. This statement is effective for the
Company's fiscal year ending December 31, 1998. This statement changes the way
public companies report information about segments of their business in their
annual financial statements and requires them to report selected segment
information in their quarterly reports. The Company adopted the provisions in
1998.
In April, 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities." The SOP requires all costs incurred as start-up costs or
organization costs be expenses as incurred. Adoption of the SOP is required for
fiscal years beginning after December 15, 1998. The Company does not believe
that the new standard will have a material impact on the Company's consolidated
financial statements.
In March, 1998, the Accounting Standards Executive Committee issued SOP
98-1. Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This SOP required that computer software costs that are incurred
in the preliminary project stage be expensed as incurred and that criteria be
met before capitalization of costs to develop or obtain internal use computer
software. Adoption of the SOP is required for fiscal years beginning after
December 15, 1998. The Company does not believe that the new standard will have
a material impact on the Company's consolidated financial statements.
YEAR 2000 COMPLIANCE
Historically, certain computer programs have been written using two
digits rather than four to define the applicable year, which could result in the
computer recognizing a date using "00" as the year 1900 rather than 2000. This
in turn, could result in major system failures or miscalculations, and is
generally referred to as the "Year 2000 Problem". The Company believes that it
has sufficiently assessed its state of readiness with respect to its Year 2000
compliance. Based on its assessment, the Company does not believe that Year 2000
compliance will result in material investments by the Company, nor does the
Company anticipate that the Year 2000 Problem will have any adverse effects on
the business operations or financial performance of the Company. The Company
does not believe that it has any material exposure to the Year 2000 Problem with
respect to its own information systems. Based upon its assessment, the Company
has established no reserve nor instituted any contingency plans.
However, the purchasing patterns of customers and potential customers
may be affected by issues associated with the Year 2000 Problem. As companies
expend significant resources to correct their current data storage solutions,
these expenditures may result in reduced funds to purchase products or undertake
projects such as those offered by the Company. There can be no assurance that
the Year 2000 Problem, as it relates to customers, potential customers and other
third-parties, will not adversely affect the Company's business, operating
results and financial condition. Conversely, the Year 2000 Problem may cause
other companies to accelerate purchases, thereby causing an increase in
short-term demand and a consequent decrease in long-term demand for the
Company's products.
- 27 -
<PAGE>
EUROPEAN MONETARY UNION (EMU)
The euro was introduced on January 1, 1999, at which time the eleven
participating EMU member countries established fixed conversion rates between
their existing currencies (legacy currencies) and the euro. The legacy
currencies will continue to be used as legal tender through January 1, 2002;
thereafter, the legacy currencies will be canceled and euro bills and coins will
be used for cash transactions in the participating countries. The Company's
European sales and operations offices affected by the euro conversion have
established plans to address the systems issues raised by the euro currency
conversion and are cognizant of the potential business implications of
converting to a common currency. The Company is unable to determine the ultimate
financial impact of the conversion on its operations, if any, given that the
impact will be dependent upon the competitive situations which exist in the
various regional markets in which the Company participates and the potential
actions which may or may not be taken by the Company's competitors and
suppliers.
SELLING SHAREHOLDERS
The Shares to be offered under this Prospectus are owned by Bandele
Attah, Paul Grant, Michael J. Hirst, Richard M. Lucy, Christopher J.J. Smith,
Robert Wilson, Patrick J. Kavanaugh, Kurt A. Collins, Marcelo J. Casas, Jay D.
Hiller, Richard Maw, Richard Farr and Michael Donahue. Messrs. Attah, Grant,
Hirst, Lucy, Smith and Wilson acquired their Shares in connection with the
acquisition by the Company, through its wholly-owned subsidiary, of their equity
interests in CPI Consulting Limited, pursuant to the terms of an Agreement of
Purchase and Sale dated as of May 7, 1998, among the Company, the Company's
wholly-owned subsidiary and Messrs. Attah, Grant, Hirst, Lucy, Smith and Wilson.
Pursuant to the terms of such agreement, the Company is required to file a
registration statement covering the Shares held by Messrs. Attah, Grant, Hirst,
Lucy, Smith and Wilson with the SEC. Messrs. Kavanaugh, Collins, Casas and
Hiller acquired their Shares in connection with the acquisition by the Company
of their equity interests in the Empower Companies, pursuant to the terms of an
(i) Agreement and Plan of Merger dated February 16, 1999, among the Company, ES
Merger Corp., Empower Solutions, L.L.C. and Messrs. Kavanaugh, Collins, Casas
and Hiller; and (ii) Agreement and Plan of Merger dated February 16, 1999, among
the Company, ES Merger Corp., Empower, Inc. and Messrs. Kavanaugh and Collins.
Pursuant to that certain Registration Rights Agreement dated as of February 16,
1999, among the Company and Messrs. Kavanaugh, Collins, Casas and Hiller, the
Company is required to file a registration statement covering the Shares held by
Messrs. Kavanaugh, Collins, Casas and Hiller. Messrs. Maw, Farr and Donahue
acquired their Shares in connection with the acquisition by the Company of their
equity interest in Network Publishing, Inc., pursuant to the terms of a Stock
Purchase Agreement dated as of December 21, 1998, among the Company, Network
Publishing, Inc. and Messrs. Maw, Farr and Donahue. Pursuant to the terms of
such agreement, the Company is required to file a registration statement
covering the Shares held by Messrs. Maw, Farr and Donahue with the SEC.
- 28 -
<PAGE>
The following table sets forth, as of January 11, 2000, certain
information with respect to the Selling Shareholders.
<TABLE>
<CAPTION>
Number of
Beneficial Ownership Shares Beneficial
Name of of Selling Shareholders Offered Ownership of Shares
Selling Shareholders Prior to Offering (1) Hereby(2) After Offering(2)
- ------------------------------- ----------------------- --------- -------------------
Number Percent Number Percent
------ ------- ------ -------
<S> <C> <C> <C>
Bandele Attah.................. 50,234(3) * 12,934 37,300 *
Paul Grant..................... 53,250(4) * 12,934 40,316 *
Michael J. Hirst............... 41,194(5) * 12,934 28,260 *
Richard M. Lucy................ 53,324(6) * 12,934 40,390 *
Christopher J.J. Smith......... 51,734(7) * 12,934 38,800 *
Robert J. Wilson............... 13,684(8) * 12,934 750 *
Patrick J. Kavanaugh........... 133,073(9) * 132,724 349 *
Kurt A. Collins................ 132,724(10) * 132,724 -- *
Marcelo J. Casas............... 299,879(11) 1.9 57,456 242,423 1.5
Jay D. Hiller.................. 215,877(12) 1.3 39,773 176,104 1.1
Richard Maw.................... 34,186(13) * 33,186 1,000 *
Richard Farr................... 34,474(14) * 33,186 1,288 *
Michael Donahue................ 33,186(15) * 33,186 -- *
</TABLE>
- ---------------
* Less than one percent
(1) Applicable percentage of ownership is based on 15,946,716 shares of Common
Stock issued and outstanding.
(2) Assumes that all Shares are sold pursuant to this offering and that no
other shares of Common Stock are acquired or disposed of by the Selling
Shareholders prior to the termination of this offering. Because the Selling
Shareholders may sell all, some or none of their Shares or may acquire or
dispose of other shares of Common Stock, no reliable estimate can be made
of the aggregate number of Shares that will be sold pursuant to this
offering or the number or percentage of shares of Common Stock that each
Selling Shareholder will own upon completion of this offering.
(3) Includes 750 shares subject to options granted pursuant to the Company's
1996 Stock plan which are exercisable within 60 days from January 11, 2000.
Does not include options to purchase 12,250 shares of Common Stock granted
to such holder pursuant to the Company's 1996 Stock Plan exercisable after
such date.
(4) Includes 3,900 shares purchased on the open market and 3,250 shares subject
to options granted pursuant to the Company's 1996 Stock plan which are
exercisable within 60 days from January 11, 2000. Does not include options
to purchase 19,750 shares of Common Stock granted to such holder pursuant
to the Company's 1996 Stock Plan exercisable after such date.
(5) Includes 3,250 shares subject to options granted pursuant to the Company's
1996 Stock plan which are exercisable within 60 days from January 11, 2000.
Does not include options to purchase 19,750 shares of Common Stock granted
to such holder pursuant to the Company's 1996 Stock Plan exercisable after
such date.
(6) Includes 3,250 shares subject to options granted pursuant to the Company's
1996 Stock plan which are exercisable within 60 days from January 11, 2000.
Does not include options to purchase 2,250 shares of Common Stock granted
to such holder pursuant to the Company's 1996 Stock Plan exercisable after
such date.
(7) Includes 3,250 shares subject to options granted pursuant to the Company's
1996 Stock plan which are exercisable within 60 days from January 11, 2000.
Does not include options to purchase 19,750 shares of Common Stock granted
to such holder pursuant to the Company's 1996 Stock Plan exercisable after
such date.
(8) Includes 750 shares subject to options granted pursuant to the Company's
1996 Stock plan which are exercisable within 60 days from January 11, 2000.
Does not include options to purchase 2,250 shares of Common Stock granted
to such holder pursuant to the Company's 1996 Stock Plan exercisable after
such date.
(9) Includes 74,126 shares held in escrow pending settlement of any claims
relating to the acquisition of the Empower Companies by the Company and
expiration of the escrow agreement on February 16, 2000. Does not include
options to purchase 155,029 shares of Common Stock granted to Mr. Kavanaugh
pursuant to the Company's 1996 Stock Plan which become exercisable on April
4, 2001.
- 29 -
<PAGE>
(10) Includes 74,126 shares held in escrow pending settlement of any claims
relating to the acquisition of the Empower Companies by the Company and
expiration of the escrow agreement on February 16, 2000. Does not include
options to purchase 155,029 shares of Common Stock granted to Mr. Collins
pursuant to the Company's 1996 Stock Plan which become exercisable on April
4, 2001.
(11) Includes 31,188 shares held in escrow pending settlement of any claims
relating to the acquisition of the Empower Companies by the Company and
expiration of the escrow agreement on February 16, 2000. Also includes
2,700 shares purchased on the open market. Does not include options to
purchase 214,499 shares of Common Stock granted to Mr. Casas pursuant to
the Company's 1996 Stock Plan which become exercisable on April 4, 2001.
(12) Includes 21,588 shares held in escrow pending settlement of any claims
relating to the acquisition of the Empower Companies by the Company and
expiration of the escrow agreement on February 16, 2000. Does not include
options to purchase 77,444 shares of Common Stock granted to Mr. Hiller
pursuant to the Company's 1996 Stock Plan which become exercisable on April
4, 2001.
(13) Does not include options to purchase 5,000 shares of Common Stock granted
to Mr. Maw pursuant to the Company's 1996 Stock Plan which become
exercisable over time as of March 12, 2000.
(14) Does not include options to purchase 5,000 shares of Common Stock granted
to Mr. Farr pursuant to the Company's 1996 Stock Plan which become
exercisable over time as of March 12, 2000.
(15) Does not include options to purchase 5,000 shares of Common Stock granted
to Mr. Donahue pursuant to the Company's 1996 Stock Plan which become
exercisable over time as of March 12, 2000.
All offering expenses are being paid by us except the fees and expenses
of any counsel and other advisors that the Selling Shareholders may employ to
represent them in connection with the offering and all brokerage or underwriting
discounts or commissions paid to broker-dealers in connection with the sale of
the shares.
