SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
Commission File No. 0-20943
Intelligroup, Inc.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
New Jersey 11-2880025
------------------------------------ ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
499 Thornall Street, Edison, New Jersey 08837
--------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(732) 590-1600
---------------------------------
(Registrant's Telephone Number,
Including Area Code)
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes: X No:
----- -----
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of August 10, 2000:
Class Number of Shares
----- ----------------
Common Stock, $.01 par value 16,629,625
<PAGE>
INTELLIGROUP, INC. and SUBSIDIARIES
TABLE OF CONTENTS
-----------------
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements............................. 1
Consolidated Balance Sheets
as of June 30, 2000 and December 31, 1999 (unaudited) ........ 2
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the Three Months and Six Months Ended
June 30, 2000 and 1999 (unaudited)............................ 3
Consolidated Statements of Cash Flows
for the Six Months Ended
June 30, 2000 and 1999 (unaudited)............................ 4
Notes to Consolidated Financial Statements (unaudited)........ 5
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition................. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 22
Item 3. Defaults Upon Senior Securities............................... 22
Item 4. Submission of Matters to a Vote of Security Holders........... 23
Item 5. Other Information............................................. 23
Item 6. Exhibits and Reports on Form 8-K.............................. 25
SIGNATURES................................................................. 26
- i -
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
- 1 -
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and December 31, 1999
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 2000 1999
---------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................................... $ 1,799,000 $ 5,510,000
Accounts receivable, less allowance for doubtful accounts of $3,022,000
at June 30, 2000 and $2,939,000 at December 31, 1999................. 18,749,000 27,607,000
Unbilled services....................................................... 6,162,000 7,692,000
Income tax receivable................................................... 2,533,000 3,612,000
Deferred tax asset...................................................... 2,481,000 2,481,000
Other current assets.................................................... 4,617,000 2,699,000
Note receivable - SeraNova.............................................. 3,000,000 --
Net current assets of discontinued operations........................... 1,036,000 7,621,000
----------- -----------
Total current assets............................................... 40,377,000 57,222,000
Note receivable - SeraNova................................................. 12,059,000 8,397,000
Property and equipment, net................................................ 8,076,000 7,744,000
Capitalized software solutions, net........................................ 2,376,000 813,000
Intangible assets, net..................................................... 4,960,000 5,189,000
Deferred tax asset......................................................... 1,049,000 --
Other assets............................................................... 1,092,000 835,000
Net non-current assets of discontinued operations.......................... 9,668,000 --
----------- -----------
$ 79,657,000 $ 80,200,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................................ $ 2,858,000 $ 3,800,000
Accrued payroll and related taxes....................................... 9,152,000 5,527,000
Accrued expenses and other liabilities.................................. 7,456,000 4,273,000
Income taxes payable.................................................... 600,000 3,904,000
Current portion of long-term debt and obligations under capital leases 5,261,000 10,585,000
----------- -----------
Total current liabilities.......................................... 25,327,000 28,089,000
Deferred income taxes...................................................... -- 806,000
Net non-current liabilities of discontinued operations..................... -- 2,651,000
Commitments and contingencies
Shareholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized, none
issued or outstanding................................................ -- --
Common stock, $.01 par value, 25,000,000 shares authorized;
16,630,000 and 15,949,000 shares issued and outstanding at
June 30, 2000 and December 31, 1999, respectively.................... 166,000 160,000
Additional paid-in capital.............................................. 59,092,000 43,356,000
Retained earnings (deficit)............................................. (3,615,000) 6,317,000
Currency translation adjustments........................................ (1,313,000) (1,179,000)
----------- -----------
Total shareholders' equity .......................................... 54,330,000 48,654,000
----------- -----------
$ 79,657,000 $ 80,200,000
=========== ===========
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these statements.
- 2 -
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
For the Three Months and Six Months Ended June 30, 2000 and 1999
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
--------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue................................. $ 27,689,000 $ 37,820,000 $ 56,740,000 $ 76,627,000
Cost of sales........................... 18,490,000 24,953,000 37,674,000 51,479,000
---------- ---------- ---------- ----------
Gross profit...................... 9,199,000 12,867,000 19,066,000 25,148,000
--------- ---------- ---------- ----------
Selling, general and administrative
expenses............................. 12,050,000 10,851,000 24,140,000 20,283,000
Depreciation and amortization........... 723,000 750,000 1,570,000 1,388,000
Acquisition expenses.................... -- -- -- 2,115,000
Restructuring and other special charges. -- 7,328,000 -- 7,328,000
---------- ---------- ---------- ----------
Total operating expenses.......... 12,773,000 18,929,000 25,710,000 31,114,000
---------- ---------- ---------- ----------
Operating loss.................... (3,574,000) (6,062,000) (6,644,000) (5,966,000)
Other income, net....................... 49,000 107,000 24,000 46,000
Interest income (expense), net.......... 164,000 (194,000) 160,000 (230,000)
---------- ---------- ---------- ----------
Loss from continuing operations before
income tax benefit................... (3,361,000) (6,149,000) (6,460,000) (6,150,000)
Income tax benefit...................... (470,000) (1,964,000) (1,461,000) (1,599,000)
---------- ---------- ---------- ----------
Loss from continuing operations......... (2,891,000) (4,185,000) (4,999,000) (4,551,000)
Income (loss) from discontinued
operations, net of tax expense
(benefit) of $(986,000), $65,000,
$(2,095,000) and $244,000,
respectively ........................ (1,812,000) 152,000 (4,891,000) 432,000
---------- ---------- ---------- ----------
Net loss ............................... $ (4,703,000) $ (4,033,000) $ (9,890,000) $ (4,119,000)
========== ========== ========== ==========
Earnings per share:
Basic earnings per share:
Loss from continuing operations... $ (0.17) $ (0.27) $ (0.31) $ (0.29)
Discontinued operations........... (0.11) 0.01 (0.30) 0.03
---------- ---------- ---------- ----------
Net loss per share................ $ (0.28) $ (0.26) $ (0.61) $ (0.26)
========== ========== ========== ==========
Weighted average number of
Common shares - Basic.............. 16,575,000 15,549,000 16,360,000 15,548,000
========== ========== ========== ==========
Diluted earnings per share:
Loss from continuing operations... $ (0.17) $ (0.27) $ (0.31) $ (0.29)
Discontinued operations .......... (0.11) 0.01 (0.30) 0.03
---------- ---------- ---------- ----------
Net loss per share................ $ (0.28) $ (0.26) $ (0.61) $ (0.26)
========== ========== ========== ==========
Weighted average number of
Common shares - Diluted............ 16,575,000 15,549,000 16,360,000 15,548,000
========== ========== ========== ==========
Comprehensive Income (Loss)
---------------------------
Net loss................................ $ (4,703,000) $ (4,033,000) $ (9,890,000) $ (4,119,000)
Other comprehensive loss -
Currency translation adjustments (155,000) (234,000) (134,000) (563,000)
--------- --------- --------- ---------
Comprehensive loss...................... $ (4,858,000) $ (4,267,000) $(10,024,000) $ (4,682,000)
========== ========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these statements.
