<PAGE> 1
INTELLIGROUP, INC.
499 THORNALL STREET
EDISON, NEW JERSEY 08837
June 29, 2000
Dear Intelligroup Shareholder:
I am pleased to inform you that the Board of Directors of Intelligroup,
Inc. has conditionally approved a distribution to holders of our common stock.
Intelligroup intends to distribute all of the outstanding shares of common stock
of Intelligroup's subsidiary, SeraNova, Inc. ("SeraNova") held by Intelligroup.
Intelligroup currently owns approximately 95% of the outstanding shares of
SeraNova. SeraNova provides Internet professional services to businesses.
The distribution will be made to holders of record of Intelligroup common
stock on May 12, 2000. Pursuant to the distribution and subject to transfers
subsequent to the record date, you will receive one share of SeraNova common
stock for every one share of Intelligroup common stock you hold on the record
date. Shares of SeraNova common stock are expected to trade on the Nasdaq
National Market under the symbol "SERA." Holders of Intelligroup common stock on
the record date are not required to take any action to participate in the
distribution.
The enclosed Information Statement/Prospectus explains the proposed
distribution in detail and provides important financial and other information
regarding SeraNova. We urge you to read this Information Statement/Prospectus
carefully. A shareholder vote is not required in connection with the
distribution and, accordingly, your proxy is not being sought. We thank you for
your continued support.
Very truly yours,
/s/ NAGARJUN VALLURIPALLI
Nagarjun Valluripalli
Chairman and Co-Chief Executive
Officer
<PAGE> 2
FILED PURSUANT TO RULE 424(b)(3) UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (REGISTRATION STATEMENT NO. 333-34964)
INFORMATION STATEMENT/PROSPECTUS
SERANOVA, INC.
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
We have prepared this information statement/prospectus to provide you with
information regarding the proposed spin-off of all outstanding shares of
SeraNova which are currently held by Intelligroup to Intelligroup shareholders.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 TO READ ABOUT RISKS RELATING TO THE
SHARES OF OUR COMMON STOCK BEING DISTRIBUTED IN THE SPIN-OFF.
The spin-off does not require approval by shareholders of Intelligroup,
Inc. Therefore, Intelligroup is not asking you for a proxy and requests that you
do not send Intelligroup a proxy. This information statement/prospectus is not
an offer to sell, or a solicitation of an offer to buy, any of our securities or
those of Intelligroup.
If you are an Intelligroup shareholder at the close of business on July 5,
2000, you will receive one share of our common stock for every one share of
Intelligroup common stock you hold at that time. The spin-off will take effect
on July 5, 2000 and certificates for our shares will be mailed to you on or
about July 6, 2000. You will not be required to make any payment for the shares
of our common stock that you will receive in the spin-off.
If you have any questions regarding the spin-off, you may contact American
Stock Transfer & Trust Company at 40 Wall Street, New York, New York 10005, or
by telephone at (212) 936-5100, or Intelligroup's investor relations contact,
Richard Bevis, at Intelligroup, Inc., 499 Thornall Street, Edison, New Jersey
08837, or by telephone at (732) 362-2343.
No public trading market currently exists for our common stock. However, we
are seeking to have our common stock approved for quotation on the Nasdaq
National Market. If the shares are accepted for quotation on the Nasdaq National
Market, we expect that a "when issued" market will develop on or shortly after
the record date for the spin-off and regular way trading will begin on the first
business day after the effective date of the spin-off.
Proposed Nasdaq National Market Trading Symbol
"SERA"
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OUR COMMON STOCK, OR DETERMINED IF THIS
INFORMATION STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this information statement/prospectus is June 29, 2000.
<PAGE> 3
SERANOVA, INC.
INFORMATION STATEMENT/PROSPECTUS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Questions and Answers about the Spin-Off.................... ii
Forward-Looking Statements.................................. iii
Summary..................................................... 1
Risk Factors................................................ 6
The Spin-Off................................................ 17
Dividend Policy............................................. 20
Capitalization.............................................. 21
Selected Historical Financial Data.......................... 22
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 24
Business.................................................... 34
Management.................................................. 43
Relationship with Intelligroup.............................. 49
Certain Transactions........................................ 52
Principal Shareholders...................................... 53
Description of Capital Stock................................ 54
Legal Matters............................................... 57
Experts..................................................... 57
Where You Can Find More Information......................... 58
Index to Financial Statements............................... F-1
</TABLE>
Until July 30, 2000, all dealers that effect transactions in these
securities may be required to deliver this information statement/prospectus.
i
<PAGE> 4
QUESTIONS AND ANSWERS ABOUT THE SPIN-OFF
WHAT IS THE SPIN-OFF? Intelligroup intends to pay a dividend to its
shareholders consisting of all of the shares of
SeraNova's common stock owned by Intelligroup.
The dividend is known as a spin-off.
WHAT WILL I RECEIVE IN THE
SPIN-OFF? Subject to subsequent transfers, for every one
share of Intelligroup stock that you hold at
the close of business on May 12, 2000, you will
receive one share of our common stock. Shares
of our common stock will be sent to you
automatically without any required payment or
other action on your part.
WHEN WILL THE SPIN-OFF OCCUR? The spin-off will be completed as soon as
possible after the conditions to the spin-off
are met. These conditions include, among
others, approval for quotation of our common
stock on the Nasdaq National Market.
ARE THERE TAX CONSEQUENCES? Arthur Andersen LLP has issued an opinion to
Intelligroup to the effect that the spin-off
should be tax-free to Intelligroup shareholders
and to Intelligroup for federal income tax
purposes. To review the material federal income
tax consequences in greater detail, see page
18.
WILL I BE PAID DIVIDENDS ON MY
SERANOVA COMMON STOCK? We do not expect to pay cash dividends on our
stock for the foreseeable future.
WHERE WILL MY SERANOVA COMMON
STOCK BE TRADED? We anticipate that our common stock will be
traded on the Nasdaq National Market under the
symbol "SERA," subject to official notice of
issuance.
WHAT WILL HAPPEN TO
INTELLIGROUP AND
MY EXISTING INTELLIGROUP
COMMON
STOCK? Intelligroup will continue to own and operate
its other business. Intelligroup stock will
continue to trade on the Nasdaq National Market
under the symbol "ITIG." The spin-off will not
affect the number of outstanding shares of
Intelligroup stock or any rights of
Intelligroup shareholders.
HOW WILL I TRADE MY
INTELLIGROUP
AND SERANOVA COMMON STOCK? Beginning on or about May 15, 2000, and
continuing through July 5, 2000, you will only
be able to sell your Intelligroup stock with
due bills for our stock. The due bill entitles
you to receive the dividend intended to be paid
to each of the Intelligroup shareholders in the
spin-off. This means that during the due bill
period, if you sell your Intelligroup stock,
you will give up your right to receive the
dividend of SeraNova stock. As a result, if you
sell your Intelligroup stock during the due
bill period, you will have to deliver the
certificate for our stock to the buyer of your
Intelligroup stock once you receive our
certificate. Shares of Intelligroup common
stock are traded on the Nasdaq National Market
which is aware of the due bill period.
Accordingly, you do not have to notify the
Nasdaq National Market when trading your
Intelligroup stock during the due bill period.
Beginning on July 6, 2000 we expect that
regular way trading in our stock will begin on
the Nasdaq National Market. This means that
Intelligroup stock will no longer be traded
with due bills. Accordingly, beginning on July
6, 2000, you will be able to trade your
SeraNova stock and your Intelligroup stock
independently of each other.
ii
<PAGE> 5
FORWARD-LOOKING STATEMENTS
This information statement/prospectus contains certain "forward-looking
statements" concerning our operations, performance and financial condition,
including our future economic performance, cash flows, plans, and objectives and
the likelihood of success in developing and expanding our business. These
statements are based upon a number of assumptions and estimates which are
subject to significant uncertainties, many of which are beyond our control. The
words "may," "would," "could," "will," "expect," "anticipate," "believe,"
"intend," "plan," "estimate" and similar expressions are meant to identify such
forward-looking statements. Actual results may differ materially from those
expressed or implied by such forward-looking statements. Factors that could
cause actual results to differ materially include, but are not limited to, those
set forth in the section entitled "Risk Factors." These forward-looking
statements reflect our views only as of the date of this information
statement/prospectus. We undertake no obligation to update such statements or
publicly release the result of any revisions to these forward-looking statements
which we may make to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
iii
<PAGE> 6
SUMMARY
This summary highlights selected information from this information
statement/prospectus, but does not contain all details concerning the spin-off
of our common stock to Intelligroup shareholders, including information that may
be important to you. To better understand the spin-off and our business and
financial position, you should carefully review this entire information
statement/prospectus.
OUR BUSINESS
SeraNova provides Internet professional services to businesses. Our
services enable our clients to combine the scope and efficiencies of the
Internet with their existing business processes. We design and implement
Internet-based software applications that help companies manage procurement,
sell products and services, provide customer service, conduct supplier
transactions and communicate with their employees over the Internet. Our
services include strategy consulting, creative design, technology implementation
and maintenance of Internet-based software applications. In all of our client
engagements, we apply SeraNova's Time-to-Market Approach, our proprietary
methodology, to deliver these services. We focus on five industry
markets -- financial services, telecommunications, automotive, technology and
healthcare. During the last three years, we have provided Internet professional
services to over 80 clients. Our clients include Global 5000 companies and
emerging Internet-based companies that conduct their business exclusively over
the Internet.
Increasingly, many companies are using the Internet as the primary platform
for communications and business transactions. In order to conduct complex
business-to-business transactions over the Internet, companies must build
sophisticated Internet-based software applications that are consistent with
their market positioning and business goals. In order to build these
applications, companies must have expertise in business strategy, creative
design and technology implementation. Many companies are seeking outside
specialists with comprehensive and integrated offerings to provide these
services.
SeraNova provides an integrated set of services that enable rapid
deployment of Internet-based software applications. Typically, we begin our
client engagement with strategy consulting. Our team of industry experts and
business process specialists help formulate a comprehensive Internet strategy
for our clients. Subsequently, our technology experts and implementation project
managers identify project requirements and create a software application
deployment plan. We then select and deploy a technology team from our more than
550 professionals located across our five global delivery centers to develop and
implement these applications. Once these applications are deployed, SeraNova
provides software application management services, that include website and
related database updates and software functionality enhancements. This improves
our clients' ability to dynamically adjust their business processes and
effectively address changing market opportunities. We believe our proprietary
methodology and our knowledge management processes, allow us to reduce the time
to deliver our services.
We seek to continue to strengthen our relationships with key clients and
further penetrate our target industry markets. We currently are executing a
focused marketing strategy that is aimed at building the SeraNova brand. We
intend to continue to attract and retain outstanding professionals critical to
our professional services business. SeraNova places great emphasis on proactive
recruiting, career development and employee retention.
CORPORATE INFORMATION
Our principal executive offices are located at 499 Thornall Street, Edison,
New Jersey 08837. Our telephone number at that address is (732) 590-1600. Our
website is located at http://www.SeraNova.com. The information contained at our
website is not incorporated into and does not constitute a part of this
information statement/prospectus.
All references to "we," "us," "our" or "SeraNova" in this information
statement/prospectus means SeraNova, Inc. and SeraNova's business after the
contribution of assets and liabilities of Intelligroup, Inc.'s Internet services
business to us by Intelligroup and certain of its subsidiaries pursuant to the
Contribution Agreement between Intelligroup, Inc. and SeraNova, dated as of
January 1, 2000.
1
<PAGE> 7
THE SPIN-OFF
Company Doing the Spin-off.... Intelligroup, Inc., a New Jersey corporation.
Company Resulting from the
Spin-off...................... SeraNova, Inc., a New Jersey corporation.
Conditions to the Spin-off.... Completion of the spin-off is subject to
approval for quotation of our common stock on
the Nasdaq National Market, among other
conditions.
Spin-off Ratio................ One share of our common stock for every one
share of Intelligroup common stock held of
record on the spin-off record date.
Spin-off Record Date.......... May 12, 2000 (5:00 p.m. New York time).
Spin-off Effective Date....... July 5, 2000. The dividend agent will commence
mailing our common stock certificates on July
6, 2000.
Trading in Intelligroup Common
Stock from the Spin-off Record
Date Up To and Including the
Spin-off Effective Date..... During this period, Intelligroup common stock
will trade on the Nasdaq National Market with
due bills attached. The due bills will entitle
a purchaser of Intelligroup common stock during
this period to receive one share of our stock
for every one share purchased. Accordingly, a
seller of Intelligroup common stock during the
due bill period will have to deliver the
certificate for our common stock to the buyer
of Intelligroup common stock once he or she
receives our certificate. Since the Nasdaq
National Market is aware of the due bill
period, no notification by a purchaser or
seller is necessary when trading Intelligroup
common stock. If the spin-off conditions are
not satisfied and the spin-off is not
completed, the due bills will become null and
void.
Our Outstanding Stock and
Options....................... Based on 16,629,413 shares of Intelligroup
common stock outstanding at the close of
business on May 12, 2000, 16,629,413 shares of
our common stock will be distributed in the
spin-off. There are an additional 831,470
shares of SeraNova common stock held by certain
institutional investors. We also have reserved
5.0 million shares of common stock for issuance
under our 1999 Stock Plan, of which options to
purchase 1,667,575 shares have been granted,
and we have granted additional options to
purchase 3,236,092 shares outside of the 1999
Stock Plan. See "Management -- 1999 Stock
Plan." All share numbers in this information
statement/prospectus reflect a
16,629.413-for-one stock split effective May
12, 2000.
Dividend Agent................ The dividend agent is American Stock Transfer &
Trust Company. The address and telephone number
of the dividend agent are 40 Wall Street, New
York, New York 10005, (212) 936-5100.
Material Federal Income Tax
Consequences to Intelligroup
Shareholders................ Arthur Andersen LLP has issued an opinion to
Intelligroup to the effect that, for federal
income tax purposes, the spin-off should
qualify as a tax-free distribution to the
shareholders of Intelligroup under Section 355
of the Internal Revenue Code. Therefore, you
2
<PAGE> 8
should not incur federal income tax upon the
receipt of our common stock in the spin-off.
See "The Spin-off -- Material Federal Income
Tax Consequences."
Trading Market and Symbol for
our Common Stock.............. We are seeking to have our common stock
approved for quotation on the Nasdaq National
Market under the proposed symbol "SERA." Prior
to the spin-off, we do not expect there to be
any public trading market for our common stock
except that our common stock is expected to
trade on a "when-issued" basis on the Nasdaq
National Market beginning on May 15, 2000 for
settlement on July 5, 2000. If the spin-off is
not completed, all "when-issued" trading in our
common stock will be null and void. If the
spin-off is completed, we expect that "regular
way" trading in our common stock on the Nasdaq
National Market will commence at 9:30 a.m. New
York time, on July 6, 2000 subject to official
notice of issuance. See "Risk Factors -- An
Active Trading Market May Not Develop for Our
Common Stock" and "-- Absence of Dividends" and
"The Spin-Off -- Trading of Our Common Stock."
Transfer Agent and Registrar
for our Common Stock.......... American Stock Transfer & Trust Company.
Agreements between SeraNova
and Intelligroup and
Relationship after the
Spin-off.................... After the spin-off, SeraNova and Intelligroup
will operate independently of each other as
separate public companies. Prior to the
spin-off, we entered into the following
agreements with Intelligroup: Contribution
Agreement; Services Agreement; Space Sharing
Agreement; Tax Sharing Agreement and
Distribution Agreement. Such agreements govern
our on-going relationship with Intelligroup.
See "The Spin-Off -- Agreements Between
SeraNova and Intelligroup and Relationship
After the Spin-off."
3
<PAGE> 9
SUMMARY COMBINED FINANCIAL DATA
The historical summary combined financial data set forth below for each of
the fiscal years in the two-year period ended December 31, 1999, is derived from
our audited combined financial statements included elsewhere in this information
statement/prospectus. The historical summary combined financial data for the
fiscal year ended March 31, 1998 is derived from our audited combined financial
statements not included in this information statement/prospectus. The historical
summary combined financial data for the three months ended March 31, 2000 and
1999 are unaudited but, in our opinion have been prepared on a basis consistent
with that of each of the fiscal years in the three-year period ended December
31, 1999 (except for normal year-end adjustments). Historical financial
information may not be indicative of our future performance as an independent
company. The information set forth below should also be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Combined Financial Statements and Notes. See "Index to
Financial Statements." We have for all periods presented data about historical
earnings per share. This is calculated for all periods by dividing net income
(loss) by the outstanding shares of common stock of Intelligroup as of May 12,
2000, the spin-off record date plus the weighted average number of shares sold
to investors on March 14, 2000 (see Note 13 to SeraNova's Combined Financial
Statements). Intelligroup shares were utilized since the spin-off will be one
share of SeraNova common stock for each share of Intelligroup common stock.
<TABLE>
<CAPTION>
FOR THE
FOR THE THREE FOR THE NINE-MONTH FOR THE
MONTHS ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31, MARCH 31,
------------------ ------------ ------------ ----------
2000 1999 1999(2) 1998(1) 1998
-------- ------- ------------ ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................... $ 16,176 $ 7,988 $39,795 $12,438 $ 8,995
Cost of sales.......................... 8,389 4,649 22,475 7,315 4,797
Selling, general and administrative
expenses............................ 11,319 2,726 17,605 5,106 3,812
Depreciation and amortization.......... 472 135 1,131 102 133
Operating income (loss)................ (4,004) 2,861 (1,416) (85) 253
Net income (loss)...................... (3,079) 280 (1,261) (552) (253)
Net income (loss) per common share --
basic and diluted(3)................ $ (0.18) $ 0.02 $ (0.08) $ (0.03) $ (0.02)
======== ======= ======= ======= =======
Shares used in per share calculation of
net income (loss) -- basic and
diluted(3).......................... 16,785 16,629 16,629 16,629 16,629
======== ======= ======= ======= =======
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents.............. $ 592 $ 1,243 $ 611 $ 677 $ 368
Working capital (deficit).............. 4,216 924 (776) (424) 145
Total assets........................... 24,991 12,193 18,880 5,775 3,216
Total liabilities...................... 12,607 6,575 13,910 5,383 2,975
Shareholders' equity................... 12,384 5,617 4,970 392 241
OTHER DATA:
Capital expenditures................... $ 2,234 $ 268 $ 2,175 $ 603 $ 7
</TABLE>
---------------
(1) Effective April 1, 1998, we changed our fiscal year from March 31 to
December 31.
(2) On January 8, 1999, Intelligroup, Inc. acquired the common stock of Network
Publishing, Inc. in a purchase business combination. The results of
operations of Network Publishing, Inc. have been included above since the
date of acquisition. Pro forma results for the period January 1, 1999 to
January 7, 1999 are not material to SeraNova's Combined Financial Statements
for the year ended December 31, 1999.
(3) See Note 2 to SeraNova's Combined Financial Statements.
4
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SUMMARY OF UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
We entered into certain agreements with Intelligroup that became effective
January 1, 2000. Under these agreements, Intelligroup will continue to provide
us with certain general and administrative functions on a fee basis. (See
"Relationship with Intelligroup" for a summary of these agreements). We believe
that, temporarily, these agreements are the most cost efficient and least
disruptive way to maintain the administrative support services we require.
The pro forma statement of operations for the year ended December 31, 1999
adjusts the results of operations as if the agreements with Intelligroup were
effective during 1999. The pro forma amounts are presented for informational
purposes only. The pro forma financial data is not necessarily indicative of our
results of operations.
SERANOVA, INC. AND AFFILIATES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
SERANOVA, INC. PRO FORMA ADJUSTMENTS PRO FORMA
-------------- --------------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues............................. $39,795 $39,795
Cost of Sales........................ 22,475 22,475
------- -------
Gross Profit......................... 17,320 17,320
------- -------
Selling, general and administrative
expenses........................... 17,605 $(803)(1) $ 1,162(2) 17,964 (3
Depreciation and amortization........ 1,131 1,131
------- ----- ------- -------
Total operating expenses........... 18,736 (803) 1,162 19,095
------- ----- ------- -------
Operating loss....................... (1,416) 803 (1,162) (1,775)
Other income (expense), net.......... (80) (288)(4) (368)
------- ----- ------- -------
Loss before income taxes............. (1,496) 803 (1,450) (2,143)
Benefit for income taxes............. (235) (235)
------- ----- ------- -------
Net loss............................. $(1,261) $ 803 $(1,450) $(1,908)
======= ===== ======= =======
Unaudited pro forma net loss per
common share -- basic and
diluted............................ $ (0.08) $ (0.11)
======= =======
Shares used in per share calculation
of unaudited pro forma net
loss -- basic and diluted(5)....... 16,785 16,785
======= =======
</TABLE>
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(1) Represents the elimination of historical costs covered by the services and
space sharing agreements.
(2) Represents the estimated annual costs that would have been incurred under
the services and space sharing agreements (See Note 4 to the Combined
Financial Statements).
(3) The difference between the historical costs covered by the services and
space sharing arrangements and the costs to be incurred under the services
and space sharing agreements is due to our growth throughout 1999 which
resulted in our utilizing an increasing volume of office space and incurring
higher costs as the year progressed.
(4) Represents the estimated annual interest expense to be incurred if the bank
credit facility was in place for the year 1999.
(5) Represents the outstanding shares of Intelligroup as of May 12, 2000, the
spin-off date of record, plus the weighted average number of shares sold to
certain investors on March 14, 2000.
5
<PAGE> 11
RISK FACTORS
You should carefully consider each of the following risks and all of the
other information in this information statement/prospectus. Some of the
following risks relate principally to the spin-off while other risks relate
principally to our business in general and the industry in which we operate.
Finally, other risks relate principally to the securities markets and ownership
of our common stock. The risks and uncertainties described below are not the
only ones we face. Additional risks and uncertainties not presently known to us
or that we currently believe to be immaterial may also adversely affect our
business. If any of the following risks and uncertainties develop into actual
events, our business, financial condition or results of operations could be
materially adversely affected. If that happens, the trading price of our common
stock could decline.
This information statement/prospectus contains forward-looking statements
that involve risks and uncertainties. You should not rely on these
forward-looking statements. We use words such as "anticipate," "believe,"
"plan," "expect," "future," "intend," and similar expressions to identify such
forward-looking statements. This information statement/prospectus also contains
forward-looking statements attributed to certain third parties relating to their
estimates regarding, among other things, the growth in the market for Internet
professional services. Our actual results could differ materially from those
anticipated in the forward-looking statements for many reasons, including the
risks faced by us described below and elsewhere in this information
statement/prospectus.
RISKS RELATING TO THE SPIN-OFF
FEDERAL TAX CONSEQUENCES OF THE SPIN-OFF TO INTELLIGROUP AND INTELLIGROUP
SHAREHOLDERS.
Arthur Andersen LLP has issued an opinion to Intelligroup to the effect
that the spin-off should be tax-free to Intelligroup and to Intelligroup
shareholders. We have not requested a ruling from the Internal Revenue Service
relating to the tax consequences of the spin-off. Arthur Andersen's opinion is
not binding on the Internal Revenue Service or the courts. If it is determined
that the spin-off is not a tax-free spin-off, then:
- Intelligroup would recognize a gain equal to the excess of the fair
market value of the SeraNova common stock distributed to its shareholders
over Intelligroup's basis in the SeraNova common stock; and
- Each U.S. holder of Intelligroup common stock would be generally treated
as if such shareholder had received a taxable dividend, to the extent of
earnings and profits, in an amount equal to the fair market value of the
SeraNova common stock received.
IF WE ARE UNABLE TO OBTAIN CERTAIN THIRD-PARTY CONSENTS TO THE SPIN-OFF, OUR
ABILITY TO CONDUCT OUR BUSINESS AS CURRENTLY CONDUCTED COULD BE MATERIALLY
ADVERSELY AFFECTED.
The spin-off and related transactions could result in a violation of
certain of Intelligroup's existing contractual arrangements or require the
consent of a third party to transfer these arrangements to us. In a substantial
number of situations, an amendment, consent or waiver from third parties,
including many clients, will be required. In particular, American Express, our
largest customer (representing approximately 28% and 38% of our total revenues
for the year ended December 31, 1999 and three months ended March 31, 2000,
respectively), has not yet consented to the assignment of their contracts with
Intelligroup to us. We are seeking amendments and consents to all material
arrangements although we believe that no single agreement for which an
amendment, consent or waiver is being sought is material, the failure to receive
a significant number of such amendments, waivers or consents with respect to
contractual arrangements could have a material adverse effect on our ability to
continue to conduct our business.
THE COMBINED POST-SPIN-OFF VALUE OF INTELLIGROUP AND SERANOVA SHARES MAY NOT
EQUAL OR EXCEED THE PRE-SPIN-OFF VALUE OF INTELLIGROUP SHARES.
After the spin-off, we anticipate that shares of Intelligroup common stock
will continue to be traded on the Nasdaq National Market and we expect that
shares of SeraNova common stock will also be traded on the
6
<PAGE> 12
Nasdaq National Market. We cannot assure you that the combined trading prices of
Intelligroup common stock and SeraNova common stock after the spin-off will be
equal to or greater than the trading price of Intelligroup common stock prior to
the spin-off. Until the market has fully evaluated the business of Intelligroup
without the business of SeraNova, the price at which Intelligroup common stock
trades may fluctuate significantly. Similarly, until the market has fully
evaluated the SeraNova business on an independent basis, the price at which our
common stock trades may fluctuate significantly.
IF THE SPIN-OFF IS NOT A LEGAL DIVIDEND, IT COULD BE HELD INVALID BY A COURT.
The dividend which effects the spin-off is subject to New Jersey corporate
law. We cannot assure you that a court will not later determine that the
spin-off was invalid under New Jersey law and reverse the spin-off. The
resulting complications, costs and expenses could have a material adverse effect
on our business, financial condition and results of operations.
CREDITORS OF INTELLIGROUP AT THE TIME OF THE SPIN-OFF MAY CHALLENGE THE
SPIN-OFF.
If a court in a lawsuit by an unpaid creditor or representative of
creditors of Intelligroup, such as a trustee in bankruptcy, were to find that
among other reasons, at the time of the spin-off, Intelligroup or SeraNova:
- was insolvent;
- was rendered insolvent by reason of the spin-off;
- was engaged in a business or transaction for which Intelligroup's or
SeraNova's remaining assets constituted unreasonably small capital; or
- intended to incur, or believed it would incur, debts beyond its ability
to pay such debts as they matured,
the court may be asked to void the spin-off (in whole or in part) as a
fraudulent conveyance. The court could then require that the shareholders return
some or all of the shares of SeraNova common stock, or require Intelligroup or
SeraNova, as the case may be, to fund certain liabilities of the other company
for the benefit of creditors. The measure of insolvency for purposes of the
foregoing will vary depending upon the jurisdiction whose law is being applied.
Generally, however, each of Intelligroup and SeraNova, as the case may be, would
be considered insolvent if the fair value of its assets were less than the
amount of its liabilities or if it incurred debt beyond its ability to repay
such debt as it matures. Intelligroup and SeraNova, believe that each company
will be solvent after the spin-off.
RISK FACTORS RELATING TO OUR BUSINESS AND OUR SECURITIES
OUR LIMITED OPERATING HISTORY AS A SEPARATE COMPANY MAKES IT DIFFICULT TO
EVALUATE OUR BUSINESS.
SeraNova was operated as a separate business division within Intelligroup
since September 1999. We were not operated as a separate company until January
1, 2000 and, therefore, we have a limited operating history as a stand-alone
company. Accordingly, we have a limited history of addressing material risks in
our business. These risks are magnified by the fact that we are operating in the
new and expanding Internet professional services markets. These risks include
our potential inability to:
- attract, retain and motivate qualified personnel;
- expand our sales and support staff;
- obtain financing for our expanding business which may be hindered by our
lack of an operating history as a separate corporate entity;
- develop our own internal operating and financial reporting procedures;
- increase the scale of our operations;
- maintain sufficiently high employee utilization;
- respond effectively to competitive pressures;
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- continue to develop and upgrade our services and solutions;
- replace the transitional services necessary for the conduct of our
business that Intelligroup has agreed to provide to us for a limited
period after the completion of the spin-off; and
- satisfy legal and regulatory requirements.
