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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission file number 0-20943
INTELLIGROUP, INC.
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(Exact Name of Registrant as Specified In Its Charter)
New Jersey 11-2880025
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
499 Thornall Street, Edison, New Jersey 08837
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(Address of Principal Executive Offices) (Zip Code)
(732) 590-1600
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(Registrant's Telephone Number,
Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant: $10,398,963 at March 16, 2001 based on the
last sales price on that date.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of March 16, 2001:
Class Number of Shares
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Common Stock, $.01 par value 16,630,125
The following documents are incorporated by reference into the Annual
Report on Form 10-K: Portions of the Registrant's definitive Proxy Statement for
its 2001 Annual Meeting of Shareholders are incorporated by reference into Part
III of this Report.
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TABLE OF CONTENTS
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Item Page
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PART I 1. Business..................................................... 4
2. Properties................................................... 16
3. Legal Proceedings............................................ 17
4. Submission of Matters to a Vote of Security Holders.......... 17
PART II 5. Market for the Company's Common Equity and Related
Shareholder Matters.......................................... 18
6. Selected Financial Data...................................... 18
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 20
7A. Quantitative and Qualitative Disclosure About Market Risk.... 30
8. Financial Statements......................................... 30
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................... 30
PART III 10. Directors and Executive Officers of the Registrant........... 31
11. Executive Compensation....................................... 31
12. Security Ownership of Certain Beneficial Owners and
Management................................................... 31
13. Certain Relationships and Related Transactions............... 31
PART IV 14. Exhibits, List and Reports on Form 8-K....................... 32
SIGNATURES................................................................... 33
EXHIBIT INDEX................................................................ 35
FINANCIAL STATEMENTS.........................................................F-1
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PART I
ITEM 1. BUSINESS.
GENERAL
Overview
Intelligroup, Inc. ("Intelligroup" or the "Company") provides a wide range
of information technology solutions and services including the development,
integration, implementation, hosting and full lifecycle support of e-commerce
and enterprise applications to companies of all sizes. Our industry-specific
knowledge and expertise in a wide range of technologies, coupled with our
ability to provide timely and cost-effective integrated technology solutions,
are intended to provide our customers with substantial improvements in the
efficiency and performance of their businesses. Our mission is to develop,
deploy, and host customized, scalable technology solutions that integrate
seamlessly into our customers' existing environment, maximize the return on
customers' technology investment, and provide a faster time-to-market and lower
total cost of ownership.
Company History
The Company was incorporated in New Jersey in October 1987 under the name
Intellicorp, Inc. to provide systems integration and custom software
development. The Company's name was changed to Intelligroup, Inc. in July 1992.
In March 1994, the Company acquired Oxford Systems Inc. ("Oxford"). On December
31, 1996, Oxford was merged into the Company and ceased to exist as an
independent entity. In October 1996, the Company consummated its initial public
offering of its Common Stock. The Company's executive offices are located at 499
Thornall Street, Edison, New Jersey 08837 and its telephone number is (732)
590-1600.
In late 1999, the Company made the strategic decision to leverage its
traditional application integration and consulting experience and reposition
Intelligroup for future growth by focusing on the emerging Application Service
Provider ("ASP") market. At the same time, the Company made the strategic
decision to spin-off its Internet services business to shareholders.
Accordingly, on January 1, 2000, the Company transferred its Internet
applications services and management consulting businesses to SeraNova, Inc.
("SeraNova"), a wholly-owned subsidiary of the Company on such date.
On January 27, 2000, SeraNova filed a Registration Statement with the
Securities and Exchange Commission (the "SEC") relating to the proposed spin-off
of SeraNova from the Company. On June 29, 2000, the SEC declared SeraNova's
Registration Statement effective. On July 5, 2000, the Company distributed all
of the outstanding shares of the common stock of SeraNova then held by the
Company to holders of record of the Company's common stock as of the close of
business on May 12, 2000 (or to their subsequent transferees) in accordance with
the terms of a Distribution Agreement dated as of January 1, 2000 between the
Company and SeraNova. Accordingly, the assets, liabilities and results of
operations of SeraNova have been reported as discontinued operations for all
periods presented.
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Business Description
As a global application service provider, or ASP, of customized, scalable
enterprise and e-commerce solutions, we have focused our development and
marketing efforts on the vertical industries in which we have built expertise
and which we believe are ready for adoption of the ASP model. These specific
industries include: process and discrete manufacturing, professional services,
and the public sector. As a full-service, single-source ASP, Intelligroup's
ASPPlus(SM) Hosting service bundles the key ASP components and core
competencies, combining leading e-commerce and enterprise software and a global
technology infrastructure, with our application implementation, management and
support resources and capabilities. Utilizing the ASP model, our
"software-to-service" solutions are contracted on a predictable subscription
basis and delivered to customers over a secure global network. As the single
point of accountability to the customer, we support and manage every component
of the ASP - from servers to software, data centers to data storage. By taking
responsibility for the Service Level Agreements associated with the ASP model,
we can help assure the on-going reliability of security, performance, service
and long-term support for the customer.
Our ASPPlus Hosting service provides customers with e-commerce and
enterprise software selected by Intelligroup to closely match the business needs
of specific market segments, such as pharmaceutical manufacturers, IT
professional services organizations, high tech and educational institutions. Our
strategic alliances with such software leaders as SAP, PeopleSoft, Niku,
MicroStrategy, Onyx, Vignette, Crossworlds and Ariba give our customers access
to the latest developments in technology-based business solutions, including
enterprise resources planning, customer relationship management, business
intelligence, content management, and supply chain management. To provide the
global infrastructure on which we deliver and support solutions for customers
worldwide, Intelligroup became a founding Platinum member of AT&T's Ecosystem
for ASPs. As our strategic partner and infrastructure provider, AT&T provides
the data center, hardware and operating systems, and requisite bandwidth and
communications capabilities. These strategic alliances and hosting partnerships
not only support our ASP model, they present strong cross-selling opportunities
and multiple points of entry into a customer's enterprise.
By customizing, configuring and integrating core business systems such as
human resources and financials with business-to-business and
business-to-customer applications, we can create for our customers an end-to-end
technology value chain that delivers e-commerce and enterprise solutions across
the entire enterprise.
Key to our strategy is the ASPPlus Advanced Development Center in
Hyderabad, India, which provides 24 x 365 development and support using the
technical expertise of its developers and technical staff. In May 2000, the
center was awarded Level 2 of the People Capability Maturity Model(R) by the
Carnegie Mellon Software Engineering Institute ("CMM-SEI"). The achievement
recognizes Intelligroup for its ability to attract, develop, motivate, organize
and retain the talent needed to continuously improve its software development
capability. Intelligroup is among the first in the IT industry to integrate
CMM-SEI workforce improvement with software process improvement, for which we
have achieved Software CMM-SEI Level 5 certification for continuous improvement
of our software engineering. In addition, we are ISO 9001-certified for software
development, support and optimization.
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Intelligroup's ASPPlus Application Management services are focused on the
delivery and support of outsourced Enterprise Resource Planning ("ERP") software
implementation and maintenance services. ASPPlus Application Management services
provide full life cycle support of ERP applications through our offshore
facilities and resources.
Since 1987, the Company has built a solid reputation on the design,
development, implementation and support of complex technology solutions based
primarily on SAP, Oracle and PeopleSoft products, utilizing our best business
practices, methodologies and toolsets. The Company continues to provide a wide
range of information technology services, including enterprise-wide business
process solutions, IT training solutions, systems integration and custom
software development based on leading technologies.
SAP, Oracle and PeopleSoft products are representative of a class of
application products known as ERP software. ERP products are pre-packaged
solutions for a wide-range of business areas, including financial information,
manufacturing and human resources. For prospective customers, ERP products are
an alternative to the custom design and development of their own applications.
Although ERP products are pre-packaged, there is a significant amount of
technical work involved in implementing them and tailoring their use for a
particular customer's needs. The Company recognized the implementation and
customization services work as a significant potential business opportunity.
ERP vendors such as SAP, Oracle and PeopleSoft, have a vested interest in
encouraging third party service companies to provide implementation and
customization services to customers. These vendors have established formal
programs, which are designed to recruit and authorize third party service
companies as service partners. Companies wishing to become authorized partners
must meet performance criteria established by the ERP vendor. They are then
allowed to use the vendor's partner designation and associated logo to promote
their own services. The ERP product vendors also promote these authorized
partners to customers and prospective customers of their ERP products. The
Company believes that such partner status with the ERP vendors has and will
continue to result in direct referrals and enhanced industry recognition.
In 1995, the Company achieved the status of a SAP National Implementation
Partner. In the same year, the Company also began to utilize Oracle's ERP
application products to diversify its service offerings. In 1997, the Company
enhanced its partner status with SAP, by first achieving National Logo Partner
status and then AcceleratedSAP Partner status. Also, in 1997, the Company
further diversified its ERP-based service offerings, by beginning to provide
PeopleSoft and Baan implementation services. In July 1997, the Company was
awarded PeopleSoft implementation partnership status, and, in September 1997, it
was awarded Baan international consulting partnership status. In June 1998, the
Company also expanded its Oracle applications implementation services practice
and added upgrade services to meet market demand of mid-size to large companies
that were implementing or upgrading Oracle applications.
The Company provides its services directly to end-user organizations, or as
a member of consulting teams assembled by other information technology
consulting firms. The number of customers billed by the Company has grown
substantially from three customers in 1993 to
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approximately 800 customers in 2000. The Company's customers are primarily
Fortune 1000 and other large and mid-sized companies in the United States and
abroad. They have included Armstrong World Industries, AT&T, Block Drug Company,
Bristol-Myers Squibb, IMC Global, Simon & Schuster, Lucent Technologies,
Lockheed Martin and Network Associates. The Company has also participated in
project teams lead by information technology consulting firms such as Ernst &
Young LLP, IBM Global Services, KPMG LLP and PricewaterhouseCoopers LLP.
Trademarks and Service Marks
"Intelligroup," "myADVISOR," "ASPPlus" and the Company's logo are service
marks of the Company.
"Empower Solutions" is a trademark of Empower Solutions, a subsidiary of
the Company.
All other trade names, trademarks or service marks referenced herein are
the property of their respective owners and are not the property of the Company.
Safe Harbor Statements
This Form 10-K contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, including,
without limitation, statements regarding the Company's intention to shift its
focus to comprehensive ASPPlus solutions. Such forward-looking statements
include risks and uncertainties, including, but not limited to:
o the continued uncertainty of the application service provider ("ASP")
market and revenues derived from anticipated ASP business;
o the substantial variability of the Company's quarterly operating
results caused by a variety of factors, many of which are not within
the Company's control, including (a) patterns of software and hardware
capital spending by customers, (b) information technology hosting and
outsourcing trends, (c) the timing, size and stage of projects, (d)
timing and impact of acquisitions, (e) new service introductions by
the Company or its competitors and the timing of new product
introductions by the Company's ERP partners, (f) levels of market
acceptance for the Company's services, (g) general economic
conditions, (h) the hiring of additional staff and (i) fixed price
contracts;
o changes in the Company's billing and employee utilization rates;
o the Company's ability to manage its growth effectively, which will
require the Company (a) to continue developing and improving its
operational, financial and other internal systems, as well as its
business development capabilities, (b) to attract, train, retain,
motivate and manage its employees, (c) to continue to maintain high
rates of employee utilization at profitable billing rates, (d) to
successfully integrate the personnel and businesses acquired by the
Company, and (e) to maintain project quality, particularly if the size
and scope of the Company's projects increase;
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o the Company's ability to maintain an effective internal control
structure;
o the Company's limited operating history within the ASP line of
business;
o the Company's reliance on a continued relationship with SAP America
and the Company's present status as a SAP National Logo Partner;
o the Company's substantial reliance on key customers and large
projects;
o the highly competitive nature of the markets for the Company's
services;
o the Company's ability to successfully address the continuing changes
in information technology, evolving industry standards and changing
customer objectives and preferences;
o the Company's reliance on the continued services of its key executive
officers and leading technical personnel;
o the Company's ability to attract and retain a sufficient number of
highly skilled employees in the future;
o uncertainties resulting from pending litigation matters and from
potential administrative and regulatory immigration and tax law
matters;
o the Company's ability to protect its intellectual property rights; and
o In addition, in October 2000, SeraNova and Silverline Technologies
Limited ("Silverline") announced the proposed acquisition of SeraNova
by Silverline. SeraNova's management has represented that such
acquisition was not contemplated at the time of the spin-off of
SeraNova by the Company, and accordingly should not impact the
tax-free nature of the spin-off. Should the spin-off be ultimately
construed to be taxable, there is a risk that if SeraNova and/or
Silverline are unable or unwilling to pay the resultant tax liability
pursuant to SeraNova's indemnification obligations under its Tax
Sharing Agreement with the Company, the Company would bear the
liability to pay such resultant tax liability.
As a result of these factors and others, the Company's actual results may
differ materially from the results disclosed in such forward-looking statements.
INDUSTRY BACKGROUND
Many businesses face a rapidly changing business environment, including
intense global competition, accelerating technological change, and the need to
embrace emerging web commerce and procurement strategies. Such businesses
continually seek to improve the quality of products and services, lower costs,
reduce cycle times, optimize their supply chain and increase value to customers.
Businesses are implementing and utilizing advanced information
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solutions, which enable them to redesign their business processes in such areas
as product development, service delivery, manufacturing, sales and human
resources.
Many businesses have adopted information systems strategies using
client/server architectures based on personal computers, local area network/wide
area network ("LAN/WAN"), shared databases and packaged software applications.
Frequently these strategies are intended to replace legacy systems, which are
often mainframe-based, running proprietary software and applications. Such
client/server systems, when developed and implemented appropriately, enable the
creation and utilization of more functional, flexible and cost effective
applications, which are critical to the competitive needs of businesses.
As part of their client/server strategies, organizations often acquire, or
consider acquisition of, packaged enterprise-wide business software
applications, including those offered by leading ERP vendors, such as SAP,
Oracle and PeopleSoft. These applications are then implemented or customized to
meet their particular business needs. Alternatively, the organizations may
develop, or commission the development of, customized software applications to
meet their needs.
For many customers, the issue of Year 2000 compliance had driven their
decisions to migrate to new client/server-based ERP solutions. Others had
decided to retain their legacy mainframe applications and make them Year 2000
compliant, rather than replacing them. In both cases, these customers now have a
set of core operations applications, which they use to support their central
business processes. These customers may now face competing internal demands
against their budgets and resources. The customers must balance demands from
their user departments for new, innovative business applications against the
absolute requirement to maintain, manage and optimize the core operations
applications. These competing demands reflect areas of potential business
opportunity for the Company in the areas of hosting or outsourcing of the ERP
applications maintenance.
Intense competitive and market pressures continue to force many
organizations to look for improvements in the quality, efficiency and
responsiveness of their end-to-end business models. This would normally require
an in-depth analysis of their business strategies, operational processes and
supporting delivery mechanisms, including information systems. Customers will
sometimes retain external business and management consulting organizations to
assist with this analysis and the preparation of relevant recommendations.
The majority of customers who have implemented, or are implementing, ERP
solutions have been Fortune 2000 companies. The Company believes that
opportunities for new ERP implementations will continue to exist in this
segment, as these companies deploy ERP solutions to subsidiaries and operating
units. In addition, these customers are also faced with the need to manage and
maintain their ERP applications. The Company believes that there is significant
potential business opportunity for implementing ERP version-to-version upgrades
and also for application hosting and outsourcing.
Because of the ERP penetration of Fortune 2000 customers, the marketing
focus of the ERP vendors has turned toward mid-market clients. In addition, the
leading ERP vendors are also realigning their sales organizations along industry
segments (e.g. manufacturing, finance,
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etc.). The mid-market segment presents the most opportunity for new ERP product
sales and implementations. Many of these companies are growing rapidly and are
likely to have the need for core financial and other operations systems that can
be addressed by ERP products. The Company believes that opportunity exists for
ERP implementation services to mid-market clients. This segment is very cost
conscious and will require a highly efficient services delivery model.
