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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission File No. 0-20943
Intelligroup, Inc.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
New Jersey 11-2880025
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
499 Thornall Street, Edison, New Jersey 08837
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(732) 590-1600
-------------------------------
(Registrant's Telephone Number,
Including Area Code)
Indicate by checkmark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
----- -----
Indicate the number of shares outstanding of each of the Issuer's
classes of common stock, as of August 14, 2002:
Class Number of Shares
----- ----------------
Common Stock, $.01 par value 16,630,125
INTELLIGROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements............................ 1
Consolidated Balance Sheets as of June 30, 2002 (unaudited)
and December 31, 2001........................................ 2
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the Three Months and Six Months Ended
June 30, 2002and 2001 (unaudited)............................ 3
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2002 and 2001 (unaudited)..................... 4
Notes to Consolidated Financial Statements (unaudited)....... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 35
Item 4. Submission of Matters to a Vote of Security Holders.......... 37
Item 5. Other Information............................................ 37
Item 6. Exhibits and Reports on Form 8-K............................. 38
SIGNATURES................................................................ 40
- i -
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
- 1 -
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND DECEMBER 31, 2001
JUNE 30, DECEMBER 31,
2002 2001
------------ -------------
ASSETS (UNAUDITED)
Current Assets:
Cash and cash equivalents.............................. $ 1,375,000 $ 2,138,000
Accounts receivable, less allowance for doubtful
accounts of $1,645,000 and $2,073,000 at June 30,
2002 and December 31, 2001, respectively............ 17,173,000 13,519,000
Unbilled services...................................... 4,673,000 7,536,000
Prepaid income taxes................................... 463,000 342,000
Deferred tax assets.................................... 1,736,000 1,736,000
Other current assets................................... 2,620,000 3,548,000
Note receivable - SeraNova............................. 4,000,000 9,140,000
------------- -------------
Total current assets............................. 32,040,000 37,959,000
Property and equipment, net............................ 7,178,000 8,099,000
Other assets........................................... 1,003,000 1,036,000
------------- -------------
$ 40,221,000 $ 47,094,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable....................................... $ 3,796,000 $ 3,548,000
Accrued payroll and related taxes...................... 6,200,000 5,465,000
Accrued expenses and other liabilities................. 4,603,000 4,414,000
Deferred revenue....................................... 854,000 1,211,000
Income taxes payable................................... 586,000 427,000
Current portion of long term debt and obligations
under capital leases................................ 4,570,000 4,712,000
------------- -------------
Total current liabilities....................... 20,609,000 19,777,000
Deferred tax liabilities................................. 154,000 164,000
------------- -------------
Obligations under capital leases, less current portion... 156,000 371,000
------------- -------------
Other long-term liabilities.............................. 1,082,000 --
------------- -------------
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, 16,630,125 shares issued and
outstanding at June 30, 2002 and December 31, 2001.. 166,000 166,000
Additional paid-in capital............................. 41,366,000 41,366,000
Accumulated deficit.................................... (19,234,000) (10,685,000)
Currency translation adjustments....................... (4,078,000) (4,065,000)
------------- -------------
Total shareholders' equity ...................... 18,220,000 26,782,000
------------- -------------
$ 40,221,000 $ 47,094,000
============= =============
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
- 2 -
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS) FOR THE THREE
MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------- ----------------------------------
2002 2001 2002 2001
--------------- ---------------- -------------- ---------------
Revenue.......................................... $ 26,476,000 $ 28,734,000 $ 51,085,000 $ 59,523,000
Cost of sales.................................... 18,212,000 19,347,000 35,400,000 40,971,000
------------- -------------- -------------- --------------
Gross profit................................ 8,264,000 9,387,000 15,685,000 18,552,000
------------- -------------- -------------- --------------
Selling, general and administrative expenses..... 7,042,000 8,061,000 13,546,000 16,179,000
Depreciation and amortization.................... 676,000 917,000 1,383,000 1,862,000
SeraNova receivable impairment and other charges. 8,362,000 -- 8,362,000 --
Proxy contest charges............................ 464,000 -- 464,000 --
------------- -------------- -------------- --------------
Total operating expenses.................... 16,544,000 8,978,000 23,755,000 18,041,000
------------- -------------- -------------- --------------
Operating (loss) income..................... (8,280,000) 409,000 (8,070,000) 511,000
Other expense, net............................... (70,000) (132,000) (138,000) (11,000)
------------- -------------- -------------- --------------
(Loss) income before provision for income taxes.. (8,350,000) 277,000 (8,208,000) 500,000
Provision for income taxes....................... 210,000 98,000 341,000 133,000
------------- -------------- -------------- --------------
Net (loss) income................................ $ (8,560,000) $ 179,000 $ (8,549,000) $ 367,000
============= ============== ============== ==============
Earnings per share:
Basic earnings per share:
Net (loss) income per share............... $ (0.51) $ 0.01 $ (0.51) $ 0.02
============= ============== ============== ==============
Weighted average number of
Common shares - Basic..................... 16,630,000 16,630,000 16,630,000 16,630,000
============= ============== ============== ==============
Diluted earnings per share:
Net (loss) income per share............... $ (0.51) $ 0.01 $ (0.51) $ 0.02
============= ============== ============== ==============
Weighted average number of
Common shares - Diluted................... 16,630,000 16,631,000 16,630,000 16,649,000
============= ============== ============== ==============
Comprehensive Income (Loss)
Net (loss) income................................ $ (8,560,000) $ 179,000 $ (8,549,000) $ 367,000
Other comprehensive income (loss) -
Currency translation adjustments.......... 412,000 565,000 (13,000) (921,000)
------------- -------------- -------------- --------------
Comprehensive (loss) income ..................... $ (8,148,000) $ 744,000 $ (8,562,000) $ (554,000)
============= ============== ============== ==============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
- 3 -
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six
Months Ended June 30, 2002 and 2001
(unaudited)
SIX MONTHS ENDED JUNE 30,
2002 2001
------------- -------------
Cash flows from operating activities:
Net (loss) income.................................................... $ (8,549,000) $ 367,000
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization.................................... 1,826,000 2,270,000
Provision for doubtful accounts.................................. 247,000 1,042,000
SeraNova receivable impairment and other charges................. 8,362,000 --
Deferred income taxes............................................ (10,000) --
Changes in operating assets and liabilities:
Accounts receivable................................................ (3,901,000) 2,991,000
Unbilled services.................................................. 2,863,000 (54,000)
Other current assets............................................... (477,000) (136,000)
Other assets....................................................... 33,000 666,000
Accounts payable................................................... 248,000 (2,169,000)
Accrued payroll and related taxes.................................. 735,000 (899,000)
Accrued expenses and other liabilities............................. (213,000) (604,000)
Accrued restructuring charges...................................... (454,000) (117,000)
Deferred revenue................................................... (357,000) (27,000)
Income taxes payable............................................... 159,000 (2,000)
------------- -------------
Net cash provided by operating activities............................ 512,000 3,328,000
------------- -------------
Cash flows from investing activities:
Purchase of equipment ............................................. (905,000) (2,651,000)
Purchase of software licenses...................................... -- (2,678,000)
------------- -------------
Net cash used in investing activities................................ (905,000) (5,329,000)
------------- -------------
Cash flows from financing activities:
Principal payments under capital leases.............................. (334,000) (279,000)
Other borrowings (repayments)........................................ 3,000 (89,000)
Net change in line of credit borrowings.............................. (26,000) 1,427,000
Repayment of note receivable-SeraNova subsequent to spin-off date.... -- 2,060,000
------------- -------------
Net cash (used in) provided by financing activities................ (357,000) 3,119,000
------------- -------------
Effect of foreign currency exchange rate changes on cash........... (13,000) (921,000)
------------- -------------
Net (decrease) increase in cash and cash equivalents ................... (763,000) 197,000
Cash and cash equivalents at beginning of period........................ 2,138,000 1,327,000
------------- -------------
Cash and cash equivalents at end of period.............................. $ 1,375,000 $ 1,524,000
============= =============
Supplemental disclosures of cash flow information:
Cash paid for income taxes........................................... $ 572,000 $ 426,000
============= =============
Cash paid for interest............................................... $ 201,000 $ 430,000
============= =============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
- 4 -
INTELLIGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements and accompanying financial
information as of June 30, 2002 and for the three months and six months ended
June 30, 2002 and 2001 are unaudited and, in the opinion of management, include
all adjustments (consisting only of normal recurring adjustments) which the
Company considers necessary for a fair presentation of the financial position of
the Company at such dates and the operating results and cash flows for those
periods. The consolidated financial statements included herein have been
prepared in accordance with accounting principles generally accepted in the
United States and the instructions of Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, certain information and footnote disclosures normally included
in consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted. These consolidated financial statements should be read in conjunction
with the Company's audited consolidated financial statements for the year ended
December 31, 2001, which were included as part of the Company's Form 10-K.
In November 2001, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") concluded that reimbursable "out-of-pocket"
expenses should be classified as revenue, and correspondingly cost of services,
in the statement of operations. Most service companies, whose employees incur
incidental expenses such as airfare, mileage, hotel and out-of-town meals while
working on behalf of customers, previously reported reimbursable "out-of-pocket"
expenses on a "net" basis in the statement of operations. Accordingly, effective
January 1, 2002, the Company has reported gross reimbursable "out-of-pocket"
expenses incurred as both revenue and cost of sales in the statement of
operations. The Company has also reclassified prior period financial information
for presentation consistent with the new EITF accounting guidance. The impact of
this reclassification was an increase to both revenue and cost of sales of
$542,000 and $707,000 for the three months ended June 30, 2002 and 2001,
respectively, and $1,039,000 and $1,459,000 for the six months ended June 30,
2002 and 2001, respectively.
The Company's 2002 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 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
- 5 -
satisfy its operating requirements in the normal course of business. However, no
assurance can be given that sufficient cash will be generated from operations.
Results for interim periods are not necessarily indicative of results for
the entire year.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common stock outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock, unless they are antidilutive.