In addition, we believe that our historical financial statements for all
periods do not reflect potential changes that may occur in our funding and our
operations as a result of our becoming a stand-alone company which are discussed
in the following risk factors.
WE ANTICIPATE FUTURE LOSSES.
We expect to incur significant sales and marketing, infrastructure
development and general and administrative expenses. As a result, we anticipate
losses through at least the third quarter of 2000. In order to achieve
profitability, we will need to control costs associated with building our own
infrastructure as well as increase our revenues. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis in the future. We cannot assure you that we will be
able to contain costs, grow revenue or increase profitability.
WE DERIVE A SUBSTANTIAL PORTION OF OUR REVENUE FROM A SMALL NUMBER OF CLIENTS.
ANY SIGNIFICANT LOSS OF OR DELAY IN SERVICES PROVIDED TO THOSE CLIENTS COULD
SIGNIFICANTLY AND ADVERSELY IMPACT OUR FINANCIAL PERFORMANCE.
We have historically derived, and for the foreseeable future expect to
derive, a significant portion of our revenue from a relatively small number of
clients. For the year ended December 31, 1999, six clients, including American
Express (our largest customer, which accounted for approximately 28% of total
revenues), accounted for approximately 50% of total revenues. During the three
months ended March 31, 2000, American Express and Volkswagen of America
accounted for approximately 38% and 11% of total revenues, respectively. If any
of these clients stop or delay engaging us for services, our financial
performance would be negatively impacted. Additionally, American Express has not
yet consented to the assignment of their contracts with Intelligroup to us.
WE WILL NOT BE ABLE TO RELY ON INTELLIGROUP TO FUND FUTURE CAPITAL REQUIREMENTS.
Prior to January 1, 2000, the assets, liabilities, operations and personnel
associated with our business were operated within Intelligroup and certain of
its subsidiaries. As such, all of our capital requirements in excess of
internally generated funds were provided by Intelligroup's equity offerings or
credit facilities. Consequently, we have not independently maintained or managed
any cash or been responsible for obtaining external sources of financing.
Pursuant to the terms of Intelligroup's current credit facility, Intelligroup is
not permitted to provide funds to finance our working capital or other cash
requirements. While our agreements with Intelligroup permit, and Intelligroup
has in the past provided, intercompany loans, Intelligroup will no longer be
able to fund our operations. As of December 31, 1999, we were indebted to
Intelligroup for approximately $8.4 million. As of March 31, 2000, we were
indebted to Intelligroup for approximately $3.9 million. At May 31, 2000, we
were indebted to Intelligroup for approximately $15.1 million. We believe our
capital requirements will vary greatly from quarter to quarter, depending on,
among other things, capital expenditures, fluctuations in our operating results
and financing activities. We cannot guarantee that financing, if needed, will be
available on favorable terms, if at all. In addition, future financing could
subject us to restrictive covenants that may limit our ability to take certain
actions. We may not be able to obtain financing with interest rates as favorable
as those historically obtained by Intelligroup. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
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WE ANTICIPATE THAT WE WILL NEED TO CONSUMMATE ADDITIONAL DEBT OR EQUITY
FINANCINGS TO REPAY OUR OBLIGATIONS TO INTELLIGROUP.
On May 31, 2000, we entered into a promissory note with Intelligroup for
$15.1 million. Under the terms of the note, we are obligated to pay Intelligroup
$3.0 million by September 30, 2000 with the balance of principal and interest on
the note due on July 31, 2001. We anticipate that our cash flow from operations
will not be sufficient to satisfy our obligations to Intelligroup and,
therefore, we will need to pursue alternative sources of capital, including debt
or equity financings, to meet these obligations. If adequate funds are not
available and we are unable to repay Intelligroup in a timely manner,
Intelligroup will be entitled to pursue all remedies under the note, including
legal proceedings. In the event we issue and sell shares of capital stock, such
issuances may dilute our existing shareholders. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
POTENTIAL CONFLICTS WITH INTELLIGROUP MAY NOT BE RESOLVED IN OUR FAVOR.
Conflicts may develop between Intelligroup and us regarding the terms of
our agreements with Intelligroup. Such disputes may not be resolved in our
favor. It is our policy and the policy of Intelligroup that transactions between
Intelligroup and us will generally be on terms and conditions comparable to
those between unaffiliated third parties. However, because our agreements with
Intelligroup, including our promissory note with Intelligroup, were negotiated
in the context of a parent-subsidiary relationship, we cannot assure you that
these agreements, or the transactions with Intelligroup contemplated by such
agreements, will be effected on terms as favorable to us as could have been
obtained from unaffiliated third parties. If such conflicts are not resolved in
our favor, our business, financial condition and results of operations could be
adversely affected. See "Relationship with Intelligroup."
VARIABILITY OF QUARTERLY OPERATING RESULTS MAY ADVERSELY AFFECT OUR STOCK PRICE.
The market price of our common stock may be adversely affected because our
revenue, gross profit, operating income and net income or net loss may vary
substantially from quarter to quarter. Many factors may contribute to
fluctuations in our operating results. These factors include the following:
Factors within our control:
- changes in our pricing policies;
- introduction of our new services offerings;
- possibility of over-runs on fixed-price contracts;
- the timing and number of personnel we hire;
- the timing and acquisition of new businesses by us; and
- the efficiency with which we utilize our employees.
Factors not exclusively within our control:
- changes in our competitors' pricing policies;
- variations in billing margins and personnel utilization rates;
- introduction of new services by our competitors;
- acceptance of our new services offerings;
- the market for qualified technical personnel;
- seasonal impact on customer spending;
- cancellation or delay of contracts by our customers or potential
customers;
- length of our sales cycle;
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- short-term nature of our customers' contractual commitments;
- the number, size, scope and timing of our projects; and
- the demand for Internet professional services.
WE MAY NOT BE ABLE TO EXPAND OUR OWN SALES AND SUPPORT ORGANIZATION.
We need to substantially expand our direct and indirect sales activities
and we may not be able to successfully do so. Our services require a
sophisticated and technical sales effort targeted at professionals at different
levels within our prospective customers' organizations. Without an expanded
sales effort, we may not be able to:
- Build market awareness and establish name recognition for SeraNova;
- Compete effectively with larger Internet services organizations; or
- Establish alternative sales channels.
We cannot be certain that we will be able to successfully expand our sales
and marketing efforts or that we will be able to successfully promote our
existing or future services offerings. See "Business -- Business Strategy" and
"-- Sales and Marketing."
OUR HISTORICAL FINANCIAL INFORMATION MAY HAVE LIMITED RELEVANCE TO OUR RESULTS
OF OPERATIONS AS A SEPARATE COMPANY.
Prior to the transfer of Intelligroup's Internet services business to us on
January 1, 2000, Intelligroup did not account for our business as, and prior to
September 1999, we were not operated as, a separate unit or division. In
presenting our historical financial statements for all periods, we specifically
identified all revenue, cost of sales, other income (expense) and certain
selling, general and administrative expenses incurred by Intelligroup on our
behalf. Other selling, general and administrative expenses were allocated using
methodologies which took into consideration the ratio of our revenue to the
consolidated revenue of Intelligroup, head count, occupancy and other factors.
However, we cannot assure you that our historical financial information prior to
December 31, 1999 necessarily reflects what the results of operations, financial
position and cash flows would have been had we been a separate company, or is
indicative of our future results of operations, financial positions and cash
flows. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
WE MAY NOT BE ABLE TO HIRE AND RETAIN QUALITY TECHNICAL AND MANAGERIAL PERSONNEL
DUE TO A COMPETITIVE MARKET.
We may not be able to hire and retain the number of quality technical
personnel necessary to meet our requirements. Our future success depends to a
significant extent on our ability to attract, train and retain quality
professionals who are highly skilled in the Internet and its rapidly changing
technology. We believe that there is a worldwide shortage of, and significant
competition for, professionals with the advanced technical and managerial skills
necessary to perform the services we offer. Our business, financial condition,
results of operations and growth prospects could decline significantly if we are
unable to hire and retain qualified technical personnel that are necessary to
conduct and expand our operations successfully. While substantially all of our
technical personnel have entered into agreements which contain non-disclosure,
non-solicitation and non-competition provisions, we cannot guarantee that such
agreements are enforceable or ensure continued service by such individuals. See
"Business -- Business Strategy" and "-- People and Culture."
IF WE EXPERIENCE LOWER BILLING AND UTILIZATION RATES OUR RESULTS OF OPERATIONS
WILL BE ADVERSELY AFFECTED.
Our personnel costs are relatively fixed for any given period. Our
personnel expense levels are based in part on expectations of future revenue. As
a result, our operating results have been, and in the future will continue to
be, impacted by changes in technical personnel billing and utilization rates. We
may be required to
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increase the compensation of our employees due to the competitive market for
technical personnel, which would likely result in lower billing margins. During
periods of rapid and concentrated hiring, technical personnel utilization rates
have been, and are expected to continue to be, adversely affected and we are
likely to incur greater technical training costs. Due to these and other
factors, if we are successful in expanding our services offerings and revenue,
periods of variability in utilization are likely to occur. We believe,
therefore, that past operating results and period-to-period comparisons should
not be relied upon as an indication of future operating performance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Selected Quarterly Results of Operations."
THERE IS INTENSE COMPETITION IN THE INTERNET SERVICES MARKET.
The Internet services market is relatively new, intensely competitive and
rapidly changing. We expect competition to continue and intensify which may
adversely affect our ability to maintain or increase our market share. To be
competitive, we must respond effectively to evolving changes in technology as
well as to our competitors' innovations by continuing to enhance our services
offerings and expand our sales channels. Any pricing pressures, reduced margins
or loss of market share resulting from our failure to compete effectively could
materially adversely affect our business. Furthermore, we believe the barriers
to entry into our markets are relatively low, which enable new competitors to
offer competing services. Current or future competitors may develop or offer
services that are comparable or superior to ours at a lower price, which could
result in a decrease in our revenues and the value of your investment.
Many of our current and potential competitors have longer operating
histories and substantially greater financial, marketing, technical and other
resources. Some of these competitors have a greater ability to provide services
on a national or international basis and may be able to adapt more quickly to
changes in customer needs or to devote greater resources to providing Internet
professional services. Such competitors may attempt to increase their presence
in our markets by forming strategic alliances with other competitors or our
customers, offering new or improved products and services to our customers or
increasing their efforts to gain and retain market share through competitive
pricing. In addition, other companies have developed particularly strong
reputations in niche service offerings or local markets which may provide them
with a competitive advantage. See "Business -- Competition."
WE MAY BE LIABLE TO DISSATISFIED CUSTOMERS.
We design, develop, implement and manage Internet solutions that are
critical to the operation of our customers' businesses. Defects in the solutions
developed by us could result in delayed or lost revenue to our customers. Since
many of our projects are critical to the operation of our customers' businesses
and provide benefits that are difficult to quantify, the claim for damages by
any customer could be substantial. In cases in which we have written contracts
with our customers, we attempt to contractually limit our liability for damages
arising from errors, mistakes, omissions or negligent acts performed while
rendering our services. However, the limitations of liability set forth in our
contracts may not be enforceable in all instances or may not otherwise protect
us from liability for damages. Additionally, we do not have written contracts
with many of our customers, and therefore we have no contractual limitation of
liability. We do not carry errors and omissions insurance. We intend to pursue
such coverage. However, we can not assure you that such coverage will be
available on terms acceptable to us. Our business, financial condition and
results of operations could decline if customers successfully assert one or more
large claims that exceed available insurance coverage, if any, against us.
WE MUST MANAGE OUR GROWTH EFFECTIVELY.
We have experienced substantial growth in revenue, employees and customers
during the past few years. Future growth will likely place a strain on our
resources. We also expect that additional demands will be placed on our
resources due to our becoming a separate company. To manage our growth
effectively, we will have 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.
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Our future success will depend in large part on our ability to:
- continue to maintain high rates of employee utilization at profitable
billing rates;
- successfully execute fixed-price contracts within our target cost
parameters;
- maintain project quality, particularly if the size and scope of our
projects increase; and
- integrate the services offerings, operations and employees of acquired
businesses.
In the foreseeable future, our administrative, operational and other
infrastructure resources will continue to be provided, in large part, by
Intelligroup. For the near term, our ability to manage our growth effectively
will depend, in part, upon Intelligroup's timely and complete performance of its
obligations to provide such resources. Over the long term, our ability to manage
growth will depend on our ability to develop independent internal systems, as
well as our own business development capabilities. If we fail to manage our
growth effectively, it could adversely affect our business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
WE MAY NOT BE ABLE TO KEEP PACE WITH ANTICIPATED RAPID TECHNOLOGICAL CHANGES.
Our success depends, in part, on our ability to develop solutions that keep
pace with:
- Rapidly changing Internet and other technology;
- Evolving industry standards;
- Changing customer objectives and standards; and
- Frequent new services introductions.
Any delay or failure on our part in responding quickly, efficiently and
cost-effectively to these developments could result in serious harm to our
business and operating results. The development and commercialization of new
technologies and the introduction of new services could render our existing
services obsolete or unmarketable. We cannot assure you that we will be
successful in identifying, developing, marketing or implementing the new
services necessary to keep pace with technological change. We must enhance
existing services while developing, integrating and introducing new services
offerings on a timely and cost-effective basis to keep pace with technological
developments and address increasingly sophisticated customer requirements. We
may experience contractual, technical or personnel difficulties that could delay
or prevent our successful introduction of such new services. See
"Business -- Industry Background."
OUR SUCCESS IS DEPENDENT UPON OUR KEY PERSONNEL.
We believe our success depends to a significant degree upon the continued
service of the key members of our management team, Rajkumar Koneru, our
chairman, chief executive officer and president, Ravi Singh, our chief financial
officer and executive vice president and Rajan Nair, our chief operating
officer, because of their industry knowledge, marketing skills and relationships
with our major customers, strategic partners and employees. The loss of the
services of any one of them could materially adversely affect us. See
"Management -- Employment Agreements."
OUR FUTURE ACQUISITIONS MAY NEGATIVELY IMPACT OUR BUSINESS.
A key element of our strategy is growth by acquisition. We expect to
undertake acquisitions in the future, although none are planned or being
negotiated as of the date of this information statement. Risks associated with
an acquisition include:
- Potential difficulty assimilating acquired personnel, operations,
customers or vendors;
- Possibility that we are unable to retain acquired personnel, customers or
vendors;
- Management of growth issues;
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- Dilution to existing shareholders in the event we have to incur debt or
issue equity securities to pay for any future acquisitions;
- Risks associated with financing;
- Disruption of our ongoing business and distraction of our management and
employees; and
- Unanticipated expenses or liabilities or lower than expected revenues of
the business acquired.
Although we intend to conduct due diligence reviews with respect to all
acquisition candidates, we may not successfully identify all material
liabilities or risks related to a potential acquisition candidate.
WE MAY EXPERIENCE COST OVER-RUNS ON FIXED-PRICE CONTRACTS.
We bear the risk of cost over-runs and inflation in connection with
fixed-price projects. An increasing number of our future projects may be
fixed-price contracts rather than contracts billed based on actual time spent
providing services. Cost over-runs for fixed-price contracts would likely result
from our inaccurately estimating the time or resources required. Inaccurate
estimates on our part could lead to losses on our engagements. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
WE DEPEND ON INTELLIGROUP FOR MANY ADMINISTRATIVE SERVICES.
The majority of our administrative functions are provided by Intelligroup
pursuant to our contractual arrangements with Intelligroup, including most
administrative, human resources and management information systems functions. We
intend, over time, to further develop our own administrative infrastructure. If
we are required to perform all of such functions prior to developing our own
infrastructure, we will likely experience operational disruptions and increased
expenses. We cannot assure you that we will be able to develop adequate
administrative functions in a timely and cost-effective manner. See
"Relationship with Intelligroup."
WE GENERALLY DO NOT HAVE LONG-TERM CONTRACTS AND NEED TO ESTABLISH RELATIONSHIPS
WITH NEW CLIENTS.
We generally are engaged by clients on a project-by-project basis, rather
than long-term contracts. As a result, clients may not engage us for future
services once a project has been completed. Additionally, most of our contracts
can be canceled by the customer on short notice and without significant penalty.
The cancellation or significant reduction in the scope of a large contract could
have a material adverse effect on our business.
WE RELY ON OUR INTELLECTUAL PROPERTY RIGHTS.
Our future success is dependent, in part, upon our proprietary
implementation methodology, development tools and other intellectual property
rights. In order to protect our proprietary rights, we:
- Rely upon trade secrets, nondisclosure and other contractual
arrangements;
- Rely on copyright and trademark laws;
- Enter into confidentiality agreements with employees, consultants and
customers;
- Limit access to and distribution of proprietary information; and
- Require almost all employees and consultants to assign to us their rights
in intellectual property developed during their employment or engagement
by us.
There can be no assurance that the steps taken by us 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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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.
OUR SUCCESS DEPENDS ON THE CONTINUED GROWTH OF THE INTERNET.
The Internet is new and rapidly evolving. Our future success depends on the
acceptance and continued use of the Internet for conducting business. Our
business will be adversely affected if commerce on the Internet does not
continue to grow, or grows more slowly than anticipated. Some of the critical
issues relating to Internet usage that concern businesses and consumers include:
- Actual or perceived lack of security;
- Cost and ease of Internet access;
- Intellectual property ownership;
- Potentially inadequate network infrastructure;
- Quality of service; and
- Uncertainty of potential taxation of electronic commerce transactions.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES RELATING TO THE INTERNET COULD
AFFECT OUR BUSINESS.
An increase in the regulation of the Internet could hinder the growth and
the use of the Internet for business and commerce. Although there are currently
few laws and regulations in effect, federal, state and local governmental
organizations as well as foreign governments are considering a number of
legislative and regulatory proposals. New laws and regulations may govern or
restrict the areas of:
- User privacy;
- Pricing and taxation of goods and services offered over the Internet;
- Quality of services;
- Content of websites; and
- Intellectual property ownership.
We can not be certain as to how new or existing laws governing the Internet
will affect our business.
WE FACE RISKS BECAUSE WE HAVE INTERNATIONAL OPERATIONS.
Our international operations have increased in recent years. For the year
ended December 31, 1999 and the three months ended March 31, 2000, approximately
31% and 28.8% of our revenues, respectively, were derived from international
operations. To date, we have established foreign operations in Australia, New
Zealand, the Philippines, Thailand, India 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 in
our international business activities include:
- Unexpected changes in regulatory environments;
- Foreign currency fluctuations;
- Tariffs and other trade barriers;
- Longer accounts receivable payment cycles;
- Difficulties in managing international operations;
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- Political instability;
- Potential foreign tax consequences including restrictions on the
repatriation of earnings; and
- 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.
WE FACE RISKS ASSOCIATED WITH OUR OPERATIONS IN INDIA.
We commenced Internet operations in India in October 1999. As a result, 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 encourage foreign investment
in certain sectors of the economy. Certain of these benefits that directly
affect our Indian operations include:
- Tax holidays;
- Liberalized import and export duties; and
- 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. 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:
- Inflation;
- Interest rates;
- Taxation; or
- 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.
OUR STOCK PRICE MAY BE VOLATILE.
The market price of our common stock may be volatile as the stock market in
general has been volatile. In addition, the stock prices for many technology and
Internet-related companies, including Intelligroup, have experienced wide
fluctuations which often have been unrelated to operating performance. Investors
may not be able to resell their shares of common stock at acceptable prices
following periods of volatility because of the market's adverse reaction to such
volatility. Factors that could cause volatility in our stock price include,
among other things:
- Actual or anticipated variations in quarterly results;
- Variations in our operating results which may cause us to fail to meet
analysts' or investors' expectations;
- Changes in earnings estimates or recommendations by securities analysts;
- Conditions or trends in the Internet services industry;
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- Changes in the market valuations of, and earnings and other announcements
by, providers of Internet professional services;
- Announcements by us or our competitors of technological innovations;
- Additions or departures of our key personnel; and
- Volume and timing of sales of our common stock.
AN ACTIVE TRADING MARKET MAY NOT DEVELOP FOR OUR COMMON STOCK.
There is no public market for our common stock. We are seeking to have our
common stock included for quotation on the Nasdaq National Market. We cannot
assure you that an active trading market in the common stock will develop or, if
one develops, that it will be sustained. Until the time that the spin-off has
been completed, our common stock is fully distributed and an orderly market
develops, various conditions may adversely affect the trading price of our
common stock. These conditions include, among others, investor perception about
us and general economic and market conditions.
ANTI-TAKEOVER PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK COULD DETER OUR
ACQUISITION BY A THIRD PARTY.
Certain provisions of our Certificate of Incorporation and By-laws could
make it more difficult for a third party to acquire control of us, 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. 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
shareholder" for a period of five years following the date the person became an
interested shareholder, unless, among other things:
- the board of directors approved the transaction in which such shareholder
became an interested shareholder prior to the date the interested
shareholder attained such status; and
- 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 shareholder 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
shareholder. In general, an interested shareholder is a person who, together
with affiliates and associates, owns, or within five years prior to the
determination of interested shareholder status, did own, 10% or more of the
corporation's voting stock. See "Description of Capital Stock -- Preferred
Stock" and "-- Anti-Takeover Effects of Certain Certificate of Incorporation and
By-law Provisions."
ABSENCE OF DIVIDENDS.
We have never paid, and do not anticipate paying any cash dividends on our
common stock in the foreseeable future.
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THE SPIN-OFF
REASONS FOR THE SPIN-OFF.
The spin-off will allow us to focus solely on our Internet professional
services business which requires a sales and marketing effort that is distinct
from Intelligroup's. In addition, we believe that we will be able to raise
capital more easily and provide better incentives for our employees as a
separate publicly-traded Internet services company. The spin-off should enable
us and Intelligroup to conduct business with each other's competitors and to
invest in or acquire complementary businesses that will potentially solidify our
competitive position in the market for Internet professional services. The
spin-off will also allow Intelligroup to focus on its core business relating to
the implementation of enterprise resource planning software and as an
application service provider.
MANNER OF EFFECTING THE SPIN-OFF.
The spin-off will be effected by a stock dividend paid to each holder of
record of Intelligroup common stock. The spin-off ratio will be one share of our
common stock for every one share of Intelligroup common stock outstanding on the
spin-off record date. Intelligroup shareholders will not be required to pay for
shares of our common stock received in the spin-off. Additionally, Intelligroup
shareholders will not need to surrender or exchange Intelligroup common stock in
order to receive shares of our common stock. All shares of our common stock
received by Intelligroup shareholders in connection with the spin-off will be
fully paid and non-assessable. Intelligroup shareholders do not have any
appraisal rights in connection with the spin-off.
On or about May 15, 2000 and continuing through July 5, 2000, Intelligroup
common stock will trade on the Nasdaq National Market with due bills attached.
The due bills will entitle a purchaser of Intelligroup common stock during this
period to receive one share of our common stock for each one share purchased.
Accordingly, a seller of Intelligroup common stock during the due bill period
will have to deliver the certificate for our common stock to the buyer of
Intelligroup common stock once he or she receives our certificate. Since the
Nasdaq National Market is aware of the due bill period, no notification by a
purchaser or seller is necessary when trading Intelligroup common stock. If the
spin-off is not completed, all due bills attaching to Intelligroup common stock
will become null and void.
In order to be entitled to receive shares of our common stock in the
spin-off, Intelligroup shareholders must be holders of record of Intelligroup
common stock at 5:00 p.m. New York time on the spin-off effective date, which is
expected to be July 5, 2000.
The dividend agent is American Stock Transfer & Trust Company. American
Stock Transfer & Trust Company will commence mailing our common stock
certificates on the spin-off effective date.
RESULTS OF THE SPIN-OFF.
Following the spin-off, we will be a separate, publicly-traded company.
Immediately after the spin-off, based on the number of outstanding shares of
Intelligroup common stock and the number of record holders on May 12, 2000, we
expect to have 17,460,883 shares of common stock outstanding, held by
approximately 90 record holders and 2,730 beneficial holders.
Following the spin-off, Intelligroup will continue to own and operate its
other business. The spin-off will not affect the number of outstanding shares of
Intelligroup common stock or any rights of Intelligroup shareholders.
TRADING OF OUR COMMON STOCK.
We are seeking to have our common stock included for quotation on the
Nasdaq National Market under the symbol "SERA." Prior to the spin-off, we do not
expect any public trading market for our common stock to exist except that,
beginning on May 15, 2000, our common stock is expected to trade on a
"when-issued" basis on the Nasdaq National Market for settlement when our common
stock is issued on July 5, 2000. The term "when-issued" means trading in shares
prior to the time certificates are actually available or issued. If
17
<PAGE> 23
the spin-off conditions are not satisfied and the stock dividend is not paid,
all such "when-issued" trading will become null and void. If the spin-off
conditions are satisfied and the stock dividend is paid on the spin-off
effective date, it is expected that "regular way" trading in our common stock on
the Nasdaq National Market will commence at 9:30 a.m. New York time on July 6,
2000, subject to official notice of issuance.
The shares of our common stock issued to Intelligroup shareholders will be
freely transferable, except for shares received by persons who may be deemed to
be our "affiliates" under the Securities Act. Persons who may be deemed to be
our affiliates after the spin-off generally include individuals or entities that
control, are controlled by, or are under common control with us and may include
certain of our officers and directors. Persons who are our affiliates will be
permitted to sell their shares of our common stock only pursuant to an effective
registration statement under the Securities Act or an exemption from the
registration requirements of the Securities Act, such as the exemptions afforded
by Section 4(1) of the Securities Act and Rule 144 under the Securities Act
(with the exemption under Rule 144 not available until 90 days after the date of
this information statement).
For a discussion of certain uncertainties that should be considered when
trading in our common stock, see "Risk Factors -- An Active Trading Market May
Not Develop for Our Common Stock."
AGREEMENTS BETWEEN SERANOVA AND INTELLIGROUP AND RELATIONSHIP AFTER THE
SPIN-OFF.
After the spin-off, SeraNova and Intelligroup will operate independently of
each other as separate public companies. Neither SeraNova nor Intelligroup will
have any beneficial stock ownership interest in the other. All employees of
Intelligroup who join us will cease to be employees of Intelligroup.
We entered into agreements with Intelligroup providing for the transfer of
Intelligroup's Internet business to us prior to the spin-off. We also entered
into agreements with Intelligroup that will define our responsibilities
regarding the following:
- Indemnification against certain liabilities, including liabilities for
taxes;
- Corporate transitional matters, including the transfer of assets and
liabilities under employee benefit plans;
- Space sharing and other administrative services;
- Allocation of taxes; and
- Repayment of indebtedness.
These agreements were negotiated before the spin-off and thus were
negotiated between affiliated parties. We believe that the terms of these
agreements equitably reflect the benefits and costs of our ongoing relationship
with Intelligroup. However, we cannot assure you that any of these agreements,
or that any of the transactions provided for in these agreements, were effected
on terms at least as favorable to us or to Intelligroup as could have been
obtained from unaffiliated third parties. See "Relationship With Intelligroup"
for a summary of such agreements, arrangements and transactions.
Following the spin-off, additional or modified agreements, arrangements and
transactions may be entered into by us and Intelligroup. Any such future
agreements, arrangements and transactions will be determined through
arm's-length negotiation between the parties.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.
Arthur Andersen LLP has issued an opinion to Intelligroup to the effect
that, among other things, the spin-off should qualify as a tax-free spin-off to
Intelligroup's shareholders and Intelligroup under Section 355 of the Internal
Revenue Code. The following is a summary of the material federal income tax
consequences to Intelligroup's shareholders and Intelligroup expected to result
from the spin-off.
- An Intelligroup shareholder should not recognize any taxable gain or loss
as a result of the spin-off.
18
<PAGE> 24
- An Intelligroup shareholder should apportion the tax basis for his or her
Intelligroup stock on which our common stock is distributed between the
Intelligroup stock and our common stock received in the spin-off in
proportion to the relative fair market values of Intelligroup stock and
our common stock on the date of the spin-off.
- The holding period for our common stock received by an Intelligroup
shareholder in the spin-off should include the period during which he or
she held the Intelligroup stock on which our common stock is distributed,
provided that the Intelligroup stock is held as a capital asset by such
holder on the date of the spin-off.