The task of developing and implementing enterprise-wide, mission-critical,
information solutions is complex. It presents significant challenges for most
customer organizations and can be a time consuming and costly undertaking, which
typically requires significant allocation of organizational resources.
Information technology managers must integrate and manage information systems
environments consisting of multiple computing platforms, operating systems,
databases and networking protocols, as well as multiple packaged and custom
developed applications.
Companies must also continually keep pace with a broad and often confusing
array of new technological developments, which can render internal information
technology skills obsolete. Professionals with the requisite technology skills
often are in short supply and many organizations are reluctant to expand their
internal information systems department for particular projects. At the same
time, external economic factors encourage organizations to focus on their core
competencies and trim work forces in the information technology management area.
Accordingly, organizations often lack sufficient, and/or appropriate, technical
resources necessary to design, develop, implement and manage the information
technology solutions needed to support their business needs.
To support their information technology needs, many businesses increasingly
engage experienced outside specialists for assistance across the full life cycle
of their solutions. Because of the heightened business pressures they face,
these customers are demanding innovative solutions, in shorter timeframes, with
lower life cycle cost of ownership, at higher levels of quality and service, all
with lower risk to themselves and their businesses.
As a result of these industry dynamics, demand for information technology
services has grown significantly. It has moved from an implementation focus to
one addressing an integrated view of corporate business and information
processes; it has also moved to a focus on value-based pricing and cost of
ownership over the total life cycle of the solution. These changes favor
services companies which can provide high quality, low cost life cycle services,
and which address high value solution areas for clients' businesses.
THE INTELLIGROUP SOLUTION
Intelligroup improves its clients' business performance, through the
intelligent application of information technology. We deliver to our clients
timely, cost-effective and innovative ERP implementation, hosting and
outsourcing solutions by combining our:
Proven Offshore Development and Maintenance Model: The Company has the
ability to develop, implement and maintain business solutions through its
offshore Advanced Development Center ("ADC"), at high quality and low cost. In
May 2000, the ADC was awarded Level 2 of
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the People Capability Maturity Model(R) by the Carnegie Mellon Software
Engineering Institute ("CMM-SEI"). The achievement recognizes Intelligroup for
its ability to attract, develop, motivate, organize and retain the talent needed
to continuously improve its software development capability. Intelligroup is
among the first in the IT industry to integrate CMM-SEI workforce improvement
with software process improvement, for which we have achieved the Software
CMM-SEI Level 5 certification for continuous improvement of our software
engineering. In addition, we are ISO 9001-certified for software development,
support and optimization.
The ADC is process driven and connected to the Company's operations centers
in Asia/Pacific, the United States and Europe via high-speed satellite links.
The center operates on a 24x7, round-the-clock basis, allowing next business day
turn-around of work units to clients. Combining the center's quality processes,
skilled development team and low cost of operation allows the Company to compete
for implementation and maintenance contracts on a fixed price/fixed time basis.
Expertise in a Wide Range of Technologies, Industries and Disciplines: The
Company's consultants have expertise with SAP, Oracle and PeopleSoft products
and with a wide variety of leading computing technologies, including Internet,
client/server architectures, object-oriented technologies, CASE, distributed
database management systems, mainframe connectivity, LAN/WAN and
telecommunications technologies. The Company believes that its personnel are
effective because of their technical excellence, their industry experience and
their strong grounding in the disciplines of project implementation and
management.
Customer-Driven Approach: The Company's project managers and consultants
maintain on-going communication and close interaction with customers to ensure
that they are involved in all facets of a project and that the solutions
designed and implemented by the Company meet the customer's needs. The Company's
goal is to provide training to its customers during a project to achieve high
levels of self-sufficiency among its customers' end users and internal
information technology personnel. The Company believes that its ability to
deliver the requisite knowledge base to its customers is critical to fostering
long-term relationships with, and generating referrals from, existing customers.
Proprietary Methodologies: The Company has developed a proprietary
implementation methodology, as well as a software-based implementation toolset,
which are designed to minimize the time required to develop and implement SAP,
Oracle and PeopleSoft solutions for its customers.
INTELLIGROUP SERVICES
Intelligroup provides a wide range of information technology solutions and
services including the development, integration, implementation, hosting and
full lifecycle support of e-commerce and enterprise applications to companies of
all sizes.
Historically, the Company's services have ranged from providing customers
with a single consultant to multi-personnel full-scale projects. The Company
provides these services to its customers primarily on a time and materials basis
and pursuant to agreements, which are
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terminable upon relatively short notice. As the Company has re-oriented itself
towards serving our clients' needs over their solutions' entire life cycle, it
is beginning to enter into hosting and outsourcing agreements with customers.
The contractual arrangements in these situations are typically fixed term, fixed
price and multi-year, as is common in the hosting and outsourcing market. The
Company's focus on life cycle services is also intended to encourage ongoing and
recurring service relationships, rather than one-time implementation
engagements.
ENTERPRISE RESOURCE PLANNING SOLUTIONS
The Company designs, develops, integrates and implements sophisticated
business process solutions based on SAP, Oracle and PeopleSoft products,
utilizing its best business practices, methodologies and toolsets. The Company
believes that its expertise in a wide variety of technologies, coupled with its
ability to provide comprehensive business process solutions and timely and
cost-effective implementation of new business systems, enables its customers to
achieve substantial improvements in efficiency and effectiveness in their
businesses and fosters long-term customer relationships.
Accelerated Implementation Methodology and Toolset: As a result of our
experience in implementing ERP software, the Company has developed a proprietary
methodology and associated toolset for implementing enterprise business software
applications. The toolset also contains a project management and tracking tool,
which the Company utilizes to monitor implementation projects undertaken for
clients. The Company believes that its methodology and toolset throughout an
implementation project, may enable its customers to realize significant savings
in time and resources. Furthermore, the Company believes that use of the
methodology and toolset also shortens the turn-around time for program
development, as it streamlines the information flow between the Company's
offices and customer sites.
APPLICATION SERVICE PROVIDER SOLUTIONS
The Company services the Application Service Provider market with its
ASPPlus Solutions, which include implementation, management and hosting of
e-commerce solutions and enterprise applications. ASPPlus utilizes a mass
customization approach, providing pre-configured vertical industry solutions of
mission critical e-commerce and enterprise business applications. Through
ASPPlus, the Company offers customized solutions to its client's specific
e-commerce and enterprise needs.
APPLICATION MANAGEMENT SERVICES
The Application Management Services ("AM") practice provides clients with
application management, support and maintenance services. These services may be
provided on-site, off-site through the Company's operations centers and ADC, or
a combination of both on-site and off-site. The Company's low cost, high quality
ADC delivery model allows the Company to compete for long term fixed price/fixed
time contracts.
The AM practice teams with the Company's various ERP practices on their
implementation projects, and will take the lead role in selling and delivering
longer term outsourcing relationships.
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The ADC is an important component of the Company's value proposition to
customers. The Company utilizes the programmers at the ADC, in conjunction with
its consultants in the United States who are on site at customer locations, to
provide its customers with savings in development and implementation costs and
time to project completion. The ADC allows the Company to provide
cost-effective, timely and high quality software development, maintenance and
support services to customers throughout the world. Intelligroup is able to
deliver high value services at attractive prices due to the following: (i) the
high level of expertise and experience of our ADC consultant programmers; (ii)
the rigorous application of the Company's proprietary software project
methodologies, tools and project management disciplines; and (iii) the cost
structures associated with the ADC's offshore location in Hyderabad, India.
The ADC is connected by dedicated, high-speed satellite links, to certain
customer sites, as well as the Company's headquarters in the United States, its
European headquarters in the United Kingdom and its office in New Zealand. Over
200 qualified and experienced programmers staff the ADC. As the Company expands
its ERP businesses, the ADC is being prepared to undertake projects in any of
the three ERP practices (SAP, PeopleSoft and Oracle), as well as certain other
advanced technologies.
SALES AND MARKETING
The Company historically has generated new sales leads from (i) referrals
from existing customers, (ii) introductions to potential customers by the
Company's alliance partners, which often need to recommend qualified systems
integrators to implement their software products, and (iii) internal sales
efforts. In addition, the Company has been introduced to customers by certain of
its competitors, such as the "Big Five" accounting firms, which at times require
the Company's expertise and ability to deliver qualified personnel for complex
projects.
The Company has dedicated an increased level of resources to sales and
marketing efforts. The Company will continue to market to potential customers
with demonstrated needs for the Company's expertise in ERP solutions. The
Company intends to implement focused sales management programs, to leverage its
relationships with existing customers, as well as those with ERP and other
product vendors.
Among its sales and marketing efforts, the Company's has exhibited and
presented the Company's expertise at trade events associated with the primary
ERP offerings. These include events such as SAPPHIRE, the annual SAP conference
for SAP service providers and end-users, the Americas SAP User Group, the Oracle
Americas User Group and the PeopleSoft Users Group. The Company intends to
continue participation in such industry-recognized programs and trade shows.
Most importantly, however, the Company believes that satisfying customer
expectations within budgets and time schedules is critical to gaining repeat
business and obtaining new business from referrals. The Company believes that it
has consistently met customer expectations with respect to budgets and time
schedules.
As of December 31, 2000, the Company's sales and marketing group consisted
of 28 employees in the United States, 10 employees in Europe, and 16 employees
in the Asia Pacific
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region. The Company markets and delivers its services to customers on an
international basis through its network of offices. The Company's headquarters
in New Jersey and its branch offices in Atlanta, GA; Rosemont, IL; Foster City,
CA and Trujillo Alto, Puerto Rico serve the United States market. In addition,
the Company also maintains offices in Europe (Denmark, the United Kingdom and
Sweden) and Asia Pacific (Australia, India, Japan, New Zealand, Singapore and
Hong Kong).
The Company's services require a substantial financial commitment by
customers and, therefore, typically involve a long sales cycle. Once a lead is
generated, the Company endeavors to understand quickly the potential customer's
business needs and objectives in order to develop the appropriate solution and
bid accordingly. The Company's project managers are involved throughout the
sales cycle to ensure mutual understanding of customer goals, including time to
completion, and technological requirements. Sales cycles for complex business
solutions projects typically range from one to six months from the time the
Company initially meets with a prospective customer until the customer decides
whether to authorize commencement of an engagement.
CUSTOMERS
The Company provides its services directly to many Fortune 2000 companies,
as well as small to medium sized enterprises, or as a member of consulting teams
assembled by other information technology consultants, such as the "Big Five"
accounting firms. The number of customers billed by the Company has grown
substantially from three customers in 1993 to approximately 800 customers in
2000.
The Company's ten largest customers accounted for, in the aggregate,
approximately 41%, 43% and 34% of its revenue in 1998, 1999 and 2000,
respectively. During 1998, no single customer accounted for more than 10% of
revenue. During 1999 and 2000, one customer accounted for more than 10% of
revenue. In 1998, 1999 and 2000, 21%, 48% and 36%, respectively, of the
Company's revenue was generated by serving as a member of consulting teams
assembled by other information technology consulting firms.
Although the Company has contracts with many of its customers to provide
its services, in general such contracts are terminable upon relatively short
notice, typically not more than 30 days. When providing hosting and outsourcing
services for customers, the Company expects to compete for multi-year fixed
term, fixed price contracts. There can be no assurance that the Company's
customers will continue to enter into contracts with the Company or that
existing contracts will not be terminated.
Many of the Company's engagements involve projects that are critical to the
operations of its customers' businesses and provide benefits that may be
difficult to quantify. The Company's failure or inability to meet a customer's
expectations in the performance of its services could result in a material
adverse change to the customer's operations giving rise to claims for damages
against the Company or causing damage to the Company's reputation, adversely
affecting its business, financial condition and results of operations. In
addition, certain of the Company's agreements with its customers require the
Company to indemnify the customer for damages arising from services provided to,
or on behalf of, such customer. Under certain of the
- 14 -
Company's customer contracts, the Company warrants that it will repair errors or
defects in its deliverables without additional charge to the customer. The
Company has not experienced, to date, any material claims against such
warranties. The Company has purchased and maintains errors and omissions
insurance to insure the Company for damages and expenses incurred in connection
with alleged negligent acts, errors or omissions.
COMPETITION
The markets for the Company's services are highly competitive. The Company
believes that its principal competitors include the internal information systems
groups of its prospective customers, as well as the following classes of
companies (some of which are also customers of the Company):
o Consulting and software integration firms: including, IBM Global
Services, Cambridge Technology Partners, MCI Systemhouse, Computer
Sciences Corporation and others.
o "Big Five" accounting firms: Deloitte & Touche, Ernst & Young, KPMG,
PricewaterhouseCoopers.
o Software applications vendors: SAP, Oracle and PeopleSoft.
o General management consulting firms: such as McKinsey & Co., Bain &
Company.
o Application service providers: Breakaway Solutions, Inc.,
USinternetworking, Inc., Corio, Inc., and Interliant, Inc.
Many of the Company's competitors have longer operating histories, possess
greater industry and name recognition and have significantly greater financial,
technical and marketing resources than the Company. In addition, there are
relatively low barriers to entry into the Company's markets and the Company has
faced, and expects to continue to face, additional competition from new entrants
into its markets.
The Company believes that the principal competitive factors in its markets
include quality of service and deliverables, speed of development and
implementation, price, project management capability and technical and business
expertise. The Company believes that its ability to compete also depends in part
on a number of competitive factors outside its control, including the ability of
its competitors to hire, retain and motivate project managers and other senior
technical staff, the development by others of services that are competitive with
the Company's services and the extent of its competitors' responsiveness to
customer needs.
The Company believes that it competes based on its expertise across the
full life cycle of its clients' ERP solutions. This expertise includes
management consulting skills, plus design and implementation skills in ERP
products (primarily SAP, PeopleSoft and Oracle), application integration and
application hosting and outsourcing related to those solutions. There can be no
assurance that the Company will be able to continue to compete successfully with
existing and new competitors.
- 15 -
EMPLOYEES
As of December 31, 2000, the Company employed 1,174 full-time employees, of
whom 968 were engaged as consultants or as software developers, 54 were engaged
in sales and marketing, and 152 were engaged in delivery management, finance and
administration. Of the total number of employees, 433 were based in the United
States, 636 were based in the Asia Pacific region and 105 were based in Europe.
In addition, the Company engaged 106 independent contractors to perform
information technology services.
None of the Company's employees are covered by a collective bargaining
agreement. Substantially all of the Company's employees have executed employment
agreements containing non-competition, non-disclosure and non-solicitation
clauses. In addition, the Company requires that all new employees execute such
agreements as a condition of employment by the Company. The Company believes
that it has been successful in attracting and retaining skilled and experienced
personnel. There is increasing competition for experienced sales and marketing
personnel and technical professionals. The Company's future success will depend
in part on its ability to continue to attract, retain, train and motivate highly
qualified personnel. The Company considers relations with its employees to be
good.
INTELLECTUAL PROPERTY RIGHTS
The Company's success is dependent, in part, upon its proprietary
implementation methodology, development tools and other intellectual property
rights. The Company relies upon a combination of trade secret, non-disclosure
and other contractual arrangements, and copyright and trademark laws, to protect
its proprietary rights. The Company generally enters into confidentiality
agreements with its employees, consultants and customers, and limits access to
and distribution of its proprietary information. The Company also requires that
substantially all of its employees and consultants assign to the Company their
rights in intellectual property developed while employed or engaged by the
Company. There can be no assurance that the steps taken by the Company in this
regard will be adequate to deter misappropriation of its proprietary information
or that the Company will be able to detect unauthorized use of and take
appropriate steps to enforce its intellectual property rights.
ITEM 2. PROPERTIES.