A reconciliation of weighted average number of common shares outstanding to
weighted average common shares outstanding assuming dilution is as follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Weighted average number of common
shares............................... 16,630,000 16,630,000 16,630,000 16,630,000
Common share equivalents of
outstanding stock options............ -- 1,000 -- 19,000
---------- ----------- ---------- ----------
Weighted average number of common
shares assuming dilution............. 16,630,000 16,631,000 16,630,000 16,649,000
========== ========== ========== ==========
Stock options, which would be antidilutive (2,747,000 and 2,929,000 as of
June 30, 2002 and 2001, respectively), have been excluded from the calculations
of diluted shares outstanding and diluted earnings per share.
NOTE 3 - LINES OF CREDIT
On May 31, 2000, the Company and PNC Bank, N.A. (the "Bank") entered into a
three-year revolving credit facility. Such 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 Company's
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 June 30, 2002, the Company had
outstanding borrowings under the credit facility of $4,040,000. The Company
estimates undrawn availability under the credit facility to be $8,375,000 as of
June 30, 2002. As of December 31, 2001, the Company had outstanding borrowings
under the credit facility of $4,066,000.
- 6 -
NOTE 3 - LINES OF CREDIT (CONTINUED)
The 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) not less than 95% of the Company's
consolidated net worth of the immediately preceding fiscal year-end as at each
such fiscal quarter after December 31, 2000; and (b) at least 105% of the
Company's 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) not
less than 95% of the Company's unconsolidated net worth of the immediately
preceding fiscal year-end as at each such fiscal quarter after December 31,
2000; and (b) at least 105% of the Company's 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 regard to the
financial condition of the assets, liabilities and operations of the Company.
As of December 31, 2001, the Company was not in compliance with the
consolidated net worth and unconsolidated net worth financial covenants. In
March 2002, the Company finalized with the Bank the terms of a waiver and
amendment to the credit agreement. The terms of the waiver and amendment
included, among other things, (1) a waiver of the covenant defaults as of
December 31, 2001, (2) a modification to the financial covenants to require that
consolidated net worth and unconsolidated net worth as of December 31, 2002 be
not less than 102% of consolidated net worth and unconsolidated net worth,
respectively, as of December 31, 2001, (3) a modification to the consolidated
net worth and unconsolidated net worth covenants to exclude any changes to
consolidated net worth and unconsolidated net worth resulting from the
write-down or write-off of up to $10,833,000 of the note due from SeraNova, and
(4) a new financial covenant requiring that the Company generate earnings before
interest, taxes, depreciation and amortization ("EBITDA") of at least 90% of the
prior year's EBITDA.
As a result of the charges incurred for the proxy contest during the
quarter ended June 30, 2002, the Company was not in compliance with the EBITDA
covenant as of June 30, 2002. The Company is currently negotiating with the Bank
and expects to receive a waiver of the covenant default existing as of June 30,
2002. There can be no assurance, however, that the Company will be able to
obtain a waiver and appropriate amendment to the agreement on terms acceptable
to the Company.
Interest expense on debt and obligations under capital leases approximated
$201,000 and $430,000 for the six months ended June 30, 2002 and 2001,
respectively.
- 7 -
NOTE 4 - NOTE RECEIVABLE - SERANOVA
On May 31, 2000, SeraNova, Inc. ("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
$940,000 as of June 30, 2002 and December 31, 2001. The Company has not recorded
any accrued interest on the balance of the Note subsequent to the maturity date
of July 31, 2001. A payment of $3,000,000 was made on September 29, 2000 with
the balance being due on July 31, 2001.
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.
In 2001, the Company received principal payments totaling $2,060,000 from
SeraNova. However, SeraNova failed to make final payment of all amounts due
under the Note to the Company as of July 31, 2001. On August 16, 2001, the
Company filed a complaint against SeraNova and Silverline Technologies Limited
("Silverline"), which acquired SeraNova in March 2001. As of such date, SeraNova
was obligated to pay to the Company the remaining principal (approximately
$9,140,000) and accrued interest (approximately $940,000), or an aggregate of
$10,080,000. SeraNova then filed a counterclaim against the Company for
unspecified damages as a set-off against the Company's claims. In response to
the Company's request for a statement of damages, SeraNova stated that it was in
the process of calculating its damages, but for informational purposes claimed
compensatory damages in excess of $5,500,000 and punitive damages in the amount
of $10,000,000.
- 8 -
NOTE 4 - NOTE RECEIVABLE - SERANOVA (CONTINUED)
In addition, during late 2001, SeraNova failed to pay certain outstanding
lease obligations to the Company's landlords. Accordingly, on March 4, 2002, the
Company filed an arbitration demand with the American Arbitration Association
against SeraNova, Silverline and Silverline Technologies, Inc. (see Part II,
Item 1, Legal Proceedings). The demand for arbitration, which sought damages,
alleged among other things that SeraNova, Silverline and/or Silverline
Technologies, Inc. failed to pay outstanding lease obligations to the Company's
landlords and to reimburse the Company for all rent payments made by the Company
on their behalf. An arbitration hearing was held on June 25 and June 28, 2002
seeking $525,000 in outstanding lease obligations. On August 9, 2002, an award
was issued in the amount of $616,905.26 (including attorney's fees) plus
reimbursement of administrative fees, in favor of the Company and against
SeraNova, Silverline and Silverline Technologies, Inc. (collectively, the
"SeraNova Group") jointly and severally. The award also includes a provision
that jurisdiction is retained by the tribunal, and the Company may seek from the
tribunal any additional rents and other fees due and owing on a quarterly basis.
On August 12, 2002, an action was commenced in the Superior Court of New Jersey
to confirm the award, seek a writ of execution against the SeraNova Group's
assets, restrain the disposal of the SeraNova Group's assets, and enjoin the
distribution of proceeds from any sale of the SeraNova Group's assets among
other emergency relief. On August 13, 2002, the Court, among other things, (i)
confirmed the award and entered judgment against SeraNova in the amount of
$616,905.26 plus $7,100 in administrative fees, (ii) authorized the issuance of
a writ of execution against SeraNova's bank accounts and other assets to satisfy
the judgment, (iii) restrained the SeraNova Group from disposing of any assets,
including funds in their bank accounts, (iv) authorized the attachment of all
net proceeds from the sale of any assets of the SeraNova Group up to the amount
of the arbitration award to be held in an interest bearing escrow account
pending further court order and (v) scheduled a hearing for September 3, 2002 in
order for the SeraNova Group to show cause why the relief granted by the Court
to the Company against SeraNova should not be applied to the SeraNova Group
jointly and severally. The Company does not believe that the outcome of this
claim will have a materially adverse effect on the Company's business, financial
condition or results of operations.
Although the Company has aggressively pursued its various legal options to
obtain payment from the SeraNova Group on the Note and outstanding lease
obligations, the Company believes that the current liquidity issues plaguing the
SeraNova Group requires a reassessment of the realizability of these outstanding
amounts. During this time, the Company has also actively engaged in discussions
with management of the SeraNova Group, with the objective of seeking an out of
court resolution to all outstanding matters involving the Note, and certain
other receivables and lease obligations. Although no final resolution has been
reached, the Company believes that the substance of these discussions provides a
basis for determining the approximate realizable value of the Note and other
receivables, as well as an estimate of the costs required to exit certain lease
obligations. Accordingly, the Company recorded the following charges during the
quarter ended June 30, 2002:
- 9 -
NOTE 4 - NOTE RECEIVABLE - SERANOVA (CONTINUED)
WRITE-DOWN WRITE-OFF ASSUMPTION
OF NOTE OF OTHER OF CERTAIN
RECEIVABLE RECEIVABLES - LEASE OTHER
- SERANOVA SERANOVA OBLIGATIONS CHARGES TOTAL
-----------------------------------------------------------------------------
Charges to operations during 2002... $ 5,140,000 $ 1,257,000 $ 1,501,000 $ 464,000 $ 8,362,000
Costs paid during 2002.............. -- -- -- (118,000) (118,000)
Non-cash items...................... (5,140,000) (1,257,000) -- -- (6,397,000)
------------- ------------ ------------ ------------ ------------
Accrued costs as of June 30, 2002... $ -- $ -- $ 1,501,000 $ 346,000 $ 1,847,000
============= ============ ============ ============ ============
The Company recorded a $5,140,000 charge to write-down the carrying value
of the Note to $4,000,000. The Company also recorded a $1,257,000 charge to
write-off the carrying value of the other SeraNova receivables (primarily,
accrued interest on the Note and a receivable for a system implementation
project). Additionally, the Company recorded a liability of $1,501,000 for
certain lease exit costs, $1,082,000 of which is included in other long-term
liabilities, as of June 30, 2002. Such liability represents primarily obligated
space costs for which the Company currently believes it cannot use or sublease
and the differential between certain Company lease obligations and sublease
amounts to be received.
If the Company were to collect less than $4,000,000 on the Note recorded as
of June 30, 2002, or incur additional obligations or costs, the SeraNova
receivable impairment and/or charges would be increased in future periods.
NOTE 5 - RESTRUCTURING AND OTHER SPECIAL CHARGES
In connection with the Company's plan to reduce costs and improve operating
efficiencies, the Company incurred a 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.
During the quarter ended December 31, 2001, in an effort to further refine
the Company's business strategy around its core competencies and to refocus on
more active markets, the Company recorded a $13,261,000 restructuring and other
special charges provision. The charges, which were mainly non-cash in nature,
were related primarily to the ASP business in the United States, the termination
of an agreement to build and operate a technology development and support center
in Puerto Rico, and to the restructuring and downsizing of the Company's
operations in the United Kingdom.
- 10 -
NOTE 5 - RESTRUCTURING AND OTHER SPECIAL CHARGES (CONTINUED)
Activity in accrued costs for restructuring and other special charges is as
follows:
SEVERANCE AND ASSET
RELATED COSTS IMPAIRMENTS EXIT COSTS TOTAL
-------------------------------------------------------------------
Charges to operations during 1999......... $ 5,027,000 $ -- $ 601,000 $ 5,628,000
Costs paid during 1999.................... (4,162,000) -- (517,000) (4,679,000)
------------- ------------ ------------ ------------
Accrued costs as of December 31, 1999..... 865,000 -- 84,000 949,000
Costs paid during 2000.................... (608,000) -- -- (608,000)
------------- ------------ ------------ ------------
Accrued costs as of December 31, 2000..... 257,000 -- 84,000 341,000
Charges to operations during 2001......... 530,000 10,999,000 1,732,000 13,261,000
Costs paid during 2001.................... (402,000) -- (172,000) (574,000)
Non-cash utilization during 2001.......... -- (10,999,000) (1,177,000) (12,176,000)
------------- ----------- ------------ ------------
Accrued costs as of December 31, 2001..... 385,000 -- 467,000 852,000
Costs paid during 2002.................... (218,000) -- (236,000) (454,000)
------------- ------------ ------------ ------------
Accrued costs as of June 30, 2002......... $ 167,000 $ -- $ 231,000 $ 398,000
============= ============ ============ ============
The Company expects to pay out the remaining costs above within the next 12
months.