- 3 -
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2000 and 1999
(unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
------------------------
June 30, June 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss..................................................... $ (9,890,000) $ (4,119,000)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Loss (income) from discontinued operations, net of tax... 4,891,000 (432,000)
Depreciation and amortization............................ 1,571,000 1,388,000
Provision for doubtful accounts.......................... 2,109,000 2,410,000
Deferred income taxes.................................... (1,855,000) (639,000)
Changes in operating assets and liabilities:
Accounts receivable........................................ 6,749,000 (1,949,000)
Unbilled services.......................................... 1,530,000 (2,575,000)
Other current assets....................................... (839,000) (1,820,000)
Other assets............................................... (257,000) 2,165,000
Accounts payable........................................... (942,000) (1,187,000)
Accrued payroll and related taxes.......................... 3,625,000 1,577,000
Accrued restructuring charges.............................. (414,000) 3,351,000
Accrued expenses and other liabilities..................... 3,597,000 2,591,000
Income taxes payable....................................... (3,304,000) (3,649,000)
---------- ----------
Cash provided by (used in) operating activities of
continuing operations...................................... 6,571,000 (2,888,000)
Cash used in operating activities of discontinued operations.. (6,504,000) (2,313,000)
---------- ----------
Net cash provided by (used in) operating activities ... 67,000 (5,201,000)
---------- ----------
Cash flows from investing activities:
Purchase of equipment and capitalized software solutions
by continuing operations................................... (3,237,000) (1,267,000)
Purchase of equipment by discontinued operations............. (5,270,000) (209,000)
Acquisition of businesses by discontinued operations ........ -- (1,682,000)
---------- ----------
Net cash used in investing activities.................. (8,507,000) (3,158,000)
---------- ----------
Cash flows from financing activities:
Principal payments under capital leases...................... (6,000) (6,000)
Proceeds from exercise of stock options...................... 5,742,000 9,000
Shareholder dividends ....................................... -- (170,000)
Net change in line of credit borrowings...................... (5,318,000) 11,322,000
Net change in note receivable-SeraNova....................... (6,662,000) (1,353,000)
---------- ----------
Net cash (used in) provided by financing activities of
continuing operations.................................... (6,244,000) 9,802,000
Net cash provided by (used in) financing activities of
discontinued operations.................................. 11,149,000 (798,000)
---------- ----------
Net cash provided by financing activities.............. 4,905,000 9,004,000
---------- ----------
Effect of foreign currency exchange rate changes on cash..... (176,000) (563,000)
---------- ----------
Net (decrease) increase in cash and cash equivalents .. (3,711,000) 82,000
Cash and cash equivalents at beginning of period................ 5,510,000 3,568,000
---------- ----------
Cash and cash equivalents at end of period...................... $ 1,799,000 $ 3,650,000
========== ==========
Supplemental disclosures of cash flow information:
Cash paid for income taxes................................... $ 2,432,000 $ 2,308,000
Cash paid for interest....................................... 169,000 272,000
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these statements.
- 4 -
<PAGE>
INTELLIGROUP, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) BASIS OF PRESENTATION
The consolidated financial statements and accompanying financial
information as of June 30, 2000 and for the three and six months ended June 30,
2000 and 1999 are unaudited and, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the financial position of the
Company at such dates and the operating results and cash flows for those
periods. The financial statements included herein have been prepared in
accordance with generally accepted accounting principles and the instructions of
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. These financial statements should be read in conjunction with the
Company's audited financial statements for the year ended December 31, 1999,
which were included as part of the Company's Form 10-K.
Results for interim periods are not necessarily indicative of results for
the entire year.
(2) EARNINGS PER SHARE
Basic earnings per share is computed by dividing income (loss) available to
common shareholders by the weighted average number of common stock outstanding
for the period. Diluted earnings per share reflects the potential dilution that
would occur if securities or other contracts to issue common stock were
exercised or converted into common stock, unless they are antidilutive.
A reconciliation of weighted average number of common shares outstanding to
weighted average common shares outstanding assuming dilution is as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average number of
common shares 16,575,000 15,549,000 16,360,000 15,548,000
Common share equivalents of
outstanding stock options -- -- -- --
---------- ---------- ----------- ----------
Weighted average number of common
shares assuming dilution 16,575,000 15,549,000 16,360,000 15,548,000
========== ========== ========== ==========
</TABLE>
- 5 -
<PAGE>
Stock options, which would be antidilutive (3,981,000 outstanding as of
June 30, 2000) have been excluded from the calculations of diluted shares
outstanding and diluted earnings per share.
(3) LINES OF CREDIT
On January 29, 1999, the Company entered into a three-year revolving credit
facility agreement with PNC Bank, N.A. (the "Bank"). The credit agreement with
the Bank was comprised of a revolving line of credit pursuant to which the
Company could borrow up to $30,000,000 either at the Bank's prime rate per annum
or the EuroRate plus 2% (at the Company's option).
As a result of the restructuring and other special charges incurred during
the quarter ended June 30, 1999, the Company was not in compliance with the
consolidated cash flow leverage ratio and consolidated net worth financial
covenants at June 30, 1999. On August 12, 1999, the Bank notified the Company
that such non-compliance constituted an event of default under the credit
agreement. At September 30, 1999, while the Company was in compliance with the
consolidated net worth financial covenant, it was not in compliance with the
consolidated cash flow leverage ratio and minimum fixed charge coverage ratio
financial covenants. On January 26, 2000, the Company finalized with the Bank
the terms of a waiver and amendment to the credit agreement to remedy defaults
which existed under the credit agreement. The terms of the waiver and amendment
included, among other things, (i) a $15,000,000 reduction in availability under
the credit agreement, (ii) a first priority perfected security interest on all
assets of the Company and its domestic subsidiaries and (iii) modification of
certain financial covenants and a waiver of prior covenant defaults.
As a result of the first quarter's operating losses, the Company was not in
compliance with the minimum consolidated net worth covenant and the minimum
consolidated earnings before interest, taxes, depreciation and amortization
("EBITDA") financial covenant as of March 31, 2000. On May 9, 2000, the Bank
issued to the Company a waiver of the defaults which existed under the credit
agreement for the quarter ended March 31, 2000.
On May 31, 2000, the Company entered into a new three-year revolving credit
facility agreement with the Bank. The credit facility agreement is comprised of
a revolving line of credit pursuant to which the Company can borrow up to
$20,000,000 either at the Bank's prime rate per annum or the EuroRate plus 2.5%
to 1.75% based upon the Company's ratio of debt to EBITDA. The credit facility
is collateralized by substantially all of the assets of the United States based
operations. The maximum borrowing availability under the line of credit is based
upon a percentage of eligible billed and unbilled accounts receivable.