- 30 -
<PAGE>
PLAN OF DISTRIBUTION
The Selling Shareholders have not advised us of any specific plan for
distribution of the shares offered hereby, but it is anticipated that the shares
will be sold from time to time by the Selling Shareholders or by pledgees,
donees, transferees or other successors in interest. Such sales may be made
over-the-counter on the Nasdaq National Market at prices and at terms then
prevailing or at prices related to the then current market price, or in
negotiated transactions. The shares may be sold by one or more of the following:
(i) a block trade in which the broker or dealer so engaged will attempt to sell
the shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction; (ii) purchases by a broker or dealer
for its account pursuant to this Prospectus; or (iii) ordinary brokerage
transactions and transactions in which the broker solicits purchases. In
effecting sales, brokers or dealers engaged by the Selling Shareholders may
arrange for other brokers or dealers to participate. Brokers or dealers will
receive commissions or discounts from the Selling Shareholders in amounts to be
negotiated immediately prior to the sale. Such brokers or dealers and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales, and any commissions
received by them and any profit realized by them on the resale of shares as
principals may be deemed underwriting compensation under the Securities Act. The
expenses of preparing this Prospectus and the related Registration Statement
with the Commission will be paid by the Company. Shares of Common Stock covered
by this Prospectus also may qualify to be sold pursuant to Rule 144 (subject to
the holding periods thereunder) under the Securities Act, rather than pursuant
to this Prospectus. The Selling Shareholders have been advised that they are
subject to the applicable provisions of the Exchange Act, including without
limitation, Rules 10b-5 and Regulation M thereunder.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for the Company by Buchanan Ingersoll Professional Corporation, 650 College
Road East, Princeton, New Jersey.
EXPERTS
The consolidated financial statements for fiscal years ended December
31, 1998, 1997 and 1996 included in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said report.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 14A:3-5 of the New Jersey Business Corporation Act permits each
New Jersey business corporation to indemnify its directors, officers, employees
and agents against expenses and liabilities in connection with:
o any proceeding involving such persons by reason of his or her serving or
having served in such capacities; or
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<PAGE>
o each such person's acts taken in such capacity if such actions were
taken in good faith and in a manner which he or she reasonably believed
to be in or not opposed to the best interests of the corporation.
With respect to any criminal proceeding, indemnity is permitted if such
person had no reasonable cause to believe his or her conduct was unlawful,
provided that any such proceeding is not by or in the right of the corporation.
Section 14A:2-7(3) of the New Jersey Business Corporation Act enables a
corporation in its certificate of incorporation to limit the liability of
directors and officers of the corporation to the corporation or its
shareholders. Specifically, the certificate of incorporation may provide that
directors and officers of the corporation will not be personally liable for
money damages for breach of a duty as a director or an officer, except for
liability for:
o any breach of the director's or officer's duty of loyalty to the
corporation or its shareholders;
o acts or omissions not in good faith or which involve a knowing violation
of law; or
o as to directors only, under Section 14A:6-12(1) of the New Jersey
Business Corporation Act, which relates to unlawful declarations of
dividends or other distributions of assets to shareholders or the
unlawful purchase of shares of the corporation; or
o any transaction from which the director or officer derived an improper
personal benefit.
Our Certificate of Incorporation limits the liability of our directors
and officers as authorized by Section 14A:2-7(3). The affirmative vote of the
holders of at least 80% of the voting power of all outstanding shares of our
capital stock is required to amend such provisions.
Our Amended and Restated By-laws specify that we shall indemnify our
directors and officers to the extent such parties are involved in or made a
party to any action, suit or proceeding because he or she was a director or
officer. We have agreed to indemnify such parties for their actual and
reasonable expenses if such party:
o acted in good faith and in a manner he or she reasonably believed to be
in our best interests; and
o had no reasonable cause to believe his or her conduct was unlawful.
This provision of the By-laws is deemed to be a contract between us and
each director and officer who serves in such capacity at any time while such
provision and the relevant provisions of the New Jersey Business Corporation Act
are in effect. Any repeal or modification shall not offset any action, suit or
proceeding brought or threatened based in whole or in part upon any such state
of facts. The affirmative vote of the holders of at least 80% of the voting
power of all outstanding shares of our capital stock is required to adopt, amend
or repeal such provision of the By-laws.
- 32 -
<PAGE>
We have executed indemnification agreements with each of our directors
and executive officers. Such agreements require us to indemnify such parties to
the full extent permitted by law, subject to certain exceptions, if such party
becomes subject to an action because such party is a director, officer,
employee, agent or fiduciary.
We have liability insurance for the benefit of our directors and
officers. The insurance covers claims against such persons due to any breach of
duty, neglect, error, misstatement, misleading statement, omission or act done.
The insurance covers such claims, except as prohibited by law, or otherwise
excluded by such insurance policy.
SECURITIES AND EXCHANGE COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of
Intelligroup pursuant to the foregoing provisions, or otherwise, we have been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
- 33 -
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants......................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and 1997..... F-3
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996....................... F-4
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996................. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996....................... F-6
Notes to Consolidated Financial Statements....................... F-7
Financial Statement Schedules
Financial Statement Schedules required by the Securities
and Exchange Commission have been omitted as the required
information is included in the Notes to the Consolidated
Financial Statements or are not applicable.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Intelligroup, Inc.:
We have audited the accompanying consolidated balance sheets of
Intelligroup, Inc. (a New Jersey corporation) and subsidiaries as of December
31, 1998 and 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Intelligroup, Inc.
and its subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
May 7, 1999 (except with
respect to the fifth paragraph
of Note 11 as to which the date
is January 6, 2000, and the
third paragraph of Note 11 as
to which the date is
January 26, 2000)
F-2
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................... $ 4,245,000 $ 8,825,000
Accounts receivable, less allowance for doubtful
accounts of $1,053,000 and $799,000 at December 31,
1998 and 1997, respectively........................... 33,622,000 21,065,000
Unbilled services....................................... 10,842,000 7,840,000
Deferred tax asset...................................... 808,000 404,000
Other current assets.................................... 4,197,000 790,000
------------- -------------
Total current assets................................ 53,714,000 38,924,000
Property and equipment, net............................... 9,506,000 3,781,000
Costs in excess of fair value of net assets acquired, net. 5,629,000 --
Other assets.............................................. 716,000 359,000
------------- -------------
$ 69,565,000 $ 43,064,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................ $ 5,347,000 $ 1,960,000
Accrued payroll and related taxes....................... 6,254,000 3,569,000
Accrued expenses and other liabilities.................. 2,999,000 1,430,000
Accrued acquisition costs............................... 3,302,000 --
Income taxes payable.................................... 3,160,000 1,079,000
Current portion of long term debt and obligations under
capital leases........................................ 11,000 386,000
------------- -------------
Total current liabilities........................... 21,073,000 8,424,000
------------- -------------
Long term debt and obligations under capital leases, less
current portion......................................... 60,000 355,000
------------- -------------
Deferred income taxes..................................... 483,000 171,000
------------- -------------
Minority interest......................................... -- 78,000
------------- -------------
Commitments and contingencies
Shareholders' Equity
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued or outstanding................ -- --
Common stock, $.01 par value, 25,000,000 shares
authorized, 15,393,000 and 15,083,000 shares issued
and outstanding at December 31, 1998 and 1997,
respectively.......................................... 154,000 151,000
Additional paid-in capital.............................. 35,263,000 30,814,000
Retained earnings....................................... 13,077,000 3,170,000
Currency translation adjustments........................ (545,000) (99,000)
------------- -------------
Total shareholders' equity ......................... 47,949,000 34,036,000
------------- -------------
$ 69,565,000 $ 43,064,000
============= =============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-3
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenue.................................................. $ 162,840,000 $ 98,301,000 $ 61,699,000
Cost of sales............................................ 104,984,000 67,452,000 43,142,000
------------- ------------- -------------
Gross profit....................................... 57,856,000 30,849,000 18,557,000
------------- ------------- -------------
Selling, general and administrative expenses............. 38,074,000 22,449,000 14,544,000
Acquisition expenses..................................... 2,118,000 -- --
------------- ------------- -------------
Total selling, general and administrative expenses. 40,192,000 22,449,000 14,544,000
------------- ------------- -------------
Operating income................................... 17,664,000 8,400,000 4,013,000
------------- ------------- -------------
Other expenses:
Interest (income) expense, net......................... (187,000) (265,000) 336,000
Factor charges......................................... -- -- 999,000
------------- ------------- -------------
(187,000) (265,000) 1,335,000
-------------- -------------- -------------
Income before provision for income taxes and
extraordinary charge................................... 17,851,000 8,665,000 2,678,000
Provision for income taxes............................... 4,451,000 2,327,000 748,000
------------- ------------- -------------
Income before extraordinary charge....................... 13,400,000 6,338,000 1,930,000
Extraordinary charge-Loss on early extinguishment of
debt, net of income tax benefit of $296,000............ -- -- 1,148,000
------------- ------------- -------------
Net income............................................... $ 13,400,000 $ 6,338,000 $ 782,000
============= ============= =============
Earnings per share:
Basic earnings per share:
Income before extraordinary charge................. $ 0.88 $ 0.44 $ 0.18
Extraordinary charge, net of income tax benefit.... -- -- (0.11)
------------ ------------ -------------
Net income per share............................. $ 0.88 $ 0.44 $ 0.07
============ ============= =============
Weighted average number of common shares - Basic... 15,207,000 14,457,000 11,003,000
============ ============= =============
Diluted earnings per share:
Income before extraordinary charge................. $ 0.85 $ 0.42 $ 0.16
Extraordinary charge, net of income tax benefit.... -- -- (0.10)
------------ ------------ -------------
Net income per share............................. $ 0.85 $ 0.42 $ 0.06
============ ============= =============
Weighted average number of common shares - Diluted. 15,789,000 14,937,000 12,263,000
============ ============= =============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-4
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Cumulative
Retained Foreign Comprehensive
Common Stock Addutional Earnings Currency Total Income
------------------- Paid-in (Accumulated Translation Shareholders' for the
Shares Amount Capital Deficit) Adjustments Equity Period
------ ------ ---------- ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 15,298,000 $153,000 $ 639,000 $ (719,000) $ 17,000 $ 90,000 --
Repurchase and retirement
of common stock............. (4,881,000) (49,000) -- (1,451,000) -- (1,500,000) --
Issuance of common stock,
net of related costs........ 2,050,000 20,000 17,815,000 -- -- 17,835,000 --
Exercise of warrants........ 1,364,000 14,000 1,386,000 -- -- 1,400,000 --
Currency transactions
adjustments................. -- -- -- -- 68,000 68,000 $ 68,000
Shareholder dividends....... -- -- -- (931,000) -- (931,000) --
Net income.................. -- -- -- 782,000 -- 782,000 782,000
--------- -------- ----------- ----------- --------- ----------- -----------
Balance at December 31, 1996 13,831,000 138,000 19,840,000 (2,319,000) 85,000 17,744,000 $ 850,000
===========
Issuance of common stock,
net of related costs........ 1,150,000 12,000 9,888,000 -- -- 9,900,000 --
Exercise of stock options... 102,000 1,000 838,000 -- -- 839,000 --
Tax benefit from exercise
of stock options............ -- -- 248,000 -- -- 248,000 --
Shareholder dividends....... -- -- -- (849,000) -- (849,000) --
Currency translation
adjustments................. -- -- -- -- (184,000) (184,000) $ (184,000)
Net income.................. -- -- -- 6,338,000 -- 6,338,000 6,338,000
--------- -------- ----------- ----------- --------- ----------- -----------
Balance at December 31, 1997 15,083,000 151,000 30,814,000 3,170,000 (99,000) 34,036,000 $ 6,154,000
===========
Issuance of common stock in
connection with acquisitions 166,000 2,000 3,126,000 -- -- 3,128,000 --
Exercise of stock options... 144,000 1,000 1,021,000 -- -- 1,022,000 --
Tax benefit from exercise
of stock options............ -- -- 302,000 -- -- 302,000 --
Adjustment for difference
in Azimuth fiscal periods... -- -- -- 32,000 -- 32,000 --
Shareholder dividends....... -- -- -- (3,525,000) -- (3,525,000) --
Currency translation -- -- -- -- (446,000) (446,000) $ (446,000)
adjustments.................