NOTE 6 - SEGMENT DATA AND GEOGRAPHIC INFORMATION
The Company operates in one industry, information technology solutions and
services. The Company has four reportable operating segments, which are
organized and managed on a geographical basis, as follows:
o United States ("US") - the largest segment of the Company, with
operations in the United States and Puerto Rico. Includes the
operations of the Company's US subsidiary, Empower, Inc., and all
corporate functions and activities. The US and corporate headquarters
are located in Edison, New Jersey;
o Asia-Pacific ("APAC") - includes the operations of the Company in
Australia, Hong Kong, Indonesia, Japan, New Zealand and Singapore. The
APAC headquarters are located in Wellington, New Zealand;
o Europe - includes the operations of the Company in Denmark, Sweden and
the United Kingdom. The European headquarters are located in Norfolk,
United Kingdom; and
o India - includes the operations of the Company in India and Jamaica.
The Indian headquarters are located in Hyderabad, India.
- 11 -
NOTE 6 - SEGMENT DATA AND GEOGRAPHIC INFORMATION (CONTINUED)
Each of the operating segments has a Managing Director, or equivalent
position, which reports directly to the Chief Executive Officer (CEO).
Currently, the CEO is fulfilling the requirements of this position in the US.
The CEO has been identified as the Chief Operating Decision Maker (CODM) because
he has final authority over resource allocation decisions and performance
assessment. The CODM regularly receives certain discrete financial information
about the geographical operating segments, including primarily revenue and
operating income, to evaluate segment performance.
Accordingly, the Company's operating results and financial position are
presented in the following geographic segments for the three months and six
months ended June 30, 2002 and 2001.
UNITED STATES ASIA-PACIFIC EUROPE INDIA TOTAL
------------- ------------ ------ ----- -----
THREE MONTHS ENDED
- ------------------
JUNE 30, 2002
- -------------
Revenue....................... $ 19,269,000 $ 2,220,000 $ 1,444,000 $3,543,000 $ 26,476,000
Depreciation & amortization... 450,000 56,000 58,000 112,000 676,000(1)
Operating income (loss)....... (8,150,000) (640,000) (352,000) 862,000 (8,280,000)(2)
Total assets.................. 28,463,000 4,276,000 1,738,000 5,744,000 40,221,000
THREE MONTHS ENDED
- ------------------
JUNE 30, 2001
- -------------
Revenue....................... $ 18,982,000 $ 3,406,000 $ 2,745,000 $3,601,000 $ 28,734,000
Depreciation & amortization... 536,000 85,000 182,000 114,000 917,000(3)
Operating income (loss)....... 30,000 375,000 (1,173,000) 1,177,000 409,000
Total assets.................. 45,799,000 6,282,000 7,663,000 4,311,000 64,055,000
SIX MONTHS ENDED
- ----------------
JUNE 30, 2002
- -------------
Revenue....................... $ 36,738,000 $ 4,721,000 $ 3,029,000 $6,597,000 $ 51,085,000
Depreciation & amortization... 924,000 83,000 115,000 261,000 1,383,000(1)
Operating income (loss)....... (8,035,000) (839,000) (541,000) 1,345,000 (8,070,000)(2)
SIX MONTHS ENDED
- ----------------
JUNE 30, 2001
- -------------
Revenue....................... $ 38,977,000 $ 7,109,000 $ 6,632,000 $6,805,000 $ 59,523,000
Depreciation & amortization... 1,074,000 169,000 365,000 254,000 1,862,000(3)
Operating income (loss)....... 20,000 106,000 (1,906,000) 2,291,000 511,000
- -------------
(1) Excludes $182,000 and $443,000 of depreciation and amortization
included in cost of sales for the three months and six months ended
June 30, 2002.
(2) Includes $8.4 million of SeraNova receivable impairment and other
charges and $464,000 of proxy contest charges for the three months and
six months ended June 30, 2002.
(3) Excludes $215,000 and $408,000 of depreciation and amortization
included in cost of sales for the three months and six months ended
June 30, 2001.
Included above are application management and support revenues of
$6,529,000 and $6,107,000 for the three months ended June 30, 2002 and 2001,
respectively. The application management and support revenues for the six months
ended June 30, 2002 and 2001 are $12,946,000 and $11,210,000, respectively.
Other information related to the application management and support business is
not maintained and the Company determined that it would be impractical to
calculate such data.
- 12 -
NOTE 7 - NEW ACCOUNTING PRONOUNCEMENT
In June 2002, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS No. 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The Company is evaluating the impact of the
adoption of SFAS No. 146, which is effective for the Company as of January 1,
2003, but does not believe it will have a material impact on the Company's
financial position or results of operations.
- 13 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company provides a wide range of high-quality, cost-effective
information technology solutions and services. These services and solutions
include the development, integration, implementation, management and support of
enterprise, e-commerce and m-commerce software applications. The Company's
onsite/offshore delivery model, comprehensive suite of tools and
industry-specific solutions provide customers with a faster time-to-market and
lower total cost of ownership.
In October 1987, the Company first began to provide systems integration and
custom software development services to customers. In 1994, the Company began to
diversify its customer base by expanding the scope of its systems integration
and custom development services to include Enterprise Resource Planning ("ERP")
software. ERP software 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 solutions, there is a significant amount of technical work
involved in implementing them and tailoring their use for a particular
customer's needs.
Throughout the mid-to-late 1990s, the Company grew significantly by
capitalizing on the business opportunity to provide implementation and
customization services work to the expanding ERP market. The Company first began
to provide these technical services to customers implementing SAP software
before expanding its service offerings to include ERP products developed by
Oracle in 1995 and PeopleSoft in 1997.
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 its 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 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.
During the second half of 2000, finding that the market for ASP services
had not developed and grown as projected by market analysts, the Company
significantly reduced its investment in the ASP business model. Expenditures for
marketing and direct selling initiatives were significantly decreased, as were
the infrastructure and personnel that supported the Company's ASP services. The
Company renewed it focus and efforts on pursuing shorter-term success
opportunities of implementing and enhancing application solutions based on SAP,
Oracle and PeopleSoft products.
- 14 -
At the same time, the Company redirected some of its ASP infrastructure and
personnel towards Application Management Services. Additionally, the Company
introduced Power Up Services. Finally, in 2001, the Company developed Pharma
Express and Contractor Express. Pharma Express, a solution designed for
small-to-medium sized life sciences companies, improves manufacturing
efficiencies and helps control the total cost of production. Contractor Express
assists companies in improving operational efficiency and controlling
manufacturing project schedules.
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 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 year
ended December 31, 2001, revenues derived from projects under fixed price
contracts represented approximately 17% of the Company's total revenue. Fixed
price contracts, in the aggregate, represented 24% of the Company's total
revenue during the six months ended June 30, 2002. No single fixed price project
was in excess of 10% of revenue during 2001 or during the six months ended June
30, 2002. The Company believes that, as it pursues its strategy of providing
Application Management 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 six months ended June 30, 2002 and the year ended December 31,
2001, the Company's ten largest customers accounted for, in the aggregate,
approximately 39% and 33% of revenue, respectively. For the six months ended
June 30, 2002, one customer accounted for approximately 10% of revenue. For the
year ended December 31, 2001, no single customer accounted for more than 10% of
revenue. For the six months ended June 30, 2002 and the year ended December 31,
2001, 36% and 42%, 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.
- 15 -
During the six months ended June 30, 2002 and the year ended December 31,
2001, approximately 66% and 69%, respectively, of the Company's total revenue
was derived from projects in which the Company implemented, extended,
maintained, managed or supported software developed by SAP. For the six months
ended June 30, 2002 and the year ended December 31, 2001, approximately 20% and
17%, respectively, of the Company's total revenue was derived from projects in
which the Company implemented, extended, maintained, managed or supported
software developed by PeopleSoft. For the six months ended June 30, 2002 and the
year ended December 31, 2001, approximately 8% and 9%, of the Company's total
revenue was derived from projects in which the Company implemented, extended,
maintained, managed or supported 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) and Foster City (California). The
Company also maintains offices in Europe (Denmark, Sweden and the United
Kingdom), and Asia-Pacific (Australia, Hong Kong, India, Indonesia, Japan, New
Zealand, and Singapore). The Company leases its headquarters in Edison, New
Jersey. Such lease has an initial term of ten (10) years, which commenced in
September 1998.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND RISKS
The Company's critical accounting policies are set forth in its Annual
Report on Form 10-K for the year ended December 31, 2001. There has been no
change, update or revision to the Company's critical accounting policies
subsequent to the filing of the Company's Form 10-K for the year ended December
31, 2001.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, including,
without limitation, statements regarding the Company's intention to shift more
of its focus towards the management and support of customers' enterprise,
e-commerce and m-commerce applications. Such forward-looking statements include
risks and uncertainties, including, but not limited to:
o the continued uncertainty associated with the slowdown in economies
worldwide, including its impact on IT spending habits by customers;
o the continued uncertainty of the outsourcing market and revenues
derived from anticipated application management and support business;
- 16 -
o the failure to maintain the minimum bid price of $1.00 per share for a
period of 30 consecutive business days or other criteria as required
for continued listing by the Nasdaq National Market;
o the substantial variability of the Company's quarterly operating
results caused by a variety of factors, many of which are not within
the Company's control, including (a) patterns of software and hardware
capital spending by customers, (b) information technology outsourcing
trends, (c) the timing, size and stage of projects, (d) timing and
impact of acquisitions, (e) new service introductions by the Company
or its competitors and the timing of new product introductions by the
Company's ERP partners, (f) levels of market acceptance for the
Company's services, (g) general economic conditions, (h) the hiring of
additional staff and (i) fixed price contracts;
o changes in the Company's billing and employee utilization rates;
o the Company's ability to manage its business effectively, which will
require the Company (a) to continue developing and improving its
operational, financial and other internal systems, as well as its
business development capabilities, (b) to attract, train, retain,
motivate and manage its employees, (c) to continue to maintain high
rates of employee utilization at profitable billing rates, (d) to
successfully integrate the personnel and businesses acquired by the
Company, and (e) to maintain project quality, particularly if the size
and scope of the Company's projects increase;
o the Company's limited operating history within the outsourcing line of
business;
o the Company's reliance on continued relationships with SAP America,
Oracle and PeopleSoft, and the Company's present partnership status;
o the Company's substantial reliance on key customers and large
projects;
o the highly competitive nature of the markets for the Company's
services;
o the Company's ability to successfully address the continuing changes
in information technology, evolving industry standards and changing
customer objectives and preferences;
o the Company's reliance on the continued services of its key executive
officers and leading technical personnel;
o the Company's ability to attract and retain a sufficient number of
highly skilled employees in the future;
o the Company's ability to protect its intellectual property rights;
o uncertainties resulting from pending litigation matters and from
potential administrative and regulatory immigration and tax law
matters and from the
- 17 -
outstanding liability of SeraNova to the Company under the promissory
note dated May 31, 2000, as amended; and
o in addition, in March 2001, SeraNova and Silverline Technologies
Limited ("Silverline") consummated the 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.