- Intelligroup should not recognize any gain or loss as a result of the
spin-off.
Current Treasury regulations require each Intelligroup shareholder who
receives our common stock in the spin-off to attach to his or her federal income
tax return for the year in which the spin-off occurs, a detailed statement
setting forth such data as may be appropriate in order to show the applicability
of Section 355 of the Internal Revenue Code to the spin-off. Intelligroup will
provide the appropriate information to each shareholder of record as of the
spin-off record date.
The summary of federal income tax consequences set forth above is for
general information only and may not be applicable to shareholders who receive
their shares of our common stock through the exercise of employee stock options
or otherwise as compensation or who are otherwise subject to special treatment
under the Internal Revenue Code. All shareholders should consult their own tax
advisors as to the particular tax consequences to them, including the
applicability and effect of state, local and foreign tax laws.
REASONS FOR FURNISHING THIS INFORMATION STATEMENT/PROSPECTUS.
This information statement/prospectus is being furnished by Intelligroup
solely to provide information to Intelligroup shareholders about, subject to the
satisfaction of the spin-off conditions, the receipt of our common stock
pursuant to the spin-off. It is not, and is not to be construed as, an
inducement or encouragement to buy or sell any of our securities or those of
Intelligroup.
19
<PAGE> 25
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently anticipate that we will retain any future earnings to fund future
growth and development of our business and, therefore, do not anticipate paying
any cash dividends in the foreseeable future. Payment of future dividends, if
any, will be at the discretion of our board of directors after taking into
account various factors, including our earnings, financial condition, operating
results and current and anticipated cash needs, as well as any economic
conditions the board of directors may deem relevant. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
20
<PAGE> 26
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000 on
an actual and as adjusted basis. The as adjusted information reflects the
spin-off as if the spin-off had occurred on March 31, 2000.
Note payable to Intelligroup represents $3.9 million payable to
Intelligroup as of March 31, 2000. As of such date, our long-term debt was
$591,000. You should read this table in conjunction with "Selected Historical
Financial Data," our historical financial statements, including the notes
thereto, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" which appear elsewhere in this information
statement/prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
(IN THOUSANDS)
--------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Note payable to Intelligroup(1)............................. $ 3,913 $ 3,913
======= =======
Long-term debt.............................................. 591 591
======= =======
Shareholders' equity
Common stock: $0.01 par value 40,000,000 shares authorized:
17,460,883 shares issued and outstanding actual(2)........ 175 175
Additional paid-in capital.................................. 9,992 17,558
Intelligroup investment(3).................................. 7,566 --
Accumulated comprehensive loss.............................. (5,349) (5,349)
------- -------
Total shareholders' equity............................. 12,384 12,384
------- -------
Total capitalization................................... $16,888 $16,888
======= =======
</TABLE>
---------------
(1) As of May 31, 2000, Note payable to Intelligroup was $15,100,000. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
(2) Excludes 750,786 vested SeraNova options as of May 12, 2000 which may be
exercised prior to spin-off, the number of which will not be ascertainable
until the spin-off. (See Note 10 of Notes to Combined Financial Statements.)
(3) At the time of the spin-off, the Intelligroup investment will be converted
to common stock and additional paid-in capital.
21
<PAGE> 27
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data for all periods reflects the
combined results of operations and financial condition of Intelligroup's
Internet services business as if we had existed as a corporation separate from
Intelligroup during the periods presented. The selected historical data includes
the historical assets, liabilities, revenue and expenses directly related to our
operations that were either specifically identified or in the case of certain
selling, general and administrative expenses, allocated using methodologies
which took into consideration the ratio of our revenue to the consolidated
revenue of Intelligroup, headcount, occupancy or other appropriate factors. You
should read the selected historical financial data together with our financial
statements and the sections of this information statement entitled
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
We derived the selected financial data presented below from our combined
financial statements described in this paragraph. Arthur Andersen LLP,
independent public accountants, audited our combined financial statements as of
December 31, 1999 and 1998 and for the year ended December 31, 1999, the nine
months ended December 31, 1998 and the year ended March 31, 1998. Their report
relating to such audits appears on page F-2 of this information
statement/prospectus. The historical financial data set forth below for the
fiscal year ended March 31, 1997 is derived from SeraNova's audited combined
financial statements not included in this information statement. The historical
financial data set forth below as of March 31, 2000 and 1996, and for the three
months ended March 31, 2000 and 1999 are derived from SeraNova's unaudited
combined financial statements. In our opinion, these unaudited combined
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the information.
22
<PAGE> 28
SERANOVA, INC. AND AFFILIATES
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE YEAR FOR THE NINE
MONTHS ENDED ENDED MONTHS ENDED
MARCH 31, DECEMBER 31, DECEMBER 31, FOR THE YEARS ENDED MARCH 31,
----------------- ------------ ------------ ------------------------------
2000 1999 1999(3) 1998(1) 1998 1997 1996
------- ------- ------------ ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.................... $16,176 $ 7,988 $39,795 $12,438 $ 8,995 $ 9,200 $ 9,347
Cost of sales............... 8,389 4,649 22,475 7,315 4,797 4,949 4,664
------- ------- ------- ------- ------- ------- -------
Gross profit................ 7,787 3,339 17,320 5,123 4,198 4,251 4,683
------- ------- ------- ------- ------- ------- -------
Selling, general and
administrative expenses... 11,319 2,726 17,605 5,106 3,812 4,092 3,576
Depreciation and
amortization.............. 472 135 1,131 102 133 150 119
------- ------- ------- ------- ------- ------- -------
Total operating
expenses......... 11,791 2,861 18,736 5,208 3,945 4,242 3,695
------- ------- ------- ------- ------- ------- -------
Operating income (loss)..... (4,004) 478 (1,416) (85) 253 9 988
Other income (expense),
net....................... (185) (19) (80) (66) 13 (80) 13
------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes..................... (4,189) 459 (1,496) (151) 266 (71) 1,001
Provision (benefit) for
income taxes.............. (1,110) 179 (235) 401 519 172 470
------- ------- ------- ------- ------- ------- -------
Net income (loss)........... $(3,079) $ 280 $(1,261) $ (552) $ (253) $ (243) $ 531
======= ======= ======= ======= ======= ======= =======
Net income (loss) per common
share -- basic and
diluted(2)................ $ (0.18) $ 0.02 $ (0.08) $ (0.03) $ (0.02) $ (0.01) $ 0.03
======= ======= ======= ======= ======= ======= =======
Shares used in per share
calculation of net income
(loss) -- basic and
diluted(2)................ 16,785 16,629 16,629 16,629 16,629 16,629 16,629
======= ======= ======= ======= ======= ======= =======
BALANCE SHEET DATA:
(AT PERIOD END)
Cash........................ $ 592 $ 611 $ 677 $ 368 $ 635 $ 1,237
Working capital (deficit)... 4,216 (776) (424) 145 565 1,152
Total assets................ 24,991 18,880 5,775 3,216 2,402 4,026
Long-term debt.............. 591 618 -- 219 521 523
Shareholders' equity........ 12,384 4,970 392 241 536 925
</TABLE>
---------------
(1) Effective April 1, 1998, SeraNova changed its fiscal year from March 31 to
December 31.
(2) See Note 2 to SeraNova's Combined Financial Statements.
(3) On January 8, 1999, Intelligroup, Inc. acquired the common stock of Network
Publishing, Inc. in a purchase business combination. The results of
operations of Network Publishing, Inc. have been included above since the
date of acquisition. Pro forma results for the period January 1, 1999 to
January 7, 1999 are not material to SeraNova's combined financial statements
for the year ended December 31, 1999.
23
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our combined
financial statements and the notes related to combined financial statements
contained elsewhere in this information statement/prospectus. This discussion
contains forward-looking statements that involve risks and uncertainties.
SeraNova's actual results could differ materially from those anticipated by such
forward-looking information due to competitive factors and other factors
discussed under "Risk Factors" and elsewhere in this information statement/
prospectus.
OVERVIEW
SeraNova provides Internet professional services to businesses. We design
and implement Internet-based software applications that help companies manage
procurement, sell products and services, provide customer service, conduct
supplier transactions and communicate with their employees over the Internet. We
offer a comprehensive set of services, including strategy consulting, creative
design, technology implementation and maintenance of Internet-based software
applications. In all of our client engagements, we apply SeraNova's
Time-to-Market Approach, our proprietary methodology, to deliver these services.
We believe that our services allow our clients to gain competitive advantages by
enabling them to penetrate existing markets, enter new markets, reduce
operational costs, improve customer service, shorten product development cycles
and enhance employee productivity. We focus on five industry
markets -- financial services, telecommunications, automotive, technology and
healthcare. Most of the services we provide are for clients within the United
States. In addition to our domestic offices, we maintain a presence in multiple
locations in the Asia-Pacific region, India and the United Kingdom.
We generally bill our services based on the actual time spent providing
services. For the three months ended March 31, 2000, approximately 95% of our
revenues were derived from such time and materials contracts and arrangements.
Revenues related to time and materials contracts are typically recognized when
the services are provided. Revenues with respect to fixed-price contracts are
recognized in proportion to the costs incurred. American Express accounted for
approximately 38% of the total revenues for the three months ended March 31,
2000. Another client, Volkswagen of America, accounted for approximately 11% of
total revenues during the same period. No other client accounted for more than
10% of revenues for the three months ended March 31, 2000. Six clients,
including American Express, accounted for approximately 50% of total revenue for
the year ended December 31, 1999. We anticipate that such client concentration
will continue for the foreseeable future. To effectively address the market
demand, and to remain competitive, our clients tend to pursue multiple Internet
initiatives at the same time. By proactively developing a strong relationship
with our key clients, we expect to benefit from such initiatives, but to the
extent our significant clients use fewer of our services or terminate their
relationship with us, our revenues could decline materially. This could result
in a significant negative impact on our business and operations. Our results
from quarter to quarter may vary based upon various factors such as changes in
our pricing policies, variations in billing margins and personnel utilization
rates, length of our sales cycle, our ability to recruit technical personnel,
the acceptance of our new services offerings and fluctuation in foreign exchange
rates.
Our cost of sales represent the costs to provide our professional services
and include compensation, benefits, consultant-training and expenses incurred by
our personnel that are not billable to our clients. They do not include expenses
relating to our sales and marketing efforts. Given the supply-constrained
market, we anticipate that our cost per professional will increase in future
quarters. Our typical client engagement lasts between three and six months, and
any early termination or postponement of a large project or of several projects
could significantly impact revenues in any given quarter and result in lower
gross margins.
Selling, general and administrative expenses include costs associated with
a range of sales and sales support functions such as salaries, commissions and
related expenses for our salesforce; salaries and bonuses of executives,
marketing, information technology, human resources and other administrative
personnel; marketing expenses, facilities costs, technology expenditures,
professional services and fees and other general corporate costs. Beginning in
the fourth quarter of 1999, we made, and anticipate making, significant
24
<PAGE> 30
marketing investments to build a visible SeraNova brand among prospects and
potential employees, and to reorganize our sales process. To that end, we have
retained Mueller Shields, a leading sales and marketing strategy firm, based in
Los Angeles. While some of these expenses may occur only one time, a significant
portion of these expenses should continue to be part of our selling, general and
administrative expenses, whether the services are provided by Mueller Shields or
otherwise. More than 85% of Mueller Shields's fees will be paid on a time and
materials basis. We expect selling, general and administrative expenses to
increase in absolute dollars, and increase in the short term as a percentage of
revenue, as we invest in new infrastructures and strategic initiatives and incur
additional costs required to grow our business and operations.
We expect to incur significant sales and marketing, infrastructure
development and general and administrative expenses. As a result, we anticipate
losses through at least the third quarter of 2000. In order to achieve
profitability, we will need to control costs associated with building an
infrastructure as well as increase our revenues. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis in the future. We cannot assure you that we will be
able to contain costs, grow revenue or increase profitability.
In November 1998, Intelligroup acquired Azimuth Consulting Limited, Azimuth
Holdings Limited, Braithwaite Richmond Limited and Azimuth Corporation Limited
(the "Azimuth Companies"), by exchanging 902,928 shares of Intelligroup common
stock for all the common stock of the Azimuth Companies. The acquisition of the
Azimuth Companies was accounted for as a pooling of interests. Accordingly, all
prior period combined financial statements contain the financial results and
financial position of Azimuth Companies. In January 1999, Intelligroup acquired
Network Publishing, Inc., a Utah-based Internet consulting firm, for a
combination of cash paid up front and an additional consideration amount payable
upon the achievement of certain operating results. In July 1999, Intelligroup
and the owners of Network Publishing, Inc. agreed that this additional
consideration was approximately $2.43 million, and would no longer be contingent
on any operating performance. However, Intelligroup at its discretion, could pay
the amount either in cash, or in its common stock. Intelligroup paid
approximately $340,000 in cash and issued 99,558 shares of its common stock in
connection with such agreement on January 8, 2000. This acquisition has been
accounted for using the purchase method. The excess of the purchase price over
net tangible assets acquired has been allocated to intangible assets and
goodwill and is being amortized over five years. The financial results of
Network Publishing, Inc. have been included in the combined financial statements
since the date of acquisition. The management and operations of the Azimuth
Companies and Network Publishing, Inc. have now been integrated into SeraNova.
SeraNova's U.S. Internet business commenced in mid 1997. Prior to such period,
all operating results are those of the Azimuth Companies.
Prior to September 1999, Intelligroup did not account for our business as a
separate unit or division. In presenting our historical financial statements for
all periods, we specifically identified all revenue, cost of sales, other income
(expense) and certain selling, general and administrative expenses incurred by
Intelligroup on our behalf. Other selling, general and administrative expenses
were allocated using methodologies which took into consideration the ratio of
our revenue to the consolidated revenue of Intelligroup, head count, occupancy
and other factors. However, we cannot assure you that our historical financial
information prior to December 31, 1999 necessarily reflects what the results of
operations, financial position and cash flows would have been had we been a
separate company, or is indicative of our future results of operations,
financial positions and cash flows.
25
<PAGE> 31
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE FOR THE
MONTHS ENDED FOR THE NINE-MONTH FOR THE
MARCH 31, YEAR ENDED PERIOD ENDED YEAR ENDED
---------------- DECEMBER 31, DECEMBER 31, MARCH 31,
2000 1999 1999 1998 1998
------- ------ ------------ ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues............................... $16,176 $7,988 $39,795 $12,438 $8,995
Cost of sales.......................... 8,389 4,649 22,475 7,315 4,797
------- ------ ------- ------- ------
Gross profit......................... 7,787 3,339 17,320 5,123 4,198
Operating expenses:
Selling, general and administrative
expenses............................. 11,319 2,726 17,605 5,106 3,812
Depreciation and amortization.......... 472 135 1,131 102 133
------- ------ ------- ------- ------
Total operating expenses.......... 11,791 2,861 18,736 5,208 3,945
------- ------ ------- ------- ------
Operating income (loss)........... (4,004) 478 (1,416) (85) 253
Other income (expenses), net:
Interest expense....................... (181) (21) (82) (14) (10)
Other income (expense), net............ (4) 2 2 (52) 23
------- ------ ------- ------- ------
Total other income (expenses),
net............................. (185) (19) (80) (66) 13
------- ------ ------- ------- ------
Income (loss) before income taxes...... (4,189) 459 (1,496) (151) 266
Provision (benefit) for income taxes... (1,110) 179 (235) 401 519
------- ------ ------- ------- ------
Net income (loss).................... $(3,079) $ 280 $(1,261) $ (552) $ (253)
======= ====== ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE FOR THE
MONTHS ENDED FOR THE NINE-MONTH FOR THE
MARCH 31, YEAR ENDED PERIOD ENDED YEAR ENDED
--------------- DECEMBER 31, DECEMBER 31, MARCH 31,
2000 1999 1999 1998 1998
----- ----- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
As a Percentage of Revenues:
Revenues............................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.......................... 51.9 58.2 56.5 58.8 53.3
----- ----- ----- ----- -----
Gross profit......................... 48.1 41.8 43.5 41.2 46.7
Operating expenses:
Selling, general and administrative
expenses............................. 70.0 34.1 44.2 41.1 42.4
Depreciation and amortization.......... 2.9 1.8 2.9 0.8 1.5
----- ----- ----- ----- -----
Total operating expenses.......... 72.9 35.9 47.1 41.9 43.9
----- ----- ----- ----- -----
Operating income (loss)........... (24.8) 5.9 (3.6) (0.7) 2.8
Other income (expenses), net:
Interest expense..................... (1.1) (0.3) (0.2) (0.1) (0.1)
Other income (expense)............... 0.0 0.0 0.0 (0.4) 0.3
----- ----- ----- ----- -----
Total other income (expenses),
net............................. (1.1) (0.2) (0.2) (0.5) 0.2
----- ----- ----- ----- -----
Income (loss) before income taxes...... (25.9) 5.7 (3.8) (1.2) 3.0
Provision (benefit) for income taxes... (6.9) 2.2 (0.6) 3.2 5.8
----- ----- ----- ----- -----
Net income (loss).................... (19.0)% 3.5% (3.2)% (4.4)% (2.8)%
===== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Revenues. Revenues increased by $8.2 million, or 102.5%, to $16.2 million
in the first three months of 2000 from $8.0 million in the first three months of
1999. This increase in revenue is due to both increases in the number of clients
and increases in the size of engagements from expansion of U.S. operations plus
the continued development of Indian operations which began in the fourth quarter
of 1999. Revenues from U.S. operations increased by $6.1 million, or 113.1%, to
$11.5 million for the three months ended March 31, 2000 from $5.4 million for
the comparable period in 1999. Revenues from India operations for the three
months ended March 31, 2000 were $2.1 million.
26
<PAGE> 32
Gross profit. Gross profit is revenue less cost of revenue. Cost of
revenue consists primarily of salaries and associated employee benefits for
personnel directly assigned to client projects and non-reimbursed direct
expenses incurred to complete projects. During the first three months of 2000,
gross profit increased by $4.5 million, or 133.2%, to $7.8 million, from $3.3
million in the first three months of 1998. This increase is primarily
attributable to the continued expansion of U.S. and India operations. Gross
profit as a percentage of total revenues increased by 6.3% to 48.1% for the
first three months of 2000 as compared to 41.8% for the same period in 1999.
Gross profit percentage is influenced by the overall utilization of consulting
personnel and by billing rates as compared to consultant rates. The increase in
gross profit percentage reflects the impact of higher margins from Indian
operations and higher utilization rates for U.S. personnel.
Selling, general and administrative expenses. Selling, general and
administrative expenses include all costs including salaries not included within
cost of revenue. These expenses increased by $8.6 million, or 315.2%, to $11.3
million in the first three months of 2000 from $2.7 million in the same period
in 1999. The increase in selling, general and administrative expenses is due
primarily to substantial investments in marketing and in the development of
sales and administrative infrastructures for U.S. and overseas operations during
the first quarter of 2000. Marketing related expenses increased by more than
$1.6 million and sales and administrative salaries increased by $3.9 million for
the period ended March 31, 2000 compared with the same period in 1999.
Depreciation and amortization. Depreciation and amortization increased
$337,000, or 249.6%, to $472,000 in the first quarter of 2000 from $135,000 for
the comparable period of 1999. Depreciation and amortization also increased as a
percentage of total revenues to 2.9% in the first three months of 2000 from 1.7%
in the first three months of 1999. Both the actual and percentage increases are
due to amortization expense associated with the acquisition of Network
Publishing and the major investment in capital expenditures for expansion of
U.S. and foreign operations.
Other income (expense), net. Other income (expense), net decreased
$166,000 to a net expense of $185,000 in the first three months of 2000 from a
net expense of $19,000 in the first three months of 1999. The decrease is
primarily a result of an increase of $155,000 in interest expense on cash
advances during the first quarter of 2000 for capital expenditures and working
capital related to the expansion of foreign and U.S. operations.
Provision for income taxes. Income tax expense represents combined
federal, state and foreign taxes. SeraNova had an income tax benefit of $1.1
million on pretax losses of $4.2 million for the first quarter of 2000 compared
to an income tax provision of $179,000 on pretax profits of $459,000 for the
comparable period in 1999. The effective tax rate for the first three months of
2000 was 26.4% as compared with 39.0% for the similar period in 1999. The lower
effective tax rate for the first quarter of 2000 was due primarily to losses
incurred in certain foreign countries and states for which a valuation allowance
was provided, thus reducing the tax benefit.
Net loss. Net loss increased by $3.4 million to a net loss of $3.1 million
for the first quarter of 2000 from a net income of $280,000 for the comparable
period of 1999. The primary reason for the net loss for the three months ended
March 31, 2000 is due to planned increases in selling, general and
administrative expenses for the continued expansion of operations in the U.S.
and abroad, specifically India and the United Kingdom. (See discussion of
selling, general and administrative expenses above.)
TWELVE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1998
Revenues. Revenues increased by $27.4 million, to $39.8 million for the
year ended December 31, 1999 compared with $12.4 million for the nine-month
period ended December 31, 1998. This increase would equate to $23.3 million, or
141.2%, if the nine-month period were annualized. The increase in revenue is the
result of an increase in the number of clients and an increase in the average
size of engagements, as well as the acquisition of Network Publishing, Inc. on
January 8, 1999. Network Publishing, Inc. accounted for approximately $5.9
million, or 14.8%, of total revenue for the year ended December 1999. U.S. based
revenue, exclusive of Network Publishing, increased $15.5 million during the
year ended December 31, 1999 to $21.5 million from $6.0 million for the
nine-month period ended December 31, 1998. U.S. billing rates increased by
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<PAGE> 33
5.4% and the number of billable consultants increased from 153 to 249, or 62.8%,
for the year ended December 31, 1999. The Azimuth Companies' revenue increased
by $2.8 million, or 32.3% for the year 1999 as compared with an annualized 1998.
This increase in sales is due to Azimuth's expansion into additional foreign
markets.
Gross profit. Gross profit represents revenues less cost of sales. Cost of
sales consists primarily of salaries and associated employee benefits for
personnel directly assigned to client projects and non-reimbursed direct
expenses incurred to complete projects. For the year ended December 31, 1999,
gross profit increased by $12.2 million to $17.3 million from $5.1 million in
the nine months ended December 31, 1998. This increase would equate to a $10.5
million, or 153.6% for the year 1999 versus an annualized 1998. The primary
reasons for this increase is the expansion of U.S. operations, the addition of
Network Publishing, Inc. in January 1999, and an increase in profitability in
the Azimuth Companies' operations. U.S. operations, exclusive of Network
Publishing, increased by $4.8 million during the year ended December 31, 1999
compared to the nine-month period ended December 31, 1998 or $4.1 million
(151.8%) compared to an annualized 1998. Network Publishing contributed $4.1
million of gross profit during the year 1999. The Azimuth Companies gross profit
increased from $3.1 million during the nine months ended December 31, 1998 to
$5.7 million for the year ended December 31, 1999. This is a 38.0% increase of
1999 over 1998 on an annualized basis. Gross profit as a percentage of total
revenues increased by 2.3% to 43.5% for 1999 as compared to 41.2% for the nine
months ended December 31, 1998. The gross profit percentage is primarily
affected by two factors: the overall utilization of consulting personnel and
average billing rates less consultant payroll rates. Employee utilization could
be impacted by multiple factors including increases in recruiting, rapid growth
or reduction of number or size of projects.
Selling, general and administrative expenses. Selling, general and
administrative expenses include sales and administrative salaries and related
benefit costs, occupancy costs, professional fees, and other costs. These
expenses increased $12.5 million, or 245.0%, to $17.6 million for the year ended
December 31, 1999 from $5.1 million in the nine month period ended December
1998. This would equate to an increase of $10.8 million, or 158.8%, for the year
1999 over an annualized 1998. Selling, general and administrative expenses
increased slightly as a percentage of total sales to 44.2% for the year ended
December 31, 1999 compared to 41.1% for the nine months ended December 31, 1998.
The primary reasons for the large increase in actual selling, general and
administrative expenses during 1999 as compared with an annualized 1998 were: 1)
costs associated with the acquisition of Network Publishing, Inc., 2) the
continued investment in the expansion of U.S. operations, 3) an emphasis on
marketing and development of SeraNova during 1999 and 4) costs associated with
the spin-off of SeraNova.
Depreciation and amortization. Depreciation and amortization increased
$1.0 million, or 1008.8%, to $1.1 million for the year ended December 31, 1999
from $102,000 in the nine months ended December 31, 1998. This would equate to
an increase of $995,000, or 731.6% based on an annualization of 1998. The
primary reasons for the significant increase in depreciation and amortization
during 1999 are the acquisition of Network Publishing and the expansion of U.S.
based operations. Amortization of goodwill and intangible assets related to the
acquisition were $569,000 for 1999 plus depreciation of $279,000 from Network
Publishing operations. Depreciation related to U.S. operations increased by
$165,000 during 1999 as compared to the nine months ended December 31, 1998.
Other income (expense), net. Other income (expense), net decreased
$14,000, or 21.2%, to a net expense of $80,000 for the year ended December 31,
1999 as compared to a net expense of $66,000 for the nine months ended December
31, 1998. The decrease is primarily the result of additional interest expenses
of $77,000 in 1999 from Network Publishing operations.
Provision for income taxes. Income tax expense represents combined
federal, state and foreign taxes. Our income tax benefit is $235,000 on pretax
losses of $1.5 million for the year ended December 31, 1999 compared to a tax
provision of $401,000 on pretax loss of $151,000 for the comparable period in
1998. The effective tax rate for the year ended 1999 was (15.7)% as compared
with 265.5% for the nine months ended December 31, 1998. The low effective tax
rate benefit for 1999 was due to income taxes incurred in certain foreign
countries which were not able to be offset against domestic operations. The high
effective tax rate for
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<PAGE> 34
1998 was due to income taxes incurred by the Azimuth Companies that were not
able to be offset against losses in other foreign jurisdictions. Our India
operation, which commenced in the fourth quarter of 1999, has a tax holiday for
ten years, thus no income taxes have been provided on their earnings.
Net loss. Net loss increased by $709,000, or 128.4%, to $1.3 million for
the year ended December 31, 1999 from $552,000 for the nine months ended
December 31, 1998. This would equate to a net loss increase of $525,000, or
71.3%, if the nine-month period were annualized. The primary reason for the
increase in net loss for the year ended December 31, 1999 was an increase in
depreciation and amortization expense of $1.0 million over the nine-month period
ended December 31, 1998. Such increase amounted to $840,000 calculated on an
after-tax basis.
NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO TWELVE MONTHS ENDED MARCH 31,
1998
Revenues. Revenues increased $3.4 million, or 38.3%, to $12.4 million for
the nine-month period ended December 31, 1998 from $9.0 million for the
twelve-month period ending March 31, 1998. This increase would equate to an
increase of $7.5 million, or 84.4%, if the nine-month period was annualized.
This increase is due primarily to the rapid expansion of U.S. operations from
start up in the last calendar quarter of 1997. U.S. revenues increased by $3.9
million to $6.0 million for the nine-month period ended December 31, 1998
compared to $2.1 million for the twelve-month period ended March 31, 1998.
Revenues from foreign operations were relatively equal for the nine-month period
ended December 31, 1998 and the twelve month period ended March 31, 1998 at $6.4
million and $6.9 million, respectively. Annualization of the nine-month period
ended December 31, 1998 would equate to an increase of 23.2% over the
twelve-month period ended March 31, 1998. Revenue increases were the result of
growth in both the size and number of client projects.
Gross profit. Gross profit increased $924,000, or 22.0%, to $5.1 million
over the nine-month period ending December 31, 1998 from $4.2 million for the
twelve month period ended March 31, 1998. Annualization of the nine-month period
would equate to an increase of $2.6 million, or 62.7% over the twelve-month
period ended March 31, 1998. These increases are primarily attributable to rapid
expansion of U.S. operations during 1998. Gross profit from U.S. operations
increased $1.3 million for the nine-month period ending December 31, 1998
compared with the twelve-month period ended March 31, 1998. Gross profit as a
percentage of total revenues decreased to 41.2% for the nine-month period ended
December 31, 1998 from 46.7% for the twelve-month period ended March 31, 1998.