- 6 -
<PAGE>
(3) LINES OF CREDIT (CONTINUED)
The credit agreement provides for the following financial covenants
(exclusive of SeraNova), among other things, (1) the Company must maintain
consolidated net worth of (a) $42.0 million at each of June 30, 2000, September
30, 2000, and December 31, 2000; (b) not less than 95% of consolidated net worth
of the immediately preceding fiscal year-end as at each such fiscal quarter
after December 31, 2000; and (c) at least 105% of consolidated net worth as of
the immediately preceding fiscal year-end as at each such fiscal year-end
subsequent to December 31, 2000; provided, however, the foregoing covenant shall
not be tested for any quarter so long as the Company maintains, at all times
during such fiscal quarter, undrawn availability of more than $5.0 million and
(2) the Company must maintain unconsolidated net worth of (a) $39.0 million at
each of June 30, 2000, September 30, 2000, and December 31, 2000; (b) not less
than 95% of unconsolidated net worth of the immediately preceding fiscal
year-end as at each such fiscal quarter after December 31, 2000; and (c) at
least 105% of unconsolidated net worth as of the immediately preceding fiscal
year-end as at each such fiscal year-end subsequent to December 31, 2000;
provided, however, the foregoing covenant shall not be tested for any quarter so
long as the Company maintains, at all times during such fiscal quarter, undrawn
availability of more than $5.0 million. Additionally, the credit facility
contains standard material adverse change clauses with regards to the financial
condition of the assets, liabilities and operations of the Company. As of June
30, 2000, the Company was in compliance with all financial covenants.
(4) ACQUISITIONS
On January 8, 1999, the Company acquired Network Publishing, Inc.
("NetPub"), based in Provo, Utah. The purchase price included an initial cash
payment in the aggregate of $1,800,000 together with a cash payment of $200,000
to be held in escrow. In addition, the purchase price included an earn-out
payment of up to $2,212,650 in restricted shares of the Company's Common Stock
payable on or before April 15, 2000 and a potential lump sum cash payment of
$354,024 payable not later than March 31, 2000. The value of the earn-out was
determined to be $2,430,000 which was payable by the issuance of an additional
99,558 shares of the Company's Common Stock and $340,000 in cash. The Company
issued such shares on January 11, 2000. This acquisition has been accounted for
utilizing the purchase method of accounting. The excess of the purchase price
over the fair value of the net assets acquired was attributed to intangible
assets amounting to $4,061,471. Pro-forma financial information has not been
presented as this acquisition was immaterial to the Company's operations.
On January 1, 2000, the Company transferred the net assets of NetPub to
SeraNova, Inc. ("SeraNova"), a wholly-owned subsidiary of the Company on such
date.
- 7 -
<PAGE>
(5) DISCONTINUED OPERATIONS
In November 1999, the Company announced its intention to spin off its
Internet services business to the shareholders of the Company, subject to
certain conditions. On January 1, 2000, the Company transferred its Internet
applications services and management consulting businesses to SeraNova. On
January 27, 2000, SeraNova filed a Registration Statement with the Securities
and Exchange Commission (the "SEC") relating to the proposed spin-off of
SeraNova from the Company. On June 29, 2000, the SEC declared the Registration
Statement effective. Accordingly, the assets, liabilities and results of
operations of SeraNova have been reported as discontinued operations for all
periods presented.
The following unaudited selected financial data for SeraNova is presented
for informational purposes only:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $19,843,000 $8,614,000 $36,019,000 $16,602,000
Pre-tax income/(loss) (2,797,000) 217,000 (6,986,000) 676,000
Income tax expense/(benefit) (985,000) 65,000 (2,095,000) 244,000
Net income/(loss) (1,812,000) 152,000 (4,891,000) 432,000
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
Accounts receivable, net $13,052,000 $7,456,000
Unbilled services 7,419,000 3,680,000
Property and equipment, net 7,408,000 2,863,000
Intangible assets, net 3,365,000 3,492,000
All other assets 5,630,000 1,389,000
Note payable-Intelligroup 15,059,000 8,397,000
All other liabilities 11,111,000 5,513,000
Total shareholders' equity 10,704,000 4,970,000
</TABLE>
On July 5, 2000, the Company distributed all of the outstanding shares of
the common stock of SeraNova held by the Company to holders of record of the
Company's common stock as of the close of business on May 12, 2000 (or to their
subsequent transferees) in accordance with the terms of a Distribution Agreement
dated as of January 1, 2000 between the Company and SeraNova.
(6) NOTE RECEIVABLE - SERANOVA
On May 31, 2000, SeraNova and the Company formalized a $15.1 million
unsecured promissory note relating to net borrowings by SeraNova from the
Company through such date. The promissory note bears interest at the prime rate
plus 1/2%. A payment of $3.0 million is due by September 30, 2000 with the
balance due on July 31, 2001. The promissory note has certain mandatory
prepayment provisions based on future debt or equity financings by SeraNova.
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<PAGE>
(7) EQUITY INVESTMENT IN SERANOVA, INC.
On March 14, 2000, SeraNova, a wholly-owned subsidiary of the Company,
entered into an agreement with four institutional investors pursuant to which
such investors purchased an aggregate of 50 shares of SeraNova's common stock at
a price per share of $200,000, for an aggregate purchase price of $10.0 million.
The investment represented approximately 4.8% of SeraNova's then issued and
outstanding shares of common stock. In connection with such sale of its common
stock, SeraNova granted certain demand and piggyback registration rights to such
investors.
(8) RESTRUCTURING AND OTHER SPECIAL CHARGES
In connection with management's plan to reduce costs and improve operating
efficiencies, the Company incurred a non-recurring charge of approximately $5.6
million related to restructuring initiatives during the year ended December 31,
1999. The restructuring charge included settlement of the former Chief Executive
Officer's employment agreement and additional severance payment, expenses
associated with the termination of certain employees in the United States and
the United Kingdom, the closing of certain satellite offices in the United
States and an additional office in Belgium, and costs to exit certain
contractual obligations.
Activity in accrued costs for restructuring and other special charges
during the six month period ended June 30, 2000 is as follows:
<TABLE>
<CAPTION>
Charges to Accrued Costs
Operations Costs Paid December 31, Costs Paid Accrued Costs
during 1999 during 1999 1999 during 2000 June 30, 2000
----------- ----------- ---- ----------- -------------
<S> <C> <C> <C> <C> <C>
Severance and related costs.. $5,027,000 $4,162,000 $865,000 $414,000 $451,000
Other costs primarily to
exit facilities, contracts,
and certain activities....... 601,000 517,000 84,000 -- 84,000
---------- ---------- -------- -------- --------
$5,628,000 $4,679,000 $949,000 $414,000 $535,000
========== ========== ======== ======== ========
</TABLE>
Additionally, in 1999 the Company recorded a reserve of $1.7 million
against an outstanding receivable from a large account, whose parent corporation
filed for protection under Chapter 11 of the U.S. bankruptcy laws.
(9) SEGMENT DATA AND GEOGRAPHIC INFORMATION
The Company operates in one industry, information technology services. The
Company had been reporting two business segments as follows:
o Enterprise Applications Services group - the largest business
segment of the Company's operations which includes the
implementation, integration, development, and customization of
solutions for clients utilizing a class of application products
known as Enterprise Resource Planning software. This class of
products includes software developed by such companies as SAP,
- 9 -
<PAGE>
Oracle, PeopleSoft, and Baan. The segment also includes
application service provider offerings including the development,
customization, and integration of enterprise and e-commerce
applications, hosted externally, and made accessible to customers
over a secure network, on a monthly, per seat, subscription
basis.
o Internet Applications Services group - provides Internet
professional services to businesses. Such services enable clients
to communicate and conduct commerce between a company and its
customers, suppliers, and partners over the Internet.