RESULTS OF OPERATIONS - CONSOLIDATED
The following table sets forth for the periods indicated certain financial
data expressed as a percentage of total revenue:
PERCENTAGE OF REVENUE
---------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenue.................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales.............................. 68.8 67.3 69.3 68.8
------ ------ ------ ------
Gross profit.......................... 31.2 32.7 30.7 31.2
Selling, general and administrative
expenses................................ 26.6 28.0 26.5 27.2
Depreciation and amortization expenses..... 2.5 3.2 2.7 3.1
SeraNova settlement and related charges.... 31.6 -- 16.4 --
Proxy contest charges...................... 1.8 -- 0.9 --
------ ------ ------ ------
Total operating expenses.............. 62.5 31.2 46.5 30.3
------ ------ ------ ------
Operating (loss) income............... (31.3) 1.5 (15.8) 0.9
Other expense, net......................... (0.2) (0.5) (0.3) (0.0)
------ ------ ------ ------
(Loss) income before provision for
income taxes.......................... (31.5) 1.0 (16.1) 0.9
Provision for income taxes................. 0.8 0.4 0.6 0.3
------ ------ ------ ------
Net (loss) income.......................... (32.3)% 0.6% (16.7)% 0.6%
====== ====== ====== ======
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30,
2001
The following discussion compares the consolidated results for the three
months ended June 30, 2002 and the three months ended June 30, 2001.
Revenue. Total revenue decreased by 7.9%, or $2.2 million, from $28.7
million for the three months ended June 30, 2001, to $26.5 million for the three
months ended June 30, 2002. This decrease was attributable primarily to the
continued weakness in the global economy and
- 18 -
the resulting impact on the IT services market. Throughout the year, the effects
of the uncertain and weakened economic climate impacted the Company, as
customers delayed and/or decreased the scope of IT projects, and as the Company
experienced competitive pricing pressures in the provision of consulting
services.
In November 2001, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") concluded that reimbursable "out-of-pocket"
expenses should be classified as revenue, and correspondingly cost of services,
in the statement of operations. Most service companies, whose employees incur
incidental expenses such as airfare, mileage, hotel and out-of-town meals while
working on behalf of customers, previously reported reimbursable "out-of-pocket"
expenses on a "net" basis in the statement of operations. Accordingly, effective
January 1, 2002, the Company has reported gross reimbursable "out-of-pocket"
expenses incurred as both revenue and cost of sales in the statement of
operations. The Company has also reclassified prior period financial information
for presentation consistent with the new EITF accounting guidance. The impact of
this reclassification was an increase to both revenue and cost of sales of
$542,000 and $707,000 for the three months ended June 30, 2002 and 2001,
respectively.
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 5.9%, or $1.1 million, from $19.3 million
for the three months ended June 30, 2001, to $18.2 million for the three months
ended June 30, 2002. The Company's gross profit decreased by 12.0%, or $1.1
million, from $9.4 million for the three months ended June 30, 2001, to $8.3
million for the three months ended June 30, 2002. This decrease was attributable
primarily to lower revenues. Gross margin decreased to 31.2% for the three
months ended June 30, 2002, from 32.7% for the three months ended June 30, 2001.
The decrease in gross margin results from an increase in non-billable consultant
time and other related costs, primarily in Europe and Asia Pacific.
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 and professional fees. Selling, general and administrative
expenses decreased by 12.6% or $1.0 million, to $7.0 million for the three
months ended June 30, 2002, from $8.1 million for the three months ended June
30, 2001, and decreased as a percentage of revenue to 26.6% from 28.0%,
respectively. The decrease in selling, general and administrative expenses, in
absolute dollars and as a percentage of revenue, was related primarily to the
further containment of discretionary spending throughout the Company, as well as
the downsizing initiative completed in Europe during the fourth quarter 2001.
Depreciation and amortization. Depreciation and amortization expenses
decreased 26.3% to $676,000 for the three months ended June 30, 2002, compared
to $917,000 for the three months ended June 30, 2001. The decrease is due
primarily to the amortization and depreciation associated with the intangible
assets and long-lived assets that were written-down as part of the Company's
restructuring and other special charges provision during the quarter ended
December 31, 2001.
- 19 -
SeraNova receivable impairment and other charges. During the three months
ended June 30, 2002, the Company recorded approximately $8.4 million in special
charges associated with the note receivable from SeraNova, Inc. ("SeraNova") and
certain other related issues. Although the Company has aggressively pursued its
various legal options to obtain payment from SeraNova, Silverline Technologies
Inc. and Silverline Technologies Ltd. (collectively the "SeraNova Group") on the
Note and outstanding lease obligations, the Company believes that the current
liquidity issues plaguing the SeraNova Group requires a reassessment of the
realizability of these outstanding amounts. During this time, the Company has
also actively engaged in discussions with management of the SeraNova Group, with
the objective of seeking an out of court resolution to all outstanding matters
involving the Note, and certain other receivables and lease obligations.
Although no final resolution has been reached, the Company believes that the
substance of these discussions provides a basis for determining the approximate
realizable value of the Note and other receivables, as well as an estimate of
the costs required to exit certain lease obligations. Accordingly, the Company
has recognized an impairment charge in the amount of $5.1 million related to the
note. In addition, the Company recorded a write-off of $1.3 million related to
interest on the note and other receivables due from the SeraNova Group. The
Company also recorded $1.5 million in costs required to exit certain lease
obligations related to the SeraNova Group.
Proxy contest charges. During the three months ended June 30, 2002, the
Company incurred approximately $464,000 in charges associated with the proxy
contest. The charges resulted directly from a shareholder of the Company
launching a hostile and costly proxy contest to take control of the Company's
Board of Directors. The charges included legal fees of approximately $324,000,
proxy solicitation services of approximately $100,000, and printing, mailing and
other costs of approximately $40,000.
Other expense, net. The Company earned $26,000 in interest income during
the three months ended June 30, 2002, compared with $75,000 during the three
months ended June 30, 2001. The decrease in interest income is related primarily
to the Company not recording accrued interest on the balance of the note
receivable with SeraNova subsequent to the maturity date of the note of July 31,
2001. Such note receivable is currently in default and the Company has commenced
litigation against SeraNova (see Part II, Item 1, Legal Proceedings). The
Company incurred $96,000 and $207,000 in interest expense during the three
months ended June 30, 2002 and 2001, respectively, related primarily to
borrowings under its line of credit. Borrowings under the line of credit were
used to fund operating activities. The decrease in interest expense results from
a combination of lower outstanding borrowings under the line of credit and lower
interest rates charged on outstanding borrowings during the three months ended
June 30, 2002.
Provision for income taxes. The Company's effective rate was 2.5% and 35.4%
for the three months ended June 30, 2002 and 2001, respectively. The tax rate
for the three months ended June 30, 2002 and 2001, results from the valuation
allowances provided for the losses generated in the United States, Europe and
Asia-Pacific. The Company's net deferred tax asset as of June 30, 2002 relates
primarily to the US operations. Based on anticipated profitability in the near
future, management believes it is more likely than not, that the deferred tax
asset of $1.7 million will be realized.
- 20 -
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 three months ended June 30, 2002 and 2001, the tax
holiday and new tax deduction favorably impacted the Company's effective tax
rate.
The Company's Indian subsidiary has received an assessment from the Indian
taxing authority denying tax exemptions claimed for certain revenue earned
during the fiscal years ended March 31, 1998 and March 31, 1999. The assessment
is for 25 million rupees, or approximately $520,000. Management, after
consultation with its advisors, believes the Company is entitled to the tax
exemption claimed and thus has not recorded a provision for taxes relating to
these items as of June 30, 2002. If the Company were not successful with its
appeal, which was filed in 2001, a future charge of approximately $520,000 would
be recorded and reflected in the Company's consolidated statement of operations.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
The following discussion compares the consolidated results for the six
months ended June 30, 2002 and the six months ended June 30, 2001.
Revenue. Total revenue decreased by 14.2%, or $8.4 million, from $59.5
million for the six months ended June 30, 2001, to $51.1 million for the six
months ended June 30, 2002. This decrease was attributable primarily to the
continued weakness in the global economy and the resulting impact on the IT
services market. Throughout the year, the effects of the uncertain and weakened
economic climate impacted the Company, as customers delayed and/or decreased the
scope of IT projects, and as the Company experienced competitive pricing
pressures in the provision of consulting services.
In November 2001, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") concluded that reimbursable "out-of-pocket"
expenses should be classified as revenue, and correspondingly cost of services,
in the statement of operations. Most service companies, whose employees incur
incidental expenses such as airfare, mileage, hotel and out-of-town meals while
working on behalf of customers, previously reported reimbursable "out-of-pocket"
expenses on a "net" basis in the statement of operations. Accordingly, effective
January 1, 2002, the Company has reported gross reimbursable "out-of-pocket"
expenses incurred as both revenue and cost of sales in the statement of
operations. The Company has also reclassified prior period financial information
for presentation consistent with the new EITF accounting guidance. The impact of
this reclassification was an increase to both revenue and cost of sales of $1.0
million and $1.5 million for the six months ended June 30, 2002 and 2001,
respectively.