The decrease in gross margin percentage is primarily due to lower utilization
rates attained during expansion of the U.S. operations and, therefore, higher
costs as compared with the established foreign operations.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.3 million, or 34.0%, to $5.1 million in the
nine-month period ended December 31, 1998 from $3.8 million for the twelve-month
period ended March 31, 1998. This increase would equate to an increase of $3.0
million, or 78.6%, if the nine-month period were annualized. Selling, general
and administrative expenses decreased as a percentage of total revenue to 41.1%
for the nine-month period ended December 31, 1998 from 42.4% for the
twelve-month period ended March 31, 1998. The increase in actual dollars is
primarily due to the additional investment in U.S. operations and a one-time
charge of $659,000 incurred in the nine months ended December 31, 1998. This one
time charge is for legal and accounting fees associated with the sale of the
Azimuth Companies to Intelligroup, Inc.
Depreciation and amortization. Depreciation and amortization decreased
$31,000, or 23.6%, to $102,000 in the nine-month period ended December 31, 1998
from $133,000 in the twelve-month period ended March 31, 1998. If the nine-month
period were annualized, depreciation and amortization would increase $3,000, or
1.9% to approximately $136,000. This increase in depreciation and amortization
expense over the twelve-month period was due to an increase in depreciation on
the increased asset base in the U.S. somewhat offset by a reduction in
depreciation expense on foreign operations. The decrease in foreign depreciation
expense is primarily due to a smaller asset base.
Other income (expense), net. Other income (expense), net decreased
$79,000, or 597.8%, to a net expense of $66,000 in the nine-month period ended
December 31, 1998 from a net income of $13,000 in the twelve-month period ended
March 31, 1998. If the nine-month period were annualized to twelve months, the
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<PAGE> 35
decrease would be approximately $101,000. The decrease is principally due to
losses incurred on currency fluctuations relating to foreign operations during
the nine-month period ended December 31, 1998 compared with gains on currency
fluctuations during the comparative twelve-month period ended March 31, 1998.
Provision for income taxes. Income tax expense represents combined
federal, state and foreign taxes. Our income tax provision was $401,000 on
pretax losses of $151,000 for the nine-month period ended December 31, 1998
compared with $519,000 on pretax profits of $266,000 for the twelve-month period
ended March 31, 1998. The high effective income tax rates in these periods were
due to income taxes incurred by the Azimuth Companies in certain foreign
countries that were not able to be offset against losses in New Zealand.
Net loss. Net loss increased by $299,000, or 118.2%, to $552,000 during
the period ended December 31, 1998 compared to a net loss of $253,000 for the
year ended March 31, 1998. This would equate to net loss increase of $483,000,
or 190.9%, if the nine-month period were annualized. The primary reason for the
increase in net loss was due to a decrease in gross margin as a percentage of
revenues for the nine months ended December 31, 1998 compared to the twelve
months ended March 31, 1998.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table presents certain condensed unaudited quarterly
financial information for each of the eight most recent quarters in the period
ended March 31, 2000. This information is derived from our unaudited financial
statements that include, in our opinion, all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of results of
operations for such periods. This table should be read in conjunction with the
audited Combined Financial Statements and Notes thereto beginning on page F-1 of
this information statement/prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30,
2000 1999 1999 1999 1999 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues....................... $16,176 $12,722 $10,471 $8,614 $7,988 $4,811 $4,169 $3,525
Cost of sales.................. 8,389 6,869 6,091 4,866 4,649 2,898 2,534 1,924
------- ------- ------- ------ ------ ------ ------ ------
Gross profit................. 7,787 5,853 4,380 3,748 3,339 1,913 1,635 1,601
Operating expenses:
Selling, general and
administrative expenses.... 11,319 7,808 3,698 3,373 2,726 2,327 1,525 1,250
Depreciation and
amortization............... 472 501 350 145 135 75 2 45
------- ------- ------- ------ ------ ------ ------ ------
Total operating expenses..... 11,791 8,309 4,048 3,518 2,861 2,402 1,527 1,295
------- ------- ------- ------ ------ ------ ------ ------
Operating income (loss)...... (4,004) (2,456) 332 230 478 (489) 108 306
Other (expenses) income, net... (185) (43) (5) (13) (19) (156) 106 (12)
------- ------- ------- ------ ------ ------ ------ ------
Income (loss) before income
taxes........................ (4,189) (2,499) 327 217 459 (645) 214 294
Provision (benefit) for income
taxes........................ (1,110) (684) 205 65 179 (69) 420 67
------- ------- ------- ------ ------ ------ ------ ------
Net income (loss).............. $(3,079) $(1,815) $ 122 $ 152 $ 280 $ (576) $ (206) $ 227
======= ======= ======= ====== ====== ====== ====== ======
</TABLE>
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<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
MAR. 31 DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30,
2000 1999 1999 1999 1999 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As a Percentage of Revenues:
Revenues........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................... 51.9 54.0 58.2 56.5 58.2 60.2 60.8 54.6
----- ----- ----- ----- ----- ----- ----- -----
Gross profit.................. 48.1 46.0 41.8 43.5 41.8 39.8 39.2 45.4
Operating expenses:
Selling, general and
administrative expenses..... 70.0 61.4 35.3 39.2 34.1 48.3 36.6 35.5
Depreciation and
amortization................ 2.9 3.9 3.3 1.7 1.7 1.6 0.1 1.2
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses...... 72.9 65.3 38.6 40.9 35.8 49.9 36.7 36.7
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss)....... (24.8) (19.3) 3.2 2.6 6.0 (10.1) 2.5 8.7
Other (expenses) income, net.... (1.1) (0.3) (0.1) (0.2) (0.2) (3.3) 2.5 (0.3)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income
taxes......................... (25.9) (19.6) 3.1 2.4 5.8 (13.4) 5.0 8.4
Provision (benefit) for income
taxes......................... (6.9) (5.4) 2.0 0.8 2.2 1.4 10.1 2.0
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)............... (18.9)% (14.2)% 1.1% 1.6% 3.6% (12.0)% (5.1)% 6.4%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements are to fund working capital needs and
capital expenditures in order to support revenue growth. Historically,
SeraNova's business has operated as a division or subsidiary of Intelligroup. As
a result, Intelligroup has managed most of our cash, capital resources and cash
management functions. We have not independently maintained or managed any cash
or independently sought external sources of financing. Following the proposed
spin-off, we intend to maintain a separate and independent cash management
system, as well as seek separate financing. See "Relationship with
Intelligroup."
For the three months ended March 31, 2000, net cash used in operating
activities totaled $3.8 million. Cash provided from operations included $1.5
million from an increase in accounts payable, $1.6 million from accrued payroll
and related costs increase, $581,000 provision for doubtful accounts, and
$472,000 from depreciation and amortization. This was offset by a net loss of
$3.1 million, a $2.7 million increase in accounts receivable, a $1.7 million
increase in unbilled services, and a net increase in other assets of $633,000.
The increases in accounts receivable and unbilled services were primarily due to
increased operations within the U.S. and India. For the three months ended March
31, 1999, net cash used in operating activities was $555,000. The principal uses
of funds were an increase in accounts receivable of $923,000, an increase in
unbilled services of $980,000 and a $519,000 increase in other current assets.
This was offset by an increase in accrued payroll and related expenses of
$639,000 and an increase in accrued expenses and other liabilities of $804,000.
For the year ended December 31, 1999, net cash used in operating activities
totaled $6.1 million. Cash was provided by $1.1 million from depreciation and
amortization, $410,000 from accrued payroll and related costs increase and
$288,000 from an increase in accounts payable. This was offset by a $3.8 million
increase in accounts receivable, a $2.7 million increase in unbilled services
and a net loss of $1.3 million. The increase in accounts receivable and unbilled
services was primarily due to the increased operations within the U.S. and the
acquisition of Network Publishing, Inc. In the nine months ended December 31,
1998, net cash used in operating activities was $466,000. The principal uses of
funds were the net loss of $552,000, an increase in accounts receivable of $1.1
million, an increase in unbilled services of $648,000 and an increase of
$174,000 in other current assets. This was offset by an increase in accounts
payable of $250,000 and increases in accrued expenses of $1.4 million.
Capital expenditures for the three months ended March 31, 2000 and 1999
were $2.2 million and $268,000, respectively, for computers, furniture,
equipment and leasehold improvements. Capital expenditures for the year ended
December 31, 1999 and the nine months ended December 31, 1998 were $2.2 million
and
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<PAGE> 37
$603,000, respectively. Capital expenditures are expected to continue to be
significant at least through the next two quarters of 2000.
On January 8, 1999, Intelligroup acquired all of the shares of outstanding
capital stock of Network Publishing, Inc. The acquisition was accounted for
utilizing the purchase method of accounting. The purchase price included an
initial cash payment in the aggregate of $1.8 million together with a cash
payment of $200,000 to be held in escrow and acquisition costs of $165,000 and
resulted in costs in excess of fair value of net tangible assets acquired of
$1.6 million. In addition, the purchase price also included an earnout payment
of up to $2.2 million in restricted shares of Intelligroup and up to $354,000 in
cash. In July 1999, Intelligroup and the former shareholders of Network
Publishing, Inc. agreed to amend the agreements to eliminate the earnout and fix
the additional consideration amount to $2.4 million payable at the option of
Intelligroup in common stock or cash. As of December 31, 1999, SeraNova recorded
this transaction as an addition to goodwill. On January 8, 2000, Intelligroup
made a cash payment of $340,000 with the balance paid in Intelligroup common
stock to satisfy the obligation.
The foregoing cash flows are not necessarily indicative of the cash flows
that would have resulted if we were a separate entity.
From time to time, SeraNova, as a subsidiary of Intelligroup, borrowed
funds from Intelligroup for working capital purposes. Note Payable to
Intelligroup represents a calculation of net borrowings from Intelligroup. In
connection with the contribution by Intelligroup of its Internet services
business to SeraNova, on January 1, 2000, SeraNova became a co-borrower and
additional guarantor under Intelligroup's revolving credit facility. A portion
of such borrowings were converted to amounts repayable by SeraNova to a bank
under Intelligroup's revolving credit facility agreement. As of March 31, 2000,
SeraNova had repaid all borrowings due to the bank with a portion of the
proceeds from the sale of common stock, but remained a co-borrower and guarantor
to Intelligroup's bank pending Intelligroup's negotiation of a new credit
facility. On May 31, 2000, Intelligroup entered into a new credit facility with
a bank. As a result, SeraNova was released from all obligations under
Intelligroup's former revolving credit agreement on such date and SeraNova has
no obligations to Intelligroup's lender under the new facility. Under
Intelligroup's new loan facility, Intelligroup is not permitted to loan
additional funds to SeraNova. Separately, on May 31, 2000, SeraNova entered into
a $15,100,000 unsecured promissory note with Intelligroup reflecting funds
borrowed from Intelligroup through the effective date of Intelligroup's new
facility. The note bears interest at the prime rate plus 1/2%. A payment of
$3,000,000 is due on the note by September 30, 2000 with the balance due on July
31, 2001. The note has certain mandatory prepayment provisions based on possible
future debt or equity financings by SeraNova. Under Intelligroup's current
credit facility with its bank, all of Intelligroup's assets, including the May
31, 2000 note from SeraNova, serve as collateral. In the event of default by
SeraNova, Intelligroup will be entitled to pursue all remedies under the note
through legal proceedings. SeraNova believes that it will need to consummate
additional equity or debt financings in order to repay its obligations to
Intelligroup in full.
On March 14, 2000, SeraNova entered into a purchase agreement with four
institutional investors pursuant to which such investors purchased an aggregate
of 831,470 shares of our common stock for an aggregate purchase price of
$10,000,000. A portion of the proceeds from the sale of common stock was used to
pay off the outstanding balance due to the bank as of March 31, 2000.
On June 9, 2000, SeraNova received a commitment, subject to certain
conditions, from Fleet Credit Corporation for an asset-based revolving credit
facility that will provide SeraNova with up to $15 million in financing. The
proposed credit facility is for a three-year agreement secured by substantially
all assets of SeraNova. Borrowings may be made under the facility for general
corporate purposes with interest at the then current prime rate plus 1/2%. The
conditions to closing the proposed credit facility with Fleet Credit Corporation
include continued satisfactory due diligence and final loan documentation. In
addition, Fleet must be satisfied that there has been no material adverse change
in SeraNova's financial condition, business prospects or operations since
December 31, 1999. The credit agreement will contain customary representations,
warranties, default provisions and financial covenants. The specific financial
covenants listed in the commitment letter are: (1) SeraNova must maintain total
debt to tangible net worth not to exceed a
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ratio of three to one; and (2) any quarterly loss may not exceed the original
budget amount plus 10%. SeraNova anticipates that approximately $6.0 million
will be available initially under this facility.
SeraNova believes that the cash to be generated from its operations and
available under the proposed credit facility through Fleet Credit Corporation
will be sufficient to satisfy SeraNova's cash requirements, including the $3.0
million prepayment obligation to Intelligroup, throughout at the least the next
twelve months. However, there can be no assurance in this regard.
YEAR 2000 COMPLIANCE
We did not experience any significant computer or systems problems relating
to the Year 2000. Upon review of our internal and external systems during 1999,
we determined that we did not have any material exposure to such computer
problems and that the software and systems required to operate our business and
provide our services were Year 2000 compliant. As a result, we did not incur,
and do not expect to incur, any material expenditures relating to Year 2000
systems issues.
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BUSINESS
OVERVIEW
We provide Internet professional services which enable our business clients
to combine the scope and efficiencies of the Internet with their existing
business processes. We design and implement Internet-based software applications
that help companies manage procurement, sell products and services, provide
customer service, conduct supplier transactions and communicate with their
employees over the Internet. We offer a comprehensive set of services, including
strategy consulting, creative design, technology implementation and maintenance
of Internet-based software applications. In all of our client engagements, we
apply SeraNova's Time-to-Market Approach, our proprietary methodology, to
deliver these services. We believe that our services allow our clients to gain
competitive advantages by enabling them to penetrate existing markets, enter new
markets, reduce operational costs, improve customer service, shorten product
development cycles and enhance employee productivity. We focus on five industry
markets -- financial services, telecommunications, automotive, technology and
healthcare.
INDUSTRY BACKGROUND
Growth of Business-to-Business Electronic Commerce
The Internet is one of the fastest growing means of communication, reaching
consumers and businesses globally. Companies are increasingly using the Internet
to improve their core business processes, lower operating costs and acquire new
competencies. Many companies have identified new offerings to extend and
complement their existing products and services. Many other companies have
adopted the Internet as the primary platform to conduct transactions with their
customers, suppliers and business partners. International Data Corporation
estimates that business-to-business transactions on the Internet will reach
$1.14 trillion by 2003.
Market for Strategic Internet Professional Services
We believe that the Internet represents a revolutionary and powerful
vehicle through which businesses and entire industries will conduct day-to-day
operations. Rapidly changing markets, constantly evolving customer and supplier
relationships, emergence of new technologies, geographically dispersed
operations and demands for increased efficiencies are forcing companies to
reevaluate their business models. As a result, many senior executives rank their
Internet strategy among their highest corporate priorities.
In order to take advantage of the opportunities presented by the Internet,
businesses must use Internet-based applications that enable them to conduct
sophisticated business transactions. Few businesses have the range of expertise
and skills that are required to develop and maintain such applications. To
develop effective Internet-based applications, companies need business
strategists, Internet technology experts, creative designers and application
developers. Given the increasing pressure to bring products and offerings to
market quickly, training in-house employees to learn the requisite skills is
impractical. In addition, hiring and maintaining a full-service staff of trained
professionals can be inefficient and costly. Accordingly, many companies have
chosen to outsource some or all of their Internet services requirements to
outside professionals. These outsourcing needs have generated a dramatic demand
for Internet professional services, which International Data Corporation
estimates will grow from $7 billion in 1998 to $78.5 billion in 2003.
Challenges in Selecting the Right Internet Professional Services Provider
Increased demand for Internet professional services has attracted many
firms to this market. We believe that only a few firms provide a comprehensive
set of offerings. For example, many traditional information technology service
providers do not have the creative skills required to create captivating
web-based content and provide a favorable user-experience. Advertising and
marketing firms typically lack the technical expertise and integration skills
necessary to deliver the sophisticated software applications required to run
increasingly complex business transactions. Strategy consulting firms lack
Internet technology expertise, marketing perspective and implementation
capabilities. In addition, many of these firms lack sufficient knowledge of
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their clients' industries and business processes, an important ingredient to
build effective applications. Furthermore, companies realize that their Internet
strategy is constantly evolving, and often they are forced to simultaneously
embark on several initiatives. Therefore, program management, or the ability to
manage multiple projects and ensure an execution that is consistent with a
company's business goals, is critical to success.
We believe that companies seeking to effectively capitalize on the Internet
require and seek one firm that has a comprehensive suite of service offerings,
such as strategy consulting, technology implementation and application
maintenance capabilities. Furthermore, to be able to execute a rapid application
deployment, the service provider must utilize an integrated methodology.
THE SERANOVA SOLUTION
SeraNova provides professional services that enable companies to take
advantage of the Internet to improve their existing business processes and
acquire new competencies. We design and deploy Internet-based software
applications that facilitate a range of business-to-business activities such as
procurement, sales and customer service over the Internet. Our services include
strategy consulting, technology implementation and maintenance of Internet
applications. We believe we have the necessary assets to build strategic
Internet applications that enable our clients to achieve competitive advantages.
These key assets include:
- Approximately 75 strategy consultants with strong expertise in business
processes and substantial knowledge in specific industry markets;
- Approximately 550 technology professionals across five global delivery
centers;
- Information planning and program management experience;
- Knowledge of widely-used enterprise software applications and
technologies;
- SeraNova Time-to-Market Approach, a proprietary methodology that
emphasizes constant innovation and enables rapid execution; and
- Internet application maintenance capabilities.
SeraNova Time-to-Market Approach -- A Structured and Proprietary Methodology.
SeraNova Time-to-Market Approach is an integral part of our services
offerings. The service model divides each client engagement into five
well-defined phases -- eStrategy, Discover, Plan, Implement and Optimize, which
provides our consultants with a consistent, yet flexible approach. Our
methodology identifies and prioritizes initiatives, rapidly delivers them to
market, captures valuable market experience and feedback and immediately applies
the feedback to refine the solution. We believe this process results in a
competitive advantage to our clients. Often, we execute multiple initiatives
within the same client project to effectively adapt to constantly changing
markets. Our approach allows us to identify, retain and re-use valuable
knowledge that we develop in client projects.
Global Delivery Model
Internet professional service providers must deploy professionals on a
project in a timely manner and reduce the time it takes to develop software
applications. SeraNova has built a network of global delivery centers spanning
multiple time zones. These delivery centers enable us to engage in concurrent
development and to have a virtual 24-hour work day on client projects. In order
to quickly deploy the appropriate professional capabilities, we can select from
our approximately 550 technology professionals in our five global delivery
centers. We have delivery centers in four strategic locations in the
US -- (Edison, New Jersey; Phoenix, Arizona; Provo, Utah; and Foster City,
California); and a state-of-the-art Internet development center in Hyderabad,
India. Our concurrent development capabilities enable us to significantly reduce
development time for our clients.
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<PAGE> 41
BUSINESS STRATEGY
We seek to be a leading Internet professional services provider that
enables companies to utilize the Internet to improve their business processes.
To that end, we are pursuing the following strategies:
- BUILD OUR BRAND. We plan to establish and build recognition of the
SeraNova name through an aggressive marketing strategy, which will
emphasize our industry expertise, broad knowledge of business processes
and our global delivery model. In addition, we intend to sponsor seminars
and host roundtable discussions that will highlight our innovative
Internet applications that we have developed for our clients.
- ATTRACT AND RETAIN OUTSTANDING PROFESSIONALS. Our future growth and our
ability to build meaningful competitive advantages for our clients are
dependent on our ability to attract and retain highly skilled, dedicated
and experienced professionals. We are committed to training and
developing our professionals to meet the challenges of the fast-paced
environment in which we perform. We attract business and technical
professionals who are driven by a desire to work on strategic and
technically leading-edge projects. We plan to retain and motivate our
employees through competitive compensation packages, stock option grants
and a culture that rewards teamwork and customer-orientation. We place
great emphasis on training our employees and provide numerous career and
personal improvement programs within SeraNova. We seek to reward
employees based on merit.
- DEEPEN INDUSTRY EXPERTISE AND EXPAND BUSINESS PROCESS OFFERINGS. We are
investing to build superior practice groups along specific industry
markets and business processes. We continue to enhance our capabilities
in five target industry markets -- financial services,
telecommunications, automotive, technology and healthcare. Our business
process offerings are focused on suppliers, partners, employees and
customers. For example, our electronic procurement offering focuses on
building strategy and Internet applications to facilitate transactions
and communications between companies and their suppliers. Our interactive
customer offering targets companies looking to conduct sales and provide
customer service over the Internet. We believe our integrated approach,
in which we combine business process expertise with industry specific
knowledge allows our consultants to quickly formulate effective Internet
strategies.
- FURTHER PENETRATE OUR CLIENT BASE. We seek to establish close and long
term relationships with our clients. The Internet market is continuously
and rapidly changing. In such an environment, our long lasting
relationships with our clients become critical in developing sustainable
competitive advantages for them. By working closely with our clients to
define and enhance their Internet strategies, we believe we can help our
clients effectively address challenges and seize opportunities. To
further strengthen the relationships with our key clients, we continue to
assemble a portfolio of client-driven service offerings. We believe such
a focus results in client-satisfaction, follow-on engagements with
existing clients and referrals for engagements with new clients.
- WIDEN OUR GLOBAL PRESENCE. We have established a worldwide organization
to support our customers' global needs. Currently, in addition to the
United States, we offer services in Europe, Australia, New Zealand,
Thailand, India and the Philippines. Additionally, we intend to enhance
our presence within the United States and certain global markets, as a
result of demands from our existing clients, gaining new customers and
through strategic acquisitions.
- PROVIDE COMPREHENSIVE OFFERINGS. We provide an integrated set of
services, including strategy consulting, creative design, technology
implementation and maintenance of Internet-based software applications.
By offering a portfolio of integrated services, we believe we reduce the
development time and maximize the impact, quality, consistency and
cost-effectiveness of these Internet applications for our clients. Our
comprehensive offering also allows us to increase the potential size of a
client project. We believe SeraNova is one of the very few Internet
professional services providers that offer a seamless application
management service. This offering allows us to continue our engagement
beyond the implementation phase. When we maintain the applications, and
update the website and related databases, we often learn of new client
opportunities.
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- REFINE AND ENHANCE SERANOVA TIME-TO-MARKET APPROACH AND SOLUTIONS
FRAMEWORKS. In all of our projects, we use the SeraNova Time-to-Market
Approach, our proprietary methodology, enabling our team to formulate
strategy, implement Internet applications in a rapid time-frame and
maintain the application after deployment. We believe our approach allows
us to reduce our implementation time, lower our costs and consistently
deliver high quality results. We continue to refine these processes,
resulting in further acceleration of the delivery of our services. We
also continue to evaluate, identify, test and incorporate new
technologies into our methodology. We believe that continuous enhancement
of our methodology is critical to maintaining a competitive advantage in
the market for Internet professional services.
OUR SERVICES
We offer three types of services: strategy consulting, Internet-based
application development and application management. These offerings represent
our view of how successful Internet strategies and software applications are
deployed.
Strategy Consulting
Changing market places and competitive pressures are forcing companies to
pursue multiple Internet initiatives at the same time. Often companies pursue
these initiatives in an isolated and uncoordinated manner. As a result, many
companies fail to capitalize on the opportunity to integrate their Internet
initiatives within a broader corporate strategy. Our strategy consultants work
with clients to help them define their competitive positioning and tailor a
strategy that is designed to provide competitive advantages. We utilize our
industry experience and knowledge of specific business processes to formulate
executable Internet strategies that are closely tied to the client's overall
business objectives and operations.
Internet-based Application Development
Our technology professionals utilize the strategic plan and recommendations
from our strategy consultants and rapidly develop effective applications that
are aimed at enabling one or more strategic business processes. These offerings
are focused on four primary enterprise stakeholders: customers, suppliers,
employees and business partners.
- CUSTOMER INTERACTION APPLICATIONS. We believe that the Internet offers
our clients an opportunity to reach customers on a global basis and to
target specific services and products based on their customers' needs.
The Internet allows companies to significantly reduce their customer
acquisition costs. We design and implement customer focused applications
that enable clients to engage in personalized interactions with their
customers and prospects over the Internet. These applications allow our
clients to establish long-term relationships with their customers,
segment customers based on specific criteria, tailor their marketing
efforts to individual customers, and rapidly grow their online customer
base by attracting and serving prospects with relevant information.
- ELECTRONIC PROCUREMENT APPLICATIONS. The Internet has created an
opportunity to re-engineer procurement processes. We have created new
Internet-enabled procurement processes for businesses and implemented
Internet-based applications that automate their online procurement cycle.
We believe that these electronic procurement applications streamline
clients' procurement processes and deliver significant direct
cost-savings to our clients.
- EMPLOYEE SERVICES APPLICATIONS. We have gained significant experience in
designing and implementing Internet-based applications that provide
employees with the relevant and timely information needed to effectively
perform their job. In addition, we develop applications that help our
clients provide a range of services over the Internet to their employees
reducing certain of the company's existing human resources costs.
- CHANNEL MANAGEMENT APPLICATIONS. Our clients interact with multiple
business partners like dealers, resellers and distributors. While the
Internet can serve as a cost-effective channel for selling products
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and services within certain industries, it can often result in channel
conflicts. For example, automotive manufacturers selling vehicles
directly over the Internet can create a conflict with their dealer
network. Through careful planning and execution, it is possible to
resolve these conflicts and have the Internet and traditional channels
co-exist and often complement each other. We build channel management
applications that expand, integrate and manage multiple channels.
Application Management
As business processes become more complex, the Internet applications,
websites and related databases that support these processes must be updated and
their functionalities must be expanded. Application management is an integral
part of our comprehensive offering. Following the deployment of an Internet
solution, we provide comprehensive application management services including
timely updates, application upgrades, additional application development,
management of information systems and transition onto new technology platforms.
These services improve our clients' ability to dynamically adjust their business
processes and effectively address changing market opportunities. We perform
these functions from our delivery centers in Phoenix, Arizona; Provo, Utah; and
Hyderabad, India.
Our clients can choose to have our application management team work at
their location or at our numerous support facilities, or we can provide 24-by-7
maintenance and support from our Internet Development Center located in
Hyderabad, India. Most clients choose a combination of the above options to
achieve the optimal set of services and cost savings. We typically do not host
applications for our clients, unless requested to do so. SeraNova can perform
the required application management services regardless of where the customer's
Internet applications are hosted.
OUR APPROACH AND APPLICATION FRAMEWORKS
SeraNova Time-to-Market Approach
We formulate an effective Internet strategy, design and rapidly deploy
Internet applications for our clients. Our proprietary methodology, SeraNova
Time-to-Market Approach, is comprised of five phases: eStrategy, Discover, Plan,
Implement and Optimize.
- eSTRATEGY. In this phase, we identify enterprise business objectives,
assess opportunities and risks and analyze the market and competition.
Our strategy consultants help companies define the relevant criteria to
improve their business processes, evaluate existing infrastructures and
recommend an appropriate technology architecture. The eStrategy phase
identifies multiple projects that can be executed simultaneously across
the organization. Each of these projects then goes through the next four
phases: Discover; Plan; Implement; and Optimize. One of the key
components of eStrategy is the program management function that allows
our team to manage multiple projects.
- DISCOVER. In this phase we define the requirements and scope for a
specific project. Based on our client's objectives, SeraNova
professionals help our clients define the appropriate technology
architecture and choose relevant software packages.
- PLAN. During this phase the project team creates an initial layout and
subsequent plan to deploy the Internet applications. The project team
carefully plans development objectives and testing criteria.
- IMPLEMENT. In this fourth phase, we build and deploy Internet
applications through incremental releases. Our project team performs
rigorous testing on each release to ensure proper function and
reliability.
- OPTIMIZE. This final phase coincides with the application management
offering. Some of the activities we engage in during our Optimize phase
include return on investment analyses, application support, website and
database updates, maintenance and performance reviews.