The Internet Applications Services group represented the assets,
liabilities and results of operations of SeraNova, which has been reported as
discontinued operations for all periods presented. Accordingly, the Company's
Enterprise Applications Services group is presented as one business segment in
the following geographic areas for the three and six months ended June 30, 2000
and 1999.
<TABLE>
<CAPTION>
UNITED
STATES ASIA-PACIFIC EUROPE INDIA TOTAL
------ ------------ ------ ----- -----
QUARTER ENDED JUNE 30, 2000
---------------------------
<S> <C> <C> <C> <C> <C>
Revenue $19,626,000 $2,447,000 $4,481,000 $1,135,000 $27,689,000
Depreciation and
amortization 401,000 28,000 169,000 125,000 723,000
Operating income
(loss) (2,590,000) 6,000 (305,000) (685,000) (3,574,000)
Total assets 47,623,000 4,337,000 10,243,000 6,750,000 68,953,000
QUARTER ENDED JUNE 30, 1999
---------------------------
Revenue $27,590,000 $2,278,000 $6,576,000 $1,376,000 $37,820,000
Depreciation and
amortization 606,000 30,000 51,000 63,000 750,000
Operating income
(loss) (5,759,000) (426,000) (358,000) 481,000 (6,062,000)
Total assets 62,090,000 4,706,000 7,882,000 2,090,000 76,768,000
SIX MONTHS ENDED JUNE 30, 2000
------------------------------
Revenue $40,632,000 $4,567,000 $9,293,000 $2,248,000 $56,740,000
Depreciation and
amortization 972,000 56,000 343,000 199,000 1,570,000
Operating income
(loss) (5,043,000) (280,000) (730,000) (591,000) (6,644,000)
SIX MONTHS ENDED JUNE 30, 1999
------------------------------
Revenue $57,027,000 $4,500,000 $12,443,000 $2,657,000 $76,627,000
Depreciation and
amortization 1,105,000 54,000 102,000 127,000 1,388,000
Operating income
(loss) (6,153,000) (307,000) (622,000) 1,116,000 (5,966,000)
</TABLE>
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<PAGE>
Included above are application maintenance and support revenues of $6.3
million and $437,000 for the three months ended June 30, 2000 and 1999,
respectively. The application maintenance and support revenues for the six
months ended June 30, 2000 and 1999, are $11.2 million and $437,000,
respectively. Other information related to the application maintenance and
support business is not available and the Company determined that it would be
impractical to calculate such data.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
OVERVIEW
The Company provides a wide range of information technology services,
including enterprise-wide business process solutions, IT training solutions,
systems integration and applications support based on leading technologies. Such
services include the implementation, integration and development of solutions
for clients utilizing a class of application products known as Enterprise
Resource Planning software. This class of products includes software developed
by such companies as SAP, Oracle, PeopleSoft, and Baan.
The Company recently made the strategic decision to leverage its
"traditional" application integration and consulting experience and by
refocusing its business on the emerging application service provider ("ASP")
market. Operating as an "aggregator" ASP, the Company bundles the key ASP
components - software and technology infrastructure - with the Company's core
competency of application implementation, management and support. The resulting
service is delivered to customers over a secure network, on a predictable
subscription basis. As the single point of interface to the customer, the
Company takes responsibility for service level agreements related to the
technology infrastructure and applications support, assuring the on-going
reliability of security, performance, service, and support for the customer.
Through its ASPPlusSM Hosting business, the Company customizes and
integrates back-and-front office software applications and delivers them over
the secure global network of AT&T's Ecosystem for ASPs, which provides the data
center, hardware and operating systems, and requisite bandwidth and
communications capabilities. Through its strategic hosting alliances, the
Company provides companies with access to best-of-breed e-commerce and
enterprise software, including SAP, Niku, MicroStrategy, Onyx, Vignette and
Ariba.
Key to the Company's strategy is the Company's ASPPlusSM Advanced
Development Center in Hyderabad, India which provides 24 x 365 development and
support using the technical expertise of its developers and technical staff. In
May 2000, the center was awarded Level 2 of the People Capability Maturity
Model(R) (P-CMM(R)) by the Carnegie Mellon Software Engineering Institute (SEI).
The achievement recognizes the Company for its ability to attract, develop,
motivate, organize and retain the talent needed to continuously improve its
software development capability. The Company is among the first in the IT
industry to integrate SEI workforce improvement with software process
improvement, for which the company has achieved the SEI Capability Maturity
Model for Software (CMM)(SM) Level 3 certification for continuous improvement of
its software engineering. In addition, the Company is ISO 9001-certified for
software development, support and optimization.
The Company generates revenue from professional services rendered to
customers. Revenue is recognized as services are performed. The Company's
services range from providing customers with a single consultant to
multi-personnel, full-scale projects. The Company provides these services to its
customers primarily on a time and materials basis and pursuant to written
contracts which can be terminated with limited advance notice, typically not
more than 30 days, and without significant penalty, generally limited to fees
earned and expenses incurred by the Company through the date of termination. The
Company provides its services directly to end-
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<PAGE>
user organizations or as a member of a consulting team assembled by another
information technology consulting firm to Fortune 1000 and other large and
mid-sized companies. The Company generally bills its customers semi-monthly for
the services provided by its consultants at contracted rates. Where contractual
provisions permit, customers also are billed for reimbursement of expenses
incurred by the Company on the customers' behalf.
The Company has provided services on certain projects in which it, at the
request of the clients, offers a fixed price for its services. For the year
ended December 31, 1999, revenues derived from projects under fixed price
contracts represented approximately 9% of the Company's total revenue. Fixed
price contracts, in the aggregate, represented 13% of the Company's total
revenue during the six months ended June 30, 2000. No single fixed price project
was material to the Company's business during 1999. During the six months ended
June 30, 2000, one fixed price customer represented approximately 11% of the
Company's total revenue. The Company believes that, as it pursues its strategy
of making turnkey project management a larger portion of its business, it will
continue to offer fixed price projects. The Company has had limited prior
experience in pricing and performing under fixed price arrangements and believes
that there are certain risks related thereto and thus prices such arrangements
to reflect the associated risk. There can be no assurance that the Company will
be able to complete such projects within the fixed price timeframes. The failure
to perform within such fixed price contracts, if entered into, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company has derived and believes that it will continue to derive a
significant portion of its revenue from a limited number of customers and
projects. For the six months ended June 30, 2000, and the year ended December
31, 1999, the Company's ten largest customers accounted for in the aggregate
approximately 40% and 43% of its revenue, respectively. For the six months ended
June 30, 2000, one customer accounted for approximately 13% of revenue. For the
year ended December 31, 1999, one customer accounted for approximately 14% of
revenue. During the six months ended June 30, 2000, and the year ended December
31, 1999, approximately 62% and 53%, respectively, of the Company's total
revenue was derived from projects in which the Company implemented software
developed by SAP. During the six months ended June 30, 2000, and the year ended
December 31, 1999, approximately 8% and 9% of the Company's total revenue was
derived from projects in which the Company implemented software developed by
Oracle. During the six months ended June 30, 2000, and the year ended December
31, 1999, approximately 28% and 33%, respectively, of the Company's total
revenue was derived from projects in which the Company implemented software
developed by PeopleSoft.