Net income.................. -- -- -- 13,400,000 -- 13,400,000 13,400,000
--------- ------ ----------- ----------- --------- ----------- -----------
Balance at December 31, 1998 15,393,000 $154,000 $35,263,000 $13,077,000 $(545,000) $47,949,000 $12,954,000
========== ======= =========== =========== ========= =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-5
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $13,400,000 $ 6,338,000 $ 782,000
Adjustments to reconcile net income to net cash
(provided by) used in operating activities:
Depreciation and amortization......................... 1,538,000 571,000 362,000
Provision for doubtful accounts....................... 1,268,000 765,000 590,000
Extraordinary charge.................................. -- -- 1,148,000
Deferred income taxes................................. (92,000) 98,000 (331,000)
Tax benefit from exercise of stock options............ 302,000 248,000 --
Minority interest..................................... -- 78,000 --
Changes in operating assets and liabilities:
Accounts receivable................................... (13,826,000) (11,194,000) (3,691,000)
Unbilled services..................................... (3,002,000) (4,920,000) (1,208,000)
Other current assets.................................. (3,406,000) (255,000) 52,000
Other assets.......................................... (357,000) (134,000) (193,000)
Cash overdraft........................................ -- -- (83,000)
Accounts payable...................................... 3,388,000 1,086,000 (1,252,000)
Accrued payroll and related taxes..................... 2,685,000 743,000 (1,137,000)
Accrued expenses and other liabilities................ 2,130,000 (563,000) 313,000
Income taxes payable.................................. 2,081,000 521,000 61,000
----------- ----------- -----------
Net cash provided by (used in) operating 6,109,000 (6,618,000) (4,587,000)
activities....................................... ----------- ------------ -----------
Cash flows from investing activities:
Purchases of equipment.................................... (7,116,000) (2,436,000) (984,000)
------------ ------------ -----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance -- 9,918,000 17,835,000
costs...................................................
Proceeds from exercise of stock options................... 1,022,000 839,000 --
Proceeds from subordinated debentures and warrants, net
of issuance costs....................................... -- -- 5,888,000
Repayment of subordinated debentures...................... -- -- (6,000,000)
Repurchase of common stock................................ -- -- (1,500,000)
Repayments to factors, net................................ -- -- (3,343,000)
Proceeds from shareholder loans........................... -- 235,000 944,000
Repayments of shareholders' loans......................... (618,000) (375,000) (434,000)
Shareholder dividends..................................... (3,525,000) (849,000) (931,000)
Repayments of lines of credit, net........................ -- -- (45,000)
Principal payments under capital leases................... (6,000) (6,000) (22,000)
------------ ------------ -----------
Net cash (used in) provided by financing (3,127,000) 9,762,000 12,392,000
activities....................................... ------------ ----------- -----------
Effect of foreign currency exchange rate changes on cash.. (446,000) (184,000) 68,000
------------ ------------ -----------
Net increase (decrease) in cash and cash
equivalents...................................... (4,580,000) 524,000 6,889,000
Cash and cash equivalents at beginning of year.............. 8,825,000 8,301,000 1,412,000
----------- ----------- -----------
Cash and cash equivalents at end of year.................... $ 4,245,000 $ 8,825,000 $ 8,301,000
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest.................................... $ 24,000 $ -- $ 1,264,000
=========== =========== ===========
Cash paid for income taxes................................ $ 2,428,000 $ 1,707,000 $ 1,109,000
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-6
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Intelligroup, Inc., and its subsidiaries (the "Company") provide a wide
range of information technology services, including management consulting,
enterprise-wide business process solutions, Internet application services,
applications outsourcing and maintenance, systems integration and custom
software development based on leading technologies. The Company markets its
services to a wide variety of industries primarily in the United States. The
majority of the Company's business is with large established companies,
including consulting firms serving numerous industries.
PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES
The accompanying financial statements include the accounts of
Intelligroup, Inc. and its majority owned subsidiaries. Minority interests were
not significant at December 31, 1998 and 1997. All significant intercompany
balances and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the recorded amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of investments in highly liquid
short-term instruments, with original maturities of three months or less from
the date of purchase.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the related assets (five years). Leasehold improvements are
amortized over the shorter of the lease term or the estimated useful life (ten
years). Costs of maintenance and repairs are charged to expense as incurred.
OTHER ASSETS
Other assets at December 31, 1998 include goodwill and other intangibles
totaling $5,629,000, that were attributable to the acquisition of the minority
interest of CPI Consulting (See Note 9). These intangible assets are being
amortized over the estimated useful lives ranging from 6 to 15 years using the
straight-line method. Amortization expense was $147,000 in 1998.
F-7
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
REVENUE RECOGNITION
The Company generates revenue from professional services rendered.
Revenue is recognized as services are performed with the corresponding cost of
providing those services reflected as cost of sales. Substantially all customers
are billed on an hourly or per diem basis whereby actual time is charged
directly to the customer. Billings to customers for out-of-pocket expenses are
recorded as a reduction of expenses incurred. Unbilled services at December 31,
1998 and 1997 represent services provided which are billed subsequent to
year-end. All such amounts are anticipated to be realized in the following year.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company provides an allowance for doubtful accounts arising from
services, which is based upon a review of outstanding receivables as well as
historical collection information. Credit is granted to substantially all
customers on an unsecured basis. In determining the amount of the allowance,
management is required to make certain estimates and assumptions. The provision
for doubtful accounts totaled $1,397,000, $765,000 and $590,000 in 1998, 1997
and 1996, respectively. Accounts written off totaled $1,143,000, $512,000 and
$575,000 in 1998, 1997 and 1996, respectively.
RECOVERABILITY OF LONG-LIVED ASSETS
The Company reviews the recoverability of its long-lived assets on a
periodic basis in order to identify business conditions which may indicate a
possible impairment. The assessment for potential impairment is based primarily
on the Company's ability to recover the carrying value of its long-lived assets
from expected future cash flows from its operations on an undiscounted basis.
The Company does not believe that any such impairment existed at December 31,
1998.
STOCK-BASED COMPENSATION
Stock-based compensation is recognized using the intrinsic value method
under APB No. 25. For disclosure purposes, pro forma net income and earnings per
share impacts are provided as if the fair market value method had been applied.
CURRENCY TRANSLATION
Assets and liabilities relating to foreign operations are translated
into U.S. dollars using exchange rates in effect at the balance sheet date;
income and expenses are translated into U.S. dollars using monthly average
exchange rates during the year. Translation adjustments associated with assets
and liabilities are excluded from income and credited or charged directly to
shareholders' equity.
CONCENTRATIONS
For the years ended December 31, 1998, 1997 and 1996, approximately 52%,
56% and 57% of revenue, respectively, was derived from projects in which the
Company's personnel implemented software developed by SAP. The Company's future
success in its SAP-related
F-8
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
consulting services depends largely on its continued relationship with SAP and
on its continued status as a SAP National Implementation Partner, which was
first obtained in 1995. The Company's agreement with SAP (the "Agreement") is
awarded on an annual basis. The Company's current contract expires on December
31, 1999 and is automatically renewed for successive one-year periods, unless
terminated by either party. This Agreement contains no minimum revenue
requirements or cost sharing arrangements and does not provide for commissions
or royalties to either party. In February 1997, the Company achieved a National
Logo Partner relationship with SAP. Additionally, for each of the years ended
December 31, 1998 and 1997, approximately 12% and 11%, respectively, and less
than 10% during 1996 of revenue was derived from projects in which the Company's
personnel implemented software developed by Oracle. For each of the years ended
December 31, 1998, 1997 and 1996, approximately 19%, 12% and 9%, respectively,
of the Company's total revenue was derived from projects in which the Company
implemented software developed by PeopleSoft.
A substantial portion of the Company's revenue is derived from projects
in which an information technology consulting firm other than the Company has
been retained by the end-user organization to manage the overall project. For
years ended December 31, 1998, 1997 and 1996, 19%, 31% and 34%, respectively, of
the Company's revenue was generated by serving as a member of consulting teams
assembled by other information technology consulting firms.
One customer accounted for approximately 6%, 9% and 10% of revenue in
1998, 1997 and 1996, respectively. Accounts receivable due from this customer
was approximately $2,045,000, $1,628,000 and $2,268,000 as of December 31, 1998,
1997 and 1996, respectively. Another customer accounted for approximately 4%,
10% and 15% of revenue for 1998, 1997 and 1996, respectively. Accounts
receivable due from this customer was approximately $1,395,000, $2,049,000 and
$988,000 as of December 31, 1998, 1997 and 1996, respectively.
During 1998, the Company derived revenue totaling $1.7 million from
contracts with an entity whose chief executive officer is a director of the
Company.
INCOME TAXES
The Company accounts for income taxes pursuant to the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," ("SFAS No. 109") which utilizes the liability method and results in the
determination of deferred taxes based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities, using enacted tax rates currently in effect. The Company does not
provide for additional U.S. income taxes on undistributed earnings considered to
be permanently invested in foreign subsidiaries.
F-9
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
EARNINGS PER SHARE
Basic earnings per share is computed by dividing income attributable to
common stockholders by the weighted average number of common shares outstanding.
Diluted earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding,
adjusted for the incremental dilution of outstanding stock options. The
computation of basic earnings per share and diluted earnings per share were as
follows:
1998 1997 1996
----------- ----------- -----------
Net Income ........................... $13,400,000 $ 6,338,000 $ 782,000
----------- ----------- -----------
Denominator:
Weighted average number of common
shares ............................ 15,207,000 14,457,000 11,003,000
----------- ----------- -----------
Basic earnings per share .......... $ 0.88 $ 0.44 $ 0.07
=========== =========== ===========
Denominator:
Weighted average number of common
shares ............................ 15,207,000 14,457,000 11,003,000
Common share equivalents of
outstanding stock options ......... 582,000 480,000 1,260,000
----------- ----------- -----------
Total shares ......................... 15,789,000 14,937,000 12,263,000
----------- ----------- -----------
Diluted earnings per share ........... $ 0.85 $ 0.42 $ 0.06
=========== =========== ===========
Vested stock options which would be antidilutive have been excluded from
the calculations of diluted shares outstanding and diluted earnings per share.
RECENTLY ISSUED ACCOUNTING STANDARDS
In April, 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities." The SOP requires all costs incurred as start-up costs or
organization costs be expensed as incurred. Adoption of the SOP is required for
fiscal years beginning after December 15, 1998. The Company does not believe
that the new standard will have a material impact on the Company's consolidated
financial statements.