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[THE SERANOVA TIME-TO-MARKET APPROACH CHART]
Application Frameworks
Application frameworks are sets of guidelines for the implementation of
specific business processes such as procurement, sales or customer service. By
incorporating our experience in developing interactive and integrated
Internet-based software applications for our clients, we bring our cumulative
expertise to client engagements, allowing us to leverage our knowledge for the
benefit of our clients. We believe that these frameworks result in faster and
more efficient application implementation.
CASE STUDIES
In 1999, SeraNova worked with Global 5000 companies as well as emerging
Internet-startups. The following case studies illustrate the challenges faced by
these companies and the solutions we have provided to address these challenges.
Volkswagen and LiquidPrice.com were top ten customers in terms of revenue in
1999.
VOLKSWAGEN OF AMERICA: NEW PRODUCT LAUNCH
Volkswagen of America, Inc. markets a full line of Volkswagen and Audi
vehicles manufactured at company plants in Germany and Mexico. In the fall of
1997, Volkswagen of America sought to expand its Internet presence in
preparation for the launch of its new Beetle in January 1998. Volkswagen saw the
Internet as the perfect new medium to redefine its brand identity, to transform
its customer acquisition process and to generate new and sustainable demand.
Our automotive practice began working with Volkswagen's Interactive
Marketing group to reposition Volkswagen's brand and communication identity.
Following a market assessment of Volkswagen's target audience and positioning
strategy, our team executed extensive functional re-design of its website
including building comparitors to compare different models, an online commerce
platform and an innovative configurator for the new Beetle model. These
applications were integrated with Volkswagen's internal business
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processes such as product planning and inventory management. We believe our
solutions enabled Volkswagen to achieve a significant online milestone. Both the
number of visits to Volkswagen site and the time spent per visit have doubled
(almost 24,000 visits a day) since the launch of the new site. At present, we
are working on multiple electronic commerce initiatives with Volkswagen,
including an on-line buying system that is integrated with the sales and
distribution systems of Volkswagen and its dealer network.
LIQUIDPRICE.COM: ONLINE MARKET PLACE CONNECTING BUYERS, MERCHANTS AND
MANUFACTURERS
In July 1999, LiquidPrice.com sought to re-define the business of shopping
for new products. Their portal would not only fill a growing need for the
buyers -- "hassle-free shopping at the best price," but would significantly
expand the presence of traditional merchants and add tremendous efficiency to
the manufacturers' channel management. Buyers can choose their target purchase
items from an extensive catalog of products; and the merchants and manufacturers
can bid for the buyers' business.
LiquidPrice.com was on a critical path to launch the site in the United
States by the 1999 Christmas holiday season. Engaged by LiquidPrice.com in
August 1999, our team moved quickly to outline the positioning and created a
strategic framework to take them from "idea" to "launch." A four-week eStrategy
session yielded a complete set of functional requirements. In the following six
weeks, a team of strategy, creative and technology professionals built and
launched the first version of the site. At present, we are building the second
version of the site with complete business-to-business integration among
merchants, manufacturers and distribution agents.
CLIENTS
We have provided professional services to a variety of clients worldwide in
a range of industries. The following were our top 14 clients in 1999, each of
which represented in excess of $50,000 of revenue during such year. American
Express, Philippines Long Distance Telecom and Volkswagen of America accounted
for approximately 28%, 9% and 5% of our revenues in 1999, respectively.
<TABLE>
<S> <C> <C>
Financial Services Telecommunication Automotive
American Express Philippines Long Distance Volkswagen of America
Bell Atlantic Audi of America
US Cellular Subaru of America
New Zealand Telecom
CLEAR Communications
Technology Internet Start-ups Healthcare
Hewlett Packard LiquidPrice.com Medical Internet Solutions
3 COM
Novell
</TABLE>
SALES AND MARKETING
Our sales process is strategic, targeted and comprehensive. Once an
opportunity is identified, a sales manager, accompanied by the appropriate
industry-market expert and a business process specialist, present a market
analysis and business scenario to the client team. We believe a consultative
sales process yields more value for our clients and allows us to capitalize on
additional opportunities with the client.
Our marketing efforts include communicating with existing customers and
developing relationships with new customers through referrals, requests for
proposals, responses to customer-initiated contacts and contacts initiated by us
with desired customers. A critical focus for us is to build a visible identity
among our customers, prospects and employees. To that end, we have retained
Mueller Shields, a leading sales and marketing consulting firm to enable us
achieve these goals. In addition, they are helping extensively in generating
qualified leads and closing sales. We are seeking to expand the size and enhance
the quality of our sales force. By hiring additional highly qualified sales
personnel, we intend to increase direct sales, build market
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awareness, establish name recognition and promote our reputation as a
high-quality, comprehensive Internet professional services provider.
The length of the sales cycle varies depending on the type of service and
size of customer, typically ranging from approximately one to three months. Our
direct sales representatives generally have several years of sales experience in
the Internet professional services industry.
PEOPLE AND CULTURE
As of March 31, 2000, we employed 610 client-team professionals worldwide.
They included strategy consultants, creative designers, technical architects and
application development specialists. Our non-client staff included approximately
37 in sales, 56 in services support and 83 in administrative and management
functions. None of our employees is represented by a labor union. Substantially
all of our employees have executed non-competition agreements.
We recognize that our employees are key to our future success. This future
success is based on (1) an effective recruiting program that attracts
intelligent, creative and entrepreneurial individuals, (2) a strong and coherent
corporate culture, (3) an effective career management program and (4)
equity-ownership by our employees. Substantially all of our employees
participate in our employee stock option program.
RECRUITING
We have dedicated significant resources to our recruiting efforts. From
time to time, we use certain recruiting consultants to assist our staff
recruiters. Our recruiting efforts are targeted at four levels of professionals:
executives, industry experts, technical and creative personnel. We have designed
specific career development programs for strategy consultants, technical experts
and creative professionals within our company. We aggressively train and provide
numerous career and personal improvement programs.
ADMINISTRATIVE AND SUPPORT SERVICES
While SeraNova has its own independent support staff for critical functions
such as sales, marketing and recruiting, we anticipate in the short term,
Intelligroup will provide a range of support services. For further details,
please see Intercompany Service Agreements discussed elsewhere in this
registration statement.
COMPETITION
We compete in rapidly changing markets that are intensely competitive and
highly fragmented. We compete, directly and indirectly, with a variety of
national and regional companies, such as
- Internet professional service providers, including Sapient, Scient,
Viant, Proxicom, iXL and Razorfish.
- Large systems integrators and consulting firms, such as Andersen
Consulting and the consulting units of "Big Five" accounting firms.
- General management consulting firms, such as McKinsey & Co., Bain &
Company and Boston Consulting Group.
We believe that the principal competitive factors in the market for
Internet services include technical expertise, breadth of service offerings,
reputation, financial stability and price. To be competitive, we must respond
promptly and effectively to the challenges of technological change, evolving
standards and our competitors' innovations by continuing to enhance our service
offerings and expand our sales channels. Any pricing pressure, reduced margins
or loss of market share resulting from our failure to compete effectively could
materially affect our business.
Many of our current and potential competitors have longer operating
histories and substantially greater financial, marketing, technical and other
resources. Some of these competitors have a greater ability to provide services
on a national or international basis and may be able to adapt more quickly to
changes in customer needs or to devote greater resources to providing Internet
professional services. Such competitors may attempt
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to build their presence in our markets by forming strategic alliances with other
competitors or our customers, offering new or improved products and services to
our customers or increasing their efforts to gain and retain market share
through competitive pricing. Some companies have developed particularly strong
reputations in niche service offerings or local markets which may provide them
with a competitive advantage. In addition, competition for quality technical
personnel has continued to intensify, resulting in increased personnel costs.
Such competition has adversely affected, and is likely to continue to adversely
affect, our gross profits, margins and results of operations. Furthermore, we
believe the barriers to entry into our markets are relatively low, which enable
new competitors to offer competing services. See "Risk Factors -- There is
Intense Competition in the Internet Services Market."
We believe that we compete successfully by offering comprehensive solutions
for our customers. We provide creative, leading-edge, comprehensive Internet
professional services to help our customers expand their businesses and maintain
their competitive advantage through Internet-driven opportunities. We also
believe that we distinguish ourselves on the basis of our strategic thinking,
technical expertise, competitive pricing, our 24x7 global delivery model and our
ability to understand our customers' needs.
FACILITIES
SeraNova leases various office facilities under operating leases expiring
at various dates through December 31, 2005 (See Notes to the Financial
Statements). Also, we are currently permitted to occupy and use various office
space pursuant to the terms of a space sharing agreement with Intelligroup. Our
principal executive offices are located in Edison, New Jersey. Our headquarters
includes sufficient space for certain of our sales and technical staffs and our
marketing, administrative, finance and management personnel. We maintain offices
in the following locations:
<TABLE>
<CAPTION>
UNITED STATES EUROPE ASIA PACIFIC
---------------------- -------------- ------------
<S> <C> <C>
Edison, New Jersey United Kingdom Australia
Foster City, New Zealand
California Philippines
Phoenix, Arizona Thailand
Rosemont, Illinois India
Auburn Hills, Michigan
Provo, Utah
Fayetteville, Georgia
</TABLE>
We believe that our existing facilities are adequate to meet our current
needs and that suitable additional or alternative space will be available in the
future on reasonable terms as needed.
INTELLECTUAL PROPERTY RIGHTS
We do not have and do not rely on registered trademarks or patents to
protect our proprietary information. Instead, we rely primarily on a combination
of copyright and trademark laws, trade secrets, confidentiality procedures and
contractual provisions.
We have developed specific processes, methodologies and tools underlying
the SeraNova Time-To-Market Approach. We can not guarantee that the steps we
have taken to protect our proprietary rights will be adequate to prevent
misappropriation of our intellectual property.
LEGAL PROCEEDINGS
There are currently no material legal proceedings pending to which we are a
party or to which any of our property is subject.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
At the time of the spin-off, the following individuals are expected to
serve on our board of directors and/or serve as our executive officers or key
employees. Our board of directors may appoint additional executive officers from
time to time.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Rajkumar Koneru............................ 30 Chairman, Chief Executive Officer and
President
Ravi Singh................................. 41 Chief Financial Officer, Executive Vice
President and Director
Rajan Nair................................. 31 Chief Operating Officer
Nagarjun Valluripalli...................... 31 Secretary, Treasurer and Director
Tom Bernetich.............................. 38 Senior Vice President, North America Sales
Donald Moore............................... 38 Senior Vice President, International
Operations
Richard Bevis.............................. 50 Vice President, Marketing
Tarun Chandra.............................. 33 Vice President, Corporate Strategy
Ashok Roy.................................. 28 Vice President, Business Development
</TABLE>
All directors hold office until the next annual meeting of shareholders or
until their successors have been elected and qualified. All of our executive
officers are elected annually by the board of directors and serve at the
discretion of the board of directors and until their successors are elected and
qualified.
Rajkumar Koneru has been the Chief Executive Officer of SeraNova since its
formation in September 1999. Mr. Koneru joined our parent company, Intelligroup,
in 1994 when his company Oxford Systems merged with Intelligroup. He has served
as the Chief Executive Officer of Intelligroup from November 1997 to April 1998,
and from May 1999 to January 2000. Mr. Koneru led the reorganization of
Intelligroup resulting in two separate businesses -- ASP Plus and SeraNova. Mr.
Koneru has led SeraNova's strategic direction and growth over the last three
years. He also serves as the Chairman of the Board of Directors of IndiaInfo.com
Private Limited and Visual Interactive, Inc. Mr. Koneru graduated from the Birla
Institute of Technology and Science with a Masters degree in Management Studies.
Ravi Singh has served as our Chief Financial Officer since September 1999.
Mr. Singh has eighteen years of investment banking and senior management
experience, including eleven years in investment banking, focused on technology
and emerging growth companies. Before joining SeraNova, from July 1998 to
September 1999, Mr. Singh was a Managing Director and Head of Technology
Investment Banking at Punk Ziegel & Company in New York. From 1996 to 1998,
before joining Punk Ziegel, Mr. Singh was Managing Director of Forbes & Walker
Inc., a New York and Toronto based private equity investment firm. Prior to
that, Mr. Singh was a General Partner and Managing Director of SG Cowen in New
York. Before joining SG Cowen, Mr. Singh was a Manager in Coopers & Lybrand's
New York practice. Mr. Singh is a member of the Board of Directors at SeraNova.
He also serves on the Board of Directors for each of Mangosoft Corporation in
Westborough, MA, and Bacon Felt Company in Taunton, MA. Mr. Singh received his
MBA from Columbia University.
Rajan Nair has served as the Chief Operating Officer of SeraNova since
December 1999. Since joining Intelligroup in February 1997, Mr. Nair has been
instrumental in building the sales force and delivery team for Intelligroup's
Internet Services unit. From January 1999 to December 1999 he was the Vice
President of Intelligroup's Internet Services unit. In December 1999 Mr. Nair
was appointed as the Chief Operating Officer of SeraNova. Prior to that, from
August 1995 to February 1997, he was a Principal with Computer Sciences
Corporation's national SAP practice. From February 1994 to August 1995, Mr. Nair
was a Senior Consultant with Deloitte and Touche. Mr. Nair received his
bachelor's degree from Bombay University in India.
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Nagarjun Valluripalli serves as Secretary and Treasurer of SeraNova, and a
member of its Board of Directors. Mr. Valluripalli joined Intelligroup in 1994
when his company Oxford Systems merged with Intelligroup and currently serves as
Chairman and Co-Chief Executive Officer for Intelligroup. Prior to founding
Intelligroup, Mr. Valluripalli was a regional sales manager for Satya
Electronics. He received a Masters in Technology from Birla Institute of
Technology and Science in 1990.
Tom Bernetich joined SeraNova as a Senior Vice President in November 1999.
Mr. Bernetich is responsible for SeraNova's North American sales efforts. Prior
to that, from April 1998 to October 1999, Mr. Bernetich was a Vice-President at
Bluestone Software, where he led the company's software sales effort. From
August 1994 to April 1998, Mr. Bernetich was a director at Bluestone Consulting,
where he was responsible for multiple functions including sales, recruiting and
operations. Mr. Bernetich received a BA in Accounting with a minor in Computer
Science from Lynchburg College in May 1983.
Richard Bevis has served as the Vice President of Marketing at SeraNova
since September 1999. Mr. Bevis served as the Director of Marketing for
Intelligroup from February 1999 to September 1999. Prior to that, Mr. Bevis
served in various capacities at multiple technology companies. He was Vice
President of Marketing at Planetworks from 1997 to 1999. From 1990 to 1994, Mr.
Bevis managed the Consulting Partners Program at Novell and was a Group
Marketing Manager at Unix System Laboratories. From 1979 to 1990, Mr. Bevis held
several marketing management positions at AT&T Information Systems. Mr. Bevis
has a B.Sc. degree in Physics and Math from the University of Liverpool and an
MBA in Information Systems from Pace University.
Tarun Chandra is the Vice President of Corporate Strategy at SeraNova.
Prior to joining SeraNova in October 1999, Mr. Chandra spent eight years on Wall
Street. Most recently, from 1997 to 1999 he was a Partner and Senior Analyst
with Punk, Ziegel & Company, a technology and healthcare investment banking
boutique in New York, where he covered IT services and Internet companies. Mr.
Chandra has an MBA in Finance from the University of Detroit, and an M.S. in
information systems from Pace University.
Donald Moore is a Senior Vice President at SeraNova and is responsible for
its international operations, including Asia-Pacific and Europe. Mr. Moore
joined Intelligroup with the acquisition of Azimuth Consulting in November 1998.
From October 1995 to November 1998 he served as the Managing Director of Azimuth
Consulting. From April 1992 to September 1995, Mr. Moore was the General Manager
of Azimuth Consulting, New Zealand. Prior to that he held several sales and
senior management positions at Wang Computers and other professional services
companies.
Ashok Roy has been the Vice President of Business Development at SeraNova
since September 1999. Mr. Roy is responsible for SeraNova's business development
with respect to Internet-based companies and acquisitions. Mr. Roy joined
Intelligroup in December 1997 to lead Intelligroup's mergers and acquisition
efforts. Prior to joining Intelligroup, Mr. Roy was an investment banker at
Broadview Associates. He received his Masters in Business Administration from
the Wharton School and a Bachelor of Technology degree from the Indian Institute
of Technology.
The board of directors has a compensation committee, which approves
salaries and incentive compensation for our executive officers and administers
our stock plan. The compensation committee currently consists of Messrs. Koneru
and Singh. Upon the election of three independent directors, we expect that our
compensation committee will consist of Mr. Koneru and one or more of the
independent directors. The board of directors also has an audit committee, which
reviews the results and scope of the audit and other services provided by our
independent accountants. The audit committee currently consists of the entire
board. Nasdaq has granted to us a temporary exception to the independent
director and audit committee requirements as set forth under Marketplace Rules
4460(c) and 4460(d), respectively. Such exception expires 90 calendar days
following the first day of trading on the Nasdaq National Market. Upon the
election of three independent directors, we expect that our audit committee will
consist of at least three independent directors.
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DIRECTORS' COMPENSATION
Currently, we do not provide our directors with cash compensation for their
services as members of our board of directors. However, we anticipate that we
will compensate each non-employee member of the Board with cash compensation and
stock option grants upon his or her election to the Board of Directors. In
December 1999, we granted Mr. Nagarjun Valluripalli options to purchase 300,000
shares of SeraNova's common stock at an exercise price of $6.51 per share.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
paid by Intelligroup for services in all capacities awarded to, earned by or
paid to our chief executive officer and each of our other executive officers
whose aggregate compensation exceeded $100,000 during the year ended December
31, 1999 or would have exceeded $100,000 had they served the entire year
(collectively, the "Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ----------------
NAME AND PRINCIPAL POSITION(S) YEAR SALARY BONUS STOCK OPTIONS(1)
------------------------------ ---- -------- ------- ----------------
<S> <C> <C> <C> <C>
Rajkumar Koneru................................ 1999 $252,798 $ -- 777,938
Chairman, Chief Executive Officer and
President
Ravi Singh..................................... 1999 $ 75,803 $ -- 466,763
Chief Financial Officer
Rajan Nair..................................... 1999 $200,126 $81,126 466,763
Chief Operating Officer
</TABLE>
---------------
(1) The number of shares covered by this option grant was established based upon
the assumption that the spin-off will be effected in a manner whereby each
holder of an outstanding share of Intelligroup common stock will receive one
share of SeraNova common stock as a result of the spin-off. If the spin-off
occurs at a ratio other than one-to-one as herein described, then the number
of shares purchasable by the Named Executive pursuant to such option shall
be proportionately adjusted.
OPTION GRANTS IN 1999
The following table sets forth information concerning individual grants of
stock options made during year ended December 31, 1999 to each of the Named
Executives.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE
---------------------------------------------- VALUE AT ASSUMED ANNUAL
% OF TOTAL RATES OF STOCK PRICE
OPTIONS EXERCISE APPRECIATION FOR OPTION
GRANTED TO PRICE TERM(4)
OPTIONS EMPLOYEES IN PER EXPIRATION -----------------------
NAME GRANTED 1999(2) SHARE(3) DATE 5% 10%
---- ------- ------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Rajkumar Koneru............. 777,938 24.0% $2.52 9/15/09 $1,232,887 $3,124,379
Ravi Singh.................. 466,763 14.4% $2.52 9/15/09 $ 739,732 $1,874,628
Rajan Nair.................. 466,763 14.4% $2.52 10/1/09 $ 739,732 $1,874,628
</TABLE>
---------------
(1) All options were granted outside of the 1999 Stock Plan as described herein.
The number of shares covered by such options, was established based upon the
assumption that the spin-off will be effected in a manner whereby each
holder of an outstanding share of Intelligroup Inc. common stock will
receive one
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<PAGE> 51
share of SeraNova common stock as a result of the spin-off. If the spin-off
occurs at a ratio other than one-to-one as herein described, then the number
of shares purchasable by the Named Executive shall be proportionately
adjusted.
(2) Based on 3,236,092 shares reserved for issuance upon the exercise of options
granted to employees during 1999.
(3) The exercise price equals the fair market value of the common stock as of
the grant date as determined by the board of directors.
(4) The potential realizable value is calculated based upon the term of the
option at the time of grant (10 years). Assumed stock price appreciation of
5% and 10% is based on the fair value at the time of grant.
1999 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF OPTIONS AT VALUE OF IN-THE-MONEY
FISCAL YEAR-END OPTIONS(1)
--------------------- ----------------------
NAME VESTED UNVESTED VESTED UNVESTED
---- ------- --------- ------- -----------
<S> <C> <C> <C> <C>
Rajkumar Koneru..................................... -- 777,938 $-- $3,103,973
Ravi Singh.......................................... -- 466,763 -- 1,862,384
Rajan Nair.......................................... -- 466,763 -- 1,862,384
</TABLE>
---------------
(1) Based on a year-end fair market value of the underlying securities equal to
$6.51 per share less the exercise price per share for such shares. The
year-end fair market value of the common stock was determined in good faith
by the Board of Directors of SeraNova.
1999 STOCK PLAN
The 1999 Stock Plan was adopted by the board of directors, approved by
Intelligroup, as our sole shareholder, and became effective on December 1, 1999.
The 1999 Stock Plan shall remain in effect until terminated by the board of
directors. As of December 31, 1999, a total of 5,000,000 shares of common stock
were reserved for issuance upon the exercise of options or the grant of
restricted stock awards or stock awards under the 1999 Stock Plan. However, the
total number of shares reserved for issuance under the 1999 Stock Plan may be
automatically increased in the event such number of shares represents less than
20% of the outstanding shares of our common stock on December 31 of any future
year. Those eligible to receive stock option grants, restricted stock awards and
stock awards under the 1999 Stock Plan include employees, non-employee directors
and consultants. The 1999 Stock Plan is administered by the compensation
committee of our board of directors.
Subject to the provisions of the 1999 Stock Plan, the administrator of the
1999 Stock Plan has the discretion to determine the optionees and/or grantees,
the type of options or awards to be granted, the vesting provisions, the terms
of the grants and other related provisions as are consistent with the 1999 Stock
Plan. The exercise price of an incentive stock option may not be less than the
fair market value per share of the our common stock on the date of grant or, in
the case of an optionee who beneficially owns 10% or more of the voting power of
all classes of our capital stock, not less than 110% of the fair market value
per share on the date of grant. The exercise price of a non-qualified stock
option may not be less than 85% of the fair market value per share of our common
stock on the date of grant. Prior to the spin-off, the fair market value is
determined by the board of directors in good faith. We anticipate that following
the spin-off, the fair market value shall be determined in accordance with the
closing sales price of our common stock as quoted on the Nasdaq National Market.
In addition, the 1999 Stock Plan allows for the grant of restricted stock awards
and stock awards subject to the restrictions and conditions as the administrator
may determine at the time of grant.
The term of each stock option granted under the 1999 Stock Plan shall be
stated in the applicable option agreement, provided, however, in the case of
incentive stock options, the term shall be no more than ten years from the date
of grant, subject to earlier termination upon or after a fixed period following
the optionee's
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<PAGE> 52
death, disability or termination of employment with us. The term of any options
granted to a holder of more than 10% of our capital stock may be no longer than
five years. Options granted under the 1999 Stock Plan to our employees will vest
in the manner determined by our board of directors. Typically, options are not
assignable or otherwise transferable except by will or as per the laws of
descent and distribution. The administrator, however, may in its discretion
provide that certain options may be transferred to one or more transferees
provided certain conditions are satisfied. In the event of a merger or
consolidation of us with or into another corporation or the sale of all or
substantially all of our assets in which the successor corporation does not
assume outstanding options or issue equivalent options, our board of directors
is required to provide accelerated vesting of outstanding options.
As of the date of this information statement/prospectus, there were options
to purchase 1,667,575 shares of common stock at a weighted average exercise
price per share of $6.51 outstanding under this plan. The number of shares
reserved under the 1999 Stock Plan was established based upon the assumption
that the spin-off will be effected in a manner whereby each holder of an
outstanding share of Intelligroup common stock will receive one share of
SeraNova common stock as a result of the spin-off. If the spin-off occurs at a
ratio other than one-to-one as herein described, then the number of shares
purchasable by employees shall be proportionately adjusted.
In addition, there were 3,236,092 options outstanding outside the plan.
These options include the grants to the Named Executives described above. The
weighted average exercise price of these options is $3.19 per share. In case the
spin-off occurs at a ratio other than one-to-one as herein described, then the
number of shares purchasable by these options shall be proportionately adjusted.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with each of our executive
officers.
We have an employment agreement with Rajkumar Koneru, our President, Chief
Executive Officer and Chairman of the Board, which expires September 9, 2002.
Such employment agreement automatically renews for additional successive
one-year terms unless otherwise terminated by either party upon 60 days written
notice prior to the expiration of the term then in effect. The annual salary
provided under this agreement is $350,000 together with an annual bonus of not
less than $150,000 per year. In the event of termination without cause, the
agreement provides for Mr. Koneru to receive his annual base salary for the full
term of such agreement, as well as continued coverage under all of our benefit
plans, programs and policies to the extent required by law. Additionally, the
agreement provided for the grant of options to purchase 777,938 shares of our
common stock at $2.52 per share which was equal to the fair market value per
share of our common stock as of the grant date as determined by the board of
directors. One third of such options vest on March 15, 2000 and the remaining
options vest in equal monthly amounts over a 30 month period thereafter.
Additionally, Mr. Koneru has agreed that during the term of his agreement and
for one year thereafter, he will not interfere with our customer relationships
or solicit our executives or affiliates.
We have an employment agreement with Ravi Singh, our Chief Financial
Officer, which expires September 9, 2002. Such employment agreement
automatically renews for additional successive one-year terms unless otherwise
terminated by either party upon 90 days written notice prior to the term then in
effect. The annual salary provided under this contract is approximately $250,000
together with an annual bonus of not less than $100,000 per year. In the event
of termination without cause, the agreement provides for a severance payment
equal to one year of salary, bonus, benefit payments and coverage. Additionally,
the agreement provided for the granting of options to purchase 466,763 shares of
our common stock at $2.52 per share which was equal to the fair market value per
share of our common stock as of the grant date as determined by the board of
directors. One third of such options vest on March 15, 2000, and the remaining
options vest in equal monthly amounts over a 30 month period thereafter. Mr.
Singh has agreed that during the term of this agreement and, in the event his
employment is terminated for cause, permanent incapacity or by Mr. Singh without
good reason, then for a period of one year thereafter, he will not compete with
us. Mr. Singh has also agreed that during the term of his agreement and for one
year thereafter, he will not interfere with our customer relationships. The
agreement also provides that Mr. Singh maintain the confidentiality of
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<PAGE> 53
information about us and our business. Additionally, Mr. Singh has agreed to
assign and transfer to us all his title and right to inventions and works in our
business.
We have an employment agreement with Rajan Nair, our Chief Operating
Officer. The annual salary provided under this agreement is $250,000. Either
party may terminate the agreement without cause upon 30 days written notice. In
the event of termination without cause, the agreement provides for severance
payment equal to six months salary. The agreement provides that Mr. Nair
maintain the confidentiality of our information and our business. Mr. Nair has
also agreed to assign and transfer to us all of his title and right to
inventions and works in our business. Additionally, during the term of the
agreement and for one year thereafter, Mr. Nair has agreed not to solicit or
accept similar business from our customers or prospective customers, interfere
with our customer relationships or solicit our executives and individual
contractors.
In addition to the foregoing agreements, we have executed agreements with
each of our employees, whereby each employee agrees to maintain the
confidentiality of our information and to assign inventions to us.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1999, the compensation of our executive
officers was determined by the compensation committee. The compensation
committee was established by the board of directors on September 10, 1999. The
compensation committee consists of Messrs. Koneru and Singh. Upon the election
of three independent directors, we expect that our compensation committee will
consist of Mr. Koneru and one or more of the independent directors. Mr. Koneru
also serves on the compensation committee of the Intelligroup board of directors
which, among other things, determines the compensation of Mr. Valluripalli, a
member of our board of directors. See "Management -- Employment Agreements" and
"Certain Transactions."
