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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission file number 0-20943
INTELLIGROUP, INC.
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(Exact Name of Registrant as Specified In Its Charter)
New Jersey 11-2880025
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
499 Thornall Street, Edison, New Jersey 08837
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(Address of Principal Executive Offices) (Zip Code)
(732) 590-1600
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(Registrant's Telephone Number,
Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes: No: X
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The aggregate market value of the voting stock held by non-affiliates of
the registrant at June 28, 2002 (the last business day of the most recent second
quarter) was $17,622,325 (based on the closing price as quoted on the Nasdaq
National Market on that date).
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 25, 2003:
Class Number of Shares
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Common Stock, $.01 par value 16,630,125
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TABLE OF CONTENTS
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Item Page
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PART I 1. Business..................................................... 4
2. Properties................................................... 18
3. Legal Proceedings............................................ 20
4. Submission of Matters to a Vote of Security Holders.......... 23
PART II 5. Market for the Company's Common Equity and Related
Shareholder Matters.......................................... 24
6. Selected Financial Data...................................... 24
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 26
7A. Quantitative and Qualitative Disclosure About Market Risk.... 51
8. Financial Statements and Supplementary Data.................. 51
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................... 51
PART III 10. Directors and Executive Officers of the Registrant........... 52
11. Executive Compensation....................................... 57
12. Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters................... 65
13. Certain Relationships and Related Transactions............... 68
14. Controls and Procedures...................................... 69
PART IV 15. Exhibits, List and Reports on Form 8-K....................... 70
SIGNATURES.................................................................. 71
CERTIFICATIONS.............................................................. 73
EXHIBIT INDEX............................................................... 76
FINANCIAL STATEMENTS........................................................F-1
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PART I
ITEM 1. BUSINESS.
GENERAL
Overview
Intelligroup, Inc. ("Intelligroup" or the "Company") is an information
technology services strategic outsourcing partner to the world's largest
companies. Intelligroup develops, implements and supports information technology
solutions for global corporations and public sector organizations. The Company's
onsite/offshore delivery model has enabled hundreds of customers to accelerate
results and significantly reduce costs. With extensive expertise in
industry-specific enterprise solutions, Intelligroup has earned a reputation for
consistently exceeding client expectations.
Company History
The Company was incorporated in New Jersey in October 1987 under the name
Intellicorp, Inc. to provide systems integration and custom software development
services. The Company's name was changed to Intelligroup, Inc. in July 1992. In
March 1994, the Company acquired Oxford Systems Inc. ("Oxford"). On December 31,
1996, Oxford was merged into the Company and ceased to exist as an independent
entity. In October 1996, the Company consummated its initial public offering of
its Common Stock. The Company's executive offices are located at 499 Thornall
Street, Edison, New Jersey 08837 and its telephone number is (732) 590-1600.
In 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 re-position
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.
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On July 5, 2000, the Company distributed all of the outstanding shares of
the common stock of SeraNova then held by the Company to holders of record of
the Company's common stock as of the close of business on May 12, 2000 (or to
their subsequent transferees) in accordance with the terms of a Distribution
Agreement dated as of January 1, 2000 between the Company and SeraNova.
Accordingly, the assets, liabilities and results of operations of SeraNova have
been reported as discontinued operations for all periods presented.
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.
At the same time, the Company redirected some of its ASP infrastructure and
personnel towards the management and support of customers' enterprise,
e-commerce and m-commerce applications ("Application Management Services").
Additionally, the Company introduced certain SAP-based proprietary tools that
are designed to reduce the time and cost of upgrading and maintaining SAP
systems ("Power Up Services(SM)"). In 2001, the Company developed pre-configured
SAP solutions for the pharmaceutical industry ("Pharma Express(SM)") and the
engineering and construction industry ("Contractor Express(SM)"). 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 following is a description of, including, among other things, our
services, markets and competitors. Financial information regarding our
geographic areas and results of operations appears in the footnote entitled
Segment Data and Geographic Information in the Notes to the Consolidated
Financial Statements included in Item 8. Financial Statements and Supplementary
Data.
INTELLIGROUP SERVICES
Intelligroup's strategic outsourcing services address the implementation,
upgrade, application management and development needs of information technology
executives. Its proven methodologies and innovative tools allow customers to
reduce costs by accelerating implementations, upgrades and development.
Companies around the world turn to Intelligroup for high-quality software
development and support delivered at lower costs. Intelligroup created the
industry's first offshore lab dedicated to SAP development in 1995. Since then,
Intelligroup's India-based offshore services--coupled with its U.S., U.K. and
Singapore centers--have helped hundreds of clients develop, implement, maintain,
support and integrate ERP, e-commerce and m-commerce applications. Its
onsite/offshore model has been refined into a series of repeatable,
quality-embedded processes that continually enable it to:
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o Significantly reduce clients' development time and costs;
o Deliver superior-quality developments and enhancements on schedule;
o Ensure reliable service levels;
o Accommodate requirement changes and manage risks;
o Provide 24x7 seamless access to scalable, dedicated and skilled
professionals; and
o Meet the peaks and valleys of resource requirements.
Customers partner with Intelligroup in order to co-develop a product;
implement, extend and support existing applications; or create a dedicated
offshore center for their own development efforts.
Historically, the Company's services have ranged from providing customers
with a single consultant to multi-personnel full-scale projects. The Company
provides these services to its customers primarily on a time and materials basis
and pursuant to agreements, which are terminable upon relatively short notice.
During 2000, the Company began to focus on providing management and support
services for their customers' applications. The contractual arrangements in
these situations are typically fixed term, fixed price and multi-year, as is
common in the outsourcing market. The Company's focus on management and support
services is also intended to encourage ongoing and recurring service
relationships, rather than one-time implementation engagements.