In March, 1998, the Accounting Standards Executive Committee issued SOP
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This SOP required that computer software costs that are incurred
in the preliminary project stage be expensed as incurred and that criteria be
met before capitalization of costs to develop or obtain internal use computer
software. Adoption of the SOP is required for fiscal years beginning after
F-10
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
December 15, 1998. The Company does not believe that the new standard will have
a material impact on the Company's consolidated financial statements.
FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to credit
risk consist principally of trade receivables and unbilled services. Management
of the Company believes the fair value of accounts receivable and unbilled
services approximates the carrying value.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31:
1998 1997
--------- ---------
Vehicles.......................... $ 109,000 $ 26,000
Furniture......................... 2,459,000 785,000
Equipment......................... 8,438,000 4,337,000
Computer software................. 816,000 25,000
Leasehold improvements............ 474,000 --
--------- ---------
12,296,000 5,173,000
Less-Accumulated depreciation..... (2,790,000) (1,392,000)
---------- ----------
$9,506,000 $3,781,000
Included in the above table is $102,000 of equipment held under capital
leases at December 31, 1998, 1997 and 1996. Depreciation expense was $1,391,000,
$571,000 and $362,000 in 1998, 1997 and 1996, respectively.
NOTE 3 - LINES OF CREDIT AND SUBORDINATED DEBENTURES
In January 1997, and as later amended on August 18, 1997, the Company
entered into a two-year credit agreement with a bank (the "Bank"). The credit
facility with the Bank has two components comprised of (i) a revolving line of
credit pursuant to which the Company may borrow up to $7.5 million either at the
Bank's prime rate per annum or the EuroRate plus 2% (at the Company's option),
and (ii) equipment term loans pursuant to which the Company may borrow up to an
aggregate of $350,000 (at the Bank's prime rate plus 1/4 of 1% per annum) to
purchase equipment. The credit agreement contains covenants which require the
Company to (i) maintain its working capital during the year at no less than 90%
of the working capital at the end of the immediately preceding fiscal year and
at the end of each fiscal year at no less than 105% of its working capital at
the end of the immediately preceding fiscal year; and (ii) maintain its tangible
net worth during the year at no less than 95% of its tangible net worth at the
end of the immediately preceding fiscal year and at the end of each fiscal year
at no less than 108% of tangible net worth at the end of the immediately
preceding fiscal year. The Company's obligations under the credit agreement are
collateralized by substantially all of the Company's assets, including its
accounts receivable and intellectual property. At December 31, 1998, the Company
was in compliance with all covenants. The facility was due to expire in January
1999, but was extended until a new three-year credit agreement took effect on
January 29, 1999. (See Note 11).
F-11
<PAGE>
NOTE 4 - INCOME TAXES
Income tax attributable to income from continuing operations consists of
the following:
1998 1997 1996
---------- --------- ---------
Current:
Federal............... $2,878,000 $1,384,000 $ 631,000
State................. 783,000 389,000 200,000
Foreign............... 882,000 456,000 248,000
---------- --------- ---------
4,543,000 2,229,000 1,079,000
---------- --------- ---------
Deferred:
Federal............... (71,000) 76,000 (259,000)
State................. (21,000) 22,000 (72,000)
----------- --------- ---------
(92,000) 98,000 (331,000)
---------- --------- ---------
Total................... $4,451,000 $2,327,000 $ 748,000
========== ========== =========
The provision for income taxes differs from the amount computed by
applying the statutory rate of 34% to income before income taxes. The principal
reasons for this difference are:
1998 1997 1996
----- ----- -----
Tax at federal statutory rate.............. 34% 34% 34%
Nondeductible expenses..................... 5 1 1
State income tax, net of federal benefit... 4 4 (3)
Utilization of net operating loss
carryforwards............................ (1) -- (8)
Foreign losses for which no benefit is
available................................ 7 -- 16
Changes in valuation allowance............. -- (3) (14)
Foreign operations taxed at less than
U.S. statutory rate, primarily India..... (11) (7) (1)
S Corp and L.L.C. income passed through
to shareholders.......................... (13) (6) --
Other...................................... (1) 4 3
----- ----- -----
Effective tax rate......................... 24% 27% 28%
===== ====== =====
In 1996, the Company elected a five year tax holiday in India in
accordance with a local tax incentive program whereby no income taxes will be
due for such period. The Empower Companies (see Note 11) were pass-through
entities for tax reporting purposes, thus their income was not taxed at the
corporate level. Accordingly, the Company's federal statutory tax rate was
reduced by 13% and 6% for 1998 and 1997, respectively.
F-12
<PAGE>
NOTE 4 - INCOME TAXES - (Continued)
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities as of December
31, 1998 and 1997 are as follows:
1998 1997
--------- ---------
Deferred tax assets:
Allowance for doubtful accounts............ $ 432,000 $ 327,000
Certain accrued liabilities................ 376,000 77,000
--------- ---------
Total deferred tax assets.................... 808,000 404,000
Deferred tax liability-accelerated
depreciation............................... (483,000) (171,000)
--------- ---------
Net deferred tax asset....................... $ 325,000 $ 233,000
======== =========
Realization of the net deferred tax assets is dependent on the timing of
the reversal of temporary differences. Although realization is not assured,
management believes it is more likely than not, that the 1998 net deferred tax
assets will be realized.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
As of December 31, 1998, the Company had employment agreements with
certain of its executives which provide for minimum payments in the event of
termination in other than for just cause. The aggregate amount of compensation
commitment in the event of termination under such agreements is approximately
$682,000.
LEASES
The Company leases office space and office equipment and vehicles under
capital and operating leases that have initial or remaining non-cancelable lease
terms in excess of one year as of December 31, 1998. Future minimum aggregate
annual lease payments are as follows:
FOR THE YEARS ENDING DECEMBER 31, CAPITAL OPERATING
--------------------------------- ------- ---------
1999..................................... $ 11,000 $ 3,160,000
2000..................................... 9,000 2,913,000
2001..................................... -- 2,192,000
2002..................................... -- 1,658,000
2003..................................... -- 1,346,000
--------- -----------
Subtotal................................. 20,000 11,269,000
Thereafter............................... -- 5,702,000
Less-Interest............................ --
---------
20,000
Less-Current portion..................... (11,000)
---------
$ 9,000
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
$2,217,000, $713,000 and $444,000, respectively.
F - 13
<PAGE>
NOTE 5 - COMMITMENTS AND CONTINGENCIES - (Continued)
LEGAL
The Company is engaged in certain legal and administrative proceedings.
Management believes the outcome of these proceedings will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
NOTE 6 - STOCK OPTION PLANS AND WARRANTS
The Company's stock option plans permit the granting of options to
employees, non-employee directors and consultants. The Option Committee of the
Board of Directors generally has the authority to select individuals who are to
receive options and to specify the terms and conditions of each option so
granted, including the number of shares covered by the option, the type of
option (incentive stock option or non-qualified stock option), the exercise
price, vesting provisions, and the overall option term. A total of 1,590,000
shares of Common Stock have been reserved for issuance under the plans.
Subsequent to December 31, 1998, the Company granted options to purchase an
aggregate of 388,100 shares of its Common Stock to certain employees. All of the
options issued pursuant to these plans expire ten years from the date of grant.
F - 14
<PAGE>
NOTE 6 - STOCK OPTION PLANS AND WARRANTS - (Continued)
The fair value of option grants for disclosure purposes is estimated on
the date of grant using the Black-Scholes option-pricing model using the
following weighted-average assumptions: expected volatility of 78%, 62% and 41%,
risk-free interest rate of 5.4%, 7.0% and 5.6% and expected lives of 8.5, 4.5
and 3.1 years, in 1998, 1997 and 1996, respectively. The weighted average fair
value of options granted during 1998, 1997 and 1996 was $13.49, $6.96 and $2.93,
respectively.
Weighted
Number of Average
Shares Exercise Price
- --------------------------------------------------------------------------------
Options Outstanding,
December 31, 1995 -- --
Granted 580,000 $ 8.38
Canceled (8,200) $ 8.00
- --------------------------------------------------------------------------------
Options Outstanding,
December 31, 1996
(none exercisable) 571,800 $ 8.39
Granted 647,640 $ 11.52
Exercised (102,381) $ 8.20
Canceled (74,113) $ 9.78
- --------------------------------------------------------------------------------
Options Outstanding,
December 31, 1997
(93,674 exercisable) 1,042,946 $ 10.25
Granted 1,257,630 $ 16.81
Exercised (143,297) $ 9.32
Canceled (258,138) $ 14.91
- --------------------------------------------------------------------------------
Options Outstanding,
December 31, 1998
(262,156 exercisable) 1,899,141 $ 14.14
========= =======
F - 15
<PAGE>
NOTE 6 - STOCK OPTION PLANS AND WARRANTS - (Continued)
The following table summarizes information about stock options
outstanding and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------- -----------
Weighted Weighted Weighted
Exercise Price Number of Average Average Number of Average
Range shares Remaining Exercise shares Exercise
Life (in Price Price
years)
- ----------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
$8 to 10 282,706 6.0 $8.14 156,944 $8.10
$10 to 12 448,605 5.8 $10.82 70,282 $10.92
$12 to 15 142,000 9.5 $14.11 8,000 $12.13
$15 to 22 1,020,830 8.2 $17.21 26,930 $16.40
$22 to 24 5,000 9.6 $23.38 -- --
---------- --------
$8 to 24 1,899,141 7.4 $14.14 262,156 $9.83
</TABLE>
As permitted by SFAS 123, the Company has chosen to continue accounting
for stock options at their intrinsic value. Accordingly, no compensation cost
has been recognized for the stock option plans. Had compensation cost for the
Company's stock option plans been determined based on the fair value option
pricing method, the tax-effective impact would be as follows:
1998 1997 1996
- --------------------------------------------------------------------------------
Net income:
as reported $ 13,400,000 $ 6,338,000 $ 782,000
pro forma $ 8,894,000 $ 5,336,000 $ 423,000
- --------------------------------------------------------------------------------
Basic Earnings per Share:
as reported $0.88 $0.44 $0.07
pro forma $0.56 $0.37 $0.04
- --------------------------------------------------------------------------------
Diluted Earnings per Share:
as reported $0.85 $0.42 $0.06
pro forma $0.54 $0.36 $0.03
F - 16
<PAGE>
NOTE 7 - STOCK RIGHTS
In October 1998 the Company's Board of Directors declared a dividend
distribution of one Preferred Share Purchase Right for each outstanding share of
the Company's Common Stock. These Rights will expire in November 2008 and trade
with the Company's Common Stock. Such Rights are not presently exercisable and
have no voting power. In the event a person or affiliated group of persons,
acquires 20% or more, or makes a tender or exchange offer for 20% or more of the
Company's Common Stock, the Rights detach from the Common Stock and become
exercisable and entitle a holder to buy one one-hundredth (1/100) of a share of
Preferred Stock at $100.00.
If, after the Rights become exercisable, the Company is acquired or
merged, each Right will entitle its holder to purchase $200.00 market value of
the surviving company's stock for $100.00, based upon the current exercise price
of the Rights. The Company may redeem the Rights, at its option, at $.01 per
Right prior to a public announcement that any person has acquired beneficial
ownership of at least 20% of the Company's Common Stock. These Rights are
designed primarily to encourage anyone interested in acquiring the Company to
negotiate with the Board of Directors.