As of December 31, 2000, the Company owns no real property and currently
leases or subleases all of its office space. The Company leases 48,475 square
feet of office space in Edison, New Jersey, of which approximately 50% is
subleased to SeraNova, Inc. Such lease has an initial term of ten (10) years,
which commenced in September 1998. The Company uses such facility for certain
technical and support personnel, sales and marketing, administrative, finance
and management personnel. The Company maintains offices for its sales and
operations within the United States in Atlanta, GA; Rosemont, IL; Foster City,
CA and Trujillo Alto, Puerto Rico. The Company also maintains offices in India,
Australia, Sweden, Denmark, Japan, New Zealand, Singapore, Hong Kong and the
United Kingdom.
- 16 -
ITEM 3. LEGAL PROCEEDINGS.
On February 7, 2001, NSA Investments II LLC filed a complaint in the United
States District Court for the District of Massachusetts naming, among others,
SeraNova, the Company and Rajkumar Koneru, a director of the Company, as
defendants. The plaintiff alleges that it invested money in SeraNova as part of
a private placement of SeraNova stock in March 2000, prior to the spin-off of
SeraNova by the Company. The complaint, which seeks damages, alleges that the
Company, as a "controlling person" vis-a-vis SeraNova, is jointly and severally
liable with and to the extent as SeraNova for false and misleading statements
constituting securities laws violations. The Company has been served with the
complaint and is in the process of responding. Furthermore, the Company has made
a request for indemnification from SeraNova pursuant to the various
inter-company agreements in connection with the spin-off. The Company denies the
allegations made and intends to defend vigorously the claims made by the
plaintiff. It is too early in the dispute process to determine the impact, if
any, that such dispute will have upon the Company's business, financial
condition or results of operations.
There is no other material litigation pending to which the Company is a
party or to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
- 17 -
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Common Stock is quoted on the Nasdaq National Market (the "NNM") under
the symbol "ITIG." The following table sets forth, for each of the periods
indicated, the high and low sale prices per share of Common Stock as quoted on
the NNM. The prices shown represent quotations among securities dealers, do not
include retail markups, markdowns or commissions and may not represent actual
transactions.
QUARTER ENDED HIGH LOW
----------------------- ------------- -------------
March 31, 1999 $ 20 1/2 $ 5 1/4
June 30, 1999 $ 9 5/8 $ 5
September 30, 1999 $ 7 11/16 $ 5 1/8
December 31, 1999 $ 27 11/16 $ 6 7/8
March 31, 2000 $ 45 3/4 $ 19 9/16
June 30, 2000 $ 29 1/2 $ 7 1/4
September 30, 2000 $ 14 1/4 $ 1 7/16
December 31, 2000 $ 3 1/8 $ 25/32
As of March 16, 2001, the approximate number of holders of record of the
Common Stock was 78 and the approximate number of beneficial holders of the
Common Stock was 4,671.
The Company has never declared or paid any dividends on its capital stock.
The Company intends to retain any earnings to fund future growth and the
operation of its business, and, therefore, does not anticipate paying any cash
dividends in the foreseeable future.
All information relating to the Common Stock of the Company in this Annual
Report on Form 10-K reflects a 81,351.1111-for-1 stock split of the Common Stock
effected July 12, 1996, prior to the Company's initial public offering of its
Common Stock in September 1996.
ITEM 6. SELECTED FINANCIAL DATA.
The selected statement of operations data for the years ended December 31,
1998, 1999 and 2000 and the selected balance sheet data as of December 31, 1999
and 2000 are derived from, are qualified by reference to, and should be read in
conjunction with, the more detailed audited consolidated financial statements
and the related notes thereto included elsewhere herein. The selected statement
of operations data for the year ended December 31, 1996 and 1997 and the
selected balance sheet data as of December 31, 1996, 1997 and 1998 have been
derived from audited financial statements of the Company which are not included
elsewhere herein.
- 18 -
The following should be read in conjunction with the consolidated financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere herein:
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue........................................ $52,626 $90,607 $147,462 $146,272 $112,838
Cost of sales.................................. 38,261 63,534 96,024 97,382 75,444
Gross profit................................. 14,365 27,073 51,438 48,890 37,394
Selling, general and administrative expenses... 10,360 18,816 32,364 42,822 45,191
Acquisition Expenses........................... -- -- 1,397 2,115 --
Restructuring and other special charges........ -- -- -- 7,328 --
Total operating expenses..................... 10,360 18,816 33,761 52,265 45,191
Operating income (loss)...................... 4,005 8,257 17,677 (3,375) (7,797)
Other income (expenses), net................... (1,257) 252 206 (513) 570
Income (loss) from continuing operations
before income taxes.......................... 2,748 8,509 17,883 (3,888) (7,227)
Provision (benefit) for income taxes........... 578 2,173 3,852 1,441 (573)
Income (loss) from continuing operations....... 2,170 6,336 14,031 (5,329) (6,654)
Income (loss) from discontinued operations,
net of income tax expense (benefit)
of $170, $154, $599, $(235) and $(2,095)..... (240) 2 (631) (1,261) (4,891)
Extraordinary charge, net of income
tax benefit of $296.......................... (1,148) -- -- -- --
Net income (loss).......................... $ 782 $ 6,338 $ 13,400 $ (6,590) $(11,545)
Earnings per share(1)
Basic earnings per share:
Continuing operations...................... $ 0.20 $ 0.43 $ 0.91 $ (0.34) $ (0.40)
Discontinued operations.................... (0.02) -- (0.04) (0.08) (0.30)
Extraordinary charge....................... (0.11) -- -- -- --
Net income (loss)........................ $ 0.07 $ 0.43 $ 0.87 $ (0.42) $ (0.70)
Common shares - Basic.......................... 11,003 14,637 15,387 15,766 16,485
Diluted earnings per share:
Continuing operations........................ $ 0.18 $ 0.42 $ 0.88 $ (0.34) $ (0.40)
Discontinued operations...................... (0.02) -- (0.04) (0.08) (0.30)
Extraordinary charge......................... (0.10) -- -- -- --
Net income (loss).......................... $ 0.06 $ 0.42 0.84 $ (0.42) $ (0.70)
Common shares - Diluted........................ 12,263 15,117 15,969 15,766 16,485
AS OF DECEMBER 31,
------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 7,657 $ 8,506 $ 3,568 $ 5,510 $ 1,327
Working capital surplus........................ 15,672 30,500 32,641 29,133 23,575
Total assets................................... 22,506 44,302 66,924 80,200 67,368
Short-term debt and current portion
of obligations under capital leases.......... 226 386 11 10,585 5,623
Long-term debt and obligations under
capital leases, less current portion......... 108 433 60 -- 1,037
Shareholders' equity........................... 18,280 34,036 47,949 48,654 41,201
- ---------------
(1) Basic and diluted earnings per share have replaced primary and fully
diluted earnings per share in accordance with SFAS No. 128.
- 19 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company provides a wide range of information technology solutions and
services including the development, integration, implementation, hosting and
full lifecycle support of e-commerce and enterprise applications to companies of
all sizes. Our industry-specific knowledge and expertise in a wide range of
technologies, coupled with our ability to provide timely and cost-effective
integrated technology solutions, are intended to provide our customers with
substantial improvements in the efficiency and performance of their businesses.
Our mission is to develop, deploy, and host customized, scalable technology
solutions that integrate seamlessly into our customers' existing environment,
maximize the return on customers' technology investment, and provide a faster
time-to-market and lower total cost of ownership.
In late 1999, the Company made the strategic decision to leverage its
traditional application integration and consulting experience and reposition
Intelligroup for future growth by focusing on the emerging Application Service
Provider ("ASP") market. At the same time, the Company made the strategic
decision to spin-off its Internet services business to the shareholders of the
Company. Accordingly, on January 1, 2000, the Company transferred its Internet
applications services and management consulting businesses to SeraNova, Inc.
("SeraNova"), a wholly-owned subsidiary of the Company on such date.
On January 27, 2000, SeraNova filed a Registration Statement with the
Securities and Exchange Commission (the "SEC") relating to the proposed spin-off
of SeraNova from the Company. On June 29, 2000, the SEC declared SeraNova's
Registration Statement effective. On July 5, 2000, the Company distributed all
of the outstanding shares of the common stock of SeraNova then held by the
Company to holders of record of the Company's common stock as of the close of
business on May 12, 2000 (or to their subsequent transferees) in accordance with
the terms of a Distribution Agreement dated as of January 1, 2000 between the
Company and SeraNova. Accordingly, the assets, liabilities and results of
operations of SeraNova have been reported as discontinued operations for all
periods presented. (See Discontinued Operations.)
During 1998 and 1999, the Company expanded its operations through its
acquisitions of CPI Consulting Limited, CPI Resources Limited and the Empower
Companies. The CPI Companies provide consulting and implementation services
related to PeopleSoft applications. The Empower Companies provide business
process reengineering, system design and development, project management and
training services.
The majority of the Company's revenues are derived from professional
services rendered to customers. Revenue is typically recognized as services are
performed. The Company's services range from providing customers with a single
consultant to multi-personnel full-scale projects. Although the Company has
contracts with many of its customers to provide its services, in general, such
contracts are terminable upon relatively short notice, typically not more than
30 days. There can be no assurance that the Company's customers will continue to
enter into contracts with the Company or that existing contracts will not be
terminated. The Company provides its services either directly to end-user
organizations, or as a member of a consulting
- 20 -
team assembled by another information technology consulting firm. Where
contractual provisions permit, customers also are billed for reimbursement of
expenses incurred by the Company on the customers' behalf.
The Company has provided services on certain projects in which it, at the
request of the clients, offered a fixed price for its services. For the years
ended December 31, 1999 and 2000, revenues derived from projects under fixed
price contracts represented approximately 9% and 10%, respectively, of the
Company's total revenue. No single fixed price project was material to the
Company's business during 1999 or 2000. The Company believes that, as it pursues
its strategy of providing hosting and outsourcing services to customers, it will
continue to offer fixed price projects. The Company believes that there are
certain risks related to fixed price arrangements and thus prices such
arrangements to reflect the associated risk. There can be no assurance that the
Company will be able to complete such projects within the fixed price
timeframes. The failure to perform within such fixed price contracts, if entered
into, could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company has derived and believes that it will continue to derive a
significant portion of its revenue from a limited number of customers and
projects. For the years ended December 31, 1998, 1999 and 2000, the Company's
ten largest customers accounted for in the aggregate, approximately 41%, 43% and
34% of its revenue, respectively. During 1998, no single customer accounted for
more than 10% of revenue. During 1999 and 2000, one customer accounted for more
than 10% of revenue. For the years ended December 31, 1998, 1999 and 2000, 21%,
48% and 36%, respectively, of the Company's revenue was generated by serving as
a member of consulting teams assembled by other information technology
consulting firms. There can be no assurance that such information technology
consulting firms will continue to engage the Company in the future at current
levels of retention, if at all.
During the years ended December 31, 1998, 1999 and 2000, approximately 55%,
54% and 63%, respectively, of the Company's total revenue was derived from
projects in which the Company implemented software developed by SAP. For each of
the years ended December 31, 1998, 1999 and 2000, approximately 21%, 33% and
24%, respectively, of the Company's total revenue was derived from projects in
which the Company implemented software developed by PeopleSoft. For each of the
years ended December 31, 1998, 1999 and 2000, approximately 12%, 9% and 9%,
respectively, of the Company's total revenue was derived from projects in which
the Company implemented software developed by Oracle.
The Company's most significant cost is project personnel expenses, which
consist of consultant salaries, benefits and payroll-related expenses. Thus, the
Company's financial performance is based primarily upon billing margin (billable
hourly rate less the cost to the Company of a consultant on an hourly basis) and
personnel utilization rates (billable hours divided by paid hours).
The Company currently maintains its headquarters in Edison (New Jersey),
and branch offices in Atlanta (Georgia), Rosemont (Illinois), Foster City
(California) and Trujillo Alto, Puerto Rico. The Company also maintains offices
in Europe (Denmark, the United Kingdom, and Sweden), and Asia Pacific
(Australia, India, Japan, New Zealand, Singapore and Hong
- 21 -
Kong). The Company leases its headquarters in Edison, New Jersey. Such lease has
an initial term of ten (10) years, which commenced in September 1998.
DISCONTINUED OPERATIONS
On July 5, 2000, the Company completed the tax-free spin-off of SeraNova by
distributing all of the outstanding shares of the common stock of SeraNova then
held by the Company to holders of record of the Company's common stock as of the
close of business on May 12, 2000 (or to their subsequent transferees).
SeraNova represented a significant segment of the Company's business.
Pursuant to Accounting Principles Board ("APB") Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," the Consolidated Financial Statements of the Company have been
reclassified to reflect the spin-off of SeraNova. Accordingly, the assets,
liabilities, results of operations, and cash flows of SeraNova have been
segregated in the Consolidated Balance Sheets, Consolidated Statements of
Operations and Consolidated Statements of Cash Flows. The net operating results,
net assets and net cash flows of SeraNova have been reported as "Discontinued
Operations." The historical carrying amount of the net assets of SeraNova on the
spin-off date has been recorded as a dividend.
The Company has reported a $4.9 million loss from discontinued operations
for the period from January 1, 2000 to July 5, 2000 and a $1.3 million and a
$0.6 million loss from discontinued operations for the years ended December 31,
1999 and 1998, respectively.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data expressed as a percentage of total revenue, for continuing operations:
PERCENTAGE OF REVENUE
YEAR ENDED
DECEMBER 31
2000 1999 1998
---- ---- ----
Revenue....................................... 100.0% 100.0% 100.0%
Cost of sales................................. 66.9 66.6 65.1
----- ----- -----
Gross profit.............................. 33.1 33.4 34.9
Selling, general and administrative expenses.. 37.2 27.3 21.0
Depreciation and amortization expense......... 2.8 2.0 0.9
Acquisition expenses.......................... -- 1.4 0.9
Restructuring and other special charges....... -- 5.0 --
----- ----- -----
Total operating expenses.................. 40.0 35.7 22.8
----- ----- -----
Operating income (loss)................... (6.9) (2.3) 12.1
Other income (expense), net................... 0.5 (0.4) 0.0
----- ----- -----
Income (loss) from continuing operations
before income taxes....................... (6.4) (2.7) 12.1
Provision (benefit) for income taxes.......... (0.5) 0.9 2.6
----- ----- -----
Net income (loss) from continuing operations.. (5.9)% (3.6)% 9.5%
===== ===== =====
- 22 -
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
The following discussion compares the year ended December 31, 2000 and the
year ended December 31, 1999, for continuing operations.
Revenue. Total revenue decreased by 22.9% or $33.5 million, from $146.3
million in 1999 to $112.8 million in 2000. This decrease was primarily
attributable to the anticipated decline in sales of traditional implementation
services offerings and slower than expected growth in outsourcing and hosting
revenues as the Company refocused resources into the application service
provider market. The decline in traditional implementation services and slower
than expected growth in the application service provider market primarily
resulted from the general economic slowdown in which customers have decreased
technology budgets and have displayed a lack of urgency to immediately fund
information technology projects.
Gross profit. The Company's cost of sales primarily includes the cost of
salaries to consultants and related employee benefits and payroll taxes. The
Company's cost of sales decreased by 22.6%, or $22.0 million, from $97.4 million
in 1999 to $75.4 million in 2000. The Company's gross profit decreased by 23.5%,
or $11.5 million, from $48.9 million in 1999 to $37.4 million in 2000. These
decreases were primarily attributable to lower revenues. Gross margin decreased
slightly to 33.1% in 2000 from 33.4% in 1999. The Company was able to maintain
gross margins relatively comparable to the prior year by managing non-billable
consultant time.
Selling, general and administrative expenses. Selling, general and
administrative expenses primarily consist of administrative salaries, and
related benefits costs, occupancy costs, sales person compensation, travel and
entertainment, costs associated with the Advanced Development Center and related
development costs and professional fees. Selling, general and administrative
expenses increased by 5.3%, or $2.1 million, from $39.9 million in 1999 to $42.0
million in 2000, and increased as a percentage of revenue from 27.3% to 37.2%,
respectively. The increase in selling, general and administrative expenses, in
absolute dollars and as a percentage of revenue, was primarily related to
additional sales staff and expanded marketing efforts as the Company refocused
resources around the emerging application service provider market.