Gross profit. The Company's cost of sales decreased by 13.6%, or $5.6
million, from $41.0 million for the six months ended June 30, 2001, to $35.4
million for the six months ended June 30, 2002. The Company's gross profit
decreased by 15.5%, or $2.9 million, from $18.6
- 21 -
million for the six months ended June 30, 2001, to $15.7 million for the six
months ended June 30, 2002. This decrease was attributable primarily to lower
revenues. Gross margin decreased slightly to 30.7% for the six months ended June
30, 2002, from 31.2% for the six months ended June 30, 2001. The decrease in
gross margin results from an increase in non-billable consultant time and other
related costs.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased by 16.2%, or $2.6 million, to $13.6 million
for the six months ended June 30, 2002, from $16.2 million for the six months
ended June 30, 2001, and decreased as a percentage of revenue to 26.5% from
27.2%, respectively. The decrease in selling, general and administrative
expenses, in absolute dollars and as a percentage of revenue, was related
primarily to the further containment of discretionary spending throughout the
Company, as well as the downsizing initiative completed in Europe during the
fourth quarter 2001.
SeraNova receivable impairment and other charges. During the six months
ended June 30, 2002, the Company recorded approximately $8.4 million in special
charges associated with the note receivable from SeraNova, and certain other
related issues. Although the Company has aggressively pursued its various legal
options to obtain payment from the SeraNova Group on the Note and outstanding
lease obligations, the Company believes that the current liquidity issues
plaguing the SeraNova Group requires a reassessment of the realizability of
these outstanding amounts. During this time, the Company has also actively
engaged in discussions with management of the SeraNova Group, with the objective
of seeking an out of court resolution to all outstanding matters involving the
Note, and certain other receivables and lease obligations. Although no final
resolution has been reached, the Company believes that the substance of these
discussions provides a basis for determining the approximate realizable value of
the Note and other receivables, as well as an estimate of the costs required to
exit certain lease obligations. Accordingly, the Company has recognized an
impairment charge in the amount of $5.1 million related to the note. In
addition, the Company recorded a write-off of $1.3 million related to interest
on the note and other receivables due from the SeraNova Group. The Company also
recorded $1.5 million in costs required to exit certain lease obligations
related to the SeraNova Group.
Proxy contest charges. During the six months ended June 30, 2002, the
Company incurred approximately $464,000 in charges associated with the proxy
contest. The charges resulted directly from a shareholder of the Company
launching a hostile and costly proxy contest to take control of the Company's
Board of Directors. The charges included legal fees of approximately $324,000,
proxy solicitation services of approximately $100,000, and printing, mailing and
other costs of approximately $40,000.
Depreciation and amortization. Depreciation and amortization expenses
decreased 25.7% to $1.4 for the six months ended June 30, 2002, compared to $1.9
million for the six months ended June 30, 2001. The decrease is due primarily to
the amortization and depreciation associated with the intangible assets and
long-lived assets that were written-down as part of the Company's restructuring
and other special charges provision during the quarter ended December 31, 2001.
- 22 -
Other expense, net. The Company earned $63,000 in interest income during
the six months ended June 30, 2002, compared with $419,000 during the six months
ended June 30, 2001. The decrease in interest income is related primarily to the
Company not recording accrued interest on the balance of the note receivable
with SeraNova subsequent to the maturity date of the note of July 31, 2001. Such
note receivable is currently in default and the Company has commenced litigation
against SeraNova (see Part II, Item 1, Legal Proceedings). The Company incurred
$201,000 and $430,000 in interest expense during the six months ended June 30,
2002 and 2001, respectively, related primarily to borrowings under its line of
credit. Borrowings under the line of credit were used to fund operating
activities. The decrease in interest expense results from a combination of lower
outstanding borrowings under the line of credit and lower interest rates charged
on outstanding borrowings during the six months ended June 30, 2002.
Provision for income taxes. The Company's effective rate was 4.1% and 26.6%
for the six months ended June 30, 2002 and 2001, respectively. The tax rate for
the six months ended June 30, 2002 and 2001, results from the valuation
allowances provided for the losses generated in the United States, Europe and
Asia-Pacific. The Company's net deferred tax asset as of June 30, 2002 relates
primarily to the US operations. Based on anticipated profitability in the near
future, management believes it is more likely than not, that the deferred tax
asset of $1.7 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 six months ended June 30, 2002 and 2001, the tax holiday
and new tax deduction favorably impacted the Company's effective tax rate.
The Company's Indian subsidiary has received an assessment from the Indian
taxing authority denying tax exemptions claimed for certain revenue earned
during the fiscal years ended March 31, 1998 and March 31, 1999. The assessment
is for 25 million rupees, or approximately $520,000. Management, after
consultation with its advisors, believes the Company is entitled to the tax
exemption claimed and thus has not recorded a provision for taxes relating to
these items as of June 30, 2002. If the Company were not successful with its
appeal, which was filed in 2001, a future charge of approximately $520,000 would
be recorded and reflected in the Company's consolidated statement of operations.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
The Company has four reportable operating segments, which are organized and
managed on a geographical basis, as follows:
o United States ("US") - the largest segment of the Company, with
operations in the United States and Puerto Rico. Includes the
operations of the Company's US subsidiary, Empower, Inc., and all
corporate functions and activities. The US and corporate headquarters
are located in Edison, New Jersey;
- 23 -
o Asia-Pacific ("APAC") - includes the operations of the Company in
Australia, Hong Kong, Indonesia, Japan, New Zealand and Singapore. The
APAC headquarters are located in Wellington, New Zealand;
o Europe - includes the operations of the Company in Denmark, Sweden and
the United Kingdom. The European headquarters are located in Norfolk,
United Kingdom; and
o India - includes the operations of the Company in India and Jamaica.
The Indian headquarters are located in Hyderabad, India.
Each of the operating segments has a Managing Director, or manager with an
equivalent position, who reports directly to the Chief Executive Officer (CEO).
Currently, the CEO is fulfilling the requirements of this position in the US.
The CEO has been identified as the Chief Operating Decision Maker (CODM) because
he has final authority over resource allocation decisions and performance
assessment. The CODM regularly receives certain discrete financial information
about the geographical operating segments, including primarily revenue and
operating income, to evaluate segment performance.
Three months Ended June 30, 2002 Compared to Three months Ended June 30,
2001
The following discussion compares the segment results for the three months
ended June 30, 2002 and the three months ended June 30, 2001.
Revenue. The following table displays revenues by reportable segment (in
thousands).
THREE MONTHS ENDED JUNE 30
------------------------------------------------------
2002 2001
------------------------- -------------------------
PERCENTAGE OF PERCENTAGE OF
DOLLARS TOTAL DOLLARS TOTAL
-------- ------------- ------- -------------
United States........ $19,269 72.8% $18,982 66.1%
Asia-Pacific......... 2,220 8.4 3,406 11.8
Europe............... 1,444 5.5 2,745 9.6
India................ 3,543 13.3 3,601 12.5
------- ------ ------- ------
Total................ $26,476 100.0% $28,734 100.0%
======= ====== ======= ======
US revenue increased by 1.5%, or $287,000, from $19.0 million for the three
months ended June 30, 2001, to $19.3 million for the three months ended June 30,
2002. The increase was attributable primarily to the operating performance of
Empower, Inc.
APAC revenue decreased by 34.8% or $1.2 million, from $3.4 million for the
three months ended June 30, 2001, to $2.2 million for the three months ended
June 30, 2002. The decrease was due primarily to challenging economic conditions
throughout the Asia-Pacific region, including Japan (a decrease of $762,000),
Australia (a decrease of $220,000), Indonesia (a decrease of $125,000) and
Singapore (a decrease of $116,000).
Europe revenue decreased by 47.4%, or $1.3 million, from $2.7 million for
the three months ended June 30, 2001, to $1.4 million for the three months ended
June 30, 2002. The
- 24 -
decrease was attributable primarily to the United Kingdom ("UK") operations (a
decrease of $1.2 million), while the consolidated Nordic operations (Denmark and
Sweden) decreased slightly (a decrease of $130,000). As a result of the decline
in operating performance, the Company executed a plan to reorganize and downsize
the Company's operations in the UK in the fourth quarter of 2001. The UK
operations now consist of a much smaller core group of billable consultants,
focused primarily on providing application management and support services in
the PeopleSoft market.
India revenue decreased by 1.6%, or $58,000, from $3.6 million for the
three months ended June 30, 2001, to $3.5 million for the three months ended
June 30, 2002. The slight decrease was attributable primarily to the weakness in
the global economy, as a majority of the total revenue generated in India is
derived from providing offshore development and support services to customers
sourced through the Company's affiliated entities in other parts of the world.
Operating Income (Loss). The following table displays operating income
(loss) by reportable segment (in thousands).
THREE MONTHS ENDED JUNE 30
----------------------------
2002 2001
--------- ---------
United States....................... $(8,150) $ 30
Asia-Pacific........................ (640) 375
Europe.............................. (352) (1,173)
India............................... 862 1,177
--------- ---------
Total............................... $(8,280) $ 409
========= =========
US operating performance decreased by $8.2 million, from operating income
of $30,000 for the three months ended June 30, 2001, to an operating loss of
$8.2 million for the three months ended June 30, 2002. The significant decline
in operating performance was a result of the charges associated with the
SeraNova receivable impairment and other charges and the proxy contest ("Special
Charges"). Excluding these Special Charges, the US operating income for the
three months ended June 30, 2002 was $676,000, or an increase of $646,000,
compared to the same period of the prior year. The increase in operating income
was attributable primarily to the aforementioned growth in revenue as well as
further containment of discretionary expenditures, such as employee bonuses and
travel and entertainment expenses.
APAC operating performance decreased by $1.0 million, from operating income
of $375,000 for the three months ended June 30, 2001, to an operating loss of
$640,000 for the three months ended June 30, 2002. The decrease was attributable
primarily to the operating performance in Japan (a decrease of $602,000),
Australia (a decrease of $194,000) and Singapore (a decrease of $222,000), as
gross margins declined as a result of local market conditions.