NOTE 8 - INITIAL PUBLIC OFFERING, STOCK SPLIT AND PREFERRED STOCK AUTHORIZATION
In July 1996, the Company's Board of Directors recommended and
shareholders approved an amendment to the Company's Certificate of Incorporation
to effect an 81,351.1111-for-1 stock split. All common shares and per share
amounts in the accompanying financial statements have been adjusted
retroactively to give effect to the stock split.
The Company's initial public offering for the sale of 2,050,000 shares
of its Common Stock became effective on September 26, 1996 and the net proceeds
of approximately $19,065,000 (before deducting expenses of the offering paid by
the Company) were received on October 2, 1996.
On July 2, 1997, the Company consummated a follow-on public offering
(the "Offering") of 1,000,000 shares of its Common Stock at a price to the
public of $9.50 per share. On July 15, 1997 and as part of the Offering, an
additional 150,000 shares at $9.50 per share were issued and sold by the Company
to cover over-allotments. The net proceeds to the Company from the Offering,
after underwriting discounts and commissions and other expenses of the Offering,
were approximately $9,900,000.
NOTE 9 - ACQUISITIONS
On May 7, 1998, the Company acquired thirty percent of the outstanding
share capital of CPI Consulting Limited. This acquisition was accounted for
utilizing purchase accounting. The consideration paid by the Company included
the issuance of 165,696 shares of the Company's Common Stock with a fair market
value of $3.1 million, and a future liability to the sellers predicated upon
operating results for the balance of 1998. The value of the liability has been
determined as of December 31, 1998 to be $2.5 million, which is payable by
issuance of additional 155,208 shares of the Company's Common Stock. The excess
of purchase price over
F - 17
<PAGE>
NOTE 9 - ACQUISITIONS (Continued)
the fair value of the net assets acquired was attributed to intangible assets,
amounting in the aggregate to $5.8 million.
On May 21, 1998, the Company acquired all of the outstanding share
capital of CPI Resources Limited. The acquisition of CPI Resources Limited was
accounted for as a pooling of interests. Prior results for all periods have been
restated in accordance with pooling of interests accounting. As consideration
for this acquisition, the Company issued 371,000 shares of the Company's Common
Stock. At the time of the acquisition, CPI Resources Limited owned seventy
percent of the outstanding share capital of CPI Consulting Limited.
On November 25, 1998, the Company consummated the acquisition of all of
the outstanding capital stock of each of Azimuth Consulting Limited, Azimuth
Holdings Limited, Braithwaite Richmond Limited and Azimuth Corporation Limited
(collectively the "Azimuth Companies"). The acquisition of the Azimuth Companies
was accounted for as a pooling of interests. Prior results for all periods have
been restated in accordance with pooling of interests accounting. As
consideration for this acquisition, the Company issued 902,928 shares of the
Company's Common Stock.
The pre-merger results of CPI Resources Limited and the Azimuth
Companies were revenues of $14,137,000 and net income of $190,000 for 1997, and
revenues of $14,510,000 and a net loss after taxes of $11,000 for 1996. In
connection with these mergers, $2,118,000 of non-recurring acquisition related
charges were incurred and have been charged to expense during the year ended
December 31, 1998. These costs primarily relate to professional fees incurred in
connection with the mergers.
NOTE 10 - SEGMENT DATA AND GEOGRAPHIC INFORMATION
The Company operates in one industry, IT Services. The Company's service
lines share similar customer bases. The Company's identifiable business segments
can be categorized into three groups:
o ERP Implementation Services ("ERP") is the largest business segment of
the Company's operations, and includes the implementation, integration,
and development of solutions for clients utilizing a class of
application products known as Enterprise Resource Planning software.
This class of products include software developed by such companies as
SAP, Oracle, PeopleSoft, and Baan.
o Management Consulting ("MC") includes business consulting services, such
as Business Process Re-engineering, Change Management, IT Strategy, and
Software Selection.
o Advanced Technology Practice ("ATP") includes Internet technology
solutions and custom application and enhancement development for
clients.
F - 18
<PAGE>
NOTE 10 - SEGMENT DATA AND GEOGRAPHIC INFORMATION (Continued)
The following table presents financial information based upon the
Company's identifiable business segments for the year ended December 31, 1998.
Information on revenue, operating income and margins for these segments is not
available for the year ended December 31, 1997, and the Company determined that
it would be impractical to recreate such data. Substantially all of the
Company's operations for the year ended December 31, 1996 were in the ERP
segment:
Year Ended December 31, 1998 ERP MC ATP
- ---------------------------- ------------ ----------- -----------
Revenues.................... $138,740,000 $8,873,000 $15,227,000
Operating Income............ $ 31,530,000 ($1,232,000) $ 2,304,000
Operating Margin............ 23.1% N/A 15.1%
The Company also incurred corporate expenses for selling, general and
administrative activities of $12,820,000 and non-recurring acquisition related
charges of $2,118,000 during the year ended December 31, 1998, resulting in
total operating income of $17,664,000. Other 1998 information is as follows:
Income before taxes $17,851,000
Total assets $69,565,000
Capital expenditures $ 7,116,000
Depreciation and amortization $ 1,538,000
The following table presents financial information based upon the
Company's geographic segments for the years ended December 31, 1998 and 1997.
For the year ended December 31, 1996, substantially all of the Company's
revenues, operating income, and assets were located within the United States.
Net Operating Identifiable
1998 Revenues Income Assets
-------------------------------------------------
United States......... $119,542,000 $ 13,889,000 $52,820,000
Asia-Pacific.......... 19,466,000 2,299,000 8,475,000
Europe................ 23,832,000 1,952,000 8,270,000
--------------------------------------------------
Total................. $162,840,000 $18,140,000 $69,565,000
==================================================
Net Operating Identifiable
1997 Revenues Income Assets
-------------------------------------------------
United States......... $ 73,253,000 $ 5,744,000 $35,103,000
Asia-Pacific.......... 12,438,000 1,875,000 3,849,000
Europe................ 12,610,000 781,000 4,112,000
--------------------------------------------------
Total................. $ 98,301,000 $ 8,400,000 $43,064,000
===================================================
F - 19
<PAGE>
NOTE 11 - SUBSEQUENT EVENTS
On January 8, 1999, the Company acquired Network Publishing, Inc., based
in Provo, Utah, for a purchase price of approximately $4.5 million consisting of
cash and Intelligroup common stock. NetPub shareholders will receive a portion
of this consideration as an earnout, payable at a later date subject to
operating performance. Pro-forma financial information has not been presented as
this acquisition was deemed immaterial to the Company's operations as a whole.
On January 29, 1999, the Company entered into a new three-year credit
agreement (the "Credit Agreement") with the PNC Bank N.A. (the "Bank"). The new
credit facility with the Bank is comprised of a revolving line of credit
pursuant to which the Company may borrow up to $30.0 million either at the
Bank's prime rate per annum or the EuroRate plus 2% (at the Company's option).
The Credit Agreement contains covenants which require the Company to (i)
maintain a consolidated cash flow leverage ratio equal to or less than 2.5 to
1.0 for the period of four fiscal quarters preceding the date of determination
taken together as one accounting period, (ii) maintain a consolidated net worth
of not less than 90% of the consolidated net worth as of September 30, 1998 plus
50% of positive net income commencing October 1, 1998, and thereafter at the end
of each fiscal year, to be not less than consolidated net worth of the prior
fiscal year plus 50% of positive net income for such fiscal year, (iii) not
enter into any agreement to purchase and/or pay for, or become obligated to pay
for capital expenditures, long term leases, capital leases or sale lease-backs,
in an amount at any time outstanding aggregating in excess of $5,000,000 during
any fiscal year, provided, however, in a one year carry-forward basis, the
Company may incur capital expenditures not to exceed $8,000,000 during any
fiscal year, and (iv) shall not cause or permit the minimum fixed charge
coverage ratio, calculated on the basis of a rolling four quarters of (a)
consolidated EBITDA to (b) the sum of cash income tax expense plus interest
expense, plus scheduled principal payments under any indebtedness, plus
dividends or distributions paid or declared, to be less than 1.4 to 1.0 as at
the end of each fiscal quarter. The proceeds of the Credit Agreement may be used
by the Company for financing acquisitions and general corporate purposes. At the
Company's option, for each loan, interest shall be computed either at the Bank's
prime rate per annum or the Adjusted Libo Rate plus the Applicable Margin, as
such terms are defined in the Loan Agreement. The Company's obligations under
the credit facility are payable at the expiration of such facility on January
29, 2002.
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 Loan
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 Loan Agreement to remedy defaults
which existed under the Loan Agreement. The terms of the waiver and amendment
include, among other things, (i) a $15 million reduction in availability under
the Loan Agreement, (ii) a first priority perfected security interest on all of
the assets of the Company and its domestic subsidiaries and (iii) modification
of certain financial covenants and a waiver of prior covenant defaults.
F - 20
<PAGE>
NOTE 11 - SUBSEQUENT EVENTS (Continued)
On February 16, 1999, the Company, by way of merger transactions,
acquired both Empower Solutions, L.L.C. and its affiliate Empower, Inc. (a
corporation organized under sub-chapter S of the Internal Revenue Code). The
acquisitions were accounted for as poolings of interests. The accompanying
consolidated financial statements as of December 31, 1998 and 1997 and each of
the three years in the period ended December 31, 1998, have been restated in
accordance with pooling of interests accounting. In connection with these
acquisitions, the Company issued approximately 1,831,000 shares of the Company's
Common Stock. Additional shares of its stock may be issued upon the completion
of a net worth calculation on the closing balance sheet, as defined. The
pre-merger results of the Empower Companies were revenues of $18.0 million and
net income of $5.7 million for 1998 and revenues of $4.0 million and net income
of $1.7 million for 1997. In connection with this merger, acquisition expenses
of $2.1 million were expensed during 1999. These costs primarily relate to
professional fees incurred in connection with the merger.
In November 1999, the Company announced its intentions to spin off its
internet solutions group to its shareholders. The spin-off is subject to certain
conditions and approvals. Internet solutions group revenues approximated $15
million for the year ended December 31, 1998 and approximately $27 million
(unaudited) for the nine months ended September 30, 1999.
F - 21
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
SEC registration fee....................... $ 3,402.04(1)
Counsel fees and expenses*................. 75,000.00
Accounting fees and expenses*.............. 17,500.00
Miscellaneous expenses*.................... 4,097.96
----------
Total*................................. $ 100,000.00
----------
(1) $2,564.13 of such registration fee was paid by us at the time of
the initial filing of the Registration Statement.
* Estimated
All expenses of issuance and distribution listed above will be borne by
the Company. The costs of fees and expenses of legal counsel and other advisors,
if any, that the Selling Shareholders employ in connection with the offering
will be borne by the Selling Shareholders.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 14A:3-5 of the New Jersey Business Corporation Act permits each
New Jersey business corporation to indemnify its directors, officers, employees
and agents against expenses and liabilities in connection with:
o any proceeding involving such persons by reason of his or her serving or
having served in such capacities; or
o each such person's acts taken in such capacity if such actions were
taken in good faith and in a manner which he or she reasonably believed
to be in or not opposed to the best interests of the corporation.
With respect to any criminal proceeding, indemnity is permitted if such
person had no reasonable cause to believe his or her conduct was unlawful,
provided that any such proceeding is not by or in the right of the corporation.