Depreciation and amortization. Depreciation and amortization expenses
increased 10.3% to $3.2 million in 2000, compared to $2.9 million in 1999. The
increase is primarily due to additional computers, equipment and software placed
in service since 1999, in support of the ASPPlus business model.
Acquisition expense. In 1999, the Company incurred costs of $2.1 million in
connection with the acquisition of the Empower Companies. This acquisition was
accounted for as a pooling of interests. Acquisition costs primarily consisted
of professional fees associated with the acquisition.
Restructuring and other special charges. In connection with management's
plan to reduce costs and improve operating efficiencies, the Company incurred a
non-recurring charge of $5.6 million related to restructuring initiatives during
1999. The restructuring charge included
- 23 -
settlement of the former chief executive officer's employment agreement and
additional severance payment, expenses associated with the termination of
certain employees in the United States and the United Kingdom, the closing of
certain satellite offices in the United States and an additional office in
Belgium, and costs to exit certain contractual obligations. Over 83% of the
total restructuring charges were paid out in 1999 and an additional 11% were
paid out in 2000. Additionally, the Company recorded a reserve of $1.7 million
against an outstanding receivable from a large ERP account, whose parent
corporation filed for protection under Chapter 11 of the U.S. bankruptcy laws.
Other income (expense), net. The Company earned $1.2 million in interest
income in 2000, compared with $0.2 million in 1999. The increase was related to
the additional interest earned on the balance of the note receivable with
SeraNova, which increased in 2000. The Company incurred $0.6 million and $0.7
million in interest expense in 2000 and 1999, respectively, primarily related to
borrowings under its line of credit. Borrowings under the line of credit were
used to fund operating activities.
(Benefit) provision for income taxes. During 1999, the Company generated
losses for tax purposes in the United States and income related to its foreign
entities (foreign source income). As of December 31, 1999, the Company planned
to file a consolidated tax return. As a result, the Company would have generated
unused foreign tax credits related to this foreign source income. Accordingly,
as of December 31, 1999, included in deferred taxes was an asset for foreign tax
credits and a related valuation allowance as the ability to apply these credits
may be limited in the future.
During 2000, the Company changed their tax strategy, and filed separate
company returns for 1999 which resulted in the realization of the foreign tax
credits and a portion of the valuation allowance being reversed. By choosing
this strategy the Company was able to generate net operating losses which are
less restrictive than the foreign tax credits.
During 2000, the Company continued to generate overall pre-tax losses even
though there were profits generated in foreign jurisdictions. The Company has
provided a valuation allowance against certain of these net operating losses as
the ability to utilize these losses may be limited in the future. This has
negatively impacted the amount of income tax benefit recorded in 2000.
Accordingly, the Company's effective tax rate was (8%) in 2000 and 37% in 1999.
Based on anticipated profitability in the near future, management believes it is
more likely than not, that the 2000 net deferred tax asset of $0.8 million will
be realized.
In 1996, the Company elected a five year tax holiday in India, in
accordance with a local tax incentive program whereby no income tax will be due
in such period. Such tax holiday was extended an additional five years in 1999.
Effective April 1, 2000 pursuant to changes introduced by the Indian Finance
Act, 2000, the tax holiday previously granted is no longer available and has
been replaced in the form of a tax deduction incentive. The impact of this
change is not expected to be material to the consolidated financial statements
of the Company. For the years ended December 31, 2000 and 1999, the tax holiday
and new tax deduction favorably impacted the Company's effective tax rate by
approximately 2.0% and 5.0%, respectively.
- 24 -
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
The following discussion compares the year ended December 31, 1999 and the
year ended December 31, 1998, for continuing operations.
Revenue. Total revenue decreased by 0.8% or $1.2 million, from $147.5
million in 1998 to $146.3 million in 1999. This decrease was primarily
attributable to a decrease in expenditures on ERP implementations, related to
Y2K concerns as companies shifted resources away from mission critical,
enterprise-wide applications.
Gross profit. The Company's cost of sales increased 1.4%, or $1.4 million,
from $96.0 million in 1998 to $97.4 million in 1999. The Company's gross profit
margin decreased from 34.9% in 1998 to 33.4% in 1999. The decrease was primarily
attributable to lower staff utilization, experienced as a result of a decline in
the ERP implementation market.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 28.7%, or $8.9 million, from $31.0 million
in 1998 to $39.9 million in 1999 and increased as a percentage of revenue from
21.0% to 27.3%, respectively. The increases in such expenses in absolute dollars
and as a percentage of revenue were primarily due to the increase in salaries
and related benefits, reflecting headcount increases in the Company's sales
force and its marketing, finance, accounting and administrative staff through
acquisitions and in order to manage its growth. The Company's occupancy costs
increased as a result of the relocation of its corporate headquarters. In
addition, the Company experienced increases in sales and management recruiting
costs, occupancy costs (as additional offices were opened in the United States),
support services and the provision for doubtful accounts.
Acquisition expense. During the year ended December 31, 1999, the Company
incurred costs of $2.1 million in connection with the acquisition of the Empower
Companies. During the year ended December 31, 1998, the Company incurred costs
of $1.4 million in connection with the acquisition of CPI Resources Limited.
Both acquisitions were accounted for as a pooling of interests. Acquisition
costs primarily consisted of professional fees associated with each acquisition.
Restructuring and other special charges. In connection with management's
plan to reduce costs and improve operating efficiencies, the Company incurred a
non-recurring charge of $5.6 million related to restructuring initiatives during
the year ended December 31, 1999. The restructuring charge included settlement
of the former chief executive officer's employment agreement and additional
severance payment, expenses associated with the termination of certain employees
in the United States and the United Kingdom, the closing of certain satellite
offices in the United States and an additional office in Belgium, and costs to
exit certain contractual obligations. Over 83% of the restructuring charges were
paid out in 1999. Additionally, the Company recorded a reserve of $1.7 million
against an outstanding receivable from a large ERP account, whose parent
corporation filed for protection under Chapter 11 of the U.S. bankruptcy laws.
Interest expense (income). The Company incurred $0.7 million in interest
expense during the year ended December 31, 1999, primarily related to its
borrowings under its line of credit.
- 25 -
Borrowings under the line of credit were used to fund operating activities,
purchases of computer equipment and office furniture and fixtures, as well as
for acquisitions. The interest expense was partially offset by interest income
of $0.2 million in 1999.
Provision for income taxes. While the Company experienced an overall
pre-tax loss, profits generated in certain foreign jurisdictions resulted in tax
expense for the year ended December 31, 1999. Although the Company expects these
foreign taxes to produce foreign tax credits in the United States, the ability
to apply these credits may be limited and, therefore, the Company has provided a
valuation allowance against such tax credits, which has negatively impacted
income tax expense. The Company's effective income tax rate was 37% and 22% for
the years ended December 31, 1999 and 1998, respectively. Based on current and
anticipated profitability, management believes all recorded net deferred tax
assets are more likely than not to be realized.
In 1996, the Company elected a five year tax holiday in India in accordance
with a local tax incentive program whereby no income tax will be due during such
period. Such tax holiday was extended an additional five years in 1999. For the
year ended December 31, 1999 and 1998, the tax holiday favorably impacted the
effective tax rate by approximately 5% and 12%, respectively.
As discussed in the consolidated financial statements, on February 16,
1999, the Company acquired Empower Solutions, L.L.C. and Empower, Inc. (a
corporation organized under subchapter S of the Internal Revenue Code). The
acquisitions were accounted for as pooling of interests and thus prior year
financial statements have been restated in accordance with the pooling of
interests accounting. The Empower Companies were pass-through entities for tax
reporting purposes, thus their income was not taxed at the corporate level.
Accordingly, the Company's federal statutory tax rate was reduced by 8% and 14%
for 1999 and 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its operations primarily from cash flow generated from
operations and financing activities, and prior to 1998 from cash balances
generated from the Company's initial and follow-on public offerings consummated
in October 1996 and July 1997, respectively.
The Company had cash and cash equivalents of $1.3 million at December 31,
2000 and $5.5 million at December 31, 1999. The Company had working capital of
$23.6 million at December 31, 2000 and $29.1 million at December 31, 1999.
Cash provided by continuing operating activities was $7.6 million during
the year ended December 31, 2000, resulting primarily from decreases in accounts
receivable, unbilled services and income taxes receivable, and increases in
accounts payable, accrued payroll and related taxes and accrued expenses and
other liabilities. These amounts were partially offset by an increase in other
current assets and a decrease in income taxes payable. Cash used in continuing
operating activities was $0.5 million during the year ended December 31, 1999.
Cash provided by continuing operating activities during the year ended December
31, 1998 was $6.9 million.
- 26 -
The Company invested $2.9 million, $2.4 million and $6.4 million in
computer equipment and office furniture and fixtures in 2000, 1999 and 1998,
respectively. The increase reflects purchases of computer and telecommunications
equipment for consultants and administrative staff and office furniture and
fixtures for consultants and administrative staff. In addition, the Company
invested $4.0 million in purchased software in 2000. The purchased software is
an integral component of the overall ASPPlus solution provided to customers.
From January 29, 1999 until May 31, 2000, the Company had an unsecured
three-year $30.0 million revolving credit facility with PNC Bank, N.A. (the
"Bank"). The credit facility contained certain financial covenants in which the
Company was not in compliance with as of June 30, 1999 and September 30, 1999.
In January 2000, the Company finalized with the Bank the terms of a waiver and
amendment to the credit agreement to remedy defaults, which existed under the
credit agreement. The terms of the waiver and amendment included, among other
things, (i) a $15.0 million reduction in availability under the credit
agreement, (ii) a first priority perfected security interest on all assets of
the Company and its domestic subsidiaries and (iii) modification of certain
financial covenants and a waiver of prior covenant defaults. However, the
Company was not in compliance with the modified financial covenants as of March
31, 2000. Accordingly, on May 9, 2000, the Bank issued to the Company a waiver
of the defaults, which existed under the credit agreement for the quarter ended
March 31, 2000.
On May 31, 2000, the Company and the Bank entered into an agreement to
replace the previous facility with a new three-year revolving credit facility
agreement. The new credit facility is comprised of a revolving line of credit
pursuant to which the Company can borrow up to $20.0 million either at the
Bank's prime rate per annum or the Euro Rate plus 1.75% to 2.5% based upon the
Company's ratio of debt to EBITDA. The credit facility is collateralized by
substantially all of the assets of the United States based operations. The
maximum borrowing availability under the line of credit is based upon a
percentage of eligible billed and unbilled accounts receivable, as defined. As
of December 31, 2000, the Company had outstanding borrowings under the credit
facility of $5.0 million. The Company estimates undrawn availability under the
credit facility to be $6.2 million as of December 31, 2000. As of December 31,
1999, the Company had outstanding borrowings under the prior credit facility of
$10.6 million.
The new credit facility provides for the following financial covenants,
among other things, (1) the Company must maintain consolidated net worth, as
defined ("consolidated net worth") of (a) $42.0 million at each of June 30,
2000, September 30, 2000, and December 31, 2000; (b) not less than 95% of
consolidated net worth of the immediately preceding fiscal year-end as at each
such fiscal quarter after December 31, 2000; and (c) at least 105% of
consolidated net worth as of the immediately preceding fiscal year-end as at
each such fiscal year-end subsequent to December 31, 2000; provided, however,
the foregoing covenant shall not be tested for any quarter so long as the
Company maintains, at all times during such fiscal quarter, undrawn availability
of more than $5.0 million and (2) the Company must maintain unconsolidated net
worth, as defined ("unconsolidated net worth") of (a) $39.0 million at each of
June 30, 2000, September 30, 2000, and December 31, 2000; (b) not less than 95%
of unconsolidated net worth of the immediately preceding fiscal year-end as at
each such fiscal quarter after December 31, 2000; and (c) at least 105% of
unconsolidated net worth as of the immediately preceding fiscal year-end as at
each such fiscal year-end subsequent to
- 27 -
December 31, 2000; provided, however, the foregoing covenant shall not be tested
for any quarter so long as the Company maintains, at all times during such
fiscal quarter, undrawn availability of more than $5.0 million. Additionally,
the credit facility contains material adverse change clauses with regard to the
financial condition of the assets, liabilities and operations of the Company. As
of December 31, 2000, the Company was in compliance with all financial
covenants.
On May 31, 2000, SeraNova and the Company formalized a $15.1 million
unsecured promissory note (the "Note") relating to net borrowings by SeraNova
from the Company through such date. The Note bears interest at the prime rate
plus 1/2%. The Company has recorded total accrued interest of $0.8 million as of
December 31, 2000. A payment of $3.0 million was made on September 29, 2000 with
the balance being due on July 31, 2001. The Note has certain mandatory
prepayment provisions based on future debt or equity financings by SeraNova.
In September 2000, SeraNova consummated an $8.0 million preferred stock
financing with two institutional investors. According to the mandatory
prepayment provisions of the Note, SeraNova was required to make a prepayment of
$3.0 million on the Note as a result of the stock financing. Subsequently, the
Company finalized, with SeraNova, the terms of an agreement to waive, subject to
certain conditions, certain of the mandatory prepayment obligations arising as a
result of the financing. The terms of the new agreement included, among other
things, that SeraNova pay the Company (i) $0.5 million upon execution of the
agreement; (ii) $0.5 million on or before each of January 31, 2001, February 28,
2001, March 31, 2001, April 30, 2001 and May 31, 2001; and (iii) $0.4 million on
or before December 15, 2000 to be applied either as (a) an advance payment
towards a contemplated services arrangement for hosting services to be provided
to SeraNova by the Company (the "Hosting Agreement"); or (b) in the event that
no such Hosting Agreement is executed on or before December 15, 2000, an
additional advance prepayment toward the principal of the Note. The Company
received from SeraNova the $0.5 million payment that was due upon execution of
the agreement and a $0.4 million payment in December 2000 as an advance payment
towards the principal of the Note since no Hosting Agreement was executed before
December 15, 2000.
The Company's 2001 operating plan contains assumptions regarding revenue
and expenses. The achievement of the operating plan depends heavily on the
timing of work performed by the Company on existing projects and the ability of
the Company to gain and perform work on new projects. Project cancellations,
delays in the timing of work performed by the Company on existing projects or
the inability of the Company to gain and perform work on new projects could have
an adverse impact on the Company's ability to execute its operating plan and
maintain adequate cash flow. In the event actual results do not meet the
operating plan, management believes it could execute contingency plans to
mitigate such effects. Such plans include additional cost reductions or seeking
additional financing. Considering the cash on hand, the anticipated collection
of the note receivable from SeraNova, the credit facility and based on the
achievement of the operating plan and management's actions taken to date,
management believes it has the ability to continue to generate sufficient cash
to satisfy its operating requirements in the normal course of business. However,
no assurance can be given that sufficient cash will be generated from
operations.
- 28 -
The Company believes that its available funds, together with current credit
arrangements, the anticipated collection of the note receivable from SeraNova
and the cash flow expected to be generated from operations, will be adequate to
satisfy its current and planned operations for at least the next 12 months.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. In July 1999,
the FASB approved SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133," and in
June 2000 approved SFAS 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities--an Amendment of SFAS No. 133," both of which amend
SFAS No. 133. The Company will be required to adopt SFAS No. 133 in fiscal 2001
in accordance with SFAS No. 137. The Company has evaluated the impact of the
adoption of SFAS No. 133 and 138 and does not believe that their adoption will
have a material impact on its financial position and results of operations.