Europe operating performance improved by $821,000, from an operating loss
of $1.2 million for the three months ended June 30, 2001, to an operating loss
of $352,000 for the three months ended June 30, 2002. The improvement was
attributable primarily to an improvement in the operating performance of the UK
of $1.0 million, while the Nordic operations declined by $218,000. The
improvement in the UK operating performance resulted primarily from the
- 25 -
restructuring program initiated in the UK during late 2001. As noted above, the
UK operations now consist of a much smaller core group of billable consultants,
focused primarily on providing application management and support services in
the PeopleSoft market. The decline in the Nordic operating performance resulted
from competitive local conditions, primarily within the SAP software market.
India operating income decreased by 26.8%, or $315,000, from $1.2 million
for the three months ended June 30, 2001, to $862,000 for the three months ended
June 30, 2002. The decrease was attributable primarily to an increase
non-billable consultant time and other related costs.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
The following discussion compares the segment results for the six months
ended June 30, 2002 and the six months ended June 30, 2001.
Revenue. The following table displays revenues by reportable segment (in
thousands).
SIX MONTHS ENDED JUNE 30
------------------------------------------------------
2002 2001
------------------------- -------------------------
PERCENTAGE OF PERCENTAGE OF
DOLLARS TOTAL DOLLARS TOTAL
------- ------------- ------- -------------
United States......... $36,738 71.9% $38,977 65.5%
Asia-Pacific.......... 4,721 9.3 7,109 11.9
Europe................ 3,029 5.9 6,632 11.2
India................. 6,597 12.9 6,805 11.4
------- ------- ------- -------
Total................. $51,085 100.0% $59,523 100.0%
======= ======= ======= =======
US revenue decreased by 5.7%, or $2.2 million, from $39.0 million for the
six months ended June 30, 2001, to $36.7 million for the six months ended June
30, 2002. The decrease was attributable primarily to the weakness in the US
economy and the resulting impact on the IT services market.
APAC revenue decreased by 33.6%, or $2.4 million, from $7.1 million for the
six months ended June 30, 2001, to $4.7 million for the six months ended June
30, 2002. The decrease was due primarily to challenging economic conditions
throughout the Asia-Pacific region, including Japan (a decrease of $1.1
million), New Zealand (a decrease of $530,000), Australia (a decrease of
$309,000), Indonesia (a decrease of $241,000) and Singapore (a decrease of
$173,000).
Europe revenue decreased by 54.3% or $3.6 million, from $6.6 million for
the six months ended June 30, 2001, to $3.0 million for the six months ended
June 30, 2002. The decrease was attributable primarily to the United Kingdom
("UK") operations (a decrease of $3.4 million), while the consolidated Nordic
operations (Denmark and Sweden) decreased slightly (a decrease of $238,000). As
a result of the decline in operating performance, the Company executed a plan to
reorganize and downsize the Company's operations in the UK in the fourth quarter
of 2001. The UK operations now consist of a much smaller core group of billable
consultants, focused primarily on providing application management and support
services in the PeopleSoft market.
- 26 -
India revenue decreased by 3.1%, or $208,000, from $6.8 million for the six
months ended June 30, 2001, to $6.6 million for the six months ended June 30,
2002. The decrease was attributable primarily to weakness in the global economy,
as a majority of the total revenue generated in India is derived from providing
offshore development and support services to customers sourced through the
Company's affiliated entities in other parts of the world.
Operating Income (Loss). The following table displays operating income
(loss) by reportable segment (in thousands).
SIX MONTHS ENDED JUNE 30
-----------------------------
2002 2001
-------- --------
United States....................... $(8,035) $ 20
Asia-Pacific........................ (839) 106
Europe.............................. (541) (1,906)
India............................... 1,345 2,291
-------- --------
Total............................... $(8,070) $ 511
======== ========
US operating performance decreased by $8.1 million, from operating income
of $20,000 for the six months ended June 30, 2001, to an operating loss of $8.0
million for the six months ended June 30, 2002. The significant decline in
operating performance was a result of the charges associated with the SeraNova
receivable impairment and other charges and the proxy contest ("Special
Charges"). Excluding these Special Charges, the US operating income for the six
months ended June 30, 2002 was $791,000, or an increase of $771,000, compared to
the same period of the prior year. The increase in operating income resulted
primarily from the containment of discretionary expenditures, such as employee
bonuses and travel and entertainment expenses.
APAC operating performance declined by $945,000, from operating income of
$106,000 for the six months ended June 30, 2001, to an operating loss of
$839,000 for the six months ended June 30, 2002. The decrease was attributable
primarily to the operating performance in Japan (a decrease of $468,000),
Singapore (a decrease of $245,000) and Australia (a decrease of $200,000), as
gross margins declined as a result of local market conditions.
Europe operating performance improved by $1.4 million, from an operating
loss of $1.9 million for the six months ended June 30, 2001, to an operating
loss of $541,000 for the six months ended June 30, 2002. The improvement was
attributable primarily to an improvement in the operating performance of the UK
of $1.7 million, while the Nordic operations declined by $304,000. The
improvement in the UK operating performance resulted primarily from the
restructuring program initiated in the UK during late 2001. As noted above, the
UK operations now consist of a much smaller core group of billable consultants,
focused primarily on providing application management and support services in
the PeopleSoft market. The decline in the Nordic operating performance resulted
from competitive local conditions, primarily within the SAP software market.
India operating income decreased by 41.3%, or $946,000, from $2.3 million
for the six months ended June 30, 2001, to $1.3 million for the six months ended
June 30, 2002. The decrease was attributable to a decline in revenues (as a
result of the weakness in the global
- 27 -
economy) and a decline in gross margins (as a result of an increase in
non-billable consultant time and other related costs).
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $1.4 million at June 30, 2002
and $2.1 million at December 31, 2001. The Company had working capital of $11.4
million at June 30, 2002 and $18.2 million at December 31, 2001.
Cash provided by operating activities was $512,000 for the six months ended
June 30, 2002, resulting primarily from the net loss being offset by
depreciation and amortization of $1.8 million, the provision for doubtful
accounts of $247,000, the SeraNova receivable impairment and other charges of
$8.4 million, a decrease in unbilled services of $2.9 million, and increases in
accounts payable of $248,000, accrued payroll and related taxes of $735,000 and
income taxes payable of $159,000. These amounts were partially offset by
increases in accounts receivable of $3.9 million and other current assets of
$477,000 and decreases in accrued expenses and other liabilities of $213,000,
accrued restructuring charges of $454,000 and deferred revenue of $357,000. The
changes in accounts receivable, unbilled services, other current assets,
accounts payable, accrued payroll and related taxes, accrued expenses and other
liabilities, deferred revenue and income taxes payable result primarily from
timing differences. The decrease in accrued restructuring charges results from
the payment of severance and related costs and exit costs. Cash provided by
operating activities during the six months ended June 30, 2001 was $3.3 million.
The Company invested $905,000 and $2.7 million in computer equipment,
internal-use computer software and office furniture and fixtures during the six
months ended June 30, 2002 and 2001, respectively. The decrease results from
concerted efforts by management to closely monitor and curtail capital
expenditures.
In conjunction with the strategic decision to focus on the emerging ASP
market, the Company invested $2.7 million in purchased computer software
licenses during the six months ended June 30, 2001. The computer software was to
be re-sold to customers as part of the Company's ASPPlus solutions and services.
However, during the three months ended December 31, 2001, the Company recorded a
write-down of the purchased computer software, as management believed the
recoverability of the value of the assets acquired for use in the ASP service
offering was unlikely given current and future expected market conditions.
On May 31, 2000, the Company and PNC Bank, N.A. (the "Bank") entered into a
three-year revolving credit facility. Such 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 Company's 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 June 30, 2002, the Company had outstanding borrowings under the
credit facility of $4.0 million. The Company estimates undrawn availability
under the credit facility to be $8.4 million as of
- 28 -
June 30, 2002. As of December 31, 2001, the Company had outstanding borrowings
under the credit facility of $4.1 million.
The 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) not less than 95% of the Company's
consolidated net worth of the immediately preceding fiscal year-end as at each
such fiscal quarter after December 31, 2000; and (b) at least 105% of the
Company's 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) not
less than 95% of the Company's unconsolidated net worth of the immediately
preceding fiscal year-end as at each such fiscal quarter after December 31,
2000; and (b) at least 105% of the Company's unconsolidated net worth as of the
immediately preceding fiscal year-end as at each such fiscal year-end subsequent
to December 31, 2000; provided, however, the foregoing covenant shall not be
tested for any quarter so long as the Company maintains, at all times during
such fiscal quarter, undrawn availability of more than $5.0 million.
Additionally, the credit facility contains material adverse change clauses with
regard to the financial condition of the assets, liabilities and operations of
the Company.
As of December 31, 2001, the Company was not in compliance with the
consolidated net worth and unconsolidated net worth financial covenants. In
March 2002, the Company finalized with the Bank the terms of a waiver and
amendment to the credit agreement. The terms of the waiver and amendment
included, among other things, (1) a waiver of the covenant defaults as of
December 31, 2001, (2) a modification to the financial covenants to require that
consolidated net worth and unconsolidated net worth as of December 31, 2002 be
not less than 102% of consolidated net worth and unconsolidated net worth,
respectively, as of December 31, 2001, (3) a modification to the consolidated
net worth and unconsolidated net worth covenants to exclude any changes to
consolidated net worth and unconsolidated net worth resulting from the
write-down or write-off of up to $10.8 million of the note due from SeraNova,
and (4) a new financial covenant requiring that the Company generate earnings
before interest, taxes, depreciation and amortization ("EBITDA") of at least 90%
of the prior year's EBITDA.
As a result of the charges incurred for the proxy contest during the
quarter ended June 30, 2002, the Company was not in compliance with the EBITDA
covenant as of June 30, 2002. The Company is currently negotiating with the Bank
and expects to receive a waiver of the covenant default existing as of June 30,
2002. There can be no assurance, however, that the Company will be able to
obtain a waiver and appropriate amendment to the agreement on terms acceptable
to the Company.