Section 14A:2-7(3) of the New Jersey Business Corporation Act enables a
corporation in its certificate of incorporation to limit the liability of
directors and officers of the corporation to the corporation or its
shareholders. Specifically, the certificate of incorporation may provide that
directors and officers of the corporation will not be personally liable for
money damages for breach of a duty as a director or an officer, except for
liability for:
o any breach of the director's or officer's duty of loyalty to the
corporation or its shareholders;
o acts or omissions not in good faith or which involve a knowing violation
of law; or
II-1
<PAGE>
o as to directors only, under Section 14A:6-12(1) of the New Jersey
Business Corporation Act, which relates to unlawful declarations of
dividends or other distributions of assets to shareholders or the
unlawful purchase of shares of the corporation; or
o any transaction from which the director or officer derived an improper
personal benefit.
Our Certificate of Incorporation limits the liability of our directors
and officers as authorized by Section 14A:2-7(3). The affirmative vote of the
holders of at least 80% of the voting power of all outstanding shares of our
capital stock is required to amend such provisions.
Our Amended and Restated By-laws specify that we shall indemnify our
directors and officers to the extent such parties are involved in or made a
party to any action, suit or proceeding because he or she was a director or
officer. We have agreed to indemnify such parties for their actual and
reasonable expenses if such party:
o acted in good faith and in a manner he or she reasonably believed to be
in our best interests; and
o had no reasonable cause to believe his or her conduct was unlawful.
This provision of the By-laws is deemed to be a contract between us and
each director and officer who serves in such capacity at any time while such
provision and the relevant provisions of the New Jersey Business Corporation Act
are in effect. Any repeal or modification shall not offset any action, suit or
proceeding brought or threatened based in whole or in part upon any such state
of facts. The affirmative vote of the holders of at least 80% of the voting
power of all outstanding shares of our capital stock is required to adopt, amend
or repeal such provision of the By-laws.
We have executed indemnification agreements with each of our directors
and executive officers. Such agreements require us to indemnify such parties to
the full extent permitted by law, subject to certain exceptions, if such party
becomes subject to an action because such party is a director, officer,
employee, agent or fiduciary.
We have liability insurance for the benefit of our directors and
officers. The insurance covers claims against such persons due to any breach of
duty, neglect, error, misstatement, misleading statement, omission or act done.
The insurance covers such claims, except as prohibited by law, or otherwise
excluded by such insurance policy.
SECURITIES AND EXCHANGE COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of
Intelligroup pursuant to the foregoing provisions, or otherwise, we have been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
II-2
<PAGE>
ITEM 16. EXHIBITS.
Exhibit No. Description of Exhibit
----------- ----------------------
5 Opinion of Buchanan Ingersoll Professional Corporation as to
legality of the shares of common stock.
10.1** First Amendment to Revolving Credit Loan Agreement by and
between Intelligroup, Inc., a New Jersey corporation and PNC
Bank, National Association, a national banking association.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Buchanan Ingersoll Professional
Corporation (contained in the opinion filed as Exhibit 5 to
the Registration Statement).
24* Powers of Attorney of certain officers and directors of the
Company.
* previously filed
** The schedules or exhibits to this document are not being filed herewith
because the Company believes that the information contained therein should not
be considered material or such information is otherwise adequately disclosed in
this Amendment No. 1 to the Registration Statement on Form S-3 or may otherwise
be filed as an Exhibit to this Registration Statement. The Company agrees to
furnish supplementally a copy of any schedule or exhibit to the SEC upon
request.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement to include any
material information with respect to the plan of distribution not previously
disclosed in this Registration Statement or any material change to such
information in this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit
II-3
<PAGE>
plan's annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this amendment to
the registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Township of Edison, State of New Jersey, on
the 28th day of January, 2000.
INTELLIGROUP, INC.
By: /s/ Ashok Pandey
-----------------------------
Ashok Pandey
Co-Chief Executive Officer
II-5
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Ashok Pandey Co-Chief Executive Officer January 28, 2000
- --------------------------- and Director
Ashok Pandey
* Co-Chief Executive Officer January 28, 2000
- --------------------------- and Director
Rajkumar Koneru
* Chairman, Co-Chief Executive January 28, 2000
- --------------------------- Officer and Director
Nagarjun Valluripalli
/s/ Nicholas Visco Vice President - Finance January 28, 2000
- --------------------------- (principal financial and
Nicholas Visco accounting officer)
/s/ * Director January 28, 2000
- ---------------------------
Klaus Besier
By: /s/ Nicholas Visco January 28, 2000
------------------------
Nicholas Visco
Attorney-in-Fact
II-6
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
5 Opinion of Buchanan Ingersoll Professional Corporation as to
legality of the shares of common stock.
10.1** First Amendment to Revolving Credit Loan Agreement by and
between Intelligroup, Inc., a New Jersey corporation and PNC
Bank, National Association, a national banking association.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Buchanan Ingersoll Professional
Corporation (contained in the opinion filed as Exhibit 5 to
the Registration Statement).
24* Powers of Attorney of certain officers and directors of the
Company.
* previously filed
** The schedules or exhibits to this document are not being filed herewith
because the Company believes that the information contained therein should not
be considered material or such information is otherwise adequately disclosed in
this Amendment No. 1 to the Registration Statement on Form S-3 or may otherwise
be filed as an Exhibit to this Registration Statement. The Company agrees to
furnish supplementally a copy of any schedule or exhibit to the SEC upon
request.
EXHIBIT 5
BUCHANAN INGERSOLL PROFESSIONAL CORPORATION
(Incorporated in Pennsylvania)
Attorneys
650 College Road East
Princeton, New Jersey 08540
January 28, 2000
Intelligroup, Inc.
499 Thornall Street
Edison, New Jersey 08837
Gentlemen:
We have acted as counsel to Intelligroup, Inc., a New Jersey corporation
(the "Company"), in connection with the filing by the Company of an Amendment
No. 1 to Registration Statement on Form S-3 (the "Registration Statement"),
under the Securities Act of 1933, as amended, relating to the registration of an
aggregate of 539,839 shares (the "Shares") of the Company's common stock, $0.01
par value, all of which are to be offered by certain selling shareholders as set
forth therein.
In connection with the Registration Statement, we have examined such
corporate records and documents, other documents, and such questions of law as
we have deemed necessary or appropriate for purposes of this opinion. On the
basis of such examination, it is our opinion that:
1. The issuance of the Shares was duly and validly authorized; and
2. The Shares are legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Registration Statement.
Very truly yours,
BUCHANAN INGERSOLL
PROFESSIONAL CORPORATION
/s/David J. Sorin
------------------------
By: David J. Sorin,
a member of the firm
FIRST AMENDMENT TO REVOLVING CREDIT LOAN AGREEMENT
--------------------------------------------------
THIS FIRST AMENDMENT TO REVOLVING CREDIT LOAN AGREEMENT (the "Amendment")
is made this 26th day of January, 2000, by and between INTELLIGROUP, INC., a New
Jersey corporation (the "Borrower") and PNC BANK, NATIONAL ASSOCIATION, a
national banking association (the "Lender").
WHEREAS, the Borrower and the Lender are parties to a certain Revolving
Credit Loan Agreement dated January 29, 1999 (the "Loan Agreement"), relating to
financing by the Lender to the Borrower (all capitalized terms used, but not
specifically defined herein, shall have the meaning provided for such terms in
the Loan Agreement); and
WHEREAS, certain Events of Default have occurred under the Loan Agreement
with respect to the financial covenants as set forth in Article VIII of the Loan
Agreement; and
WHEREAS, the Borrower has requested and the Lender has agreed to, among
other things, waive such Events of Default and amend certain terms and
conditions of the Loan Agreement as set forth herein; and
WHEREAS, as a condition precedent to the Lender entering into the
Amendment, the Lender requires that the Borrower and all domestic Subsidiaries
pledge substantially all of their assets to the Lender to secure the
Obligations; and
WHEREAS, to induce the Lender to amend certain terms and conditions of the
Loan Agreement, the Borrower has offered to execute and deliver the Amendment.
NOW, THEREFORE, in consideration of the foregoing and of other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Lender and the Borrower agree as follows:
1. The term "Revolving Credit Facility" in the first recital of the Loan
Agreement is hereby amended from "up to Thirty Million ($30,000,000.00) Dollars"
to "up to Fifteen Million ($15,000,000.00) Dollars".
2. Article I of the Loan Agreement, the definition of (i) "Consolidated
EBITDA" is amended by adding the word "(Loss)" after the word "Income" on the
third line thereof and adding "and (d) non-recurring items" after the word
"operations" on the last line thereof and (ii) "Consolidated Net Income" is
amended by adding the word "(Loss)" after the word "Income" on the first and
third lines thereof.
3. Article I of the Loan Agreement is hereby amended by
<PAGE>
adding the following new Subsections as follows:
"Borrowing Certificate": The borrowing certificate in the form of
----------------------
Exhibit "G" annexed hereto and made a part hereof.
"Collateral": All --
----------------
(i) inventory of the Borrower, whether now owned or hereafter
acquired, including, without limitation, raw materials, work in process,
finished goods, consigned inventory, and materials used or consumed in business
and other goods held for sale or lease or furnished or to be furnished under
contracts of service;
(ii) accounts of the Borrower, whether now existing or hereafter
arising, including, without limitation, all accounts receivable and contract
rights and any rights to payment for goods sold or leased or for services
rendered which are not evidenced by an instrument or chattel paper, whether or
not such rights have been earned by performance;
(iii) equipment of the Borrower, whether now owned or hereafter
acquired, including, without limitation, machinery, trade and production
equipment, furniture, furnishings, fixtures, and all other goods used by the
Borrower which do not constitute inventory or farm products;
(iv) instruments (including, without limitation, negotiable
instruments and non-negotiable instruments), investment property (including,
without limitation, certificated securities, uncertificated securities, security
entitlements, securities accounts, commodity contracts and commodity accounts),
chattel paper, general intangibles (including, without limitation, income tax
refunds, copyrights, licenses, rights, patents, patent rights, franchise rights,
distributorship rights, trademarks, trademark rights, trade dress, formulae,
customer lists, goodwill, and trade secrets), and documents of title (including,
without limitation, bills of lading, dock warrants, dock receipts, and warehouse
receipts), all of the Borrower, whether now owned or existing or hereafter
arising or acquired;
(v) interests of the Borrower in goods or merchandise, whether now
owned or existing or hereafter arising or acquired, as to which an account
receivable has arisen; and
(vi) as to all of the foregoing (i) through (v) inclusive, cash
proceeds, non-cash proceeds and products thereof, additions and accessions
thereto, replacements and substitutions therefor, and all related books,
records, journals, computer print-outs and data, of the Borrower.