The Company's most significant cost is project personnel expenses, which
consist of consultant salaries, benefits and payroll-related expenses. Thus, the
Company's financial performance is based primarily upon billing margin (billable
hourly rate less the cost to the Company of a consultant on an hourly basis) and
personnel utilization rates (billable hours divided by paid hours). The Company
believes that turnkey project management assignments typically carry higher
margins. The Company has been shifting to such higher-margin turnkey management
assignments and more complex projects by leveraging its reputation, existing
capabilities, proprietary implementation and upgrade 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.
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<PAGE>
The Company's inability to continue its shift to higher-margin turnkey
management assignments and more complex projects may adversely impact the
Company's future growth.
The Company currently maintains its headquarters in Edison, New Jersey, and
branch offices in Houston, Rosemont (Illinois), Foster City (California) and
Atlanta. The Company also currently maintains offices in Europe (the United
Kingdom, Denmark and Sweden), and Asia Pacific (Australia, India, Japan, New
Zealand, Hong Kong and Singapore). The Company leases its headquarters in
Edison, New Jersey. Such lease has an initial term of ten (10) years, which
commenced in September 1998.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, including,
without limitation, statements regarding the Company's intention to shift to
higher margin turnkey management assignments and more complex projects and to
utilize its proprietary implementation and upgrade methodology in an increasing
number of projects. In addition, statements regarding the Company's intent to
expand its service offerings through internal growth and acquisitions are also
forward-looking statements. Such forward-looking statements include risks and
uncertainties, including, but not limited to:
o the substantial variability of the Company's quarterly operating results
caused by a variety of factors, many of which are not within the Company's
control, including (a) patterns of software and hardware capital spending
by customers, (b) information technology outsourcing trends, (c) the
timing, size and stage of projects, (d) timing and impact of acquisitions,
(e) new service introductions by the Company or its competitors and the
timing of new product introductions by the Company's ERP partners, (f)
levels of market acceptance for the Company's services, (g) general
economic conditions, (h) the hiring of additional staff and (i) fixed price
contracts;
o changes in the Company's billing and employee utilization rates;
o the Company's ability to manage its growth effectively, which will require
the Company (a) to continue developing and improving its operational,
financial and other internal systems, as well as its business development
capabilities, (b) to attract, train, retain, motivate and manage its
employees, (c) to continue to maintain high rates of employee utilization
at profitable billing rates, (d) to successfully integrate the personnel
and businesses acquired by the Company, and (e) to maintain project
quality, particularly if the size and scope of the Company's projects
increase;
o the Company's ability to maintain an effective internal control structure;
o the Company's limited operating history within its current line of
business;
o the Company's reliance on a continued relationship with SAP America and the
Company's present status as a SAP National Logo Partner;
o the Company's substantial reliance on key customers and large projects;
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<PAGE>
o the highly competitive nature of the markets for the Company's services;
o the Company's ability to successfully address the continuing changes in
information technology, evolving industry standards and changing customer
objectives and preferences;
o the Company's reliance on the continued services of its key executive
officers and leading technical personnel;
o the Company's ability to attract and retain a sufficient number of highly
skilled employees in the future;
o the Company's ability to continue to diversify its offerings, including
growth in its Oracle, Baan and PeopleSoft services;
o uncertainties resulting from pending litigation matters and from potential
administrative and regulatory immigration and tax law matters;
o the Company's ability to protect its intellectual property rights; and
o the continued uncertainty of the application service provider ("ASP")
market and revenues derived from anticipated ASP business.
As a result of these factors and others, the Company's actual results may
differ materially from the results disclosed in such forward-looking statements.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data as a percentage of revenue:
<TABLE>
<CAPTION>
Percentage of Revenue
----------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue.................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales............................ 66.8 66.0 66.4 67.2
------ ------ ------ ------
Gross profit......................... 33.2 34.0 33.6 32.8
Selling, general and administrative
expenses............................... 43.5 28.7 42.5 26.4
Depreciation and amortization expenses... 2.6 2.0 2.8 1.8
Acquisition expenses..................... -- -- -- 2.8
Restructuring and other special charges.. -- 19.4 -- 9.6
------ ------ ------ ------
Operating loss....................... (12.9) (16.1) (11.7) (7.8)
Interest and other income (expense), net. 0.8 (0.2) 0.3 (0.2)
------ ------ ------ ------
Loss from continuing operations
before income tax benefit ............ (12.1) (16.3) (11.4) (8.0)
Income tax benefit....................... (1.7) (5.2) (2.6) (2.1)
------ ------ ------ ------
Loss from continuing operations.......... (10.4)% (11.1)% (8.8)% (5.9)%
====== ====== ====== ======
</TABLE>
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<PAGE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
The following discussion compares the quarters ended June 30, 2000 and June
30, 1999, in each case without SeraNova, which has been treated as discontinued
during this quarter.
Revenue. Total revenue decreased by 26.8%, or $10.1 million, from $37.8
million during the three months ended June 30, 1999, to $27.7 million during the
three months ended June 30, 2000. This decrease was primarily attributable to
the anticipated decline in sales of traditional implementation services
offerings and slower than expected growth in outsourcing and hosting revenues as
the Company refocuses resources into the application service provider market.
Total revenue for the three months ended June 30, 2000 included a fixed price
project, which accounted for approximately 7% of revenue.
Gross profit. The Company's cost of sales includes primarily the cost of
salaries to consultants and related employee benefits and payroll taxes. The
Company's cost of sales decreased by 26.0%, or $6.5 million, from $25.0 million
during the three months ended June 30, 1999 to $18.5 million during the three
months ended June 30, 2000. The Company's gross profit decreased by 28.5%, or
$3.7 million, from $12.9 million during the three months ended June 30, 1999 to
$9.2 million during the three months ended June 30, 2000. These decreases were
attributable to lower revenues. Gross margin decreased to 33.2% during the three
months ended June 30, 2000 from 34.0% during the three months ended June 30,
1999. The Company was able to maintain gross margins comparable to prior
quarters as a result of the previously implemented variable cost of sales model.
Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of administrative salaries, and
related benefits costs, occupancy costs, sales person compensation, travel and
entertainment, costs associated with the Advanced Development Center and related
development costs and professional fees. Selling, general and administrative
expenses increased by 11.0%, or $1.2 million, from $10.9 million (excluding
restructuring and other special charges) during the three months ended June 30,
1999 to $12.1 million during the three months ended June 30, 2000 and increased
as a percentage of revenue from 28.7% to 43.5%, respectively. The increase in
selling, general and administrative expenses, in absolute dollars and as a
percentage of revenue, is primarily related to additional sales staff and
expanded marketing efforts as the Company focuses resources around the emerging
application service provider market.
Restructuring and other special charges. In connection with management's
plan to reduce costs and improve operating efficiencies, the Company incurred a
non-recurring charge of $5.6 million related to restructuring initiatives during
the three months ended June 30, 1999. The restructuring charge included
settlement of the former Chief Executive Officer's employment agreement and
additional severance payment, expenses associated with the termination of
certain employees in the United States and the United Kingdom, the closing of
certain satellite offices in the United States and an additional office in
Belgium, and costs to exit certain contractual obligations. Additionally, the
Company recorded a reserve of approximately $1.7 million against an outstanding
receivable from a large ERP account, whose parent corporation filed for
protection under Chapter 11 of the U.S. bankruptcy laws.