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," or SAB 101. SAB 101 summarizes certain areas of the staff's views
in applying generally accepted accounting principles to revenue recognition in
financial statements. In June 2000, the SEC issued SAB No. 101B to defer the
effective date of the implementation of SAB 101 until the fourth quarter of
fiscal 2000. Management has concluded that the adoption of SAB 101 did not
result in a material impact on the Company's financial position or results of
operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation -- an Interpretation of APB
No. 25," or FIN 44. FIN 44 clarifies the application of APB No. 25 and, among
other issues, clarifies the following: the definition of an employee for
purposes of applying APB No. 25; the criteria for determining whether a plan
qualifies as a non-compensatory plan; the accounting consequence of various
modifications to the terms of the previously fixed stock options or awards; and
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN 44
cover specific events that occurred after either December 15, 1998 or January
12, 2000. The application of FIN 44 had no impact on the Company's financial
position or results of operations.
EUROPEAN MONETARY UNION (EMU)
The euro was introduced on January 1, 1999, at which time the eleven
participating EMU member countries established fixed conversion rates between
their existing currencies (legacy currencies) and the euro. The legacy
currencies will continue to be used as legal tender through January 1, 2002;
thereafter, the legacy currencies will be canceled and euro bills and coins will
be used for cash transactions in the participating countries. The Company's
European sales and operations offices affected by the euro conversion have
established plans to address the systems issues raised by the euro currency
conversion and are cognizant of the potential business
- 29 -
implications of converting to a common currency. The Company is unable to
determine the ultimate financial impact of the conversion on its operations, if
any, given that the impact will be dependent upon the competitive situations
which exist in the various regional markets in which the Company participates
and the potential actions which may or may not be taken by the Company's
competitors and suppliers.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Although the Company cannot accurately determine the precise effect thereof
on its operations, it does not believe inflation, currency fluctuations or
interest rate changes have historically had a material effect on its revenues or
results of operations. Any significant effects of inflation, currency
fluctuations and changes in interest rates on the economies of the United
States, Europe or Asia Pacific could adversely impact the Company's revenues and
results of operations in the future. If there is a material adverse change in
the relationship between European currencies and/or Asian currencies and the
United States Dollar, such change would adversely affect the result of the
Company's European and/or Asia Pacific operations as reflected in the Company's
financial statements. The Company has not hedged its exposure with respect to
this currency risk, and does not expect to do so in the future, since it does
not believe that it is practicable for it to do so at a reasonable cost.
ITEM 8. FINANCIAL STATEMENTS.
The financial statements required to be filed pursuant to this Item 8 are
included in this Annual Report on Form 10-K. A list of the financial statements
filed herewith is found at "Item 14. Exhibits, List, and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
- 30 -
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to the Company's directors, nominees for election
as directors and executive officers under the headings "Election of Directors"
and "Executive Officers" in the Company's definitive proxy statement for the
2001 Annual Meeting of Shareholders is incorporated herein by reference to such
proxy statement.
ITEM 11. EXECUTIVE COMPENSATION.
The discussion under the heading "Executive Compensation" in the Company's
definitive proxy statement for the 2001 Annual Meeting of Shareholders is
incorporated herein by reference to such proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The discussion under the heading "Security Ownership of Certain Beneficial
Owners and Management" in the Company's definitive proxy statement for the 2001
Annual Meeting of Shareholders is incorporated herein by reference to such proxy
statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The discussion under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for the 2001 Annual
Meeting of Shareholders is incorporated herein by reference to such proxy
statement.
- 31 -
PART IV
ITEM 14. EXHIBITS, LIST, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements.
Reference is made to the Index to Financial Statements on Page F-1.
(2) Financial Statement Schedules.
None.
(3) Exhibits.
Reference is made to the Exhibit Index on Page 35.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December
31, 2000.
- 32 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 30th day of March
2001.
INTELLIGROUP, INC.
By: /s/ Nagarjun Valluripalli
-----------------------------------
Nagarjun Valluripalli, Chairman and
Chief Executive Officer
- 33 -
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Nagarjun Valluripalli Chairman, Chief Executive Officer March 30, 2001
- -------------------------
Nagarjun Valluripalli and Director (principal executive
officer)
/s/ Nicholas Visco Senior Vice President- Finance and March 30, 2001
- -------------------------
Nicholas Visco Administration (principal
financial and accounting officer)
/s/ Rajkumar Koneru Director March 30, 2001
- -------------------------
Rajkumar Koneru
/s/ Klaus Besier Director March 30, 2001
- -------------------------
Klaus Besier
/s/ Dennis McIntosh Director March 30, 2001
- -------------------------
Dennis McIntosh
- 34 -
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
2 Agreement and Plan of Merger of the Company and its wholly owned
subsidiary Oxford Systems Inc. (Incorporated by reference to the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996.)
3.1 Amended and Restated Certificate of Incorporation. (Incorporated
by reference to the Company's Registration Statement on Form SB-2
(Registration Statement No. 333-5981) declared effective on
September 26, 1996.)
3.2 Amended and Restated Bylaws. (Incorporated by reference to the
Company's Registration Statement on Form SB-2 (Registration
Statement No. 333-5981) declared effective on September 26,
1996.)
4.1 Shareholder Protection Rights Agreement dated as of November 6,
1998, between the Company and American Stock Transfer & Trust
Company which includes (I) the Form of Rights Certificate and
(ii) the Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of Intelligroup, Inc. (Incorporated
by reference to Exhibit No. 4.1 of the Company's Report on Form
8-K dated November 9, 1998, filed with the Securities and
Exchange Commission on November 9, 1998.)
10.1* 1996 Stock Plan, as amended, of the Company. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999.)
10.2* 1996 Non-Employee Director Stock Option Plan. (Incorporated by
reference to the Company's Registration Statement on Form SB-2
(Registration Statement No. 333-5981) declared effective on
September 26, 1996.)
10.3 Form of Indemnification Agreement entered into by the Company and
each of its Directors and officers. (Incorporated by reference to
the Company's Registration Statement on Form SB-2 (Registration
Statement No. 333-5981) declared effective on September 26,
1996.)
10.4 Employment Agreement dated October 1, 1999 between the Company
and Nicholas Visco. See Exhibit 10.30.
10.5 Employee's Invention Assignment and Confidentiality Agreement.
(Incorporated by reference to the Company's Registration
Statement on Form SB-2 (Registration Statement No. 333-5981)
declared effective on September 26, 1996.)
- 35 -
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.6 Services Provider Agreement by and between Oracle Corporation and
the Company dated July 26, 1994. (Incorporated by reference to
the Company's Registration Statement on Form SB-2 (Registration
Statement No. 333-5981) declared effective on September 26,
1996.) See Exhibit 10.8.
10.7 Agreement by and between the Company and Intelligroup Asia
Private Limited ("Intelligroup Asia") relating to operational
control of Intelligroup Asia, with related agreements.
(Incorporated by reference to the Company's Registration
Statement on Form SB-2 (Registration Statement No. 333-5981)
declared effective on September 26, 1996.)
10.8 Amendment No. 1 to Services Provider Agreement by and between
Oracle Corporation and the Company dated December 30, 1996.
(Incorporated by reference to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1996.) See Exhibit 10.6.
10.9 R/3 National Logo Partner Agreement by and between SAP America,
Inc. and the Company dated as of April 29, 1997. (Incorporated by
reference to the Company's Registration Statement on Form SB-2
(Registration Statement No. 333-29119) declared effective on June
26, 1997.) See Exhibits 10.10, 10.21 and 10.31.
10.10 ASAP Partner Addendum to R/3 National Logo Partner Agreement
between SAP America, Inc. and the Company effective July 1, 1997
(amends existing R/3 National Logo Partner Agreement).
(Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1997.) See
Exhibits 10.9, 10.21 and 10.31.
10.11 Implementation Partner Agreement between PeopleSoft, Inc. and the
Company effective July 15, 1997. (Incorporated by reference to
the Company's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1997.) See Exhibit 10.20.
10.12 Consulting Alliance Agreement with Baan International B.V. and
the Company effective September 29, 1997. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for
the quarter ended September 30, 1997.)
10.13 Lease Agreement between Alfieri-Parkway Associates, as Landlord,
and Intelligroup, Inc., as Tenant, dated March 17, 1998.
(Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998.)
10.14 Agreement of Purchase and Sale dated as of May 7, 1998 among the
Company, Intelligroup Europe Limited and the Shareholders of CPI
Consulting Limited. (Incorporated by reference to the Company's
Report on Form 8-K filed May 27, 1998.)
- 36 -
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.15 Agreement of Purchase and Sale dated as of May 21, 1998 among the
Company, Intelligroup Europe Limited and the Shareholders of CPI
Resources Limited. (Incorporated by reference to the Company's
Report on Form 8-K filed May 27, 1998.)
10.16 Agreement of Purchase and Sale dated as of November 25, 1998
among the Company and the Shareholders of each of Azimuth
Consulting Limited, Azimuth Holdings Limited, Braithwaite
Richmond Limited and Azimuth Corporation Limited. (Incorporated
by reference to the Company's Report on Form 8-K filed December
8, 1998.)
10.17 Stock Purchase Agreement dated as of December 21, 1998 among the
Company and the Shareholders of Network Publishing, Inc.
(Incorporated by reference to the Company's Report on Form 8-K
filed January 8, 1999.)
10.18 Agreement and Plan of Merger dated as of February 16, 1999 by and
among the Company, ES Merger Corp., Empower Solutions, LLC and
the members of Empower Solutions, LLC. (Incorporated by reference
to the Company's Report on Form 8-K filed February 24, 1999.)
10.19 Agreement and Plan of Merger dated as of February 16, 1999 by and
among the Company, ES Merger Corp., Empower Solutions, Inc. and
the stockholders of Empower, Inc. (Incorporated by reference to
the Company's Report on Form 8-K filed February 24, 1999.)
10.20* Fifth Amendment to the Implementation Partner Agreement dated
July 15, 1998, between the Company and PeopleSoft, Inc. See
Exhibit 10.11.
10.21* Amendment to the National Implementation Partner Agreement dated
as of January 1, 1999, between SAP America and the Company. See
Exhibits 10.9, 10.10 and 10.31.
10.22 Contribution Agreement by and between Intelligroup, Inc. and
SeraNova, Inc. dated as of January 1, 2000. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.)
10.23 Distribution Agreement by and between Intelligroup, Inc. and
SeraNova, Inc. dated as of January 1, 2000. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.)
10.24 Services Agreement by and between Intelligroup, Inc. and
SeraNova, Inc. dated as of January 1, 2000. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.)
- 37 -
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.25 Space Sharing Agreement by and among Intelligroup, Inc. and
SeraNova, Inc. dated as of January 1, 2000. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.)
10.26 Tax Sharing Agreement by and between Intelligroup, Inc. and
SeraNova, Inc. dated as of January 1, 2000. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.)
10.27* Amended and Restated Revolving Credit Loan and Security Agreement
among the Company, Empower, Inc. and PNC Bank, National
Association. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000.)
10.28 Amended and Restated Promissory Note by and between the Company
and SeraNova, Inc. dated as of May 31, 2000. (Incorporated by
reference to the Company's Report on Form 8-K/A filed September
14, 2000.) See Exhibit 10.29.
10.29 Agreement and Waiver with respect to Amended and Restated
Promissory Note by and between the Company and SeraNova, Inc.
dated as of September 29, 2000. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000.) See Exhibit 10.28.
10.30*+ First Amendment to Employment Agreement between the Company and
Nicholas Visco dated November 1, 2000.
10.31+ mySap.com Partner-Services Addendum effective June 7, 2000 to R/3
National Logo Partner Agreement between SAP America, Inc. and the
Company. See Exhibits 10.9, 10.10 and 10.21.
10.32+ Service Alliance Master Agreement and Addendums dated May 5, 2000
between PeopleSoft, Inc. and the Company.
21+ Subsidiaries of the Registrant.
23+ Consent of Arthur Andersen LLP.
- ------------------------
* A management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
+ Filed herewith. All other exhibits previously filed.
- 38 -
INTELLIGROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants................................. F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2000 and 1999............. F-3
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998................................. F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2000, 1999 and 1998................................. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998................................. F-6
Notes to Consolidated Financial Statements............................... F-7
Financial Statement Schedules
Financial Statement Schedules required by the Securities and
Exchange Commission have been omitted, as the required
information is included in the Notes to Consolidated Financial
Statements or is not applicable.