"Qualified Account Receivable": An account receivable which meets all
----------------------------
of the following requirements from the time it
-2-
<PAGE>
comes into existence until it is collected in full -
(i) The account receivable has not been outstanding more than ninety
(90) days from the date of the invoice evidencing the account receivable. In the
event more than thirty (30%) percent of the accounts receivable from a single
account debtor or group of affiliated account debtors is more than ninety (90)
days outstanding from the date of the invoice, any and all accounts receivable
due from such single account debtor or group of affiliated account debtors shall
be deemed unqualified;
(ii) In the event the account receivable from the three largest
account debtors or group of affiliated account debtors is in excess of sixty
(60%) percent of total accounts receivable of the Borrower, that portion of such
aggregate accounts receivable in excess of such percentage shall not be a
Qualified Account Receivable for the purposes herein, unless credit insurance,
acceptable to the Lender, against such account receivables, has been assigned to
the Lender;
(iii) The account receivable arose out of an enforceable order or
contract for the performance of services by the Borrower, which have been fully
and satisfactorily performed, or from the absolute sale of goods by the Borrower
in which the Borrower had the sole and complete ownership, all in accordance
with such order or contract (including contracts in which payments are to be
made according to time and materials billing), and the goods have been shipped
or delivered to the account debtor, evidence of which the Borrower has delivered
or will deliver to the Lender, if requested by the Lender, such as invoices and
shipping and delivery receipts. Without limiting this paragraph, the account
receivable must have arisen from transactions with third parties located in the
United States of America, or otherwise where secured by a letter of credit
acceptable to the Lender;
(iv) The Borrower has sole and absolute title to the account
receivable, the account receivable is not subject to any prior or subsequent
Liens except for that of the Lender and the account receivable does not arise
out of an order or contract which, by its terms, forbids or makes void or
unenforceable the Liens thereon of the Lender;
(v) The Lender shall have a perfected security interest, first in
priority, upon the account receivable;
(vi) The Borrower has not received any note, trade acceptance, draft
or other instrument with respect to or in payment for the account receivable nor
any chattel paper with respect to the goods giving rise to the account
receivable, except such instruments or chattel paper of which the Borrower has
notified the Lender;
-3-
<PAGE>
(vii) The account receivable is not subject to any set off,
counterclaim, defense, allowance or adjustment other than discounts for prompt
payment shown on the invoice, or to dispute, objection or complaint by the
account debtor concerning its liability on the account receivable, and the
goods, the sale of which gave rise to the account receivable, have not been
returned, rejected, lost or damaged, and the amount shown on the Borrower's
books and on any invoice or statement delivered to the Lender is owing to the
Borrower, and no partial payment has been made thereon by anyone;
(viii) The account receivable arose in the ordinary course of business
of the Borrower and no notice of bankruptcy, receivership, insolvency,
dissolution, termination of existence, credit impairment, or the like of the
account debtor, and no notice of death of the account debtor or any partner
thereof, has been received by the Borrower or the Lender;
(ix) The account debtor obligated on the account receivable is not a
Person which directly or indirectly, through one or more intermediaries,
controls, or is controlled by, or is under common control with, the Borrower,
including, without limitation, any Subsidiary or Affiliate as to the Borrower
and the Borrower as to any Subsidiary or Affiliate;
(x) The Lender has not notified the Borrower that the account
receivable or account debtor is unsatisfactory in the sole discretion of the
Lender due to lack of creditworthiness of the account debtor; and
(xi) Any of the accounts receivable which arose out of contract(s)
with the United States of America, or its departments, agencies or
instrumentalities, of which the Borrower has notified the Lender and executed
any necessary writings in order that all money due or to become due under such
contracts shall be assigned to the Lender and proper notice of the assignment
given under the Federal Assignment of Claims Act.
For the purposes of this Section, "Qualified Unbilled Accounts Receivable"
shall mean Qualified Accounts Receivable that have not been invoiced, but all of
the work for such invoice has been performed and completed and is expected to be
billed within thirty (30) days of completion of such work.
4. Article I of the Loan Agreement, the terms "Commitment" and "Rating
Matrix", are hereby amended and changed to read as follows:
"Commitment" shall mean, at any particular time during the term of the
----------
Revolving Credit Facility, the principal amount of the Revolving Credit Facility
which the Lender has committed to make available to the Borrower, as said
principal amount may be permanently reduced by the Borrower pursuant to Section
-------
-4-
<PAGE>
2.01(v) of this Loan Agreement. As of the date of the Amendment, the initial
- -------
amount committed is $15,000,000.00.
"Rating Matrix" shall mean the following matrix upon which (i)
--------------
interest rates described in Section 2.02 hereof and (ii) certain fees described
------------
in Section 2.03 hereof are determined on the basis of the Borrower's
-------------
Consolidated Cash Flow Leverage Ratio:
(All Amounts Expressed in Basis Points)
Consolidated Cash Flow Applicable Applicable
Leverage Ratio Index Margin*
- ------------------------------------------------------------------
I less than 1.00 to 1 25.0 150.0
II less than 1.50 to 1 but
greater than or equal
to 1.00 to 1 25.0 175.0
III less than 2.00 to 1 but
greater than or equal
to 1.50 to 1 30.0 225.00
IV less than or equal to
2.50 to 1 but greater
than 2.00 to 1 35.0 250.00
* Any adjustment to the Eurodollar Rate Option as a result of a change to the
Consolidated Cash Flow Leverage Ratio shall not take effect until the first day
of the subsequent Fiscal Quarter following the receipt of the calculation of the
Consolidated Cash Flow Leverage Ratio from the Borrower. For the purposes of
this Amendment, pricing shall be established at Level IV hereinabove until
receipt and satisfactory review by Lender of the financial reports as required
by Article V of the Loan Agreement for the Fiscal Quarter ended June 30, 2000.
5. Article II of the Loan Agreement, Section 2.01(i) is hereby amended and
changed to read as follows:
"Section 2.01 Revolving Credit Facility.
-------------------------
(i) Availability. (a) Subject to the terms and conditions set forth in
------------
this Loan Agreement and provided no Event of Default shall have occurred and be
continuing, the Lender hereby agrees to make available to the Borrower from time
to time during the period from the Closing Date to the Business Day next
preceding the Revolving Credit Termination Date, revolving credit loans
(hereinafter each individually referred to as a "Revolving Credit Loan" and
collectively referred to as the "Revolving Credit Loans") in amounts which shall
not exceed, in the aggregate for all Revolving Credit Loans at any time
outstanding, the lesser of (i) the Commitment, or (ii) up to eighty (80%)
-5-
<PAGE>
percent of the Qualified Accounts Receivable plus, until April 30, 2000, up to
twenty-five (25%) percent of Qualified Unbilled Accounts Receivable. Advances
against Qualified Unbilled Accounts Receivable shall at no time exceed
$2,000,000.00 in the aggregate and Qualified Unbilled Accounts Receivable shall
not be available for calculation of the borrowing formulas set forth herein
after April 30, 2000. The Revolving Credit Loans shall be evidenced by the
Amended and Restated Revolving Credit Loan Note. The Lender is hereby authorized
to record the date and amount of each Revolving Credit Loan made by the Lender
and the date and amount of each payment or prepayment of principal thereof made
by the Borrower on the schedule annexed to and constituting a part of the
Amended and Restated Revolving Credit Loan Note, and any such recordation shall
constitute prima facie evidence of the accuracy of the information so recorded.
At no time shall the aggregate outstanding Revolving Credit Loans exceed Fifteen
Million ($15,000,000.00) Dollars. If the outstanding amount of the Revolving
Credit Loans shall exceed the amount of the Revolving Credit Facility at any
time, such excess shall be immediately due and payable to the Lender and shall
be secured by the Collateral."
6. Article II of the Loan Agreement is hereby amended by adding new
Sections 2.12 and 2.13 as follows:
"2.12 Security Interest. In consideration of the Lender's granting to
-----------------
the Borrower the Revolving Credit Loans and Letters of Credit in accordance with
the terms and conditions of this Loan Agreement, the Borrower, to secure payment
and performance of all of the Obligations of the Borrower to the Lender, hereby
grants to the Lender a security interest in the Collateral, which security
interest shall remain in full force and effect until all of the Obligations of
the Borrower to the Lender are fully paid and satisfied.
2.13 Collateral and Proceeds of Collateral. The Lender hereby
-----------------------------------------
authorizes and permits the Borrower to receive all amounts due on the Collateral
from the account debtor thereof, as Lender's collection agent, but at Borrower's
own cost and expense subject to the direction and control of the Lender at all
times. Upon the occurrence and during the continuance of an Event of Default,
the Lender may terminate said authority and permission at any time."
7. Article IV of the Loan Agreement is hereby amended by adding new
Sections 4.04 and 4.05 as follows:
"4.04 Lender's Security Interest. The security interest granted by the
--------------------------
Borrower to the Lender is a valid and perfected security interest in the
Collateral and the Agreement is enforceable in accordance with its terms."
"4.05 Place of Business. (a) The Borrower's
-----------------
-6-
<PAGE>
principal place of business and all other places of business and locations of
the Borrower's Collateral are as set forth on Schedule 4.05.
(b) Location of Collateral and Books and Records.
--------------------------------------------
(i) With the exception of lap-top computers owned by the
Borrower and utilized by its employees, all of the Collateral is located only at
the addresses set forth on Schedule 4.05.
(ii) All of the records of the Borrower relating to the
Collateral, and the other books, records, journals, orders, receipts and
correspondence of the Borrower, are located at only the principal place of
business and other places of business of the Borrower set forth in Schedule
4.05, except the corporate minute books and related records of the Borrower
which are or may be maintained at the office of the Borrower's counsel."
8. Article V of the Loan Agreement, Sections 5.02(i) and 5.02(ii) are
hereby amended by adding the following sentence at the end of each Section:
"Such information shall include a report prepared by management
stating in comparative form the corresponding figures from the consolidated
budget of the Borrower and Subsidiaries for such period."
9. Article V of the Loan Agreement, Section 5.02, is hereby amended by
adding new Subsections (xi), (xii), (xiii) and (xiv) as follows:
(xi) Financial Reporting Requirements.
--------------------------------
The Borrower shall deliver to the Lender the following:
(a) Upon each request for an advance under the Revolving
Credit Loan, a Borrowing Certificate;
(b) Within fifteen (15) days after the end of each calendar
month (commencing with the month in which this Amendment is executed and
continuing until all of the Obligations of the Borrower to the Lender are
satisfied) a Borrowing Certificate and an aging report, setting forth, in such
form as the Lender shall reasonably require, the amount or amounts due and owing
on, and aging of, the accounts receivable of the Borrower according to the books
and records of the Borrower as of the close of such preceding calendar month,
together with a reconciliation report satisfactory to the Lender showing all
sales, collections, payments and adjustments to accounts receivable on the
Borrower's books as of the close of the
-7-
<PAGE>
preceding month.
(xii) Qualified Accounts Receivable. The Borrower shall not, to its
------------------------------
knowledge at such time, submit or represent to the Lender any account receivable
as a Qualified Account Receivable or Qualified Unbilled Accounts Receivable
which does not meet every requirement in every respect of a Qualified Account
Receivable or Qualified Unbilled Accounts Receivable, as the case may be, and
shall notify the Lender promptly, in writing, when any account receivable
against which a loan or advance was, or may be, made pursuant to Section 2.01(a)
ceases to meet any of those requirements.
(xiii) Additional Collateral.
---------------------
(a) The Borrower shall deliver to the Lender (i) all
instruments and chattel paper (including all executed copies thereof, except
such executed copies retained by the obligors thereunder) representing proceeds
of Collateral, and (ii) promptly at the Lender's request, all invoices, original
bills of lading, documents of title, original contracts, and any other writings
relating thereto, and other writings or evidence of performance of contracts or
evidence of shipment or delivery of the merchandise sold or services rendered in
connection therewith; and the Borrower shall deliver to the Lender, promptly at
the Lender's request, from time to time, additional copies of any or all of such
papers or writings, and such other information with respect to any of the said
Collateral and such schedules of accounts receivable and other writings, as the
Lender may in its sole discretion deem to be necessary or effectual to evidence
any loan made pursuant to this Agreement or to evidence, enforce or perfect the
Lender's security interest in the Collateral, to facilitate collection of the
Collateral, or to carry into effect the provisions and intent of this Agreement,
all at the sole expense of the Borrower.