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<PAGE>
Depreciation and amortization. Depreciation and amortization expenses
decreased 3.6% to $723,000 during the three months ended June 30, 2000, compared
to $750,000 during the three months ended June 30, 1999. The decrease results
from the depreciation associated with certain software being recorded in cost of
sales during the three months ended June 30, 2000.
Interest income (expense). The Company earned approximately $309,000 in
interest income during the three months ended June 30, 2000, primarily related
to the note receivable with SeraNova. The Company incurred approximately
$145,000 in interest expense during the three months ended June 30, 2000,
primarily related to borrowings under its line of credit. Borrowings under the
line of credit were used to fund operating activities.
(Benefit) provision for income taxes. The Company's effective tax rate was
(14.0)% and (31.9)% for the three months ended June 30, 2000 and 1999,
respectively. In 1996, the Company elected a five year tax holiday in India, in
accordance with a local tax incentive program whereby no income tax will be due
in such period. Such tax holiday was extended an additional five years in 1999.
For the three months ended June 30, 2000, the tax holiday unfavorably impacted
the Company's effective tax rate by approximately 6.7%, while the favorable
effect in the three months ended June 30, 1999 was 2.8%. Based on anticipated
profitability in the near future, management believes all recorded net deferred
tax assets are more likely than not to be realized.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
The following discussion compares the six months ended June 30, 2000 and
June 30, 1999, in each case without SeraNova, which has been treated as
discontinued during the quarter ended June 30, 2000.
Revenue. Total revenue decreased by 26.0%, or $19.9 million, from $76.6
million during the six months ended June 30, 1999, to $56.7 million during the
six months ended June 30, 2000. This decrease was primarily attributable to the
anticipated decline in sales of traditional implementation services offerings
and slower than expected growth in outsourcing and hosting revenues as the
Company refocuses resources into the application service provider market. Total
revenue for the six months ended June 30, 2000 included a fixed price project,
which accounted for approximately 11% of revenue.
Gross profit. The Company's cost of sales decreased by 26.8%, or $13.8
million, from $51.5 million during the six months ended June 30, 1999 to $37.7
million during the six months ended June 30, 2000. The Company's gross profit
decreased by 24.2%, or $6.1 million, from $25.1 million during the six months
ended June 30, 1999 to $19.1 million during the six months ended June 30, 2000.
These decreases were attributable to lower revenues. Gross margin increased to
33.6% during the three months ended June 30, 2000 from 32.8% during the three
months ended June 30, 1999. The Company was able to improve gross margins
compared to prior quarters as a result of the previously implemented variable
cost of sales model.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 19.0%, or $3.9 million, from $20.3 million
(excluding restructuring, acquisition and other special charges) during the six
months ended June 30, 1999 to $24.1 million during the six months ended June 30,
2000 and increased as a percentage of revenue
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<PAGE>
from 26.4% to 42.5 %, respectively. The increase in selling, general and
administrative expenses, in absolute dollars and as a percentage of revenue, is
primarily related to additional sales staff and expanded marketing efforts as
the Company focuses resources around the emerging application service provider
market.
Acquisition expense. During the six months ended June 30, 1999, the Company
incurred costs of $2.1 in connection with the acquisition of the Empower
Companies.
Restructuring and other special charges. In connection with management's
plan to reduce costs and improve operating efficiencies, the Company incurred a
non-recurring charge of $5.6 million related to restructuring initiatives during
the six months ended June 30, 1999. The restructuring charge included settlement
of the former Chief Executive Officer's employment agreement and additional
severance payment, expenses associated with the termination of certain employees
in the United States and the United Kingdom, the closing of certain satellite
offices in the United States and an additional office in Belgium, and costs to
exit certain contractual obligations. Additionally, the Company recorded a
reserve of approximately $1.7 million against an outstanding receivable from a
large ERP account, whose parent corporation filed for protection under Chapter
11 of the U.S. bankruptcy laws.
Depreciation and amortization. Depreciation and amortization expenses
increased 13.1% to $1.6 million during the six months ended June 30, 2000,
compared to $1.4 million during the six months ended June 30, 1999. The increase
is primarily due to additional computers, equipment and software placed in
service since June 30, 1999.
Interest income (expense). The Company earned approximately $358,000 in
interest income during the six months ended June 30, 2000, primarily related to
the note receivable with SeraNova. The Company incurred approximately $198,000
in interest expense during the six months ended June 30, 2000, primarily related
to borrowings under its line of credit. Borrowings under the line of credit were
used to fund operating activities.
(Benefit) provision for income taxes. The Company's effective tax rate was
(22.6)% and (26.0)% for the six months ended June 30, 2000 and 1999,
respectively. In 1996, the Company elected a five year tax holiday in India, in
accordance with a local tax incentive program whereby no income tax will be due
in such period. Such tax holiday was extended an additional five years in 1999.
For the six months ended June 30, 2000, the tax holiday unfavorably impacted the
Company's effective tax rate by approximately 2.9%, while the favorable effect
in the six months ended June 30, 1999 was 6.4%. Based on current and anticipated
profitability, management believes all recorded net deferred tax assets are more
likely than not to be realized.
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<PAGE>
BACKLOG
The Company normally enters into written contracts with its customers at
the time it commences work on a project. These written contracts contain varying
terms and conditions and the Company does not generally believe it is
appropriate to characterize such written contracts as creating backlog. In
addition, because these written contracts often provide that the arrangement can
be terminated with limited advance notice and without significant penalty, the
Company does not believe that projects in process at any one time are a reliable
indicator or measure of expected future revenue. In the event that a customer
terminates a project, the customer remains obligated to pay the Company for
services performed by it through the date of termination.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $1.8 million at June 30, 2000,
and $5.5 million at December 31, 1999. The Company had working capital of $15.1
million at June 30, 2000 and $29.1 million at December 31, 1999.
Cash provided by operating activities of continuing operations was $6.6
million during the six months ended June 30, 2000, resulting primarily from the
decreases in accounts receivable and unbilled services and increases in accrued
payroll and related taxes and accrued expenses and other liabilities, partially
offset by the net loss from continuing operations. The decreases in accounts
receivable and unbilled services result from enhanced credit and collection
efforts as well as a decrease in revenues. The increase in accrued payroll and
related taxes results from profit sharing, bonus and commission payment timing
differences. The increase in accrued expenses and other liabilities results from
accruals for costs associated with the Company's strategic hosting alliances.
Cash used in operating activities of continuing operations for the six months
ended June 30, 1999 was $2.9 million.
The Company invested $3.2 million and $1.3 million in computer equipment,
office furniture and fixtures and capitalized software solutions during the six
months ended June 30, 2000 and 1999, respectively. The increase reflects the
purchases of computer equipment and office furniture and fixtures for
consultants and administrative staff, purchases of software solutions and
internally-developed software costs for customers.