F - 1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Intelligroup, Inc.:
We have audited the accompanying consolidated balance sheets of
Intelligroup, Inc. (a New Jersey corporation) and subsidiaries as of December
31, 2000 and 1999, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. 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 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 Intelligroup, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 7, 2001
F - 2
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents............................. $ 1,327,000 $ 5,510,000
Accounts receivable, less allowance for doubtful
accounts of $2,061,000 and $2,939,000 at
December 31, 2000 and 1999, respectively.......... 22,438,000 27,607,000
Unbilled services..................................... 5,933,000 7,692,000
Income taxes receivable............................... 384,000 3,612,000
Deferred tax asset.................................... 1,348,000 2,481,000
Other current assets.................................. 4,820,000 2,699,000
Note receivable - SeraNova............................ 11,910,000 --
Net current assets of discontinued operations......... -- 7,621,000
------------- -------------
Total current assets............................ 48,160,000 57,222,000
Note receivable - SeraNova............................ -- 8,397,000
Property and equipment, net........................... 9,650,000 8,557,000
Intangible assets, net................................ 4,732,000 5,188,000
Other assets.......................................... 4,826,000 836,000
------------- -------------
$ 67,368,000 $ 80,200,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable...................................... $ 6,849,000 $ 3,800,000
Accrued payroll and related taxes..................... 6,480,000 5,527,000
Accrued expenses and other liabilities................ 5,345,000 4,273,000
Income taxes payable.................................. 288,000 3,904,000
Current portion of long term debt and obligations
under capital leases.............................. 5,623,000 10,585,000
------------- -------------
Total current liabilities....................... 24,585,000 28,089,000
Deferred tax liability.................................. 545,000 806,000
------------- -------------
Obligations under capital leases, less current portion.. 1,037,000 --
------------- -------------
Net non-current liabilities of discontinued operations.. -- 2,651,000
------------- -------------
Commitments and contingencies
Shareholders' Equity
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued or outstanding............ -- --
Common stock, $.01 par value, 25,000,000 shares
authorized, 16,630,000 and 15,949,000 shares
issued and outstanding at December 31, 2000
and 1999, respectively............................ 166,000 160,000
Additional paid-in capital............................ 41,366,000 43,356,000
Retained earnings..................................... 1,908,000 6,317,000
Currency translation adjustments...................... (2,239,000) (1,179,000)
------------- -------------
Total shareholders' equity ..................... 41,201,000 48,654,000
------------- -------------
$ 67,368,000 $ 80,200,000
============= =============
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F - 3
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------------- -------------- -------------
Revenue....................................... $ 112,838,000 $ 146,272,000 $ 147,462,000
Cost of sales................................. 75,444,000 97,382,000 96,024,000
------------- -------------- -------------
Gross profit............................. 37,394,000 48,890,000 51,438,000
------------- -------------- -------------
Selling, general and administrative expenses.. 42,004,000 39,892,000 30,977,000
Depreciation and amortization................. 3,187,000 2,930,000 1,387,000
Acquisition expenses.......................... -- 2,115,000 1,397,000
Restructuring and other special charges....... -- 7,328,000 --
------------- -------------- -------------
Total operating expenses.................. 45,191,000 52,265,000 33,761,000
------------- -------------- -------------
Operating income (loss)................... (7,797,000) (3,375,000) 17,677,000
Interest income (expense), net................ 570,000 (513,000) 206,000
------------- -------------- -------------
Income (loss) from continuing operations
before income tax provision (benefit)..... (7,227,000) (3,888,000) 17,883,000
Income tax provision (benefit)................ (573,000) 1,441,000 3,852,000
------------- -------------- -------------
Income (loss) from continuing operations...... (6,654,000) (5,329,000) 14,031,000
Loss from discontinued operations, net of
tax expense (benefit) of $(2,095,000),
$(235,000) and $599,000, respectively..... (4,891,000) (1,261,000) (631,000)
------------- -------------- -------------
Net income (loss)............................. $ (11,545,000) $ (6,590,000) $ 13,400,000
============= ============== =============
Earnings per share:
Basic earnings per share:
Income (loss) from continuing
operations ........................ $ (0.40) $ (0.34) $ 0.91
Discontinued operations .............. (0.30) (0.08) (0.04)
------------- -------------- -------------
Net income (loss) per share........ $ (0.70) $ (0.42) $ 0.87
============= ============== =============
Weighted average number of Common
shares - Basic..................... 16,485,000 15,766,000 15,387,000
============= ============== =============
Diluted earnings per share:
Income (loss) from continuing
operations ........................ $ (0.40) $ (0.34) $ 0.88
Discontinued operations .............. (0.30) (0.08) (0.04)
------------- -------------- -------------
Net income (loss) per share........... $ (0.70) $ (0.42) $ 0.84
============= ============== =============
Weighted average number ofCommon
shares - Diluted................... 16,485,000 15,766,000 15,969,000
============= ============== =============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F - 4
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
CUMULATIVE
RETAINED FOREIGN
COMMON STOCK ADDITIONAL EARNINGS CURRENCY TOTAL COMPREHENSIVE
------------ PAID-IN (ACCUMULATED TRANSLATION SHAREHOLDERS' INCOME (LOSS)
SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENTS EQUITY FOR THE PERIOD
---------- --------- ----------- ------------ ----------- ------------ --------------
Balance at December 31, 1997..... 15,263,000 $ 153,000 $30,812,000 $ 3,170,000 $ (99,000) $ 34,036,000 $ 6,154,000
============
Issuance of common stock in
connection with acquisitions..... 166,000 2,000 3,126,000 -- -- 3,128,000 --
Exercise of stock options........ 144,000 1,000 1,021,000 -- -- 1,022,000 --
Tax benefit from exercise of
stock options.................... -- -- 302,000 -- -- 302,000 --
Adjustment for difference in
Azimuth fiscal periods........... -- -- -- 32,000 -- 32,000 --
Shareholder dividends............ -- -- -- (3,525,000) -- (3,525,000) --
Currency translation adjustments. -- -- -- -- (446,000) (446,000) $ (446,000)
Net income....................... -- -- -- 13,400,000 -- 13,400,000 13,400,000
---------- --------- ----------- ----------- ----------- ------------ ------------
Balance at December 31, 1998..... 15,573,000 156,000 35,261,000 13,077,000 (545,000) 47,949,000 $ 12,954,000
============
Issuance of common stock in
connection with acquisitions..... 155,000 2,000 4,589,000 -- -- 4,591,000 --
Exercise of stock options........ 221,000 2,000 2,996,000 -- -- 2,998,000 --
Tax benefit from exercise of
stock options.................... -- -- 510,000 -- -- 510,000 --
Shareholder dividends............ -- -- -- (170,000) -- (170,000) --
Currency translation adjustments. -- -- -- -- (634,000) (634,000) $ (634,000)
Net loss......................... -- -- -- (6,590,000) -- (6,590,000) (6,590,000)
---------- --------- ----------- ----------- ----------- ------------ ------------
Balance at December 31, 1999..... 15,949,000 160,000 43,356,000 6,317,000 (1,179,000) 48,654,000 $ (7,224,000)
============
Issuance of common stock in
connection with acquisitions..... 100,000 1,000 -- -- -- 1,000 --
Spin-off distribution of
SeraNova common stock............ -- -- (7,733,000) 7,136,000 (107,000) (704,000) --
Exercise of stock options........ 581,000 5,000 5,743,000 -- -- 5,748,000 --
Currency translation adjustments. -- -- -- -- (953,000) (953,000) $ (953,000)
Net loss......................... -- -- -- (11,545,000) -- (11,545,000) (11,545,000)
---------- --------- ----------- ----------- ----------- ------------ ------------
Balance at December 31, 2000..... 16,630,000 $ 166,000 $41,366,000 $ 1,908,000 $(2,239,000) $ 41,201,000 $(12,498,000)
========== ========= =========== =========== =========== ============ ============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F - 5
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------------- ------------ ------------
Cash flows from operating activities:
Net income (loss)........................................... $(11,545,000) $ (6,590,000) $13,400,000
Less: Loss from discontinued operations, net of tax......... (4,891,000) (1,261,000) (631,000)
------------ ------------ -----------
Income (loss) from continuing operations.................... (6,654,000) (5,329,000) 14,031,000
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by (used in)
operating activities of continuing operations:
Depreciation and amortization........................... 3,187,000 2,930,000 1,387,000
Provision for doubtful accounts......................... 3,293,000 4,742,000 1,128,000
Deferred income taxes................................... 872,000 (1,430,000) (12,000)
Tax benefit from exercise of stock options.............. -- 510,000 302,000
Changes in operating assets and liabilities:
Accounts receivable....................................... 1,876,000 (1,823,000) (12,004,000)
Unbilled services......................................... 1,759,000 2,250,000 (2,212,000)
Income taxes receivable................................... 3,228,000 (3,612,000) --
Other current assets...................................... (2,121,000) 1,292,000 (3,274,000)
Other assets.............................................. 735,000 (120,000) (379,000)
Accounts payable.......................................... 3,049,000 (1,021,000) 3,121,000
Accrued payroll and related taxes......................... 953,000 312,000 2,461,000
Accrued restructuring charges............................. (608,000) (4,679,000) --
Accrued expenses and other liabilities.................... 1,680,000 4,494,000 598,000
Income taxes payable...................................... (3,616,000) 940,000 1,738,000
------------ ------------ -----------
Net cash provided by (used in) operating activities
of continuing operations.................................. 7,633,000 (544,000) 6,885,000
------------ ------------ -----------
Cash flows from investing activities:
Purchase of equipment .................................... (2,919,000) (2,356,000) (6,446,000)
Purchase of software licenses............................. (3,957,000) -- --
------------ ------------ -----------
Net cash used in investing activities of continuing
operations................................................ (6,876,000) (2,356,000) (6,446,000)
------------ ------------ -----------
Cash flows from financing activities:
Principal payments under capital leases..................... (117,000) (12,000) (6,000)
Proceeds from exercise of stock options..................... 5,749,000 2,998,000 1,022,000
Shareholder dividends ...................................... -- (170,000) (3,525,000)
Repayment of shareholders' loans ........................... -- -- (618,000)
Other borrowings............................................ 91,000 -- --
Net change in line of credit borrowings..................... (5,572,000) 10,526,000 --
Net change in note receivable-SeraNova prior to
spin-off date............................................ (6,662,000) (6,618,000) (1,475,000)
Net change in note receivable-SeraNova subsequent to
spin-off date ............................................ 3,149,000 -- --
------------ ------------ -----------
Net cash provided by (used in) financing activities
of continuing operations................................ (3,362,000) 6,724,000 (4,602,000)
------------ ------------ -----------
Effect of foreign currency exchange rate changes on cash.. (953,000) (634,000) (446,000)
------------ ------------ -----------
Net cash provided by (used in) continuing operations ......... (3,558,000) 3,190,000 (4,609,000)
Net cash used in discontinued operations ..................... (625,000) (1,248,000) (329,000)
------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents ......... (4,183,000) 1,942,000 (4,938,000)
Cash and cash equivalents at beginning of period.............. 5,510,000 3,568,000 8,506,000
------------ ------------ -----------
Cash and cash equivalents at end of period.................... $ 1,327,000 $ 5,510,000 $ 3,568,000
============ ============ ===========
Supplemental disclosures of cash flow information:
Cash paid for income taxes.................................. $ 4,053,000 $ 3,850,000 $ 2,067,000
============ ============ ===========
Cash paid for interest...................................... $ 603,000 $ 779,000 $ 7,000
============ ============ ===========
Supplemental disclosures of non-cash transactions:
Issuance of common stock in connection with acquisitions.... $ 1,000 $ 4,591,000 $ 3,128,000
============ ============ ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F - 6
INTELLIGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Intelligroup, Inc., and its subsidiaries (the "Company") provide a wide
range of information technology solutions and services including the
development, integration, implementation, hosting and full lifecycle support of
e-commerce and enterprise applications to companies of all sizes. The Company
markets its services to a wide variety of industries, the majority of which are
in the United States. The majority of the Company's business is with large
established companies, including consulting firms serving numerous industries.
On July 5, 2000, the Company spun-off its Internet applications services
and management consulting businesses ("SeraNova"). This transaction resulted in
the distribution of SeraNova common stock to each holder of the Company's common
stock of record as of May 12, 2000. As a result of this transaction, the
Consolidated Financial Statements and related notes have been restated to
present the results of this business as discontinued operations (See Note 4).
The Company's 2001 operating plan contains assumptions regarding revenue
and expenses. The achievement of the operating plan depends heavily on the
timing of work performed by the Company on existing projects and the ability of
the Company to gain and perform work on new projects. Project cancellations,
delays in the timing of work performed by the Company on existing projects or
the inability of the Company to gain and perform work on new projects could have
an adverse impact on the Company's ability to execute its operating plan and
maintain adequate cash flow. In the event actual results do not meet the
operating plan, management believes it could execute contingency plans to
mitigate such effects. Such plans include additional cost reductions or seeking
additional financing. Considering the cash on hand, the anticipated collection
of the note receivable from SeraNova, the credit facility and based on the
achievement of the operating plan and management's actions taken to date,
management believes it has the ability to continue to generate sufficient cash
to satisfy its operating requirements in the normal course of business. However,
no assurance can be given that sufficient cash will be generated from
operations.
Principles of Consolidation and Use of Estimates
The accompanying financial statements include the accounts of Intelligroup,
Inc. and its majority owned subsidiaries. All significant intercompany balances
and transactions have been eliminated.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
F - 7
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reclassification
Certain prior year amounts have been reclassified to conform to the 2000
presentation.
Cash and Cash Equivalents
Cash and cash equivalents consist of investments in highly liquid
short-term instruments, with original maturities of three months or less from
the date of purchase.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts arising from
services, which is based upon a review of outstanding receivables as well as
historical collection information. Credit is granted to substantially all
customers on an unsecured basis. In determining the amount of the allowance,
management is required to make certain estimates and assumptions. The provision
for doubtful accounts totaled $3,293,000, $4,742,000 and $1,128,000 in 2000,
1999 and 1998, respectively. Accounts written off totaled $4,171,000, $2,649,000
and $1,083,000 in 2000, 1999 and 1998, respectively.
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 (primarily three to five years). Leasehold
improvements are amortized over the shorter of the lease term or the estimated
useful life (ten years). Costs of maintenance and repairs are charged to expense
as incurred.
In 1999, the Company adopted Statement of Position 98-1 ("SOP 98-1"),
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires the capitalization of direct costs incurred in
connection with developing or obtaining software for internal use, including
external direct costs of materials and services and payroll and payroll related
costs for employees who are directly associated with and devote time to an
internal-use software development project. The cost of the internal-use software
and the capitalized implementation-related costs are included within computer
software in property and equipment as of December 31, 2000 and 1999 (See Note
2). Such capitalized costs are amortized on a straight-line basis over the
software's economic useful life of three years.
Intangible Assets
Intangible assets, net, at December 31, 2000 and 1999 include goodwill and
other intangibles totaling $4,732,000 and $5,188,000, respectively, which were
attributable to the acquisition of CPI Consulting (See Note 11). These
intangible assets are being amortized over the estimated useful lives ranging
from 5 to 15 years using the straight-line method. Accumulated amortization was
$1,044,000 and $588,000 as of December 31, 2000 and 1999,
F - 8
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
respectively. Amortization expense was $456,000, $441,000 and $147,000 in 2000,
1999 and 1998, respectively.
Other Assets
Other assets primarily include the cost of purchased computer software that
is marketed to customers as a part of the Company's ASPPlus solution. During the
year ended December 31, 2000, the Company purchased $3,957,000 of such computer
software. The cost of the software will be amortized on a straight-line basis
over the software's economic life (typically, three to five years). For the year
ended December 31, 2000, no amortization expense was recorded since the software
was not yet placed in service.
Recoverability of Long-Lived Assets
The Company reviews the recoverability of its long-lived assets on a
periodic basis whenever events and changes in circumstances have occurred which
may indicate a possible impairment. The assessment for potential impairment is
based primarily on the Company's ability to recover the carrying value of its
long-lived assets from expected future cash flows from its operations on an
undiscounted basis. The Company recently completed a review of the
recoverability of its long-lived assets and determined that no impairment
exists. The amount of impairment of goodwill is determined as part of the
long-lived asset groupings being evaluated.
Revenue Recognition
The Company primarily 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. The majority of
customers are billed on an hourly or per diem basis whereby actual time is
charged directly to the customer. Billings to customers for out-of-pocket
expenses are recorded as a reduction of expenses incurred. Unbilled services at
December 31, 2000 and 1999 represent services provided through December 31, 2000
and 1999, respectively, which are billed subsequent to year-end. All such
amounts are anticipated to be realized in the following year.
The Company also generates revenue from hosting services rendered. Hosting
services revenue primarily consists of monthly recurring fees for hosting
services provided to customers. Revenue and the associated implementation and
support costs are recognized on a monthly basis as services are performed after
the hosted application has been implemented for the customer.
The adoption of Staff Accounting Bulletin 101, relating to revenue
recognition, issued in December 1999 and effective during the fourth quarter of
2000, did not have a material impact to the Company's accompanying consolidated
financial statements.
F - 9
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation
Stock-based compensation is recognized using the intrinsic value method
under Accounting Principles Board ("APB") No. 25. For disclosure purposes, pro
forma net income (loss) and earnings (loss) per share impacts are provided as if
the fair market value method had been applied.
Currency Translation
Assets and liabilities relating to foreign operations are translated into
U.S. dollars using exchange rates in effect at the balance sheet date. Income
and expenses are translated into U.S. dollars using monthly average exchange
rates during the year. Translation adjustments associated with assets and
liabilities are excluded from income and credited or charged directly to
shareholders' equity.
Concentrations
For the years ended December 31, 2000, 1999 and 1998, approximately 63%,
54% and 55% of revenue, respectively, was derived from projects in which the
Company's personnel implemented software developed by SAP. The Company's future
success in its SAP-related consulting services depends largely on its continued
relationship with SAP and on its continued status as a SAP National
Implementation Partner, which was first obtained in 1995. The Company's
agreement with SAP (the "Agreement") is awarded on an annual basis. The
Company's current contract expires on December 31, 2001 and is automatically
renewed for successive one-year periods, unless terminated by either party. This
Agreement contains no minimum revenue requirements or cost sharing arrangements
and does not provide for commissions or royalties to either party. In July 1997,
the Company achieved Accelerated SAP Partner Status with SAP by meeting certain
criteria established by SAP. Additionally, for each of the years ended December
31, 2000, 1999 and 1998, approximately 24%, 33% and 21%, respectively, of
revenue was derived from projects in which the Company's personnel implemented
software developed by PeopleSoft. For each of the years ended December 31, 2000,
1999 and 1998, approximately 9%, 9% and 12%, respectively, of the Company's
total revenue was derived from projects in which the Company implemented
software developed by Oracle.
A substantial portion of the Company's revenue is derived from projects in
which an information technology consulting firm other than the Company has been
retained by the end-user organization to manage the overall project. For years
ended December 31, 2000, 1999 and 1998, 36%, 48% and 21%, respectively, of the
Company's revenue was generated by serving as a member of consulting teams
assembled by other information technology consulting firms.
F - 10
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
One customer accounted for approximately 10% and 15% of revenue in 2000 and
1999, respectively. Accounts receivable due from this customer was approximately
$2,979,000 and $5,900,000 as of December 31, 2000, and 1999, respectively.
During 1998, no single customer accounted for more than 10% of revenue or
accounts receivable.