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 $1.0 million as of
each of June 30, 2002 and December 31, 2001. The Company has not recorded any
accrued interest on the balance of the Note subsequent to the
- 29 -
maturity date of July 31, 2001. On September 29, 2000, the Company received a
$3.0 million payment from 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) $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 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 $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.
In 2001, the Company received principal payments totaling $2.1 million from
SeraNova. However, SeraNova failed to make final payment of all amounts due
under the Note to the Company as of July 31, 2001. On August 16, 2001, the
Company filed a complaint against SeraNova and Silverline Technologies Limited
("Silverline"), which acquired SeraNova in March 2001. As of such date, SeraNova
was obligated to pay to the Company the remaining principal (approximately $9.1
million) and accrued interest (approximately $1.0 million), or an aggregate of
$10.1 million. SeraNova then filed a counterclaim against the Company for
unspecified damages as a set-off against the Company's claims. In response to
the Company's request for a statement of damages, SeraNova stated that it was in
the process of calculating its damages, but for informational purposes claimed
compensatory damages in excess of $5.5 million and punitive damages in the
amount of $10.0 million.
In addition, during late 2001, SeraNova failed to pay certain outstanding
lease obligations to the Company's landlords. Accordingly, on March 4, 2002, the
Company filed an arbitration demand with the American Arbitration Association
against SeraNova, Silverline and Silverline Technologies, Inc. (see Part II,
Item 1, Legal Proceedings). The demand for arbitration, which sought damages,
alleged among other things that SeraNova, Silverline and/or Silverline
Technologies, Inc. failed to pay outstanding lease obligations to the Company's
landlords and to reimburse the Company for all rent payments made by the Company
on their behalf. An arbitration hearing was held on June 25 and June 28, 2002
seeking $525,000 in outstanding lease obligations. On August 9, 2002, an award
was issued in the amount of $616,905.26 (including attorney's fees) plus
reimbursement of administrative fees, in favor of Intelligroup and against
SeraNova, Silverline and Silverline Technologies, Inc. (collectively, the
"SeraNova Group") jointly and severally. The award also includes a provision
that jurisdiction is retained by the tribunal, and the Company may seek from the
tribunal any additional rents and other fees due and
- 30 -
owing on a quarterly basis. On August 12, 2002, an action was commenced in the
Superior Court of New Jersey to confirm the award, seek a writ of execution
against the SeraNova Group's assets, restrain the disposal of the SeraNova
Group's assets, and enjoin the distribution of proceeds from any sale of the
SeraNova Group's assets among other emergency relief. On August 13, 2002, the
Court, among other things, (i) confirmed the award and entered judgment against
SeraNova in the amount of $616,905.26 plus $7,100 in administrative fees, (ii)
authorized the issuance of a writ of execution against SeraNova's bank accounts
and other assets to satisfy the judgment, (iii) restrained the SeraNova Group
from disposing of any assets, including funds in their bank accounts, (iv)
authorized the attachment of all net proceeds from the sale of any assets of the
SeraNova Group up to the amount of the arbitration award to be held in an
interest bearing escrow account pending further court order and (v) scheduled a
hearing for September 3, 2002 in order for the SeraNova Group to show cause why
the relief granted by the Court to the Company against SeraNova should not be
applied to the SeraNova Group jointly and severally. The Company does not
believe that the outcome of this claim will have a materially adverse effect on
the Company's business, financial condition or results of operations.
Although the Company has aggressively pursued its various legal options to
obtain payment from the SeraNova Group on the Note and outstanding lease
obligations, the Company believes that the current liquidity issues plaguing the
SeraNova Group requires a reassessment of the realizability of these outstanding
amounts. During this time, the Company has also actively engaged in discussions
with management of the SeraNova Group, with the objective of seeking an out of
court resolution to all outstanding matters involving the Note, and certain
other receivables and lease obligations. Although no final resolution has been
reached, the Company believes that the substance of these discussions provides a
basis for determining the approximate realizable value of the Note and other
receivables, as well as an estimate of the costs required to exit certain lease
obligations. Accordingly, the Company recorded the following charges during the
quarter ended June 30, 2002:
WRITE-DOWN WRITE-OFF ASSUMPTION
OF NOTE OF OTHER OF CERTAIN
RECEIVABLE RECEIVABLES - LEASE OTHER
- SERANOVA SERANOVA OBLIGATIONS CHARGES TOTAL
-----------------------------------------------------------------------------
Charges to operations during 2002... $ 5,140,000 $ 1,257,000 $ 1,501,000 $ 464,000 $ 8,362,000
Costs paid during 2002.............. -- -- -- (118,000) (118,000)
Non-cash items...................... (5,140,000) (1,257,000) -- -- (6,397,000)
------------- ------------ ------------ ------------ ------------
Accrued costs as of June 30, 2002... $ -- $ -- $ 1,501,000 $ 346,000 $ 1,847,000
============= ============ ============ ============ ============
The Company recorded a $5.1 million charge to write-down the carrying value
of the Note to $4.0 million. The Company also recorded a $1.3 million charge to
write-off the carrying value of the other SeraNova receivables (primarily,
accrued interest on the Note and a receivable for a system implementation
project). Additionally, the Company recorded a liability of $1.5 million for
certain lease exit costs, $1.1 million of which is included in other long-term
liabilities, as of June 30, 2002. Such liability represents primarily obligated
space costs for which the Company currently believes it cannot use or sublease
and the differential between certain Company lease obligations and sublease
amounts to be received.
- 31 -
If the Company were to collect less than $4.0 million on the Note recorded
as of June 30, 2002, or incur additional obligations or costs, the SeraNova
receivable impairment and/or charges would be increased in future periods.
The Company's 2002 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 remaining availability
under 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.
The Company believes that its available funds, together with current credit
arrangements and the cash flow expected to be generated from operations, will be
adequate to satisfy its current and planned operations for at least the next 12
months.
NASDAQ NATIONAL MARKET
On April 4, 2002, the Company received a letter from the Nasdaq Stock
Market ("Nasdaq") advising the Company that it failed to meet Nasdaq
requirements for continued listing as the closing "bid" price of the Company's
common stock was less than $1.00 for 30 trading days. On May 13, 2002, the
Company received a letter from Nasdaq advising the Company that it had regained
compliance with the continued listing requirements.
In the future, should the Company fail to maintain a minimum closing bid
price of $1.00 for a period of 30 consecutive trading days, it would once again
be subject to notification by Nasdaq that it failed to meet Nasdaq requirements
for continued listing. Upon such notice, the Company would have 90 days from the
notice date to regain compliance by having the bid price for its Common Stock
close at $1.00 or greater for a minimum of 10 consecutive trading days during
the 90-day compliance period. A delisting from the Nasdaq National Market could
severely and adversely affect the market liquidity of the Company's Common
Stock.
COMMITMENTS
During late 2001, SeraNova failed to pay certain outstanding lease
obligations to the Company's landlords. Accordingly, on March 4, 2002, the
Company filed an arbitration demand with the American Arbitration Association
against the SeraNova Group (see Part II, Item 1, Legal Proceedings). The demand
for arbitration, which sought damages, alleged among other things that the
SeraNova Group failed to pay outstanding lease obligations to the Company's
landlords and to reimburse the Company for all rent payments made by the Company
on their behalf. An arbitration hearing was held on June 25 and June 28, 2002
seeking $525,000 in outstanding lease
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obligations. On August 9, 2002, an award was issued in the amount of $616,905.26
(including attorney's fees) plus reimbursement of administrative fees, in favor
of Intelligroup and against the SeraNova Group jointly and severally. The award
also includes a provision that jurisdiction is retained by the tribunal, and the
Company may seek from the tribunal any additional rents and other fees due and
owing on a quarterly basis. On August 12, 2002, an action was commenced in the
Superior Court of New Jersey to confirm the award, seek a writ of execution
against the SeraNova Group's assets, restrain the disposal of the SeraNova
Group's assets, and enjoin the distribution of proceeds from any sale of the
SeraNova Group's assets among other emergency relief. On August 13, 2002, the
Court, among other things, (i) confirmed the award and entered judgment against
SeraNova in the amount of $616,905.26 plus $7,100 in administrative fees, (ii)
authorized the issuance of a writ of execution against SeraNova's bank accounts
and other assets to satisfy the judgment, (iii) restrained the SeraNova Group
from disposing of any assets, including funds in their bank accounts, (iv)
authorized the attachment of all net proceeds from the sale of any assets of the
SeraNova Group up to the amount of the arbitration award to be held in an
interest bearing escrow account pending further court order and (v) scheduled a
hearing for September 3, 2002 in order for the SeraNova Group to show cause why
the relief granted by the Court to the Company against SeraNova should not be
applied to the SeraNova Group jointly and severally. The Company does not
believe that the outcome of this claim will have a materially adverse effect on
the Company's business, financial condition or results of operations.
NEW ACCOUNTING PRONOUNCEMENT
In June 2002, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS No. 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The Company is evaluating the impact of the
adoption of SFAS No. 146, which is effective for the Company as of January 1,
2003, but does not believe it will have a material 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
addressed the systems issues raised by the euro currency conversion and are
cognizant of the business implications of converting to a common currency. The
Company is still evaluating the ultimate financial impact of the conversion on
its operations, if any, given that the impact will be dependent upon the
competitive situations that exist in the various regional markets in which the
Company participates and the potential actions that may or may not be taken by
the Company's competitors and suppliers.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Although the Company cannot accurately determine the precise effect thereof
on its operations, it does not believe inflation, currency fluctuations or
interest rate changes have historically had a material effect on its revenues,
sales or results of operations. Any significant effects of inflation, currency
fluctuations and changes in interest rates on the economies of the United
States, Asia and Europe could adversely impact the Company's revenues, sales and
results of operations in the future. If there were a material adverse change in
the relationship between European currencies and/or Asian currencies and the
United States Dollar, such change would adversely affect the results of the
Company's European and/or Asian operations as reflected in the Company's
financial statements. The Company has not hedged its exposure with respect to
this currency risk, and does not expect to do so in the future, since it does
not believe that it is practicable for it to do so at a reasonable cost.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On 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 former director of the Company, as
defendants. The plaintiff alleges that it invested $4,000,000 in SeraNova as
part of a private placement of SeraNova common stock in March 2000, prior to the
spin-off of SeraNova by the Company. The complaint, which seeks compensatory and
punitive damages, alleges that the Company, as a "controlling person" of
SeraNova, is jointly and severally liable with and to the extent as SeraNova for
false and misleading statements constituting securities laws violations. After
being served with the complaint, the Company made a request for indemnification
from SeraNova pursuant to the various inter-company agreements in connection
with the spin-off. By letter dated April 13, 2001, SeraNova's counsel, advised
the Company that SeraNova acknowledged liability for such indemnification claims
and has elected to assume the defense of the plaintiff's claims. In October
2001, the motion to dismiss, filed on behalf of the Company in May 2001, was
denied without prejudice to refile at the close of the discovery period.