(b) The Lender may from time to time in the Lender's sole
discretion hold and treat any deposits or other sums at any time credited by or
due from the Lender to the Borrower and any securities or other property of the
Borrower in possession of the Lender, whether for safekeeping or otherwise, as
collateral security for and apply or set off the same against any of the
Obligations of the Borrower to the Lender. Without limiting the generality of
the foregoing, if at any time the amount of the loans or advances by the Lender
as allowed by this Agreement shall be exceeded, the Borrower shall pay to the
Lender, in immediately available funds, the amount of such excess if the Lender
so requests, or the Lender may charge such amount against any deposit account of
the Borrower with the Lender.
(xiv) Accounts Relating to Contracts With the United States of
---------------------------------------------------------------
America. If any of the accounts, chattel paper, general intangibles or
- -------
instruments constituting Collateral arise out of
-8-
<PAGE>
contracts with the United States or any of its departments, agencies or
instrumentalities, the Borrower shall notify the Lender and execute any
necessary writings in order that all money due or to become due under such
contracts shall be assigned to the Lender and proper notice of the assignment
given under the Federal Assignment of Claims Act."
10. Article VI of the Loan Agreement, Section 6.05, is hereby amended by
adding the following to the end of the Section:
"The Borrower shall, and shall cause each domestic Corporate
Guarantor, to cause all such insurance policies to name the Lender as lender
loss payee and additional insured."
11. Article VII of the Loan Agreement, Section 7.02(ii) is hereby amended
and changed to read as follows:
"(ii) As used in this Section 7.02, a sale, other disposition or lease
of assets shall be deemed to cover a "substantial part" of the assets of the
Borrower and the Corporate Guarantors only if, on a pro forma basis, the net
book value of such assets when added to the net book value of all other assets
sold, otherwise disposed of or leased by the Borrower and the Corporate
Guarantors during any Fiscal Year of such sale, other disposition or lease, on a
consolidated basis exceeds five (5%) percent of the consolidated assets,
provided however, notwithstanding the foregoing, the Borrower may transfer its
assets pertaining to its internet business to SeraNova, Inc., a wholly-owned
Subsidiary of the Borrower and such transfer shall not be considered in
determining whether the five (5%) percent threshold above has been exceeded."
12. Article VII of the Loan Agreement, Section 7.04 is hereby amended and
changed by adding new subsection (viii) as follows:
"(viii) Debt due from SeraNova, Inc. which shall not exceed
$10,000,000.00 at any time.
13. Article VII of the Loan Agreement, Section 7.11 is hereby amended and
changed by adding new subsections (iv) and (v) as follows:
"(iv) Notwithstanding anything herein to the contrary, the Borrower
may execute and deliver to the Lender agreements of guaranty with respect to
credit extended by the Lender to SeraNova, Inc., a wholly-owned Subsidiary of
the Borrower.
(v) Contingent Obligations contemplated by the Loan Agreement as
amended by the Amendment."
14. Article VIII of the Loan Agreement, Sections 8.02 and
-9-
<PAGE>
8.03 are hereby amended and changed to read as follows:
"8.02 Minimum Consolidated Net Worth. The Borrower shall maintain a
--------------------------------
Consolidated Net Worth of no less than the following amounts for the applicable
Fiscal Quarter:
Minimum
Fiscal Quarter Ended Consolidated Net Worth
-------------------- ----------------------
December 31, 1999 $45,950,000.00
March 31, 2000 $45,400,000.00
June 30, 2000 $47,800,000.00
September 30, 2000 $50,200,000.00
plus one hundred (100%) percent of net cash proceeds from the issuance by the
- ----
Borrower, if at all, of additional equity securities or other equity capital
investments after September 30, 1999.
Thereafter, the Borrower will not at any time permit its Consolidated Net Worth
to be less than an amount equal to the sum of (i) $50,200,000.00 plus (ii) fifty
----
(50%) percent of the positive Consolidated Net Income for the Fiscal Quarter
ending December 31, 2000, plus (iii) fifty (50%) percent of the positive
----
Consolidated Net Income for each Fiscal Year ending after December 31, 2000,
plus (iv) an amount equal to one hundred (100%) percent of net cash proceeds
- ----
from the issuance by the Borrower after September 30, 1999, of additional equity
securities or other equity capital investments.
8.03 Capital Expenditures. The Borrower shall not enter into any
---------------------
agreement to purchase and/or pay for, or become obligated to pay for capital
expenditures, long term leases, Capital Leases or sale lease-backs, in an amount
at any time outstanding aggregating in excess of $5,000,000.00 during any Fiscal
Year.
It is agreed and understood that for the Fiscal Quarters ended
December 31, 1999 through and including September 30, 2000 only, the Borrower
shall not be required to comply with the requirements of Sections 8.01, Maximum
Consolidated Cash Flow Leverage Ratio and 8.04, Minimum Fixed
Charge Coverage Ratio."
15. Article VIII of the Loan Agreement is hereby amended by adding new
Section 8.05 as follows:
"Section 8.05 Minimum Consolidated EBITDA. The Borrower shall maintain
---------------------------
a Consolidated EBITDA of no less than the following amounts for the applicable
Fiscal Quarter:
-10-
<PAGE>
Fiscal Quarter Ended Minimum Consolidated EBITDA
-------------------- ---------------------------
December 31, 1999 ($750,000.00)
March 31, 2000 -0-
June 30, 2000 $4,500,000.00
September 30, 2000 and
each Fiscal Quarter thereafter $4,500,000.00
16. Article IX of the Loan Agreement, Section 9.02 is hereby amended by
adding new Subsections (iv) through (xi) as follows:
"(iv) Upon the occurrence and during the continuance of an Event of
Default, endorse the name of the Borrower upon any and all checks, drafts, money
orders and other instruments for the payment of monies which are payable to the
Borrower and constitute proceeds of the Collateral;
(v) Sign financing statements in the name of the Borrower, or file
financing statements without the Borrower's signature, in any relevant state to
perfect or maintain the Lender's security interest in any or all of the
Collateral;
(vi) The Lender shall have all of those rights and remedies provided
in the Loan Documents, in the Uniform Commercial Code and other applicable law
in force and effect in New Jersey from time to time;
(vii) Upon the occurrence and during the continuance of an Event of
Default, in protecting, exercising or enforcing its interests, rights or
remedies under this Agreement, receive, open and dispose of mail addressed to
the Borrower, provided that the Lender shall return to the Borrower all mail not
related to the Collateral or to any of the Obligations, and in connection
therewith, give such notice to any office or officials of the United States
Postal Service, or any successor thereof, to effect such changes of address as
the Lender may deem necessary so that all mail addressed to the Borrower may be
delivered directly to the Lender;
(viii) Require the Borrower to assemble the Collateral and make it
available at the principal place of business or other places of business of the
Borrower to allow the Lender to take possession or dispose of the Collateral;
(ix) Take possession of and sell or otherwise dispose of any or all of
the Collateral at public or private sale, and if notice of such sale or of other
action by the Lender is required by applicable law, the Borrower agrees that ten
(10) days notice to the Borrower shall be sufficient, which the Lender and the
Borrower herewith agree to be commercially reasonable;
(x) Subrogate to all of the Borrower's interests,
-11-
<PAGE>
rights and remedies in respect to the Collateral, including the right to stop
delivery, and (upon notice from the Borrower that the account debtor has
returned, rejected, revoked acceptance of or failed to return the goods or that
the goods have been reconsigned or diverted) the right to take possession of and
to sell or dispose of the goods; and
(xi) The Lender may send a notice of assignment and/or notice of the
Lender's security interest to any and all account debtors or to any third party
holding or otherwise concerned with any of the Collateral, and thereafter the
Lender shall have the sole right to collect the accounts receivable and/or take
possession of the Collateral and the books and records relating thereto.
No remedy referred to herein is intended to be exclusive, but each shall be
cumulative and in addition to any other remedy referred to above or otherwise
available to the Lender at law or in equity. The Lender shall be under no
obligation whatsoever to proceed first against the Collateral before proceeding
against any other of the Collateral. It is expressly agreed and understood that
all of the Collateral stands as equal security for all Obligations, and that the
Lender shall have the right to proceed against or sell any or all of the
Collateral in any order or simultaneously, as the Lender, in its sole
discretion, shall determine."
17. Upon execution of this Amendment, the Borrower shall pay the Lender an
amendment and waiver fee of $100,000.00 which shall be fully earned and
non-refundable upon receipt.
18. The Borrower shall pay on demand all reasonable legal fees, recording
expenses and other reasonable and necessary disbursements of the Lender incident
to the preparation, execution and delivery of this Amendment.
19. The Borrower acknowledges that its obligations to the Lender pursuant
to the Loan Agreement, as amended herein, are due and owing by the Borrower to
the Lender without any defenses, set-offs, recoupments, claims or counterclaims
of any kind as of the date hereof. To the extent that any such defenses,
set-offs, recoupments, claims or counterclaims may exist as of the date hereof,
the Borrower waives and releases the Lender from the same.
20. The Borrower hereby agrees with, reaffirms and acknowledges the
representations and warranties contained in the Loan Agreement. Furthermore, the
Borrower represents that the representations and warranties contained in the
Loan Agreement continue to be true and in full force and effect. This agreement,
reaffirmation and acknowledgment is given to the Lender by the Borrower without
defenses, claims or counterclaims of any kind. To the extent that any such
defenses, claims or
-12-
<PAGE>
counterclaims against the Lender may exist, the Borrower waives and releases the
Lender from the same.
21. The Borrower ratifies and reaffirms all terms, covenants, conditions
and agreements contained in the Loan Agreement.
22. All other terms and conditions of the Loan Agreement, and any and all
Exhibits annexed thereto and all other writings submitted by the Borrower to the
Lender pursuant thereto, shall remain unchanged and in full force and effect.
23. This Amendment shall not constitute a waiver or modification of any of
the Lender's rights and remedies or of any of the terms, conditions, warranties,
representations, or covenants contained in the Loan Agreement, except as
specifically set forth above, and the Lender hereby reserves all of its rights
and remedies pursuant to the Loan Agreement and applicable law.
24. The failure of the Borrower to satisfy any of the terms and conditions
of this Amendment shall constitute an Event of Default under the Loan Agreement,
and the Lender shall be entitled to all of its rights and remedies under the
Loan Agreement and applicable law.
25. This Amendment may be executed in counterparts, each of which, when
taken together, shall be deemed to be one and the same instrument.
Executed on the date first written above.
WITNESS: INTELLIGROUP, INC.
/s/ Edward G. Carr By: /s/ Nicholas Visco
- --------------------------------- ----------------------
Edward G. Carr
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Gary Wessels
----------------------
Gary Wessels,
Vice President
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Intelligroup, Inc.:
As independent public accountants, we hereby consent to the use of our
report dated May 7, 1999 (except with respect to the fifth paragraph of Note 11
as to which the date is January 6, 2000, and the third paragraph of Note 11 as
to which the date is January 26, 2000) and to all references to our Firm
included in this Amendment No. 1 to the registration statement on Form S-3. Our
report dated February 4, 1999 (except with respect to the third paragraph of
Note 11 as to which the date is February 16, 1999) included in Intelligroup,
Inc.'s Form 10-K for the year ended December 31, 1998, which is incorporated by
reference, is no longer appropriate since restated financial statements have
been presented giving effect to a business combination accounted for as a
pooling-of-interests.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
January 26, 2000