On January 29, 1999, the Company entered into a three-year revolving credit
facility agreement with PNC Bank, N.A. (the "Bank"). The credit agreement with
the Bank was comprised of a revolving line of credit pursuant to which the
Company could borrow up to $30,000,000 either at the Bank's prime rate per annum
or the EuroRate plus 2% (at the Company's option).
As a result of the restructuring and other special charges incurred during
the quarter ended June 30, 1999, the Company was not in compliance with the
consolidated cash flow leverage ratio and consolidated net worth financial
covenants at June 30, 1999. On August 12, 1999, the Bank notified the Company
that such non-compliance constituted an event of default under the credit
agreement. At September 30, 1999, while the Company was in compliance with the
consolidated net worth financial covenant, it was not in compliance with the
consolidated cash flow leverage ratio and minimum fixed charge coverage ratio
financial covenants. On
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<PAGE>
January 26, 2000, the Company finalized with the Bank the terms of a waiver and
amendment to the credit agreement to remedy defaults which existed under the
credit agreement. The terms of the waiver and amendment included, among other
things, (i) a $15,000,000 reduction in availability under the credit agreement,
(ii) a first priority perfected security interest on all assets of the Company
and its domestic subsidiaries and (iii) modification of certain financial
covenants and a waiver of prior covenant defaults.
As a result of the first quarter's operating losses, the Company was not in
compliance with the minimum consolidated net worth covenant and the minimum
consolidated EBITDA financial covenant as of March 31, 2000. On May 9, 2000, the
Bank issued to the Company a waiver of the defaults which existed under the
credit agreement for the quarter ended March 31, 2000.
On May 31, 2000, the Company entered into a new three-year revolving credit
facility agreement with the Bank. The credit facility agreement is comprised of
a revolving line of credit pursuant to which the Company can borrow up to
$20,000,000 either at the Bank's prime rate per annum or the EuroRate plus 2.5%
to 1.75% based upon the Company's ratio of debt to EBITDA. The credit facility
is collateralized by substantially all of the assets of the United States based
operations. The maximum borrowing availability under the line of credit is based
upon a percentage of eligible billed and unbilled accounts receivable.
The credit agreement provides for the following financial covenants
(exclusive of SeraNova), among other things, (1) the Company must maintain
consolidated net worth of (a) $42.0 million at each of June 30, 2000, September
30, 2000, and December 31, 2000; (b) not less than 95% of consolidated net worth
of the immediately preceding fiscal year-end as at each such fiscal quarter
after December 31, 2000; and (c) at least 105% of consolidated net worth as of
the immediately preceding fiscal year-end as at each such fiscal year-end
subsequent to December 31, 2000; provided, however, the foregoing covenant shall
not be tested for any quarter so long as the Company maintains, at all times
during such fiscal quarter, undrawn availability of more than $5.0 million and
(2) the Company must maintain unconsolidated net worth of (a) $39.0 million at
each of June 30, 2000, September 30, 2000, and December 31, 2000; (b) not less
than 95% of unconsolidated net worth of the immediately preceding fiscal
year-end as at each such fiscal quarter after December 31, 2000; and (c) at
least 105% of unconsolidated net worth as of the immediately preceding fiscal
year-end as at each such fiscal year-end subsequent to December 31, 2000;
provided, however, the foregoing covenant shall not be tested for any quarter so
long as the Company maintains, at all times during such fiscal quarter, undrawn
availability of more than $5.0 million. Additionally, the credit facility
contains standard material adverse change clauses with regards to the financial
condition of the assets, liabilities and operations of the Company. As of June
30, 2000, the Company was in compliance with all financial covenants.
On May 31, 2000, SeraNova and the Company formalized a $15.1 million
unsecured Promissory Note relating to net borrowings by SeraNova from the
Company through such date. The Promissory Note bears interest at the prime rate
plus 1/2%. A payment of $3.0 million is due on the Promissory Note by September
30, 2000 with the balance due on July 31, 2001. The Promissory Note has certain
mandatory prepayment provisions based on possible future debt or equity
financings by SeraNova.
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<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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Although the Company cannot accurately determine the precise effect thereof
on its operations, it does not believe inflation, currency fluctuations or
interest rate changes have historically had a material effect on its revenues,
sales or results of operations. Any significant effects of inflation, currency
fluctuations and changes in interest rates on the economies of the United
States, Asia and Europe could adversely impact the Company's revenues, sales and
results of operations in the future. If there is a material adverse change in
the relationship between European currencies and/or Asian currencies and the
United States Dollar, such change would adversely affect the results of the
Company's European and/or Asian operations as reflected in the Company's
financial statements. The Company has not hedged its exposure with respect to
this currency risk, and does not expect to do so in the future, since it does
not believe that it is practicable for it to do so at a reasonable cost.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On January 20, 1999, Tony Knight, a former employee of the Company, filed a
complaint in the Superior Court of the State of California, San Mateo County,
naming the Company, among others, as a defendant. The complaint, which seeks
damages, alleges, among other things, that the Company discriminated against
plaintiff because of his race, ancestry, religious creed and national origin and
thereafter wrongfully terminated the plaintiff's employment with the Company.
The Company, through its counsel, acknowledged receipt of the summons and
complaint on April 20, 1999. On May 19, 1999, the Company removed the action
from the California Superior Court to the United States District Court for the
Northern District of California. A discovery scheduling order was entered at the
case management conference held on December 2, 1999. On April 12, 2000, the
Company's motion for summary judgment, dismissing the complaint against all
defendants, was granted.
There is no other material litigation pending to which the Company is a
party or to which any of its property is subject.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
On January 29, 1999, the Company entered into a three-year revolving credit
facility agreement with PNC Bank, N.A. (the "Bank"). The credit agreement with
the Bank was comprised of a revolving line of credit pursuant to which the
Company could borrow up to $30,000,000 either at the Bank's prime rate per annum
or the EuroRate plus 2% (at the Company's option).
As a result of the restructuring and other special charges incurred during
the quarter ended June 30, 1999, the Company was not in compliance with the
consolidated cash flow leverage ratio and consolidated net worth financial
covenants at June 30, 1999. On August 12, 1999, the Bank notified the Company
that such non-compliance constituted an event of default under the credit
agreement. At September 30, 1999, while the Company was in compliance with the
consolidated net worth financial covenant, it was not in compliance with the
consolidated cash flow leverage ratio and minimum fixed charge coverage ratio
financial covenants. On January 26, 2000, the Company finalized with the Bank
the terms of a waiver and amendment to the credit agreement to remedy defaults
which existed under the credit agreement. The terms of the waiver and amendment
included, among other things, (i) a $15,000,000 reduction in availability under
the credit agreement, (ii) a first priority perfected security interest on all
assets of the Company and its domestic subsidiaries and (iii) modification of
certain financial covenants and a waiver of prior covenant defaults.
As a result of the first quarter's operating losses, the Company was not in
compliance with the minimum consolidated net worth covenant and the minimum
consolidated EBITDA financial covenant as of March 31, 2000. On May 9, 2000, the
Bank issued to the Company a waiver of the defaults which existed under the
credit agreement for the quarter ended March 31, 2000.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Shareholders of the Company was held on May 30, 2000.