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Certificate of Incorporation and By-laws provide that we are authorized
to indemnify our directors and officers to the fullest extent authorized under
New Jersey law. We intend to enter into indemnification agreements with each of
our directors and officers providing for indemnification of such directors and
officers to the fullest extent permitted by applicable law.
48
<PAGE> 54
RELATIONSHIP WITH INTELLIGROUP
CONTRACTUAL ARRANGEMENTS
We have entered into a number of agreements with Intelligroup which became
effective January 1, 2000. We believe that the terms of these agreements
equitably reflect the benefits and costs of our ongoing relationship with
Intelligroup. However, as a result of Intelligroup's ownership interest in
SeraNova, the terms of such agreements were not, and the terms of any future
amendments to those agreements will not be, the result of arm's-length
negotiations.
Contribution Agreement
The assets and liabilities of Intelligroup's Internet services business was
transferred by Intelligroup and certain of its subsidiaries to SeraNova on
January 1, 2000. The transfer may be subject to certain post-closing
adjustments. SeraNova and Intelligroup have agreed to execute and deliver such
further assignments, documents of transfer, deeds and instruments as may be
necessary for the more effective implementation of such transfers.
Some post-closing assignments and transfers may require consent by third
parties and various filings, approvals or recordings with governmental entities.
Some permits or licenses may require reapplication by us, and the reissuance in
our name. If consent to the assignment or reissuance of any contract, license or
permit being transferred is not obtained, SeraNova and Intelligroup will seek to
develop alternative approaches so that, to the maximum extent possible, we will
receive the benefits of the contract, license or permit and will discharge the
duties and bear the costs and risks under the contract, license or permit. We
will bear the risk that the alternative arrangements will not provide us with
the full benefits of the contract, license or permit. We and Intelligroup,
however, believe that all necessary consents and reissuances that are material
to us will be obtained.
Services Agreement
Prior to Intelligroup's transfer of its Internet services business to us on
January 1, 2000, Intelligroup's administrative personnel provided support
services for our business. We have entered into a services agreement with
Intelligroup under which Intelligroup will continue to provide to us certain
general and administrative functions. We believe that our services agreement
with Intelligroup minimizes the possibility of disruption of such functions for
the foreseeable future.
The initial term of the services agreement is for a period of one year
beginning on January 1, 2000. The services agreement shall automatically renew
for additional consecutive one-year periods unless either party gives notice of
its intent not to renew at least 60 days prior to the end of the then expiring
term. The services agreement can be terminated by either party upon 30 days
written notice.
General and Administrative Services and Expenses. Under the terms of the
services agreement, we have agreed with Intelligroup: (1) to share certain
general and administrative expenses; and (2) for Intelligroup to provide us with
other general and administrative services in exchange for a fixed fee. The
general and administrative expenses that we have agreed to share with
Intelligroup include payroll costs for shared employees, utilities costs,
equipment expenses, taxes and office supplies.
The services that Intelligroup has agreed to provide to us for a fee are:
- Administrative services, including reception services, 401(k) plan
maintenance and travel administration;
- Tax services, including preparation and filing of corporate tax returns,
assistance with tax compliance and accounting for taxes, and supervision
of audits and other proceedings and litigation;
- Human resources services, including advice and assistance relating to
employee benefits, facilitation of government/regulatory reporting and
assistance with compliance issues; and
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<PAGE> 55
- Management information systems services, including operational and
technical support for telephones and voice mail.
Our Cost of Fee-Based Services. Our cost for administrative services
provided by Intelligroup is approximately $30,000 per month.
Reasons for the Agreement. We believe that the most cost-efficient and
least disruptive way to obtain the administrative support services we require is
for Intelligroup to continue to provide such services to us on a fee basis as
described above rather than based on the actual hours spent by Intelligroup
personnel providing such services. It would be difficult, if not impossible, to
determine the portion of time spent by Intelligroup's employees on functions
pertaining only to our business or only to Intelligroup's business. For example,
the provision of technical support services for internal operating systems,
inputting and processing data, recruiting of personnel, administration of
employee benefit plans that pertain to both companies and government reporting
would be difficult to allocate.
Direct Expenses. Except for the services provided on our behalf by
Intelligroup pursuant to the services agreement and the other agreements
described below, we are responsible for providing or otherwise obtaining all of
the necessary administrative, management and support services required to
conduct our business, all of which were previously provided or obtained by
Intelligroup. The direct expenses include executive compensation, personnel
salaries and benefits for our employees.
Space Sharing Agreement
We have entered into a space sharing agreement with Intelligroup providing
for the sharing by Intelligroup and us of Intelligroup's office facilities,
including the office facilities located in Edison, New Jersey at which our and
Intelligroup's principal executive offices are located. We and Intelligroup
believe that it is beneficial for us to continue to be located within
Intelligroup's corporate headquarters and branch office facilities due to
economies of scale.
Under the space sharing agreement, the costs associated with the leasing
and maintaining facilities are, in general, allocated between Intelligroup and
us on the basis of actual use of floor space.
Tax Sharing Agreement
We have entered into a tax sharing agreement with Intelligroup that governs
the allocation between us of federal, state, local and foreign tax liabilities
and related tax matters, such as the preparation and filing of tax returns and
the conduct of audits and other tax proceedings, for taxable periods before and
after the spin-off.
In general, the tax sharing agreement provides for, among other things,
that:
- each of Intelligroup and SeraNova shall be responsible for their
respective tax liabilities and receive their respective tax benefits
relating to the taxable periods prior to the spin-off as allocated by the
agreement;
- Intelligroup will be responsible for, and will indemnify us against, its
tax liabilities for taxable periods ending prior to the date of the
spin-off; and
- we will be responsible for, and will indemnify Intelligroup and its
subsidiaries against, our tax liabilities for taxable periods beginning
on or after the date of the spin-off.
In addition, Intelligroup will be liable for, and will indemnify us
against, all tax liabilities incurred by us as a result of any event, action, or
failure to act, wholly or partially within the control of Intelligroup or any of
its subsidiaries, including any event, action or failure to act that results in
a breach of any representation made to the Internal Revenue Service, or any
other event related to the acquisition of Intelligroup stock, resulting in taxes
imposed on us with respect to any action taken pursuant to the spin-off or any
related transaction. We will be liable for, and will indemnify Intelligroup and
its subsidiaries against, all tax liabilities incurred by Intelligroup or any of
its subsidiaries as a result of any event, action, or failure to act wholly or
partially within our control, including any event, action or failure to act that
results in a breach of any representation made to
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<PAGE> 56
the Internal Revenue Service, or any other event related to the acquisition of
our stock, resulting in taxes imposed on Intelligroup or any of its subsidiaries
with respect to any action taken pursuant to the spin-off or any related
transaction.
POTENTIAL CONFLICTS WITH INTELLIGROUP
As a result of our relationship with Intelligroup, including our promissory
note with Intelligroup, conflicts may develop between Intelligroup and us and
such conflicts may not be resolved in our favor. For some examples of potential
conflicts, see "Risk Factors -- Potential Conflicts with Intelligroup May Not Be
Resolved in Our Favor."
Our agreements with Intelligroup provide procedures for resolving any
disputes arising out of or relating to such agreements. Generally, the procedure
establishes that the parties shall first attempt to negotiate in good faith a
resolution of the dispute. If the parties fail to amicably resolve the dispute,
either party may submit the dispute to binding arbitration.
We may enter into material transactions and agreements with Intelligroup in
the future in addition to those described above. We have been advised by
Intelligroup that it intends that, for so long as Intelligroup owns a majority
of our voting power, the terms of any future transactions and agreements between
Intelligroup or its affiliates and us will be at least as favorable to us as
could be obtained from unrelated third parties. The board will utilize such
procedures in evaluating the terms and provisions of any material transactions
between Intelligroup or its affiliates and us as the board may deem appropriate
in light of its fiduciary duties under state law. Depending on the nature and
size of the particular transaction, in any such evaluation, the board may rely
on management's statements and opinions and may or may not utilize outside
experts or consultants or obtain independent appraisals or opinions.
Two of our three directors are also directors of Intelligroup. Rajkumar
Koneru, our Chairman, President and Chief Executive Officer resigned as an
officer of Intelligroup in January 2000. Mr. Koneru will remain a director of
Intelligroup. Nagarjun Valluripalli, a member of our board also serves as
Co-Chief Executive Officer of Intelligroup. Our directors who are also directors
of Intelligroup may have conflicts of interest with respect to matters
potentially or actually involving or affecting Intelligroup and us, such as
acquisitions, financing and other corporate opportunities that may be suitable
for Intelligroup and us. To the extent that such opportunities arise, such
directors may consult with their legal advisors and make a determination after
consideration of a number of factors, including whether such opportunity is
presented to any such director in his capacity as our director, whether such
opportunity is within our line of business or consistent with our strategic
objectives and whether we will be able to undertake or benefit from such
opportunity. In addition, determinations may be made by the board, when
appropriate, by the vote of the disinterested directors only. Notwithstanding
the foregoing, there can be no assurance that conflicts will be resolved in our
favor.
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<PAGE> 57
CERTAIN TRANSACTIONS
We had a loan payable to Intelligroup as of March 31, 2000, in the amount
of $3,913,000. Additional amounts became payable to Intelligroup stemming from
cash flow requirements subsequent to March 31, 2000. At May 31, 2000, our loan
payable to Intelligroup was $15,100,000. Under the terms of the promissory note
evidencing the loan, we are obligated to pay Intelligroup $3.0 million by
September 30, 2000 with the balance of principal and interest on the note due on
July 31, 2001. Under Intelligroup's current credit facility, Intelligroup will
no longer be able to fund our operations.
On September 15, 1999, we granted non-qualified stock options to purchase
an aggregate of 777,938 shares of our common stock to Rajkumar Koneru for an
exercise price of $2.52 per share.
On September 15, 1999, we granted non-qualified stock options to purchase
an aggregate of 466,763 shares of our common stock to Ravi Singh for an exercise
price of $2.52 per share.
On October 1, 1999, we granted non-qualified stock options to purchase an
aggregate of 466,763 shares of our common stock to Rajan Nair for an exercise
price of $2.52 per share.
On December 1, 1999, we granted non-qualified stock options to purchase an
aggregate of 300,000 shares of our common stock to Nagarjun Valluripalli for an
exercise price of $6.51 per share.
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<PAGE> 58
PRINCIPAL SHAREHOLDERS
The following table sets forth as of May 12, 2000, as adjusted to give
effect to the spin-off, certain information regarding beneficial ownership of
our common stock by:
- each person or group of affiliated persons we expect to be the beneficial
owner of more than 5% of the outstanding shares of common stock;
- each director;
- each Named Executive; and
- all directors and Named Executives as a group.
The address for each director and officer is c/o SeraNova, Inc., 499
Thornall Street, Edison, New Jersey 08837.
<TABLE>
<CAPTION>
NAME SHARES(1) PERCENTAGE(2)
---- --------- -------------
<S> <C> <C>
Rajkumar Koneru(3).......................................... 2,496,108 13.9%
Nagarjun Valluripalli(4).................................... 2,239,721 12.8
Ravi Singh(5)............................................... 176,333 1.0
Rajan Nair.................................................. 116,691 *
Ashok Pandey(6)............................................. 2,080,083 11.9
NSA Investments, Inc.(7).................................... 1,731,568 9.9
Capital Guardian Trust Company(8)........................... 876,000 5.0
All directors and executive officers as a group (four
persons).................................................. 5,029,453 28.0
</TABLE>
---------------
* Denotes less than 1%.
(1) Beneficial ownership includes any shares as to which the individual or
entity has sole or shared voting power or investment power and also any
shares which the individual or entity has a right to acquire within 60 days
after May 12, 2000 through the exercise of any stock options. The inclusion
herein of such shares, however, does not constitute an admission that the
named stockholder is a direct or indirect beneficial owner of such shares.
Unless otherwise indicated, each person or entity named in the table has
sole voting power and investment power with respect to all shares of capital
stock listed as owned by such person or entity. Based upon shares of
Intelligroup common stock beneficially owned by such holder and shares
underlying options to purchase SeraNova common stock granted to such holder.
(2) Based upon 16,629,413 shares of Intelligroup common stock and 831,470
equivalent shares of SeraNova common stock outstanding as of May 12, 2000.
(3) Includes 293,888 shares of common stock purchasable upon the exercise of
options which are exercisable as of May 12, 2000 or sixty days thereafter.
(4) Includes 37,500 shares of common stock purchaseable upon the exercise of
options which are exercisable as of May 12, 2000 or sixty days thereafter.
Excludes a total of 14,500 shares of Intelligroup common stock purchased on
May 31, 2000 and June 1, 2000.
(5) Represents 176,333 shares of common stock purchaseable upon the exercise of
options which are exercisable as of May 12, 2000 or sixty days thereafter.
(6) The address for Ashok Pandey is c/o Intelligroup, Inc., 499 Thornall Street,
Edison, New Jersey 08837.
(7) The address for NSA Investments, Inc. is 250 Engamore Lane, Suite 102,
Norwood, Massachusetts 02062. The information set forth on the table is
based solely upon data derived from a Schedule 13D/A filed by such
shareholder with respect to Intelligroup. NSA's holdings consist of
1,398,980 shares of Intelligroup common stock and 332,588 shares of SeraNova
common stock purchased in the March 2000 equity investment. (See Note 13 of
Notes to Combined Financial Statements).
(8) The address for Capital Guardian Trust Company is 11100 Santa Monica
Boulevard, Los Angeles, California 90025-3384. The information set forth on
the table is based solely upon data derived from a Schedule 13G/A filed by
such shareholder with respect to Intelligroup.
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<PAGE> 59
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our authorized capital stock consists of 40,000,000 shares of our common
stock, par value $0.01 per share and 5,000,000 shares of undesignated preferred
stock, par value $0.01 per share. The following statements are brief summaries
of certain provisions with respect to our capital stock contained in our
Certificate of Incorporation and By-laws, copies of which have been filed as
exhibits to the registration statement. The following summary is qualified in
its entirety by reference thereto.
COMMON STOCK
Voting Rights
The holders of our common stock are entitled to one vote per share on all
matters to be voted on by shareholders. Holders of shares of our common stock
are not entitled to cumulate their votes in the election of directors.
Generally, all matters to be voted on by shareholders must be approved by a
majority, or, in the case of election of directors, by a plurality, of the votes
entitled to be cast by the holders of our common stock present in person or
represented by proxy, subject to any voting rights granted to holders of any
preferred stock. Except as otherwise provided by law or in our Certificate of
Incorporation, and subject to any voting rights granted to holders of any
outstanding preferred stock, amendments to our Certificate of Incorporation must
be approved by a majority of the votes entitled to be cast by the holders of our
common stock. However, amendments to our Certificate of Incorporation that would
alter or change the powers, preferences or special rights of the our common
stock so as to affect them adversely also must be approved by a majority of the
votes entitled to be cast by the holders of the shares affected by the
amendment. Notwithstanding the foregoing, any amendment to our Certificate of
Incorporation to increase the authorized shares of any class of our capital
stock requires the approval only of a majority of the votes entitled to be cast
by the holders of our common stock.
Dividends
Holders of our common stock will share ratably on a per share basis in any
dividend declared by the board of directors, subject to any preferential rights
of any outstanding preferred stock. Dividends payable in shares of common stock
may be paid only as follows: (1) shares of our common stock may be paid only to
holders of our common stock; and (2) the number of shares so paid will be equal
on a per share basis with respect to each outstanding share of our common stock.
Other Rights
Unless approved by a majority of the votes entitled to be cast by the
holders of our common stock, in the event of any reorganization or consolidation
of us with one or more corporations or a merger of us with another corporation
in which shares of common stock are converted into or exchangeable for shares of
stock, other securities or property, all holders of our common stock, will be
entitled to receive the same kind and amount of shares of stock and other
securities and property.
On our liquidation, dissolution or winding up, after payment in full of the
amounts required to be paid to holders of preferred stock, if any, all holders
of our common stock, are entitled to receive the same amount per share with
respect to any distribution of assets to holders of shares of our common stock.
No shares of our common stock are subject to redemption or have preemptive
rights to purchase additional shares of our common stock or our other
securities.
Upon completion of the spin-off, all of the issued and outstanding shares
of our common stock will be validly issued, fully paid and non-assessable.
As of May 12, 2000, based on the stock ownership of Intelligroup, the
additional equity financing and assuming a one share-for-one share spin-off
ratio, there were 17,460,883 shares of our common stock issued or
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<PAGE> 60
outstanding, five stockholders of record and outstanding options to purchase an
aggregate of 4,903,667 shares of our common stock, 15,000 of which were
immediately exercisable. See "Management -- 1999 Stock Plan."
PREFERRED STOCK
The preferred stock is issuable from time to time in one or more series and
with such designations, preferences and other rights for each series as shall be
stated in the resolutions providing for the designation and issue of each such
series adopted by our board of directors. The board of directors is authorized
by our Certificate of Incorporation to determine, among other things, the
voting, dividend, redemption, conversion, exchange and liquidation powers,
rights and preferences and the limitations thereon pertaining to such series.
The board of directors, without shareholder approval, may issue preferred stock
with voting and other rights that could adversely affect the voting power of the
holders of the common stock and that could have certain anti-takeover effects.
We have no present plans to issue any shares of preferred stock. The ability of
the board of directors to issue preferred stock without shareholder approval
could have the effect of delaying, deferring or preventing a change in control
of us or the removal of existing management.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
On March 14, 2000, we entered into a purchase agreement with four
institutional investors pursuant to which such investors purchased an aggregate
of 831,470 shares of our common stock for an aggregate purchase price of
$10,000,000.
In connection with such investment, we entered into a registration rights
agreement with each of such investors. Pursuant to such registration rights
agreements, at any time after the earlier of (i) March 14, 2005 or (ii) four
months after the closing of the spin-off, the investors of at least 30% of the
registrable shares of common stock have the right, subject to certain
restrictions set forth therein, to require that we register, at our expense, on
no more than one occasion any or all of their shares of common stock covered by
such agreement.
The registration rights agreement also provides that, if at any time we
propose to register any of our common stock for our own account or the account
of a security holder or holders exercising its or their demand registration
rights, such investors shall have unlimited piggy back registration rights at
our expense, subject to certain restrictions, including the right of the
underwriter's representative in such offering to limit the amount of securities
registered by such investor. In addition, after we have qualified for the use of
a Form S-3, in addition to the rights set forth above, the investors holding at
least 10% of the registrable securities not previously registered shall have the
right, subject to certain restrictions, to require that we register, at our
expense, any or all of their shares of common stock covered by such agreement.
ANTI-TAKEOVER EFFECTS OF CERTAIN CERTIFICATE OF INCORPORATION AND BY-LAW
PROVISIONS
New Jersey Statute
We are governed by the provisions of Section 14A:10A-1 et seq., the New
Jersey Shareholders Protection Act (the "New Jersey Act"), of the New Jersey
Business Corporation Act, an anti-takeover law. In general, the statute
prohibits a publicly-held New Jersey corporation from engaging in a "business
combination" with an "interested shareholder" for a period of five years after
the date of the transaction in which the person became an interested
shareholder, unless the business combination is approved in a prescribed manner.
A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested shareholder. An "interested
shareholder" is a person who, together with affiliates and associates, owns (or
within five years, did own) 10% or more of the corporation's voting stock. After
the five-year waiting period has elapsed, a business combination between a
corporation and an interested shareholder will be prohibited unless the business
combination is approved by the holders of at least two-thirds of the voting
stock not beneficially owned by the interested shareholder, or unless the
business combination satisfies the New Jersey Act. The New Jersey Act's fair
price provision is intended to provide that all shareholders (other than the
interested shareholders) receive a fair price for their shares.
55
<PAGE> 61
General
The provisions of our Certificate of Incorporation and By-laws summarized
below may delay, deter, or prevent a tender offer or takeover attempt that a
stockholder might consider to be in its best interest.
Board of Directors
Our Certificate of Incorporation and By-laws provide that the number of our
directors shall be fixed from time to time exclusively by resolution adopted by
the affirmative vote of not less than a majority of the entire board of
directors. However, there shall not be less than one director. In addition, the
By-laws provide that any vacancies will be filled by the affirmative vote of:
- A majority of the remaining directors, even if less than a quorum; or
- By a sole remaining director.
Generally, directors may be removed from office by the affirmative vote of
the holders of at least a majority of our voting power.
Special Meetings and Action by Written Consent
Our By-laws provide that, special meetings of shareholders may be called
only by the President, the Chairman or by order of a majority of the board of
directors. In addition, our By-laws provide that our shareholders may not act by
written consent in lieu of a meeting of shareholders.
Amendment
Amendment of the foregoing provisions, require approval by holders of at
least 66% of all of the outstanding shares of our capital stock entitled to vote
in the election of directors, voting together as a single class. Our By-laws may
also be amended by action of the board of directors.
LIMITATIONS ON DIRECTORS' AND OFFICERS' LIABILITY
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:
- any proceeding involving such persons by reason of his serving or having
served in such capacities; or
- for each such person's acts taken in his capacity as a director, officer,
employee or agent of the corporation if such actions were taken in good
faith and in a manner which he 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.
Our Certificate of Incorporation limits the liability of our directors and
officers as authorized by Section 14A:2-7(3). 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 any breach of the director's or officer's duty of loyalty to the
corporation or its shareholders,
- for acts or omissions not in good faith or which involve a knowing
violation of law,
56
<PAGE> 62
- 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
- for any transaction from which the director or officer derived an
improper personal benefit.
Article XI of our By-laws specifies that we shall indemnify our directors,
officers, employees and agents to the extent such parties are a party to any
action because he or she was our director, officer, employee or agent. This
provision of the By-laws is deemed to be a contract between the registrant 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, and any repeal or modification thereof shall not offset any
action, suit or proceeding theretofore or thereafter 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 provisions of the
By-laws.
We intend to enter into indemnification agreements with each of our
officers and directors pursuant to which we will agree 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 or officer
of SeraNova.
At present, there is no pending litigation or proceeding involving a
director or officer of SeraNova as to which indemnification is being sought nor
are we aware of any threatened litigation that may result in claims for
indemnification by any officer of director.
LISTING
Application has been made to have our common stock approved for quotation
on the Nasdaq National Market under the symbol "SERA."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the our common stock is American Stock
Transfer & Trust Company.
LEGAL MATTERS
The validity of the shares of our common stock to be distributed in the
spin-off will be passed upon for us by Buchanan Ingersoll Professional
Corporation, Princeton, New Jersey.
EXPERTS
The financial statements included in this prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
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<PAGE> 63
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission the registration
statement under the Securities Act with respect to the SeraNova common stock
being received by Intelligroup shareholders in the spin-off. This information
statement/prospectus does not contain all of the information set forth in the
registration statement and the exhibits thereto, to which reference is hereby
made. Statements made in this information statement/prospectus as to the
contents of any contract, agreement or other document referred to herein and
filed as an exhibit are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the registration
statement, reference is made to such exhibit for a more complete description of
the matter involved, and each such statement is qualified in its entirety by
such reference. The registration statement and the exhibits thereto filed by us
with the Securities and Exchange Commission may be inspected at the public
reference facilities of the Securities and Exchange Commission listed below.
After the spin-off, we will be subject to the information requirements of
the Exchange Act, and in accordance therewith will file reports, proxy
statements and other information with the Securities and Exchange Commission.
Such reports, proxy statements and other information can be inspected and copied
at the public reference facilities maintained by the Securities and Exchange
Commission at its principal offices at 450 Fifth Street, N.W., Washington, D.C.
20549, and at its regional offices at Northwest Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, 13th
Floor, New York, New York 10048. Copies of such documents may be obtained from
the Public Reference Room of the Commission at prescribed rates. This material
also may be obtained on the Commission's website at http://www.sec.gov.
Information regarding the operation of the Public Reference Room may be obtained
by calling the Commission at 1(800) SEC-0330. Application has been made to have
the shares of SeraNova common stock included for quotation on the Nasdaq
National Market.
We intend to furnish our shareholders with annual reports containing
consolidated financial statements (beginning with fiscal year 2000) audited by
our independent accountants.
58
<PAGE> 64
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SERANOVA, INC. AND AFFILIATES
Report of Independent Public Accountants.................... F-2
Combined Balance Sheets..................................... F-3
Combined Statements of Operations........................... F-4
Combined Statements of Changes in Shareholder's Equity &
Comprehensive Income (Loss)............................... F-5
Combined Statements of Cash Flows........................... F-6
Notes to Combined Financial Statements...................... F-7
NETWORK PUBLISHING, INC.
Report of Independent Public Accountants.................... F-19
Balance Sheets.............................................. F-20
Statements of Operations.................................... F-21
Statements of Shareholders' Equity.......................... F-22
Statements of Cash Flows.................................... F-23
Notes to Financial Statements............................... F-24
</TABLE>
F-1
<PAGE> 65
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SeraNova, Inc.:
We have audited the accompanying combined balance sheets of SeraNova, Inc.
(a New Jersey corporation) and affiliates as of December 31, 1999 and 1998 and
the related statements of operations, shareholders' equity and cash flows for
the year ended December 31, 1999, the nine-month period ended December 31, 1998
and the year ended March 31, 1998. These financial statements are the
responsibility of SeraNova's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 SeraNova, Inc. and
affiliates as of December 31, 1999 and 1998, and the results of their operations
and their cash flows for the year ended December 31, 1999, the nine-month period
ended December 31, 1998 and the year ended March 31, 1998, in conformity with
accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
--------------------------------------
Arthur Andersen LLP
Roseland, New Jersey
March 6, 2000 (except with
respect to the first paragraph
of Note 13 as to which the
date is March 14, 2000, the
net income (loss) per share
disclosure in Note 2 as to
which the date is May 12, 2000
and all other paragraphs in
Note 13 as to which the date
is June 13, 2000.)
F-2
<PAGE> 66
SERANOVA, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash................................................. $ 592 $ 611 $ 677
Accounts receivable, net of allowance for doubtful
accounts of $934, $353 and $207, respectively..... 9,587 7,456 3,096
Unbilled services.................................... 5,371 3,680 900
Other current assets................................. 682 769 286
------- ------- ------
Total Current Assets................................... 16,232 12,516 4,959
Property and equipment, net............................ 4,828 2,863 816
Intangible assets, net................................. 3,289 3,492 --
Other assets........................................... 642 9 --
------- ------- ------
Total Assets........................................... $24,991 $18,880 $5,775
======= ======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt.................... $ 120 $ 120 $ --
Note payable to Intelligroup......................... 3,913 8,397 1,779
Accounts payable..................................... 2,401 872 526
Accrued payroll and related costs.................... 3,104 1,551 1,039
Accrued expenses and other liabilities............... 2,478 2,352 2,039
------- ------- ------
Total Current Liabilities.............................. 12,016 13,292 5,383
Long-Term Debt, net of current portion................. 591 618 --
------- ------- ------
Total Liabilities...................................... 12,607 13,910 5,383
------- ------- ------
Commitments
Shareholders' Equity:
Preferred stock $.01 par value, 5,000,000 shares
authorized, none issued or outstanding............ -- -- --
Common stock, $.01 par value, 40,000,000 shares
authorized, 17,460,883, 16,629,413 and 16,629,413
shares issued and outstanding as of March 31, 2000
and December 31, 1999 and 1998.................... 175 167 167
Additional paid-in capital........................... 9,992 -- --
Intelligroup investment.............................. 7,566 7,083 1,186
Accumulated deficit.................................. (5,325) (2,246) (985)
Currency translation adjustment...................... (24) (34) 24
------- ------- ------
Total Shareholders' Equity............................. 12,384 4,970 392
------- ------- ------
Total Liabilities and Shareholders' Equity............. $24,991 $18,880 $5,775
======= ======= ======
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements.