During 2000 and 1999, the Company derived revenues totaling $307,000 and
$58,000, respectively, from contracts with an entity whose chief executive
officer is a director of the Company.
Income Taxes
Deferred income taxes are recognized for the tax consequences of temporary
differences between the financial statement and tax bases of assets and
liabilities, using enacted tax rates currently in effect. The Company does not
provide for additional U.S. income taxes on undistributed earnings considered to
be permanently invested in foreign subsidiaries.
Earnings Per Share
Basic earnings per share is computed by dividing income attributable to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding, adjusted for the incremental dilution of outstanding stock options.
The computation of basic earnings per share and diluted earnings per share were
as follows:
2000 1999 1998
------------ ----------- ------------
Income (loss) from continuing operations..... $ (6,654,000) $(5,329,000) $ 14,031,000
Loss from discontinued operations............ (4,891,000) (1,261,000) (631,000)
------------ ----------- ------------
Net income (loss)............................ $(11,545,000) $(6,590,000) $ 13,400,000
============ =========== ============
Basic earnings per share:
Weighted average number of common shares... 16,485,000 15,766,000 15,387,000
------------ ----------- ------------
Basic income (loss) per share from
continuing operations.................... $ (0.40) $ (0.34) $ 0.91
Basic loss per share from discontinued
operations............................... (0.30) (0.08) (0.04)
------------ ----------- ------------
Basic net earnings (loss) per share........ $ (0.70) $ (0.42) $ 0.87
============ =========== ============
Diluted earnings per share:
Weighted average number of common shares... 16,485,000 15,766,000 15,387,000
Common share equivalents of outstanding
stock options............................ -- -- 582,000
------------ ----------- ------------
Total shares............................... 16,485,000 15,766,000 15,969,000
Diluted income (loss) per share from
continuing operations.................... $ (0.40) $ (0.34) $ 0.88
Diluted loss per share from discontinued
operations............................... (0.30) (0.08) (0.04)
------------ ----------- ------------
Diluted net earnings (loss) per share...... $ (0.70) $ (0.42) $ 0.84
============ =========== ============
F - 11
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock options, which would be antidilutive (3,369,746 and 3,927,280 as of
December 31, 2000 and 1999, respectively) have been excluded from the
calculations of diluted shares outstanding and diluted earnings per share.
Financial Instruments
Financial instruments that potentially subject the Company to credit risk
consist principally of trade receivables and unbilled services. Management of
the Company believes the fair value of accounts receivable and unbilled services
approximates the carrying value. The Company does not utilize derivative
instruments.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31:
2000 1999
-------------- -------------
Vehicles......................... $ 156,000 $ 172,000
Furniture........................ 3,392,000 3,158,000
Equipment........................ 10,152,000 7,552,000
Computer software................ 2,801,000 1,708,000
Leasehold improvements........... 801,000 625,000
-------------- -------------
17,302,000 13,215,000
Less-Accumulated depreciation.... (7,652,000) (4,658,000)
-------------- -------------
$ 9,650,000 $ 8,557,000
============== =============
Depreciation expense was $2,731,000, $2,489,000 and $1,240,000 in 2000,
1999 and 1998, respectively.
NOTE 3 - LINES OF CREDIT
From January 29, 1999 until May 31, 2000, the Company had an unsecured
three-year $30,000,000 revolving credit facility with PNC Bank, N.A. (the
"Bank"). The credit facility contained certain financial covenants in which the
Company was not in compliance with as of June 30, 1999 and September 30, 1999.
In January 2000, the Company finalized with the Bank the terms of a waiver and
amendment to the credit agreement to remedy defaults, which existed under the
credit agreement. The terms of the waiver and amendment included, among other
things, (i) a $15,000,000 reduction in availability under the credit agreement,
(ii) a first priority perfected security interest on all assets of the Company
and its domestic subsidiaries and (iii) modification of certain financial
covenants and a waiver of prior covenant defaults. However, the Company was not
in compliance with the modified financial covenants as of March 31, 2000.
Accordingly, on May 9, 2000, the Bank issued to the Company a waiver of the
defaults, which existed under the credit agreement for the quarter ended March
31, 2000.
F - 12
NOTE 3 - LINES OF CREDIT (CONTINUED)
On May 31, 2000, the Company and the Bank entered into an agreement to
replace the previous facility with a new three-year revolving credit facility
agreement. The new credit facility is comprised of a revolving line of credit
pursuant to which the Company can borrow up to $20,000,000 either at the Bank's
prime rate per annum or the Euro Rate plus 1.75% to 2.5% based upon the
Company's ratio of debt to EBITDA. The credit facility is collateralized by
substantially all of the assets of the United States based operations. The
maximum borrowing availability under the line of credit is based upon a
percentage of eligible billed and unbilled accounts receivable, as defined. As
of December 31, 2000, the Company had outstanding borrowings under the credit
facility of $5,013,000. The Company estimates undrawn availability under the
credit facility to be $6,213,000 as of December 31, 2000. As of December 31,
1999, the Company had outstanding borrowings under the prior credit facility of
$10,585,000.
The new credit facility provides for the following financial covenants,
among other things, (1) the Company must maintain consolidated net worth, as
defined ("consolidated net worth") of (a) $42,000,000 at each of June 30, 2000,
September 30, 2000, and December 31, 2000; (b) not less than 95% of consolidated
net worth of the immediately preceding fiscal year-end as at each such fiscal
quarter after December 31, 2000; and (c) at least 105% of consolidated net worth
as of the immediately preceding fiscal year-end as at each such fiscal year-end
subsequent to December 31, 2000; provided, however, the foregoing covenant shall
not be tested for any quarter so long as the Company maintains, at all times
during such fiscal quarter, undrawn availability of more than $5,000,000 and (2)
the Company must maintain unconsolidated net worth, as defined ("unconsolidated
net worth") of (a) $39,000,000 at each of June 30, 2000, September 30, 2000, and
December 31, 2000; (b) not less than 95% of unconsolidated net worth of the
immediately preceding fiscal year-end as at each such fiscal quarter after
December 31, 2000; and (c) at least 105% of unconsolidated net worth as of the
immediately preceding fiscal year-end as at each such fiscal year-end subsequent
to December 31, 2000; provided, however, the foregoing covenant shall not be
tested for any quarter so long as the Company maintains, at all times during
such fiscal quarter, undrawn availability of more than $5,000,000. Additionally,
the credit facility contains material adverse change clauses with regards to the
financial condition of the assets, liabilities and operations of the Company. As
of December 31, 2000, the Company was in compliance with all financial
covenants.
Interest expense on debt and obligations under capital leases approximated
$608,000, $720,000 and $26,000 for the years ended December 31, 2000, 1999 and
1998, respectively.
NOTE 4 - DISCONTINUED OPERATIONS
In November 1999, the Company announced its intentions to spin off its
Internet applications services and management consulting business subject to
certain approvals and conditions. On January 1, 2000, the Company transferred
its Internet applications services and management consulting businesses to
SeraNova, a wholly-owned subsidiary of the Company on such date.
F - 13
NOTE 4 - DISCONTINUED OPERATIONS (CONTINUED)
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.
On July 5, 2000, the Company completed the tax-free spin-off of SeraNova by
distributing all of the outstanding shares of the common stock of SeraNova then
held by the Company to holders of record of the Company's common stock as of the
close of business on May 12, 2000 (or to their subsequent transferees) in
accordance with the terms of a Distribution Agreement dated as of January 1,
2000 between the Company and SeraNova. SeraNova represented a significant
segment of the Company's business.
Pursuant to APB Opinion No.30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," the Consolidated
Financial Statements of the Company have been reclassified to reflect the
spin-off of SeraNova. Accordingly, the assets, liabilities, results of
operations, and cash flows of SeraNova have been segregated in the Consolidated
Balance Sheets, Consolidated Statements of Operations and Consolidated
Statements of Cash Flows. The net operating results, net assets and net cash
flows of SeraNova have been reported as "Discontinued Operations." The
historical carrying amount of the net assets of SeraNova on the spin-off date
has been recorded as a stock dividend.
The following is summarized financial information for the discontinued
operations of SeraNova:
JANUARY 1, 2000 TO YEAR ENDED YEAR ENDED
JULY 5, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
------------------ ----------------- -----------------
Revenue................................ $ 36,019,000 $ 39,795,000 $ 15,378,000
Pre-tax loss........................... (6,986,000) (1,496,000) (32,000)
Income tax expense (benefit)........... (2,095,000) (235,000) 599,000
Loss from discontinued operations...... (4,891,000) (1,261,000) (631,000)
JULY 5, 2000 DECEMBER 31, 1999
------------------ -----------------
Current assets......................... $ 25,319,000 $ 12,516,000
Total assets........................... 36,874,000 18,880,000
Note payable to Intelligroup........... 15,059,000 8,397,000
Current liabilities.................... 9,173,000 4,895,000
Total liabilities...................... 26,170,000 13,910,000
Net assets of discontinued operations.. 10,704,000 4,970,000
NOTE 5 - NOTE RECEIVABLE - SERANOVA
On May 31, 2000, SeraNova and the Company formalized a $15,100,000
unsecured promissory note (the "Note") relating to net borrowings by SeraNova
from the Company through such date. The Note bears interest at the prime rate
plus 1/2%. The Company has recorded total accrued interest of $803,000 as of
December 31, 2000. A payment of $3,000,000 was made on September 29, 2000 with
the balance being due on July 31, 2001. The Note has certain mandatory
prepayment provisions based on future debt or equity financings by SeraNova.
F - 14
NOTE 5 - NOTE RECEIVABLE - SERANOVA (CONTINUED)
In September 2000, SeraNova consummated an $8,000,000 preferred stock
financing with two institutional investors. According to the mandatory
prepayment provisions of the Note, SeraNova was required to make a prepayment of
$3,000,000 on the Note as a result of the stock financing. Subsequently, the
Company finalized, with SeraNova, the terms of an agreement to waive, subject to
certain conditions, certain of the mandatory prepayment obligations arising as a
result of the financing. The terms of the new agreement included, among other
things, that SeraNova pay the Company (i) $500,000 upon execution of the
agreement; (ii) $500,000 on or before each of January 31, 2001, February 28,
2001, March 31, 2001, April 30, 2001 and May 31, 2001; and (iii) $400,000 on or
before December 15, 2000 to be applied either as (a) an advance payment towards
a contemplated services arrangement for hosting services to be provided to
SeraNova by Company (the "Hosting Agreement"); or (b) in the event that no such
Hosting Agreement is executed on or before December 15, 2000, an additional
advance prepayment toward the principal of the Note. The Company received from
SeraNova the $500,000 payment that was due upon execution of the agreement and a
$400,000 payment in December 2000 as an advance payment towards the principal of
the Note since no Hosting Agreement was executed before December 15, 2000.
NOTE 6 - RESTRUCTURING AND OTHER SPECIAL CHARGES
In connection with the Company's plan to reduce costs and improve operating
efficiencies, the Company incurred a non-recurring charge of $5,628,000 related
to restructuring initiatives during the year ended December 31, 1999. The
restructuring charge included settlement of the former chief executive officer's
employment agreement and additional severance payment, expenses associated with
the termination of certain employees in the United States and United Kingdom,
the closing of certain satellite offices in the United States and an additional
office in Belgium, and costs to exit certain contractual obligations.
Activity in accrued costs for restructuring and other special charges
during 1999 and 2000 is as follows:
CHARGES TO ACCRUED COSTS ACCRUED COSTS
OPERATIONS COSTS PAID DECEMBER 31, COST PAID DECEMBER 31,
DURING 1999 DURING 1999 1999 DURING 2000 2000
----------- ----------- ------------- ----------- -------------
Severance and related costs..... $5,027,000 $4,162,000 $ 865,000 $ 608,000 $ 257,000
Other costs primarily to exit
facilities, contracts, and
certain activities.............. 601,000 517,000 84,000 -- 84,000
----------- ---------- ---------- --------- ---------
$5,628,000 $4,679,000 $ 949,000 $ 608,000 $ 341,000
=========== ========== ========== ========= =========
Additionally, in 1999 the Company recorded a reserve of $1,700,000 against
an outstanding receivable from a large ERP account, whose parent corporation
filed for protection under Chapter 11 of the U.S. bankruptcy laws.
F - 15
NOTE 7 - INCOME TAXES
Income taxes provision (benefit) consists of the following:
2000 1999 1998
------------ ------------ -------------
Current:
Federal......................... $ (1,951,000) $ 2,310,000 $ 2,639,000
State........................... -- 345,000 729,000
Foreign......................... 506,000 216,000 496,000
------------ ------------ -------------
(1,445,000) 2,871,000 3,864,000
------------ ------------ -------------
Deferred:
Federal......................... 872,000 (1,267,000) (12,000)
State........................... -- (163,000) --
------------ ------------ -------------
872,000 (1,430,000) (12,000)
------------ ------------ -------------
Total............................... $ (573,000) $ 1,441,000 $ 3,852,000
============ ============ =============
The provision for income taxes differs from the amount computed by applying
the statutory rate of 34% to income before income taxes. The principal reasons
for this difference are:
2000 1999 1998
------ ------ ------
Tax at federal statutory rate...................... (34)% (34)% 34%
Nondeductible expenses............................. 1 2 5
State income tax, net of federal benefit........... -- 2 4
Foreign losses for which no benefit is available... 7 3 6
Changes in valuation allowance..................... 20 77 --
Foreign operations taxed at less than U.S.
statutory rate, primarily India................ (2) (5) (12)
S Corp and L.L.C. income passed through to
shareholders................................... -- (8) (14)
Other.............................................. -- -- (1)
----- ----- -----
Effective tax rate................................. (8)% 37% 22%
===== ===== =====
In 1996, the Company elected a five year tax holiday in India in accordance
with a local tax incentive program whereby no income taxes will be due for such
period. Such tax holiday was extended for an additional five years in 1999.
Effective April 1, 2000 pursuant to changes introduced by the Indian Finance
Act, 2000, the tax holiday previously granted is no longer available and has
been replaced in the form of a tax deduction incentive. The impact of this
change is not expected to be material to the consolidated financial statements
of the Company. Prior to their acquisition, the Empower Companies (see Note 11)
were pass-through entities for tax reporting purposes, thus their income was not
taxed at the corporate level. Accordingly, the Company's federal statutory tax
rate was reduced by 8% and 13% for 1999 and 1998, respectively.
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities as of December
31, 2000 and 1999 are as follows:
F - 16
NOTE 7 - INCOME TAXES (CONTINUED)
2000 1999
----------- ------------
Deferred tax assets:
Allowance for doubtful accounts................. $ 742,000 $1,247,000
Vacation accrual................................ 122,000 334,000
Net operating losses............................ 4,033,000 570,000
Foreign tax credits............................. -- 2,200,000
Other accrued liabilities....................... 484,000 739,000
----------- ----------
Total deferred tax assets......................... 5,381,000 5,090,000
Deferred tax liability-accelerated depreciation... (1,040,000) (806,000)
Valuation allowance............................... (3,538,000) (2,609,000)
----------- ----------
Net deferred tax asset $ 803,000 $1,675,000
=========== ==========
During 1999, the Company generated losses for tax purposes in the United
States and income related to its foreign entities (foreign source income). As of
December 31, 1999, the Company planned to file a consolidated tax return. As a
result, the Company would have generated unused foreign tax credits related to
this foreign source income. Accordingly, as of December 31, 1999, included in
deferred taxes was an asset for foreign tax credits and a related valuation
allowance as the ability to apply these credits may be limited in the future.
During 2000, the Company changed their tax strategy, and filed separate
company returns for 1999 which resulted in the realization of the foreign tax
credits and a portion of the valuation allowance being reversed. By choosing
this strategy the Company was able to generate net operating losses which are
less restrictive than the foreign tax credits.