There were present at the meeting in person or by proxy shareholders
holding an aggregate of 13,035,526 shares of Common Stock. The results of the
vote taken at such meeting with respect to each nominee for director were as
follows:
Common Stock Nominees For Withheld
--------------------- --- --------
Ashok Pandey 12,857,715 177,811
Nagarjun Valluripalli 12,857,715 177,811
Rajkumar Koneru 12,857,715 177,811
Klaus P. Besier 12,857,715 177,811
Dennis McIntosh 12,857,715 177,811
In addition, a vote was taken on the proposal to ratify the appointment
of Arthur Andersen LLP as the independent auditors of the Company for the fiscal
year ending December 31, 2000. Of the shares present at the meeting in person or
by proxy, 13,019,236 shares of Common Stock were voted in favor of such
proposal, 8,525 shares of Common Stock were voted against such proposal and
7,765 shares of Common Stock abstained from voting.
ITEM 5. OTHER INFORMATION.
In November 1999, the Company announced its intentions to spin off its
Internet services business ("SeraNova") to the shareholders of the Company,
subject to certain conditions. On January 1, 2000, the Company transferred its
Internet applications services and management consulting businesses to SeraNova,
Inc., a wholly-owned subsidiary of the Company on such date. On January 27,
2000, SeraNova filed a Registration Statement with the Securities and Exchange
Commission (the "SEC") relating to the proposed spin-off of SeraNova from the
Company. On June 29, 2000, the SEC declared the Registration Statement
effective. Accordingly, the assets, liabilities and results of operations of
SeraNova have been reported as discontinued operations for all periods
presented.
On July 5, 2000, the Company distributed all of the outstanding shares of
the common stock of SeraNova held by the Company to holders of record of the
Company's common stock as of the close of business on May 12, 2000 (or to their
subsequent transferees) in accordance with the terms of a Distribution Agreement
dated as of January 1, 2000, between the Company and SeraNova.
Shares of the Company's common stock continue to trade on the Nasdaq
National Market under the ticker symbol ITIG. Shares of SeraNova common stock
trade on the Nasdaq National Market under the ticker symbol SERA.
On May 31, 2000, SeraNova and the Company formalized a $15.1 million
unsecured Promissory Note relating to net borrowings by SeraNova from the
Company through such date. The Promissory Note bears interest at the prime rate
plus 1/2%. A payment of $3.0 million is due on the Promissory Note by September
30, 2000 with the balance due on July 31, 2001. The
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Promissory Note has certain mandatory prepayment provisions based on possible
future debt or equity financings by SeraNova.
On May 31, 2000, the Company entered into a new three-year revolving credit
facility agreement with the Bank. The credit facility agreement is comprised of
a revolving line of credit pursuant to which the Company can borrow up to
$20,000,000 either at the Bank's prime rate per annum or the EuroRate plus 2.5%
to 1.75% based upon the Company's ratio of debt to EBITDA. The credit facility
is collateralized by substantially all of the assets of the United States based
operations. The maximum borrowing availability under the line of credit is based
upon a percentage of eligible billed and unbilled accounts receivable.
The credit agreement provides for the following financial covenants
(exclusive of SeraNova), among other things, (1) the Company must maintain
consolidated net worth of (a) $42.0 million at each of June 30, 2000, September
30, 2000, and December 31, 2000; (b) not less than 95% of consolidated net worth
of the immediately preceding fiscal year-end as at each such fiscal quarter
after December 31, 2000; and (c) at least 105% of consolidated net worth as of
the immediately preceding fiscal year-end as at each such fiscal year-end
subsequent to December 31, 2000; provided, however, the foregoing covenant shall
not be tested for any quarter so long as the Company maintains, at all times
during such fiscal quarter, undrawn availability of more than $5.0 million and
(2) the Company must maintain unconsolidated net worth of (a) $39.0 million at
each of June 30, 2000, September 30, 2000, and December 31, 2000; (b) not less
than 95% of unconsolidated net worth of the immediately preceding fiscal
year-end as at each such fiscal quarter after December 31, 2000; and (c) at
least 105% of unconsolidated net worth as of the immediately preceding fiscal
year-end as at each such fiscal year-end subsequent to December 31, 2000;
provided, however, the foregoing covenant shall not be tested for any quarter so
long as the Company maintains, at all times during such fiscal quarter, undrawn
availability of more than $5.0 million. Additionally, the credit facility
contains standard material adverse change clauses with regards to the financial
condition of the assets, liabilities and operations of the Company. As of June
30, 2000, the Company was in compliance with all financial covenants.
On May 1, 2000, the Company named Matthew Shocklee as the Company's
President of ASPPlusSM Solutions North America.
As of July 6, 2000, the Company has adjusted the exercise price of all
employee and director stock options to offset the reduction in option value
caused by the spin-off of SeraNova. The exercise price of each stock option
grant outstanding as of July 5, 2000, was adjusted based on the percentage
change in the closing price of the Company's stock on the distribution date of
July 5, 2000, and the ex-dividend date of July 6, 2000. In accordance with FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, the Company has concluded that there are no accounting
consequences for changing the exercise price of outstanding stock options as a
result of the spin-off.
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.1 Employment Agreement dated November 18, 1998 between the Company and
Matthew Shocklee.
10.2 Change in Control Severance Pay Agreement dated June 22, 1999 between
the Company and Matthew Shocklee.
10.3 First Amendment to Employment Agreement dated September 1, 1999
between the Company and Matthew Shocklee.
10.4 Second Amendment to Employment Agreement and First Amendment to Change
in Control Severance Pay Agreement dated July 25, 2000 between the
Company and Matthew Shocklee.
10.5 Amendment No. 1 to Services Agreement by and between the Company and
SeraNova effective as of June 14, 2000.
10.6 Amendment No. 2 to Services Agreement by and between the Company and
SeraNova effective as of July 1, 2000.
10.7 Amended and Restated Promissory Note between the Company and SeraNova
dated May 31, 2000.
10.8 Amended and Restated Revolving Credit Loan and Security Agreement
among the Company, Empower, Inc. and PNC Bank, National Association.
27.1 Financial Data Schedule for the six-month period ended June 30, 2000.
27.2 Financial Data Schedule for the three-month period ended June 30,
2000.
27.3 Financial Data Schedule for the year ended December 31, 1999.
27.4 Financial Data Schedule for the six-month period ended June 30, 1999.
27.5 Financial Data Schedule for the three-month period ended June 30,
1999.
(b) Reports on Form 8-K.
On July 17, 2000, the Company filed a report on Form 8-K relating to
(i) the Company's distribution of all of the outstanding shares of the
common stock of SeraNova held by the Company to holders of record of
the Company's common stock as of the close of business on May 12, 2000
(or to their subsequent transferees) in accordance with the terms of
that certain Distribution Agreement dated as of January 1, 2000
between the Company and SeraNova; and (ii) a $15,100,000 unsecured
Promissory Note dated May 31, 2000, between the Company and SeraNova
relating to net borrowings by SeraNova from the Company through such
date.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Intelligroup, Inc.
DATE: August 11, 2000 By: /s/ Ashok Pandey
-------------------------------------------
Ashok Pandey,
Co- Chief Executive Officer
(Principal Executive Officer)
DATE: August 11, 2000 By: /s/ Nicholas Visco
-------------------------------------------
Nicholas Visco,
Vice President-Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
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