F-3
<PAGE> 67
SERANOVA, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS FOR THE NINE-MONTH FOR THE
ENDED MARCH 31, YEAR ENDED PERIOD ENDED YEAR ENDED
----------------- DECEMBER 31, DECEMBER 31, MARCH 31,
2000 1999 1999 1998 1998
------- ------- ------------ ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.................................. $16,176 $ 7,988 $39,795 $12,438 $ 8,995
Cost of sales............................. 8,389 4,649 22,475 7,315 4,797
------- ------- ------- ------- -------
Gross profit.............................. 7,787 3,339 17,320 5,123 4,198
------- ------- ------- ------- -------
Selling, general and administrative
expenses................................ 11,319 2,726 17,605 5,106 3,812
Depreciation and amortization............. 472 135 1,131 102 133
------- ------- ------- ------- -------
Total operating expenses.................. 11,791 2,861 18,736 5,208 3,945
------- ------- ------- ------- -------
Operating income (loss)................... (4,004) 478 (1,416) (85) 253
Other income (expense), net............... (185) (19) (80) (66) 13
------- ------- ------- ------- -------
Income (loss) before income taxes......... (4,189) 459 (1,496) (151) 266
Provision (benefit) for income taxes...... (1,110) 179 (235) 401 519
------- ------- ------- ------- -------
Net income (loss)......................... $(3,079) $ 280 $(1,261) $ (552) $ (253)
======= ======= ======= ======= =======
Net income (loss) per common share --basic
and diluted............................. $ (0.18) $ 0.02 $ (0.08) $ (0.03) $ (0.02)
======= ======= ======= ======= =======
Shares used in per share calculation of
net income (loss) -- basic and
diluted................................. 16,785 16,629 16,629 16,629 16,629
======= ======= ======= ======= =======
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements.
F-4
<PAGE> 68
SERANOVA, INC. AND AFFILIATES
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL SHAREHOLDERS'
ACCUMULATED OTHER EQUITY AND
COMMON INTELLIGROUP ADDITIONAL ACCUMULATED COMPREHENSIVE COMPREHENSIVE
STOCK INVESTMENT PAID-IN-CAPITAL DEFICIT INCOME (LOSS) INCOME (LOSS)
------ ------------ --------------- ----------- ----------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE -- MARCH 31, 1997.... $167 $ 534 $ -- $ (180) $ 15 $ 536
Net loss..................... -- -- -- (253) -- (253)
Foreign currency
translation................ -- -- -- -- (68) (68)
-------
Comprehensive loss........... -- (321)
Net transfers from
Intelligroup, Inc. ........ -- 26 -- -- -- 26
---- ------ ------- ------- ---- -------
BALANCE -- MARCH 31, 1998.... 167 560 -- (433) (53) 241
Net loss..................... -- -- -- (552) -- (552)
Foreign currency
translation................ -- -- -- -- 77 77
-------
Comprehensive loss........... -- (475)
Net transfers from
Intelligroup, Inc. ........ -- 626 -- -- -- 626
---- ------ ------- ------- ---- -------
BALANCE -- DECEMBER 31,
1998....................... 167 1,186 -- (985) 24 392
Net loss (unaudited)......... -- -- -- (1,261) -- (1,261)
Foreign currency
translation................ -- -- -- -- (58) (58)
-------
Comprehensive loss........... -- (1,319)
Net transfers from
Intelligroup, Inc. ........ -- 5,897 -- -- -- 5,897
---- ------ ------- ------- ---- -------
BALANCE -- DECEMBER 31,
1999....................... 167 7,083 -- (2,246) (34) 4,970
Net loss (unaudited)......... -- -- -- (3,079) -- (3,079)
Foreign currency translation
(unaudited)................ -- -- -- -- 10 10
---- ------ ------- ------- ---- -------
Comprehensive loss
(unaudited)................ -- -- -- -- -- (3,069)
Net transfers from
Intelligroup, Inc.
(unaudited)................ -- 483 -- -- -- 483
Sale of 831,470 shares of
common stock............... 8 -- 9,992 -- -- 10,000
---- ------ ------- ------- ---- -------
BALANCE -- MARCH 31, 2000
(UNAUDITED)................ $175 $7,566 $ 9,992 $(5,325) $(24) $12,384
==== ====== ======= ======= ==== =======
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements.
F-5
<PAGE> 69
SERANOVA, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS FOR THE NINE-MONTH FOR THE
ENDED MARCH 31, YEAR ENDED PERIOD ENDED YEAR ENDED
----------------- DECEMBER 31, DECEMBER 31, MARCH 31,
2000 1999 1999 1998 1998
------- ------- ------------ ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss).................... $(3,079) $ 280 $(1,261) $ (552) $ (253)
Adjustments to reconcile net income (loss)
to net cash used operating activities:
Depreciation and amortization........ 472 135 1,131 102 133
Provision for doubtful receivables... 581 -- 189 140 127
Changes in assets and liabilities,
net of acquired business:
Accounts receivable................ (2,712) (923) (3,766) (1,068) (1,066)
Unbilled services.................. (1,691) (980) (2,662) (648) (248)
Other current assets............... 87 (519) (425) (174) (71)
Other assets....................... (633) 4 (5) -- --
Accounts payable................... 1,529 5 288 250 139
Accrued payroll and related
costs........................... 1,553 639 410 74 (32)
Accrued expenses and other
liabilities..................... 126 804 8 1,410 418
------- ------- ------- ------- -------
Net cash used in operating
activities.................... (3,767) (555) (6,093) (466) (853)
------- ------- ------- ------- -------
Cash Flows from Investing Activities:
Purchase of business, net of cash
acquired........................... -- (2,186) (2,186) -- --
Capital expenditures................. (2,234) (268) (2,175) (603) (7)
------- ------- ------- ------- -------
Net cash used in investing
activities......................... (2,234) (2,454) (4,361) (603) (7)
------- ------- ------- ------- -------
Cash Flows from Financing Activities:
Loans from Intelligroup............ 2,440 616 6,618 894 886
Repayment of loans................. (6,951) (26) (109) (219) (302)
Proceeds from sale of common
stock........................... 10,000 -- -- -- --
Net transfers from Intelligroup.... 483 2,995 3,937 626 26
------- ------- ------- ------- -------
Net cash provided by financing
activities.................... 5,972 3,585 10,446 1,301 610
------- ------- ------- ------- -------
Effect of Exchange Rate Changes on Cash
and Cash Equivalents.................... 10 (10) (58) 77 (17)
------- ------- ------- ------- -------
Increase (Decrease) in Cash and Cash
Equivalents............................. (19) 566 (66) 309 (267)
Cash and Cash Equivalents, Beginning of
Period.................................. 611 677 677 368 635
------- ------- ------- ------- -------
Cash and Cash Equivalents, End of
Period.......................... $ 592 $ 1,243 $ 611 $ 677 $ 368
======= ======= ======= ======= =======
Supplementary disclosures of cash flow
information:
Cash paid for interest............. $ 20 $ 19 $ 81 $ 17 $ 6
Cash paid for income taxes......... $ 500 $ 59 $ 229 $ 361 $ 84
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements.
F-6
<PAGE> 70
SERANOVA, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 -- SERANOVA
SeraNova, Inc. ("SeraNova") is a provider of strategic eBusiness services,
including business-to-business solutions. SeraNova's services include strategic
consulting, design, implementation and management of eBusiness systems. SeraNova
serves e-business solution needs of Global 5000 as well as emerging internet
based companies through rapid conception, creation and deployment of innovation
internet and portal-based solutions.
SeraNova was incorporated under the name Infinient, Inc. in the State of
New Jersey on September 9, 1999 and issued 100 shares to Intelligroup, Inc.
("Intelligroup") on such date. Effective on January 1, 2000, Intelligroup
contributed the assets and liabilities of its Internet solutions group,
including SeraNova India which commenced operations in October 1999, the capital
stock of Network Publishing, Inc. and the capital stock of the Azimuth Companies
to SeraNova in exchange for 900 shares of the common stock of SeraNova, $0.01
par value per share (the "Formation"). The Formation was accounted for using the
carryover basis of accounting. The accompanying combined financial statements
include the accounts and operations of the Internet solutions group since its
inception in 1997, Network Publishing, Inc. from the date of its acquisition by
Intelligroup (January 8, 1999) and the Azimuth Companies for all periods
presented (see Note 3). Intelligroup acquired the Azimuth Companies in a
transaction accounted for as a pooling of interests and Network publishing, Inc.
through a purchase acquisition.
SeraNova began operations in India in October of 1999 and the United
Kingdom in November of 1999. Results of operations and financial information
since inception have been included in the accompanying combined financial
statements.
Intelligroup has proposed to distribute to its shareholders of all of the
SeraNova shares of common stock it holds. For each common share of Intelligroup
stock held, one share of SeraNova common stock is anticipated to be issued.
SeraNova intends to split the number of its outstanding shares on the record
date of such dividend so that the number of SeraNova's outstanding shares shall
equal the number of outstanding shares of Intelligroup. The spin-off is subject
to certain conditions and approvals.
SeraNova has not operated as a separate company and faces the risks and
uncertainties encountered by companies in the early stages of development such
as managing growth, intense competition, expansion both domestically and
internationally and rapidly changing technology. In the past, SeraNova has
relied on Intelligroup for many administrative services and financial support.
SeraNova has entered into various agreements with Intelligroup (see Note 4) and
is currently exploring various alternative financing options.
Effective April 1, 1998, SeraNova changed its year end from March 31 (the
Azimuth Companies former year end) to December 31. All significant intercompany
balances and transactions have been eliminated.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The consolidated financial statements and accompanying financial
information as of March 31, 2000 and for the three months ended March 31, 2000
and 1999 are unaudited and, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) which SeraNova
considers necessary for a fair presentation of the financial position of
SeraNova at such dates and the operating results and cash flows for those
periods. Results for interim periods are not necessarily indicative of results
for the entire year.
Use of Estimates
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
F-7
<PAGE> 71
SERANOVA, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
liabilities, the 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 maturities of three months or less from date of
purchase.
Revenue Recognition
SeraNova 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 a 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 represent services provided
which are billed subsequent to the respective period end. SeraNova anticipates
all such amounts to be realized within the following year.
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). Cost of maintenance and repairs are charged to expense as incurred.
Intangible Assets
Intangible assets as of March 31, 2000 and December 31, 1999 include
goodwill of $3,922,000 and other intangibles totaling $139,500 less accumulated
amortization of $772,000 and $569,000, respectively, that was attributable to
the acquisition of Network Publishing, Inc. (see Note 3). These intangible
assets are being amortized over the estimated useful lives of 5 years using the
straight-line method. Amortization expense was $203,000 for the three months
ended March 31, 2000 and $569,000 for the year ended December 31, 1999.
Allowance for Doubtful Accounts
SeraNova provides an allowance for doubtful accounts 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 allowance, management is required to make certain estimates and
assumptions. The provision for doubtful accounts totaled $189,000, $140,000 and
$127,000 for the year ended December 31, 1999, the nine months ended December
31, 1998 and the year ended March 31, 1998, respectively. Write-offs of accounts
receivable totaled $43,000, $60,000 and $0 for the year ended December 31, 1999,
the nine months ended December 31, 1998 and the year ended March 31, 1998,
respectively.
Recoverability of Long-Lived Assets
SeraNova reviews the recoverability of its long-lived assets on a periodic
basis whenever events and circumstances have occurred that indicate the
remaining balance may not be recoverable. The assessment for potential
impairment is based primarily on SeraNova's ability to recover the carrying
value of its long-lived assets from expected future cash flows from its
operations on an undiscounted basis. SeraNova does not believe that any such
events or changes in circumstances have occurred. The amount of impairment of
goodwill and other intangibles would be determined as part of the long-lived
asset grouping being evaluated
F-8
<PAGE> 72
SERANOVA, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
utilizing undiscounted net income over the remaining life of the asset. Where
goodwill is identified with assets subject to an impairment loss, the carrying
amount of the identified goodwill would be eliminated before making any
reduction of the carrying amounts of the impaired long-lived assets and
identifiable intangibles.
Stock-Based Compensation
Stock-based compensation is recognized using the intrinsic value method
under APB No. 25. For disclosure purposes, pro forma net income (loss) impacts
are provided as if the fair market value method has been applied.
Currency Translation
Assets and liabilities relating to foreign operations are translated into
US dollars using exchange rates in effect at the balance sheet date. Income and
expenses are translated in US 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 shareholder's
equity.
Foreign currency transaction gains and losses are recorded in other income
(expense) in the combined statements of operations.
Concentrations
One customer accounted for approximately 38% and a second customer
accounted for approximately 11% of the combined revenues of SeraNova for the
three months ended March 31, 2000. Accounts receivable as of March 31, 2000
attributable to these customers was $3,231,000 and $898,000, respectively. No
other customer accounted for more than 10% of the combined revenues of SeraNova
for the three months ended March 31, 2000.
One customer accounted for approximately 28% of the combined revenues of
SeraNova for the year ended December 31, 1999. Accounts receivable as of
December 31, 1999 attributable to this customer was $1,960,000. Another customer
accounted for 13% of revenues for the nine-month period ended December 31, 1998
(See Note 4). Accounts receivable attributable to this customer was $419,000 as
of December 31, 1998. No other customer contributed in excess of 10% of the
combined revenues for any other period. For the year ended December 31, 1999,
six customers accounted for approximately 50% of SeraNova's revenues.
Income Taxes
SeraNova accounts for income taxes pursuant to SFAS 109, "Accounting for
Income Taxes", which uses the liability method to calculate deferred income
taxes.
The accompanying combined statements of operations reflect income taxes as
if SeraNova filed a separate tax return. U.S. income taxes on undistributed
earnings of foreign entities have not been provided as they are considered
permanently invested.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable and
debt approximate fair value because of the short-term nature of these
instruments.
Net Income (Loss) Per Share
Net income (loss) per share -- basic has been computed by dividing the net
loss by the May 12, 2000 (the record date of the spin off) outstanding shares of
common stock of Intelligroup and the weighted average number of shares sold to
investors on March 14, 2000 (see Note 13).
F-9
<PAGE> 73
SERANOVA, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Net income (loss) per share -- diluted has been computed by dividing the
net loss by the May 12, 2000 outstanding shares of common stock of Intelligroup
and the weighted average number of shares sold to investors on March 14, 2000
(see Note 13). Stock options (3,236,000 as of December 31, 1999) have not been
included in the calculation since they are anti-dilutive.
All common shares and per share amounts have been adjusted retroactively to
give effect to a 16,629.413-for-one stock split effective May 12, 2000 relating
to the spin-off.
NOTE 3 -- BUSINESS COMBINATIONS
On November 25, 1998, Intelligroup consummated the acquisition of all of
the outstanding capital stock 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. The accompanying combined financial
statements include the results of operations and financial position of the
Azimuth Companies for all periods presented in accordance with pooling of
interests accounting. As consideration for this acquisition, Intelligroup issued
902,928 shares of its common stock.
On January 8, 1999, Intelligroup consummated the acquisition of all of the
shares of outstanding capital stock of Network Publishing, Inc. The acquisition
was accounted for utilizing the purchase method of accounting. The purchase
price included an initial cash payment in the aggregate of $1,800,000 together
with a cash payment of $200,000 to be held in escrow plus costs of the
transaction, and resulted in costs in excess of fair value of net tangible
assets acquired of $1,600,000. Such amount has been allocated to intangible
assets (assembled workforce of $139,500) with the remainder assigned to
goodwill. In addition, the purchase price included an earn-out payment of up to
$2,212,650 in restricted shares of Intelligroup's common stock payable on or
before April 15, 2000 and a potential lump sum cash payment of $354,024 payable
no later than March 31, 2000. In July 1999, Intelligroup and the former
shareholders of Network Publishing, Inc. agreed to amend the agreements to
eliminate the earnout and fix the additional consideration amount at $2,430,000
payable at the option of Intelligroup in Intelligroup's common stock or cash. As
of December 31, 1999, SeraNova has recorded this transaction as an increase to
goodwill and equity. On January 8, 2000, Intelligroup made a cash payment of
$340,000 and issued approximately 100,000 shares of its common stock to satisfy
its obligation.
The following unaudited pro forma information presents a summary of results
of operations of SeraNova and Network Publishing, Inc. as if the acquisition had
occurred on April 1, 1997.
<TABLE>
<CAPTION>
FOR THE NINE-MONTH
PERIOD ENDED FOR THE YEAR ENDED
DECEMBER 31, 1998 MARCH 31, 1998
------------------ ------------------
<S> <C> <C>
Revenues.................................................. $15,576,000 $12,393,000
Net loss.................................................. (571,000) (559,000)
Net loss per common share -- basic and diluted............ $ (0.03) $ (0.03)
</TABLE>
NOTE 4 -- RELATED PARTY TRANSACTIONS
Prior to the Formation, Intelligroup accounted for the separate financial
results of Network Publishing, Inc. and the Azimuth Companies. However,
Intelligroup did not account separately for the U.S. internet business. In the
preparation of the accompanying combined financial statements, SeraNova and
Intelligroup have specifically identified all revenue, costs of sales, other
income (expense), net and certain direct selling, general and administrative
expenses incurred on behalf of SeraNova related to the U.S. internet operations.
Other selling, general and administrative expenses have been allocated between
Intelligroup and SeraNova based on either revenue generation, head count or
occupancy, where applicable. The selling, general and
F-10
<PAGE> 74
SERANOVA, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
administrative expenses captured and allocated by these methods pertain to only
U.S. operations. Revenue, head count and occupancy percentages were calculated
using only U.S. data for Intelligroup and SeraNova. SeraNova believes that
allocated costs approximate the historical costs of SeraNova and that the
allocation methods used are reasonable. For balance sheet purposes, the U.S.
internet operation's cash and payables are included in Intelligroup's investment
as they historically have not been accounted for separately.
For the nine-month period ended December 31, 1998, one customer accounted
for approximately $1.7 million, or 13%, of the combined revenues of SeraNova. An
executive officer of such customer is currently a member of the Board of
Directors of Intelligroup. SeraNova generated approximately $58,000 of revenue
from such company during the year ended December 31, 1999. During the three
months ended March 31, 2000 and the year ended December 31, 1999, one customer
accounted for approximately $350,000 and $105,000, respectively, of combined
revenues of SeraNova. Accounts receivable for this customer was $351,000 and $0
as of March 31, 2000 and December 31, 1999, respectively. An executive officer
of such customer is currently the chairman of SeraNova.
Note payable to Intelligroup represents a calculation of net borrowing from
Intelligroup as of December 31, 1999 and 1998 (See Note 13).
SeraNova and Intelligroup have entered into the following agreements
effective January 1, 2000.
Distribution Agreement
This agreement between SeraNova and Intelligroup calls for distribution by
Intelligroup on the Distribution Date of the SeraNova Common Stock owned by
Intelligroup to the holders of Intelligroup Common Stock as of the Record Date,
subject to certain conditions.
Services Agreement
Under the terms of the services agreement, SeraNova has agreed with
Intelligroup: (1) to share certain general and administrative expenses; and (2)
for Intelligroup to provide SeraNova with other general, administrative services
in exchange for a fee. The general and administrative expenses include payroll
costs for shared employees, utilities costs, equipment expenses, taxes and
office supplies. SeraNova's cost for administrative services provided by
Intelligroup will approximate $30,000 per month.
Contribution Agreement
The assets and liabilities of Intelligroup's Internet services business, as
defined, were transferred by Intelligroup and certain of its subsidiaries to
SeraNova effective January 1, 2000 subject to certain conditions being
satisfied. The transfer may be subject to a post contribution adjustment, as
defined. Some assignments and transfers may require prior consent by third
parties and various filings or recordings with governmental entities.
Space Sharing Agreement
SeraNova has entered into a space sharing agreement with Intelligroup
providing for the sharing by Intelligroup and SeraNova of Intelligroup's office
facilities, including the office facilities located in Edison, New Jersey at
which SeraNova's and Intelligroup's principal executive offices are located.
Under the space sharing agreement, the costs associated with leasing and
maintaining facilities are, in general, allocated between Intelligroup and
SeraNova on the basis of actual use of floor space. SeraNova's space sharing
costs will approximate $68,000 per month.
F-11
<PAGE> 75
SERANOVA, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Tax Sharing Agreement
SeraNova has entered into a tax sharing agreement with Intelligroup that
governs the allocation of federal, state, local and foreign tax liabilities and
related tax matters.
NOTE 5 -- COMMITMENTS
Employment Agreements
In September and October, 1999, SeraNova entered into three employment
agreements with certain executive officers which expire through October 2002.
The amount due under these contracts is approximately $1.1 million per year.
Additionally, the contracts provided for the granting of options to purchase
1,711,464 shares of SeraNova's common stock at $2.52 per share which was equal
to the estimated fair market value of SeraNova's common stock as of the grant
date as determined by the board of directors (See Note 10). The options vest
over a three year period.
Leases
SeraNova leases various office space, office equipment and vehicles under
operating leases expiring at various dates through December 2005. Rental expense
for all leases approximated $450,000 and $177,000 for the three months ended
March 31, 2000 and 1999, respectively, $729,000 for the year ended December 31,
1999, $284,000 for the nine-month period ended December 31, 1998 and $388,000
for the year ended March 31, 1998, respectively. Future lease commitments are as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
<S> <C>
2000........................................... $ 736,000
2001........................................... 635,000
2002........................................... 586,000
2003........................................... 551,000
2004........................................... 611,000
Thereafter..................................... 479,000
----------
$3,598,000
==========
</TABLE>
Rental expense associated with the space sharing agreement with
Intelligroup (Note 4) is not included in the above table.
Benefit Plans
Employees of SeraNova were eligible to participate in the Intelligroup,
Inc. Employee Retirement Plan (the "Plan"). The Plan allows eligible employees
to contribute up to 15% percent of their annual compensation, subject to the
Internal Revenue Code's statutory limitations. Effective January 1, 1999,
contributions to the Plan by Intelligroup are made at the discretion of the
Board of Directors, and the related expense specific to the SeraNova Plan were
approximately $132,000 for the year ended December 31, 1999. There were no
employer contributions to the Plan for the periods prior to January 1, 1999.
Effective January 1, 2000, the SeraNova, Inc. Employee Retirement Plan was
formed. As of this date, SeraNova employees will no longer be eligible to
participate in the Intelligroup, Inc. Retirement Plan. SeraNova will contribute
50% of the first 4% of a participants contribution subject to the Internal
Revenue Code's statutory limitations.
F-12
<PAGE> 76
SERANOVA, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Other Commitments
SeraNova has entered into an agreement with a strategic marketing
consulting company in connection with certain sales and marketing services.
Under the terms of this agreement the consulting company will assist SeraNova in
building a SeraNova brand, generate leads, support sales force and build a sales
systems infrastructure. SeraNova expects to spend approximately $3 million in
the first six months of the fiscal year 2000 related to this agreement.
NOTE 6 -- INCOME TAXES
The operating results of the domestic Internet solutions group have
historically been included in the consolidated tax returns of Intelligroup and
have been computed as if they were on a stand-alone basis. The tax accounts for
Network Publishing, Inc. and the Azimuth Companies are reported based on
individual tax returns filed by each company historically. The provisions for
income taxes include the effect of certain temporary differences between amounts
reported for tax purposes versus financial reporting.
The provision (benefit) for income taxes was as follows:
<TABLE>
<CAPTION>
FOR THE PERIODS ENDED
-----------------------------------------
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
------------ ------------ ---------
<S> <C> <C> <C>
Current
Federal....................................... $(560,000) $163,000 $ 76,000
State......................................... (55,000) 54,000 25,000
Foreign....................................... 363,000 386,000 450,000
--------- -------- --------
Current....................................... (252,000) 603,000 551,000
--------- -------- --------
Deferred
Federal....................................... 15,000 (37,000) (26,000)
State......................................... 2,000 (9,000) (6,000)
--------- -------- --------
Deferred...................................... 17,000 (46,000) (32,000)
--------- -------- --------
Total........................................... $(235,000) $557,000 $519,000
========= ======== ========
</TABLE>
F-13
<PAGE> 77
SERANOVA, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of the significant temporary differences which comprised
the deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Tax Deferred Assets:
Allowance for doubtful accounts.......................... $ 124,000 $ 84,000
Vacation accrual......................................... 180,000 123,000
Foreign net operating loss carryforwards................. 81,000 75,000
--------- ---------
Total deferred tax assets................................ 385,000 282,000
Deferred Tax Liabilities:
Depreciation............................................. 24,000 (4,000)
Valuation allowance........................................ (261,000) (198,000)
--------- ---------
Net deferred tax asset..................................... $ 100,000 $ 80,000
========= =========
Current.................................................... $ 304,000 $ 207,000
Non-current................................................ 57,000 71,000
Valuation.................................................. (261,000) (198,000)
--------- ---------
Net deferred tax asset..................................... $ 100,000 $ 80,000
========= =========
</TABLE>
SeraNova has provided a valuation allowance for all deferred tax assets of
the Azimuth Companies and the start up operations in the United Kingdom due to
the historical losses of these companies.
The effective tax rate of SeraNova for each period presented is comprised
of federal taxes on income of domestic operations at 34%. State taxes on
domestic income totaled 4% of the effective tax rate. Other permanent items,
including, among others, non-deductible entertainment expenses, totaled 3% of
the effective rate while non-deductible amortization totaled 13% of the
effective tax rate in 1999. The remaining difference between the statutory
federal rate of 34% and SeraNova's effective rates relates to taxes on income
from foreign jurisdictions. Losses incurred in certain countries could not be
offset by income from other countries thus resulting in high effective rate.
NOTE 7 -- LONG-TERM DEBT
Network Publishing, Inc. has entered into a $875,000 note payable with a
bank dated April 25, 1997, secured by their equipment, furniture and fixtures.
The note, which bears interest at the bank's prime rate (8.5% percent as of
December 31, 1999) plus 2%, matures on April 25, 2007. Principal and interest
are payable in monthly installments. Interest expense for the periods ended
March 31, 2000 and December 31, 1999 was $20,000 and $77,000, respectively.
Included in current portion of long-term debt are other miscellaneous borrowings
totaling approximately $35,000 and $48,000 as of March 31, 2000 and December 31,
1999, respectively. The aggregate amount of principal maturities of long-term
debt as of December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000........................................................ $120,000
2001........................................................ 73,000
2002........................................................ 81,000
2003........................................................ 89,000
2004........................................................ 99,000
Thereafter.................................................. 276,000
--------
$738,000
========
</TABLE>
F-14
<PAGE> 78
SERANOVA, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- PROPERTY AND EQUIPMENT
Property and Equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
--------- ------------ ------------
<S> <C> <C> <C>
Computers and software.......................... $ 4,419 $ 2,839 $ 595
Furniture and equipment......................... 1,799 1,191 796
------- ------- ------
6,218 4,030 1,391
Accumulated depreciation........................ (1,390) (1,167) (575)
------- ------- ------
$ 4,828 $ 2,863 $ 816
======= ======= ======
</TABLE>
Depreciation expense was $269, $561, $102 and $133 for the three months ended
March 31, 2000, the year ended December 31, 1999, the nine months ended December
31, 1998 and the year ended March 31, 1998.
NOTE 9 -- ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consisted of the following (in
thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
--------- ------------ ------------
<S> <C> <C> <C>
Accrued expenses................................ $2,413 $2,053 $1,779
Advanced billings............................... 48 83 64
Income taxes payable............................ 17 216 196
------ ------ ------
Total................................. $2,478 $2,352 $2,039
====== ====== ======
</TABLE>
NOTE 10 -- STOCK OPTIONS
On December 1, 1999 SeraNova adopted the SeraNova, Inc. 1999 Stock Plan
covering its employees, officers and directors, and certain consultants, agents
and key contractors. The maximum number of shares available for issuance under
the Plan is 5,000,000 on a post split and spin-off basis, subject to certain
adjustments. SeraNova has granted stock options with an exercise price at fair
market value as described below. The Plan provides for both non-qualified and
incentive stock options. Generally, options granted under the Plan vest in six
equal installments at the end of each six month period after the date of grant
and expire within ten years from the date of the grant and have an exercise
price equal to the fair market value of SeraNova's common stock on the date of
grant.
SeraNova has elected to follow APB No. 25 in accounting for its employee
stock options. Accordingly, no compensation cost has been recognized. A summary
of the stock option grants is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE FAIR VALUE
--------- ---------------- ----------------
<S> <C> <C> <C>
Options Outstanding, December 31, 1998........... -- -- --
Options Granted, September 15, 1999.............. 1,244,701 $2.52 $2.16
Options Granted, October 1, 1999................. 1,450,010 2.52 2.16
Options Granted, December 1, 1999................ 541,381 6.51 5.58
--------- ----- -----
Options Outstanding, December 31, 1999 (none
exercisable)................................... 3,236,092 $3.19 $2.73
========= ===== =====
</TABLE>
F-15
<PAGE> 79
SERANOVA, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
On January 1, 2000, pursuant to the 1999 stock plan, stock options were
granted to purchase 1,407,575 shares of SeraNova's common stock at an exercise
price of $6.51 per share. On January 14, 2000, SeraNova granted stock options
under the 1999 stock plan to purchase 260,000 shares of SeraNova's common stock
with an exercise price per share of $6.51.