Court-ordered mediation between the plaintiff and SeraNova during January and
February 2002 was unsuccessful. In January 2002, plaintiff filed a motion for
partial summary judgment as to certain claims against SeraNova. No summary
judgment motion was filed against the Company. SeraNova filed its opposition to
plaintiff's motion for partial summary judgment in February 2002. The court
heard argument on the motion for partial summary judgment on July 30, 2002 and
reserved its decision. 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.
On August 16, 2001, the Company filed a complaint in the Superior Court of
New Jersey, Middlesex County, against SeraNova, Inc. and Silverline Technologies
Limited, which acquired SeraNova in March 2001. The complaint, which seeks
damages, alleges among other things that SeraNova failed to pay amounts owing
under (i) an unsecured promissory note totaling $10,079,717, and (ii) a system
implementation project totaling $511,573. On September 25, 2001, SeraNova and
Silverline filed a joint Answer to the Company's complaint. In addition,
SeraNova filed a counterclaim against the Company for unspecified damages as a
set-off against the Company's claims. Thereafter, in response to the Company's
request for a statement of damages, SeraNova stated that it was in the process
of calculating its damages, but for informational purposes claimed compensatory
damages in excess of $5,500,000 and punitive damages in the amount of
$10,000,000. The parties are currently proceeding with the discovery process. A
non-binding arbitration proceeding is scheduled for September 4, 2002. The
Company believes that there is no basis to support the amounts claimed by
SeraNova in its counterclaim for compensatory and punitive damages. The
inability of the Company to collect the amount due from SeraNova and/or
Silverline or an adverse decision with respect to the Company relating to
SeraNova's counterclaim could negatively affect the Company's business,
financial condition or results of operations.
On March 4, 2002, the Company filed an arbitration demand with the American
Arbitration Association against the SeraNova Group. The demand for arbitration,
which sought
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damages, alleged among other things that respondents failed to pay outstanding
lease obligations to the Company's landlords and to reimburse the Company for
all rent payments made by the Company on behalf of the respondents. An
arbitration hearing was held on June 25 and June 28, 2002 seeking $525,000 in
outstanding lease obligations. On August 9, 2002, an award was issued in the
amount of $616,905.26 (including attorney's fees) plus reimbursement of
administrative fees, in favor of Intelligroup and against the SeraNova Group
jointly and severally. The award also includes a provision that jurisdiction is
retained by the tribunal, and the Company may seek from the tribunal any
additional rents and other fees due and owing on a quarterly basis. On August
12, 2002, an action was commenced in the Superior Court of New Jersey to confirm
the award, seek a writ of execution against the SeraNova Group's assets,
restrain the disposal of the SeraNova Group's, and enjoin the distribution of
proceeds from any sale of the SeraNova Group's assets among other emergency
relief. On August 13, 2002, the Court, among other things, (i) confirmed the
award and entered judgment against SeraNova in the amount of $616,905.26 plus
$7,100 in administrative fees, (ii) authorized the issuance of a writ of
execution against SeraNova's bank accounts and other assets to satisfy the
judgment, (iii) restrained the SeraNova Group from disposing of any assets,
including funds in their bank accounts, (iv) authorized the attachment of all
net proceeds from the sale of any assets of the SeraNova Group up to the amount
of the arbitration award to be held in an interest bearing escrow account
pending further court order and (v) scheduled a hearing for September 3, 2002 in
order for the SeraNova Group to show cause why the relief granted by the Court
to the Company against SeraNova should not be applied to the SeraNova Group
jointly and severally. The Company does not believe that the outcome of this
claim will have a materially adverse effect on the Company's business, financial
condition or results of operations.
On June 14, 2002, the Company filed a complaint in the Superior Court of
New Jersey, Mercer County, against Ashok Pandey, a shareholder and former
officer and director of the Company. The complaint, which seeks damages in
excess of $400,000, alleges among other things that Mr. Pandey breached certain
terms and conditions of a separation agreement he entered into with the Company
and that Mr. Pandey has been unjustly enriched in an amount of $350,000 from the
Company. Mr. Pandey has not yet filed an Answer to the Company's complaint. The
Company does not believe that the outcome of this claim will have a material
adverse effect on the Company's business, financial condition or results of
operations.
On July 3, 2002, the Company filed a complaint in the United States
District Court for the District of New Jersey, naming Ashok Pandey, TAIB
Securities, Inc., Beechrock Holdings Limited and Braydon Holdings Limited as
defendants. The complaint alleges, among other things, that the defendants
violated federal securities laws in connection with the Company's recent proxy
contest. The defendants have not yet filed an Answer to the complaint. The
Company does not believe that the outcome of this claim will have a material
adverse effect on 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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on July 16,
2002.
There were present at the meeting in person or by proxy shareholders
holding an aggregate of 13,837,314 shares of Common Stock. The results of the
vote taken at such meeting with respect to each nominee for Director were as
follows:
Common Stock Nominees For Withheld
--------------------- --- --------
Nagarjun Valluripalli 7,178,024 6,655
Klaus P. Besier 7,174,024 10,655
Dennis McIntosh 7,176,774 7,905
Alexander Graham Wilson 7,178,774 5,905
Prabhas Panigrahi 7,177,024 7,655
Nick Di Iorio 7,177,024 7,655
Ashok Pandey 6,641,469 11,166
Wendy Rayner 6,641,469 11,166
Stephen Savitt 6,641,469 11,166
John Supplee 6,641,469 11,166
Tarun Chandra 6,641,469 11,166
Yoshikazu "Jin" Nakamura 6,641,469 11,166
Accordingly, Nagarjun Valluripalli, Klaus P. Besier, Dennis McIntosh,
Alexander Graham Wilson, Prabhas Panigrahi and Nic Di Iorio were duly elected as
Directors of the Company.
ITEM 5. OTHER INFORMATION
On May 22, 2002, Rajkumar Koneru resigned as a Director of the Company. Mr.
Koneru had served as a Director of the Company since 1994. Mr. Koneru forwarded
a letter to the Company stating that his resignation was a result of (i) his
disagreement with the strategic direction of the Company, and (ii) the Board and
management's failure to inform Mr. Koneru of certain events and decisions made
by the Board and management of the Company which made Mr. Koneru uncomfortable
while representing the interests of all shareholders of the Company. The Company
disagreed with Mr. Koneru's assertion that he had not been informed on a timely
basis of certain events and decisions made by the Board and management of the
Company. Additionally, Mr. Koneru had not presented to the Board any plans
relating to the strategic direction of the Company.
On June 3, 2002, Gregory S. Dimit resigned as a Director of the Company for
personal reasons. Mr. Dimit had served as a Director of the Company since 2001.
On June 6, 2002, the Company's Board of Directors appointed each of Prabhas
Panigrahi and Alexander Graham Wilson to the Company's Board of Directors.
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In June 2002, after a review of the recent events concerning Arthur
Andersen LLP ("Andersen"), the Company's Board of Directors delegated to its
Audit Committee the responsibility to work with the Company's management to
review the qualification of the major national accounting firms to serve as the
Company's independent public accountants for the fiscal year ending December 31,
2002. On July 25, 2002, the Company dismissed Andersen, as the Company's
auditors. Andersen's reports on the Company's consolidated financial statements
for each of the years ended December 31, 2001, 2000 and 1999 did not contain an
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty, audit scope or accounting principals. During the years ended
December 31, 2001 and 2000 and the subsequent interim period through July 25,
2002, there were no disagreements with Andersen on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which, if not resolved to Andersen's satisfaction, would have caused
Andersen to make reference to the subject matter in connection with its report
on the Company's consolidated financial statements for such years. Further,
there were no reportable events as defined in Item 304(a)(1)(v) of Regulation
S-K.
On July 25, 2002, the Company's Board of Directors, upon the recommendation
of its Audit Committee, engaged Deloitte & Touche LLP as the Company's new
independent auditors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Employment Agreement dated June 3, 2002 between the Company
and Nagarjun Valluripalli.
99.1 Certification pursuant to 18 U.S.C Section 1350.
(b) Reports on Form 8-K.
On April 12, 2002, subsequent to the quarter ended March 31,
2002, the Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission relating to the scheduling of
the registrant's Annual Meeting of Shareholders.
On May 2, 2002, subsequent to the quarter ended March 31, 2002,
the Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission relating to the rescheduling
of the registrant's Annual Meeting of Shareholders.
On May 23, 2002, the Company filed a Current Report on Form 8-K
with the Securities and Exchange Commission relating to
resignation of Rajkumar Koneru as a Director of the Company. Mr.
Koneru had served as a Director of the Company since 1994.
On July 2, 2002, subsequent to the quarter ended June 30, 2002,
the Company filed a Form 8-K with the Securities and Exchange
Commission relating to the
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Company's adjournment of its Annual Meeting from Tuesday, July 2,
2002 to Tuesday, July 16, 2002.
On August 1, 2002, subsequent to the quarter ended June 30, 2002,
the Company filed a Form 8-K with the Securities and Exchange
Commission relating to the Company's dismissal of Arthur Andersen
LLP as the Company's auditor and its engagement of Deloitte &
Touche LLP as the Company's new independent auditor.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Intelligroup, Inc.
DATE: August 14, 2002 By: /s/ Nagarjun Valluripalli
--------------------------------------------
Nagarjun Valluripalli,
Chairman of the Board, President and Chief
Executive Officer
(Principal Executive Officer)
DATE: August 14, 2002 By: /s/ Nicholas Visco
--------------------------------------------
Nicholas Visco,
Senior Vice President-Finance and
Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)
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