During 2000, the Company continued to generate losses. The Company has
provided a valuation allowance against certain of these net operating losses as
the ability to utilize these losses may be limited in the future. Although the
realization of the net deferred tax assets is not assured, management believes
it is more likely than not, that the 2000 net deferred tax asset of $803,000
will be realized.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Tax-Free Spin-off of SeraNova
On July 5, 2000, the Company distributed SeraNova common stock to
shareholders in a transaction that was intended to be a tax-free spin-off
pursuant to Section 355 of the Internal Revenue Code ("Section 355") (See Note
4). If the distribution qualifies as a tax-free spin-off, neither the Company
nor the Company's shareholders recognize any gain or income in connection with
the transaction. However, Section 355 provides that the Company may be required
to recognize a gain on the transaction if the distribution is part of a plan
pursuant to which one or more persons acquire 50% or more of SeraNova common
stock within two years of the distribution date. The Company and SeraNova
executed a Tax Sharing Agreement, dated January 1, 2000 ("Tax Sharing
Agreement"), whereby SeraNova would indemnify the Company for any tax
liabilities in the event a future transaction of SeraNova results in the
spin-off being deemed a taxable event.
F - 17
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
On October 27, 2000, SeraNova and Silverline Technologies Limited
("Silverline") announced that they had entered into an agreement and plan of
merger, under which Silverline would acquire SeraNova in exchange for American
depositary shares of Silverline and the assumption by Silverline of SeraNova
indebtedness. However, SeraNova management has represented that the merger with
Silverline was not contemplated at the time of the spin-off and accordingly, the
spin-off should be tax-free. Should the spin-off ultimately be construed as
taxable, the resultant tax liability could be up to $65,000,000, plus interest
and, depending on the facts that ultimately are established, penalties. SeraNova
and/or Silverline would be obligated to indemnify the Company for these amounts
under the Tax Sharing Agreement.
Employment Agreements
As of December 31, 2000, the Company had employment agreements with certain
of its executives, which provide for minimum payments in the event of
termination for reasons other than just cause. The aggregate amount of
compensation commitment in the event of termination under such agreements is
approximately $550,000.
Leases
The Company leases office space, office equipment and vehicles under
capital and operating leases that have initial or remaining non-cancelable lease
terms in excess of one year as of December 31, 2000. Future minimum aggregate
annual lease payments are as follows:
FOR THE YEARS
ENDING DECEMBER 31, CAPITAL OPERATING
------------------------------ ---------- ---------
2001.......................... $ 762,000 $3,413,000
2002.......................... 810,000 3,030,000
2003.......................... 327,000 2,651,000
2004.......................... -- 2,209,000
2005.......................... -- 1,491,000
Thereafter.................... -- 3,741,000
----------
Subtotal...................... 1,899,000
Less-Interest................. 252,000
----------
1,647,000
Less-Current Portion.......... 610,000
----------
$1,037,000
==========
Rent expense for the years ended December 31, 2000, 1999 and 1998 was
$3,940,000, $4,340,000 and $3,309,000, respectively.
Legal
The Company is engaged in certain legal and administrative proceedings.
Management believes the outcome of these proceedings will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
F - 18
NOTE 9 - STOCK OPTION PLANS
The Company's stock option plans permit the granting of options to
employees, non-employee directors and consultants. The Option Committee of the
Board of Directors generally has the authority to select individuals who are to
receive options and to specify the terms and conditions of each option so
granted, including the number of shares covered by the option, the type of
option (incentive stock option or non-qualified stock option), the exercise
price, vesting provisions, and the overall option term. A total of 4,840,000
shares of Common Stock have been reserved for issuance under the plans.
Subsequent to December 31, 2000, the Company granted options to purchase an
aggregate of 75,000 shares of its Common Stock to certain employees. All of the
options issued pursuant to these plans expire ten years from the date of grant.
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
------------------------------------------------------------------------------------------
Options Outstanding, December 31, 1997
(93,674 exercisable).................... 1,042,946 $ 10.25
Granted................................. 1,257,630 $ 16.81
Exercised............................... (143,297) $ 9.32
Canceled................................ (258,138) $ 14.91
------------------------------------------------------------------------------------------
Options Outstanding, December 31, 1998
(262,156 exercisable)................... 1,899,141 $ 14.14
Granted................................. 3,465,759 $ 8.82
Exercised............................... (220,645) $ 13.47
Canceled................................ (1,216,975) $ 14.00
------------------------------------------------------------------------------------------
Options Outstanding, December 31, 1999
(336,090 exercisable)................... 3,927,280 $ 9.55
Granted................................. 4,842,931 $ 4.94
Exercised............................... (581,450) $ 10.06
Canceled................................ (4,819,015) $ 9.31
------------------------------------------------------------------------------------------
Options Outstanding, December 31, 2000
(1,038,275 exercisable)................. 3,369,746 $ 3.18
=========== ===========
Effective with the spin-off of SeraNova on July 5, 2000, all unvested
Intelligroup stock options held by SeraNova employees were canceled.
Additionally, as of July 6, 2000, the exercise price of all employee and
director stock options was adjusted to offset the reduction in option value
caused by the spin-off of SeraNova. The exercise price of each stock option
grant outstanding as of July 5, 2000, was adjusted based on the percentage
change in closing price of the Company's stock on the distribution date of July
5, 2000, and the ex-dividend date of July 6, 2000. In accordance with FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation," the Company has concluded that there are no accounting
consequences for changing the exercise price of outstanding stock options as a
result of the spin-off.
F - 19
NOTE 9 - STOCK OPTION PLANS (CONTINUED)
The following table summarizes information about stock options
outstanding and exercisable at December 31, 2000:
Outstanding Exercisable
----------- -----------
Weighted
Average Weighted Weighted
Exercise Price Number of Remaining Life Average Number of Average
Range shares in years) Exercise Price shares Exercise Price
- -----------------------------------------------------------------------------------------------------
$1.00 to 2.00 288,746 9.1 $ 1.45 21,691 $ 1.80
$2.00 to 2.50 271,425 9.0 $ 2.11 38,324 $ 2.14
$2.50 to 2.75 1,046,679 8.2 $ 2.54 397,354 $ 2.54
$2.75 to 3.00 904,500 6.5 $ 2.80 450,000 $ 2.80
$3.00 to 4.50 461,179 8.8 $ 4.29 18,243 $ 3.47
$4.50 to 6.50 316,854 6.4 $ 5.34 97,472 $ 5.48
$6.50 to 8.00 12,563 8.1 $ 7.44 3,188 $ 7.18
$8.00 to 12.50 39,300 9.1 $ 9.33 2,502 $ 9.55
$12.50 to 14.50 28,500 9.2 $ 13.80 9,501 $ 13.80
----------- ----- --------- ----------- ---------
$1.00 to 14.50 3,369,746 7.8 $ 3.18 1,038,275 $ 3.05
=========== ===========
As permitted by SFAS 123, the Company has chosen to continue accounting for
stock options at their intrinsic value. Accordingly, no compensation cost has
been recognized for the stock option plans. Had compensation cost for the
Company's stock option plans been determined based on the fair value option
pricing method, the tax-effective impact would be as follows:
2000 1999 1998
- -----------------------------------------------------------------------------------------------
Net (Loss) Income:
as reported................ $(11,545,000) $ (6,590,000) $13,400,000
pro forma.................. $(31,990,000) $(14,975,000) $ 8,894,000
- -----------------------------------------------------------------------------------------------
Basic Earnings per Share:
as reported................ $ (0.70) $ (0.42) $ 0.87
pro forma.................. $ (1.94) $ (0.95) $ 0.58
- -----------------------------------------------------------------------------------------------
Diluted Earnings per Share:
as reported................ $ (0.70) $ (0.42) $ 0.84
pro forma.................. $ (1.94) $ (0.95) $ 0.56
The fair value of option grants for disclosure purposes is estimated on the
date of grant using the Black-Scholes option-pricing model using the following
weighted-average assumptions: expected volatility of 121%, 82% and 78%,
risk-free interest rate of 5.2%, 5.6% and 5.4% and expected lives of 3.4, 2.9
and 8.5 years, in 2000, 1999 and 1998, respectively. The weighted average fair
value of options granted during 2000, 1999 and 1998 was $4.68, $9.75 and $13.49,
respectively.
F - 20
NOTE 10 - STOCK RIGHTS
In October 1998 the Company's Board of Directors declared a dividend
distribution of one Preferred Share Purchase Right for each outstanding share of
the Company's Common Stock. These Rights will expire in November 2008 and trade
with the Company's Common Stock. Such Rights are not presently exercisable and
have no voting power. In the event a person or affiliated group of persons,
acquires 20% or more, or makes a tender or exchange offer for 20% or more of the
Company's Common Stock, the Rights detach from the Common Stock and become
exercisable and entitle a holder to buy one one-hundredth (1/100) of a share of
Preferred Stock at $100.00.
If, after the Rights become exercisable, the Company is acquired or merged,
each Right will entitle its holder to purchase $200.00 market value of the
surviving company's stock for $100.00, based upon the current exercise price of
the Rights. The Company may redeem the Rights, at its option, at $.01 per Right
prior to a public announcement that any person has acquired beneficial ownership
of at least 20% of the Company's Common Stock. These Rights are designed
primarily to encourage anyone interested in acquiring the Company to negotiate
with the Board of Directors.
NOTE 11 - ACQUISITIONS
On February 16, 1999, the Company acquired Empower Solutions, L.L.C. and
its affiliate Empower, Inc. (a corporation organized under sub-chapter S of the
Internal Revenue Code). The acquisitions were accounted for as poolings of
interests. Prior results for all periods have been restated in accordance with
pooling of interests accounting. In connection with these acquisitions, the
Company issued approximately 2,000,000 shares of the Company's Common Stock. The
pre-merger results of the Empower Companies were revenues of $18,000,000 and net
income of $6,200,000 for 1998. In connection with the mergers, acquisition
expenses of $2,115,000 were expensed during 1999. These costs primarily relate
to professional fees incurred.
On May 21, 1998, the Company acquired all of the outstanding share capital
of CPI Resources Limited. The acquisition of CPI Resources Limited was accounted
for as a pooling of interests. Prior results for all periods have been restated
in accordance with pooling of interests accounting. As consideration for this
acquisition, the Company issued 371,000 shares of the Company's Common Stock. At
the time of the acquisition, CPI Resources Limited owned seventy percent of the
outstanding share capital of CPI Consulting Limited. In connection with this
merger, $1,397,000 of non-recurring acquisition related charges were incurred
and have been charged to expense during the year ended December 31, 1998. These
costs primarily relate to professional fees incurred in connection with the
merger.
On May 7, 1998, the Company acquired thirty percent of the outstanding
share capital of CPI Consulting Limited. This acquisition was accounted for
utilizing the purchase method of accounting. The consideration paid by the
Company included the issuance of 165,696 shares of the Company's Common Stock
with a fair market value of $3,100,000 at the time of purchase. An additional
155,208 shares of the Company's Common Stock with a fair market value of
$2,500,000 was paid during 1999 pursuant to an earn-out relating to the
operating results for the balance of 1998. The excess of purchase price over the
fair value of the net assets acquired was attributed to intangible assets,
amounting in the aggregate to $5,800,000.
F - 21
NOTE 12 - SEGMENT DATA AND GEOGRAPHIC INFORMATION
The Company operates in one industry, information technology solutions and
services. The Company had been reporting two business segments as follows:
o Enterprise Applications Services group - the largest business segment
of the Company's operations which includes the implementation,
integration, development, and customization of solutions for clients
utilizing a class of application products known as Enterprise Resource
Planning software. This class of products includes software developed
by such companies as SAP, PeopleSoft and Oracle. The segment also
includes application service provider offerings including the
development, customization, and integration of enterprise and
e-commerce applications, hosted externally, and made accessible to
customers over a secure network, on a monthly, per seat, subscription
basis.
o Internet Applications Services group - provides Internet professional
services to businesses. Such services enable clients to communicate
and conduct commerce between a company and its customers, suppliers,
and partners over the Internet.
The Internet Applications Services group represented the assets,
liabilities and results of operations of SeraNova, which has been reported as
discontinued operations for all periods presented. Accordingly, the Company's
Enterprise Applications Services group is presented as one business segment in
the following geographic areas for the years ended December 31, 2000 1999 and
1998.
UNITED STATES ASIA-PACIFIC EUROPE INDIA TOTAL
------------- ------------ ------ ----- -----
2000
- ----
Revenue....................... $ 77,814,000 $10,806,000 $17,844,000 $6,374,000 $112,838,000
Depreciation & amortization... 2,023,000 145,000 697,000 322,000 3,187,000
Operating income (loss)....... (6,228,000) 81,000 (1,741,000) 91,000 (7,797,000)
Total assets.................. 44,749,000 5,918,000 9,309,000 7,392,000 67,368,000
1999
- ----
Revenue....................... $105,898,000 $ 8,911,000 $24,585,000 $6,878,000 $146,272,000
Depreciation & amortization... 1,675,000 156,000 807,000 292,000 2,930,000
Operating income (loss)....... (6,133,000) (483,000) 473,000 2,768,000 (3,375,000)
Total assets.................. 53,821,000 3,362,000 12,135,000 3,261,000 72,579,000 (1)
1998
- ----
Revenue....................... $112,250,000 $ 5,557,000 $23,839,000 $5,816,000 $147,462,000
Depreciation & amortization... 1,135,000 78,000 115,000 59,000 1,387,000
Operating income (loss)....... 13,244,000 (764,000) 1,952,000 3,245,000 17,677,000
Total assets.................. 51,631,000 3,575,000 8,270,000 2,093,000 65,569,000 (1)
- -----------
(1) Excludes $7,621,000 and $1,355,000 of net assets of discontinued operations
as of December 31, 1999 and 1998, respectively.
F - 22
NOTE 12 - SEGMENT DATA AND GEOGRAPHIC INFORMATION (CONTINUED)
Included above are application maintenance and support revenues of
$20,200,000 and $1,700,000 for the years ended December 31, 2000 and 1999,
respectively. Other information related to the application maintenance and
support business is not available and the Company determined that it would be
impractical to calculate such data.
NOTE 13 -QUARTERLY INFORMATION (UNAUDITED)
FISCAL YEAR QUARTERS
------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2000
- ----------------------------
Revenue................................. $29,051,000 $27,689,000 $27,599,000 $28,499,000 $112,838,000
Gross Margin............................ 9,867,000 9,199,000 9,440,000 8,888,000 37,394,000
Loss from continuing operations......... (2,108,000) (2,891,000) (1,182,000) (473,000) (6,654,000)
Loss from discontinued operations....... (3,079,000) (1,812,000) -- -- (4,891,000)
Net loss................................ (5,187,000) (4,703,000) (1,182,000) (473,000) (11,545,000)
Earnings per share - basic and diluted:
Loss per share from continuing
operations.......................... (0.13) (0.17) (0.07) (0.03) (0.40)
Loss per share from discontinued
operations.......................... (0.19) (0.11) -- -- (0.30)
Net loss per share...................... (0.32) (0.28) (0.07) (0.03) (0.70)
YEAR ENDED DECEMBER 31, 1999
- ----------------------------
Revenue................................. $38,807,000 $37,820,000 $37,879,000 $31,766,000 $146,272,000
Gross Margin............................ 12,281,000 12,867,000 13,340,000 10,402,000 48,890,000
Income (loss) from continuing
operations.......................... (371,000) (4,185,000) 1,583,000 (2,356,000) (5,329,000)
Income (loss) from discontinued
operations.......................... 280,000 152,000 122,000 (1,815,000) (1,261,000)
Net income (loss)....................... (91,000) (4,033,000) 1,705,000 (4,171,000) (6,590,000)
Earnings per share - basic and diluted:
Income (loss) per share from
continuing operations............. (0.02) (0.27) 0.10 (0.15) (0.34)
Income (loss) per share from
discontinued operations........... 0.01 0.01 0.01 (0.11) (0.08)
Net income (loss) per share........... (0.01) (0.26) 0.11 (0.26) (0.42)
F - 23