The calculation of the option grant prices of SeraNova's common stock was
as follows: SeraNova multiplied SeraNova's revenue contribution in the most
recent quarter (SeraNova's revenue as a percentage of the total consolidated
revenue for Intelligroup) to the Intelligroup's stock price as of the valuation
date. Then SeraNova applied 100% premium to the implied price to obtain fair
market value of SeraNova's common stock.
The fair value of option grants for disclosure purposes is estimated on the
date of grant using the Black-Scholes option-pricing model that uses the
following assumptions: expected volatility of 82%, risk-free interest rate of
6%, dividend rate of 0% and expected lives of 10 years. The weighted-average
fair value of options granted during 1999 was $2.73. Had the compensation cost
for SeraNova's stock options been determined using the Black-Scholes fair value
pricing model, the net of tax impact for year ended December 31, 1999 would be
as follows:
<TABLE>
<S> <C>
Net loss as reported............................ $(1,261,000)
Net loss pro forma.............................. $(1,625,000)
Unaudited pro forma net loss per common share as
reported -- basic and diluted................. $ (0.08)
Unaudited pro forma net loss per common share as
adjusted -- basic and diluted................. $ (0.10)
</TABLE>
The pro forma results are not intended to be indicative of or a projection
of future results.
NOTE 11 -- SEGMENT INFORMATION
Historically, SeraNova has managed operations only by geographic region.
The following is information by geographic area as of and for the three-month
period ended March 31, 2000, for the year ended December 31, 1999, the
nine-month period ended December 31, 1998 and the year ended March 31, 1998.
<TABLE>
<CAPTION>
FOR THE THREE-MONTH PERIOD
ENDED MARCH 31, 2000 UNITED STATES ASIA PACIFIC EUROPE INDIA COMBINED TOTAL
-------------------------- ------------- ------------ ------ ------ --------------
<S> <C> <C> <C> <C> <C>
Revenue........................... $11,517 $ 2,503 $ 72 $2,084 $16,176
Depreciation & amortization....... 370 22 -- 80 472
Income (loss) from operations..... (3,727) (911) (387) 1,021 (4,004)
Interest income................... -- 1 -- 2 3
Interest expense.................. (175) (6) -- -- (181)
Other income (expense)............ (3) (2) -- (2) (7)
Income (loss) before income
taxes........................... (3,905) (918) (387) 1,021 (4,189)
Capital spending.................. 1,374 15 27 818 2,234
Total assets...................... 18,393 3,476 237 2,885 24,991
</TABLE>
F-16
<PAGE> 80
SERANOVA, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999 UNITED STATES ASIA PACIFIC EUROPE INDIA COMBINED TOTAL
------------------------------------ ------------- ------------ ------ ------ --------------
<S> <C> <C> <C> <C> <C>
Revenue............................ $27,408 $11,324 $ -- $1,063 $39,795
Depreciation & amortization........ 1,015 82 -- 34 1,131
Income (loss) from operations...... (2,734) 848 (99) 569 (1,416)
Interest income.................... 6 24 -- -- 30
Interest expense................... (77) (5) -- -- (82)
Other income (expense)............. -- (28) -- -- (28)
Income (loss) before income taxes... (2,805) 839 (99) 569 (1,496)
Capital spending................... 1,012 120 -- 1,043 2,175
Total assets....................... 14,032 3,410 39 1,399 18,880
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE-MONTH PERIOD ENDED DECEMBER 31, 1998 UNITED STATES ASIA PACIFIC COMBINED TOTAL
------------------------------------------------- ------------- ------------ --------------
<S> <C> <C> <C>
Revenue.............................................. $6,020 $6,418 $12,438
Depreciation & amortization.......................... 33 69 102
Income (loss) from operations........................ 411 (496) (85)
Interest income...................................... -- -- --
Interest expense..................................... -- 14 14
Other income (expense)............................... -- (52) (52)
Income (loss) before income taxes.................... 411 (562) (151)
Capital spending..................................... 594 9 603
Total assets......................................... 2,968 2,807 5,775
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31, 1998 UNITED STATES ASIA PACIFIC COMBINED TOTAL
--------------------------------- ------------- ------------ --------------
<S> <C> <C> <C>
Revenue.............................................. $2,100 $6,895 $8,995
Depreciation & amortization.......................... -- 133 133
Income (loss) from operations........................ 169 84 253
Interest income...................................... -- 1 1
Interest expense..................................... -- 10 10
Other income (expense)............................... -- 22 22
Income (loss) before income taxes.................... 170 96 266
Capital spending..................................... -- 7 7
Total assets......................................... 1,328 1,888 3,216
</TABLE>
Foreign revenue is based on the country in which SeraNova's operations
reside.
NOTE 12 -- PREFERRED STOCK
Pursuant to SeraNova's Certificate of Incorporation, SeraNova has the
authority to issue 5,000,000 shares of undesignated preferred stock, par value
$.01 per share. The preferred stock may be issued, from time to time, pursuant
to a resolution by SeraNova's Board of Directors that will set forth the voting
powers and other pertinent rights of such series.
NOTE 13 -- SUBSEQUENT EVENTS
Equity Investment
On March 14, 2000, SeraNova sold 831,470 shares of its common stock to four
institutional investors for $10,000,000. SeraNova granted certain demand and
piggyback registration rights to such investors.
F-17
<PAGE> 81
SERANOVA, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Borrowings
As discussed in Note 4, note payable to Intelligroup represents a
calculation of net borrowings from Intelligroup. On January 1, 2000, such
borrowings were converted to amounts repayable by SeraNova to a bank under
Intelligroup's revolving credit facility agreement. Effective January 1, 2000,
SeraNova became a co-borrower under Intelligroup's revolving credit facility
agreement with a bank. Intelligroup and SeraNova are jointly and severally
liable under the agreement. In the event Intelligroup requests and the bank
approves a change in control of the ownership of SeraNova as contemplated by the
spin off, all SeraNova's obligations under the agreement become due and payable.
Intelligroup was in technical default of one of the bank covenants as of March
31, 2000 but obtained a waiver of such default through September 2000.
There are no aggregate outstanding advances against the revolving credit
facility as of March 31, 2000. As of December 31, 1999, the aggregate
outstanding advances against the revolving credit facility were $10.6 million.
SeraNova's portion of the outstanding balance as of December 31, 1999, was $8.4
million. As of March 31, 2000, a portion of the proceeds from the sale of common
stock was used to pay off the outstanding balance due to the bank as of March
31, 2000.
On May 31, 2000, SeraNova was released from all obligations under
Intelligroup's revolving credit facility agreement and entered into a
$15,100,000 promissory note with Intelligroup. Such note is for services and
advances previously provided by Intelligroup. The note, which is unsecured and
bears interest at the prime rate plus 1/2%, partially matures with $3,000,000
due on September 30, 2000 with the balance due on July 31, 2001. The note has
certain mandatory prepayment provisions based on future debt or equity
financings by SeraNova, as defined.
On June 9, 2000, SeraNova received a commitment, subject to certain
conditions as defined, from Fleet Credit Corporation for an asset-based
revolving credit facility that will provide SeraNova with up to $15 million in
financing. The proposed credit facility is a three-year agreement secured by
substantially all assets of SeraNova, Inc. Borrowings may be made under the
facility for general corporate purposes with interest at the then current prime
rate plus 1/2%. The credit agreement will contain customary representations,
warranties, default provisions and financial covenants. The specific financial
covenants listed in the commitment letter are: (1) SeraNova must maintain total
debt to tangible net worth not to exceed a ratio of three to one and (2) any
quarterly loss may not exceed the original budget amount plus 10%. SeraNova
anticipates that approximately $6.0 million will be available initially under
this facility.
F-18
<PAGE> 82
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Network Publishing, Inc.:
We have audited the accompanying balance sheets of Network Publishing, Inc.
(a Utah corporation) as of December 31, 1998 and 1997, and the related
statements of operations, 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 Network Publishing, Inc. as
of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Salt Lake City, Utah
December 21, 1999
F-19
<PAGE> 83
NETWORK PUBLISHING, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash...................................................... $ 319,282 $ 93,957
Accounts receivable, net of allowance for doubtful
accounts of $36,000 and $44,000, respectively........... 781,845 656,670
Unbilled services......................................... 118,006 56,382
Prepaid expenses.......................................... 47,510 9,070
Related-party note receivable............................. 10,089 --
Income tax receivable..................................... -- 106,598
Deferred income tax asset................................. -- 12,436
---------- ----------
Total current assets............................... 1,276,732 935,113
---------- ----------
FURNITURE AND EQUIPMENT:
Computer equipment........................................ 748,467 622,520
Software.................................................. 249,611 173,379
Office furniture and equipment............................ 54,582 54,582
---------- ----------
1,052,660 850,481
Less accumulated depreciation............................. (617,930) (359,080)
---------- ----------
434,730 491,401
---------- ----------
DEFERRED INCOME TAX ASSET................................... 3,923 --
---------- ----------
$1,715,385 $1,426,514
========== ==========
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES:
Line of credit............................................ $ -- $ 80,000
Current portion of long-term debt......................... 61,887 42,652
Current portion of capital lease obligations.............. 47,135 --
Accounts payable.......................................... 57,687 88,241
Accrued payroll and related benefits...................... 102,304 100,249
Accrued liabilities....................................... 27,078 70,604
Deferred revenue.......................................... 133,633 163,047
Income taxes payable...................................... 11,979 --
Deferred income tax liability............................. 132,363 --
---------- ----------
Total current liabilities.......................... 574,066 544,793
---------- ----------
LONG-TERM DEBT, net of current portion...................... 690,464 767,958
---------- ----------
CAPITAL LEASE OBLIGATIONS, net of current portion........... 47,692 --
---------- ----------
DEFERRED INCOME TAX LIABILITY............................... -- 15,211
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 100,000 shares authorized,
40,000 shares issued.................................... 40,000 40,000
Additional paid-in capital................................ 514,013 274,975
Treasury stock; 22,000 shares at cost..................... (420,577) (420,577)
Deferred compensation..................................... (225,338) (25,021)
Retained earnings......................................... 495,065 229,175
---------- ----------
Total shareholders' equity......................... 403,163 98,552
---------- ----------
$1,715,385 $1,426,514
========== ==========
</TABLE>
F-20
<PAGE> 84
NETWORK PUBLISHING, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES............................................... $3,947,763 $3,397,713 $2,556,607
COST OF REVENUES....................................... 1,277,263 1,057,211 719,322
---------- ---------- ----------
Gross margin...................................... 2,670,500 2,340,502 1,837,285
---------- ---------- ----------
OPERATING EXPENSES:
Research and development............................. 230,120 288,319 --
Selling, general and administrative.................. 1,920,171 2,047,078 1,433,280
---------- ---------- ----------
Total operating expenses.......................... 2,150,291 2,335,397 1,433,280
---------- ---------- ----------
OPERATING INCOME....................................... 520,209 5,105 404,005
---------- ---------- ----------
INTEREST INCOME (EXPENSE):
Interest income...................................... 7,902 1,189 5,720
Interest expense..................................... (84,281) (64,451) (16,207)
---------- ---------- ----------
Interest expense, net............................. (76,379) (63,262) (10,487)
---------- ---------- ----------
INCOME (LOSS) BEFORE (PROVISION) BENEFIT FOR INCOME
TAXES................................................ 443,830 (58,157) 393,518
(PROVISION) BENEFIT FOR INCOME TAXES................... (177,940) 36,773 (160,647)
---------- ---------- ----------
NET INCOME (LOSS)...................................... $ 265,890 $ (21,384) $ 232,871
========== ========== ==========
</TABLE>
F-21
<PAGE> 85
NETWORK PUBLISHING, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL
---------------- PAID-IN ------------------ DEFERRED SHAREHOLDERS'
SHARES AMOUNT CAPITAL SHARES AMOUNT COMPENSATION RETAINED EARNINGS EQUITY
------ ------- ---------- ------ --------- ------------ ----------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................. 40,000 $40,000 $254,250 -- $ -- $ (17,245) $ 17,688 $ 294,693
Deferred compensation
related to stock
option grants........ -- -- 8,425 -- -- (8,425) -- --
Amortization of
deferred
compensation......... -- -- -- -- -- 5,183 -- 5,183
Net income............. -- -- -- -- -- 232,871 232,871
------ ------- -------- ------ --------- --------- --------- ---------
Balance, December 31,
1996................. 40,000 40,000 262,675 -- -- (20,487) 250,559 532,747
Deferred compensation
related to stock
option grants........ -- -- 12,300 -- -- (12,300) -- --
Amortization of
deferred
compensation......... -- -- -- -- -- 7,766 -- 7,766
Purchase of treasury
stock................ -- -- -- 22,000 (420,577) -- -- (420,577)
Net loss............... -- -- -- -- -- -- (21,384) (21,384)
------ ------- -------- ------ --------- --------- --------- ---------
Balance, December 31,
1997................. 40,000 40,000 274,975 22,000 (420,577) (25,021) 229,175 98,552
Deferred compensation
related to stock
option grants........ -- -- 239,038 -- -- (239,038) -- --
Amortization of
deferred
compensation......... -- -- -- -- -- 38,721 -- 38,721
Net income............. -- -- -- -- -- -- 265,890 265,890
------ ------- -------- ------ --------- --------- --------- ---------
Balance, December 31,
1998................. 40,000 $40,000 $514,013 22,000 $(420,577) $(225,338) $ 495,065 $ 403,163
====== ======= ======== ====== ========= ========= ========= =========
</TABLE>
F-22
<PAGE> 86
NETWORK PUBLISHING, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................... $ 265,890 $ (21,384) $ 232,871
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation....................................... 258,850 213,229 109,027
Deferred income taxes.............................. 125,665 (15,830) 12,185
Amortization of deferred compensation.............. 38,721 7,766 5,183
Changes in operating assets and liabilities:
Accounts receivable, net......................... (125,175) (198,505) (319,716)
Unbilled services................................ (61,624) 22,557 (51,425)
Prepaid expenses................................. (38,440) (7,753) 11,704
Accounts payable................................. (30,554) (1,667) 65,351
Accrued payroll and related benefits............. 2,055 38,661 39,596
Accrued liabilities.............................. (43,526) 71,230 (6,642)
Deferred revenue................................. (29,414) 123,047 38,763
Income taxes payable/receivable.................. 118,577 (240,948) 144,251
--------- --------- ---------
Net cash provided by (used in) operating
activities.................................. 481,025 (9,597) 281,148
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment................... (114,267) (344,609) (289,688)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on line of credit......... (80,000) 80,000 --
Proceeds from issuance of debt........................ -- 863,973 125,000
Principal payments on debt............................ (58,259) (213,452) (35,865)
Principal payments on capital lease obligations....... (3,174) -- --
Purchase of treasury stock............................ -- (420,577) --
--------- --------- ---------
Net cash provided by (used in) financing
activities.................................. (141,433) 309,944 89,135
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH......................... 225,325 (44,262) 80,595
CASH, beginning of year................................. 93,957 138,219 57,624
--------- --------- ---------
CASH, end of year....................................... $ 319,282 $ 93,957 $ 138,219
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................. $ 77,902 $ 60,395 $ 16,207
Cash paid for income taxes.............................. 19,777 219,905 --
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During 1998, the Company entered into four capital lease agreements to
finance the acquisition of certain computer equipment totaling $98,001.
During 1998, the Company sold various pieces of computer equipment to
Utah.com, a company owned by the three shareholders of the Company, in exchange
for a note receivable from Utah.com in the amount of $10,089.
F-23
<PAGE> 87
NETWORK PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Network Publishing, Inc. (the "Company"), a Utah corporation founded on
February 4, 1994, provides information technology services through web-site
development and hosting services based on leading technologies. The Company
markets its services to a wide variety of industries in the United States. The
majority of the Company's business is with large established companies,
including automobile manufacturers and technology companies.
As discussed in Note 9, subsequent to December 31, 1998, all of the
Company's outstanding shares of common stock were acquired by Intelligroup, Inc.
Use of Estimates
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.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, trade
receivables, trade payables and debt instruments. The carrying amounts of these
instruments reported in the accompanying balance sheets are considered to
estimate their fair values due to the short-term nature of such financial
instruments and the current interest rate environment.
Concentration of Credit Risk and Significant Customers
In the normal course of business, the Company extends credit to
substantially all its customers on an unsecured basis. The Company provides an
allowance for doubtful accounts, which is based upon a review of outstanding
receivables as well as historical collection information. At December 31, 1998,
management believes the Company had incurred no material impairments in the
carrying value of its accounts receivable, other than uncollectable amounts for
which a provision has been recorded.
One customer accounted for approximately 26, 19 and 10 percent of revenue
in 1998, 1997 and 1996, respectively. Accounts receivable due from this customer
were approximately 37 and 32 percent of accounts receivable as of December 31,
1998 and 1997, respectively. Another customer accounted for approximately 6, 44
and 61 percent of revenue in 1998, 1997 and 1996, respectively. Accounts
receivable due from this customer were approximately 6 and 30 percent of
accounts receivable as of December 31, 1998 and 1997, respectively. Two
additional customers each accounted for approximately 17 percent of revenue
during 1998 and 36 and 3 percent of accounts receivable as of December 31, 1998.
No other customer accounted for more than 10 percent of the Company's accounts
receivable as of December 31, 1998 or 1997 or revenues for 1998, 1997 or 1996.
The loss of one or more of these significant customers could have a material
adverse impact on the Company's financial position and results of operations.
Furniture and Equipment
Furniture and equipment are stated at cost, less accumulated depreciation.
Computer equipment, software and furniture and fixtures are depreciated using
the straight-line method over the estimated useful life of the asset, which is
typically three to seven years.
F-24
<PAGE> 88
NETWORK PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments that extend the useful
lives of existing equipment are capitalized and depreciated. On retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the statement of operations.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment when events or
changes in circumstances indicate that the book value of an asset may not be
recoverable. The Company evaluates, at each balance sheet date, whether events
and circumstances have occurred which indicate possible impairment. The Company
uses an estimate of future undiscounted net cash flows of the related asset or
group of assets over the remaining life in measuring whether the assets are
recoverable. As of December 31, 1998, the Company does not consider any of its
long-lived assets to be impaired.
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. A majority of the customers are
billed on a time and materials basis. Billings to customers for out-of-pocket
expenses are recorded as a reduction of expenses incurred. Unbilled services of
$118,006 and $56,382 at December 31, 1998 and 1997, respectively, represent
services provided prior to year-end which were billed subsequent to year-end.
Revenue from advance billings is deferred until the services are provided and
amounted to $133,633 and $163,047 as of December 31, 1998 and 1997,
respectively.
Research and Development
Research and development costs are expensed as incurred and amounted to
$230,120 and $288,319 during the years ended December 31, 1998 and 1997,
respectively. No research and development costs were incurred during the year
ended December 31, 1996.
Income Taxes
The Company recognizes an asset or liability for the deferred income tax
consequences of all temporary differences between the tax bases of assets and
liabilities and their reported amounts in the financial statements that will
result in taxable or deductible amounts in future years when the reported
amounts of the assets and liabilities are recovered or settled. These deferred
income tax assets or liabilities are measured using currently enacted tax rates.
NOTE 2 -- LINE OF CREDIT
The Company has entered into a line of credit agreement with a bank, which
provided for maximum borrowings of $300,000 as of December 31, 1998. Borrowings
under the agreement were secured by the accounts receivable of the Company, were
guaranteed by the Company's three shareholders and bore interest at the bank's
prime rate (7.75 percent at December 31, 1998) plus three percent. As of
December 31, 1998 and December 31, 1997, the Company had outstanding borrowings
of $0 and $80,000, respectively. The line of credit matured on April 5, 1999.
Under the terms of the agreement, the Company was required to comply with
certain restrictive covenants, including a minimum earnings ratio and a minimum
debt to net worth requirement. As of December 31, 1998, the Company was in
compliance with these covenants.
F-25
<PAGE> 89
NETWORK PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- LONG-TERM DEBT
As of December 31, 1996, long-term debt consisted of two notes payable to a
bank. In April 1997, the Company paid the outstanding balance on these two notes
with proceeds from a new note obtained from the same bank. Principal and
interest are payable in monthly installments through April 2007. The note bears
interest at the bank's prime rate (7.75 percent at December 31, 1998) plus two
percent. The note is secured by furniture and equipment, and is guaranteed by
the Company's three shareholders.
The aggregate amount of principal maturities of long-term debt as of
December 31, 1998 were as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1999.............................................. $ 61,877
2000.............................................. 65,585
2001.............................................. 72,842
2002.............................................. 80,669
2003.............................................. 89,337
Thereafter........................................ 382,031
--------
$752,351
========
</TABLE>
NOTE 4 -- INCOME TAXES
The components of the income tax provision (benefit) for the years ended
December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.......................................... $ 45,268 $(18,136) $128,561
State............................................ 7,007 (2,807) 19,901
-------- -------- --------
52,275 (20,943) 148,462
-------- -------- --------
Deferred:
Federal.......................................... 118,995 (16,480) 11,575
State............................................ 6,670 650 610
-------- -------- --------
125,665 (15,830) 12,185
-------- -------- --------
$177,940 $(36,773) $160,647
======== ======== ========
</TABLE>
The reconciliation of the total provision (benefit) for income taxes with
amounts determined by applying the statutory U. S. federal income tax rate to
income (loss) before income tax provision (benefit) for the years ended December
31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Federal income tax at statutory rate............... $150,902 $(19,773) $133,796
State income tax, net of federal income tax
impact........................................... 14,646 (1,919) 12,986
Non-deductible compensation expense related to
stock option grants.............................. 14,443 2,897 1,933
Research and development income tax credits........ (14,429) (18,078) --
Other.............................................. 12,378 100 11,932
-------- -------- --------
$177,940 $(36,773) $160,647
======== ======== ========
</TABLE>
F-26
<PAGE> 90
NETWORK PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS -- (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 income tax assets and liabilities as of
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Deferred income tax assets:
Depreciation.............................................. $ 3,923 $ --
Research and development income tax credits............... 36,565 28,830
--------- --------
40,488 28,830
--------- --------
Deferred income tax liabilities:
Accrual to cash basis conversion.......................... (168,928) (16,394)
Depreciation.............................................. -- (15,211)
--------- --------
(168,928) (31,605)
--------- --------
Net deferred income tax liability........................... $(128,440) $ (2,775)
========= ========
</TABLE>
As of December 31, 1998, the Company has research and development income
tax credit carryforwards of $36,565 for which there is no expiration date.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its facilities and vehicles under operating leases and
certain computer equipment under capital 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:
<TABLE>
<CAPTION>
CAPITAL LEASE OPERATING LEASE
YEAR ENDING DECEMBER 31, OBLIGATIONS OBLIGATIONS
------------------------ ------------- ---------------
<S> <C> <C>
1999..................................................... $53,653 $122,177
2000..................................................... 49,181 19,575
2001..................................................... 677 --
------- --------
103,511 $141,752
========
Less interest............................................ (8,684)
-------
94,827
Less current portion..................................... (47,135)
-------
$47,692
=======
</TABLE>
The Company has certain computer equipment under capital lease obligations.
These assets had a gross book value of $98,001 and a net book value of $89,963
as of December 31, 1998.
Rent expense related to the operating leases was $129,634, $115,308 and
$50,376 for the years ended December 31, 1998, 1997 and 1996, respectively.
Legal
The Company is engaged in legal and administrative proceedings arising in
the ordinary course of business. Management believes the outcome of these
proceedings will not have a material adverse effect on the Company's financial
position or results of operations.
F-27
<PAGE> 91
NETWORK PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- SHAREHOLDERS' EQUITY
Treasury Stock
In April 1997, the Company's Board of Directors approved the repurchase of
22,000 shares of common stock for $420,577 from the Company's majority
shareholder. The Company repurchased these shares for cash on April 24, 1997.
Stock Options
On July 1, 1995, the Company adopted the 1995 Stock Option Plan (the
"Plan") to provide incentives to eligible employees and officers. Under the
Plan, the Board of Directors is authorized to grant 3,200 options to purchase
shares of common stock to eligible participants. The Board of Directors is also
authorized to specify the terms and conditions of each option granted, including
the number of shares, the exercise price, vesting provisions, and the option
term.
A summary of option activity under the 1995 Stock Option Plan for the years
ended December 31, 1998, 1997 and 1996 is presented below:
<TABLE>
<CAPTION>
OPTIONS
-------
<S> <C>
Balance, December 31, 1995.................................. 1,400
Granted................................................... 500
-----
Balance, December 31, 1996.................................. 1,900
Granted................................................... 200
-----
Balance, December 31, 1997.................................. 2,100
Granted................................................... 1,150
Canceled.................................................. (50)
-----
Balance December 31, 1998................................... 3,200
=====
</TABLE>
All of the options granted by the Company have an exercise price of $1 and
a term of 7 years from the date of grant. The outstanding options as of December
31, 1998 have a weighted average remaining contractual life of 4.9 years and
1,350 of these options are exercisable. The weighted average fair value of
options granted during 1998, 1997 and 1996 was $208.09, $61.78 and $17.07,
respectively.
The Company accounts for its stock options issued to directors, officers
and employees under Accounting Principles Board Opinion No. 25 ("APB No. 25")
and related interpretations. Under APB No. 25, compensation expense is
recognized if an option's exercise price is below the intrinsic fair value of
the Company's common stock at the date of grant. During 1998, 1997 and 1996, the
Company granted options at prices less than the estimated intrinsic fair value
of the Company's common stock at the date of grant and accordingly recorded
deferred compensation of $239,038, $12,300 and $8,425, respectively. The Company
amortizes the deferred compensation related to these option issuances over the
vesting term of the related options and accordingly, recorded compensation
expense of $38,721, $7,766 and $5,183 during the years ended December 31, 1998,
1997 and 1996, respectively.
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation," requires pro forma information
regarding net income (loss) as if the Company had accounted for its stock
options granted subsequent to January 1, 1996 under the fair value method. The
fair market value of the stock options is estimated on the date of grant using
the Black-Scholes pricing model with the following weighted-average assumptions
for grants during the years ended December 31, 1998, 1997 and 1996: risk-free
interest rates of 5.33 percent, 6.23 percent and 6.13 percent, respectively;
expected dividend yield of zero percent; and expected exercise lives of 4 years
for all periods. For purposes of the pro forma
F-28
<PAGE> 92
NETWORK PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
disclosures, the estimated fair market value of the stock options is amortized
over the vesting periods of the respective stock options. Following are the pro
forma disclosures and the related impact on net income (loss) for the years
ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net income (loss) as reported...................... $265,890 $(21,384) $232,871
Net income (loss) pro forma........................ 265,670 (21,428) 232,756
</TABLE>
NOTE 7 -- SEGMENT INFORMATION
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information". This statement requires disclosures related
to components of a company for which separate financial information is available
and evaluated regularly by the company's chief operating decision makers in
deciding how to allocate resources and in assessing performance. Management
believes that the Company has only one operating segment because the Company's
core business operations consist only of information technology services. All of
the Company's revenues for the years ended December 31, 1998, 1997 and 1996 were
sourced from the United States.
NOTE 8 -- EMPLOYEE BENEFIT PLANS
The Company offers its employees participation in a qualified 401(k)
profit-sharing plan which requires the Company to match employee contributions
up to predetermined limits for qualified employees as defined by the plan. For
the years ended December 31, 1998, 1997 and 1996, the Company contributed
$24,025, $20,451 and $7,383 to the plan, respectively.
NOTE 9 -- SUBSEQUENT EVENT
On January 8, 1999, all outstanding shares of the Company's common stock
and vested stock options to purchase the Company's common stock were purchased
by Intelligroup, Inc. for a purchase price of approximately $4.5 million,
consisting of cash and Intelligroup, Inc. common stock.
F-29