Professional Consulting Services
The Company's professional consulting services ("PCS") utilize technical
and functional consultants to leverage the Company's expertise in ERP
architecture and systems integration, and to efficiently assimilate and
customize these applications with new e-commerce and m-commerce applications and
extensions. The Company believes that its expertise in a wide variety of
technologies, coupled with its ability to provide comprehensive business process
solutions and timely and cost-effective implementation of new business systems,
enables its customers to achieve substantial improvements in efficiency and
effectiveness in their businesses, and fosters long-term customer relationships.
Intelligroup has cultivated strong working relationships with SAP, Oracle
and PeopleSoft. These companies have a vested interest in encouraging third
party professional consulting service companies, such as Intelligroup, to
provide implementation and customization services to customers. These software
vendors have established formal programs, which are designed to recruit and
authorize third party service companies as service partners. Companies wishing
to become authorized partners must meet performance criteria established by the
respective ERP vendor. They are then allowed to use the vendor's partner
designation and associated logo to promote their own services. The ERP product
vendors also promote these authorized partners to customers and prospective
customers of their ERP products. The Company believes that such partner status
with the ERP vendors has and will continue to result in direct referrals and
enhanced industry recognition.
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In 1995, the Company achieved the status of a "SAP National Implementation
Partner." In 1997, the Company enhanced its partnership status with SAP, by
first achieving "National Logo Partner" status and then "AcceleratedSAP Partner"
status. In July 1997, the Company was awarded "PeopleSoft Implementation
Partnership" status. In June 1998, the Company expanded its Oracle applications
implementation services practice and added upgrade services to meet market
demand of mid to large size companies that were implementing or upgrading Oracle
applications. In 2000, the Company achieved "SAP Services Partner" status and
"SAP Hosting Partner" for the pharmaceuticals industry vertical status. In 2001,
the Company's pharmaceutical template for the small and medium-size businesses
market (covering cGMP processes and validation standards) was certified by SAP
America.
As a result of the Company's experience in implementing ERP software, the
Company has developed a proprietary methodology and associated toolset for
implementing enterprise business software applications. The toolset also
contains a project management and tracking tool, which the Company utilizes to
monitor implementation projects undertaken for customers. The Company believes
that its methodology and toolset may enable its customers to realize significant
savings in time and resources. Furthermore, the Company believes that use of the
methodology and toolset also shortens the turn-around time for program
development, as it streamlines the information flow between the Company's
offices and customer sites.
Additionally, the Company has introduced certain SAP-based proprietary
tools, known as Power Up Services, that are designed to reduce the time and cost
of upgrading and maintaining SAP systems. Through its Power Up Services, the
Company helps to cost-effectively size and analyze SAP upgrade projects, and
efficiently evaluate and test SAP Support Packages. The Company combines the
assessment capabilities of its proprietary Uptimizer(SM) Tool Kit with the
skills and expertise of its SAP-certified global implementation team to deliver
high-quality, cost-effective upgrades to customized SAP environments. HotPac
Analyzer(SM) enables customers to analyze and test the impact of a Support
Package on its own SAP production environment before it is actually applied. In
addition, HotPac Analyzer enables customers to validate the overall impact that
a Support Package can have and isolate and identify the business transactions
that require thorough testing.
In 2001, the Company developed Pharma Express and Contractor Express.
Pharma Express is a ready-to-run, fully integrated pharmaceutical solution that
enables pharmaceutical companies of all sizes to improve the efficiency of their
manufacturing process to effectively control the cost-of-production and
distribution while keeping the production environment cGMP-compliant. Pharma
Express incorporates SAP Best Practices for the highly regulated pharmaceutical
industry and seamlessly integrates order management, process manufacturing,
quality management, inventory and distribution and financials. Contractor
Express is a ready-to-run, fully integrated industry solution that enables
engineering and construction companies of all sizes to improve their operational
efficiency and to effectively control project schedules and manage the costs and
resources associated with construction projects. Contractor Express incorporates
SAP Best Practices for the engineering and construction industry and seamlessly
integrates order management, procurement, project systems, plant maintenance,
asset management, human resources, financials and project costing.
The Company's Advanced Development Center ("ADC"), located in Hyderabad,
India, allows the Company to provide cost-effective, timely and high quality PCS
services to customers
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throughout the world. The ADC delivers rapid, 24 by 7 development services, by
utilizing its functional and technical consultants, in conjunction with on-site
consultants at customer locations, to provide customers with savings in
development and implementation costs and faster time to project completion.
Intelligroup is able to deliver high value services at attractive prices due to:
(i) the high level of expertise and experience of ADC consultant programmers;
(ii) the rigorous application of the Company's proprietary software project
methodologies, tools and project management disciplines; and (iii) the cost
structures associated with the ADC's offshore location.
The Company provides PCS services directly to end-user organizations, or as
a member of consulting teams assembled by other information
technology-consulting firms. The cumulative number of PCS customers billed by
the Company has grown substantially from 600 customers in 1999 to over 1000
customers in 2002. The Company's customers are primarily Fortune 1000 and other
large and mid-sized companies in the United States and abroad. They have
included Apple Vacations, Bristol-Myers Squibb, Coca Cola Enterprises,
Colgate-Palmolive, Detroit Public Schools, Eastman Chemical Company, ExxonMobil
Corporation, Putnam Investments, Siemens Medical Systems and Steelcase Inc. The
Company has also participated in project teams led by information technology
consulting firms such as Cap Gemini Ernst & Young and BearingPoint.
Application Management Services
Intelligroup's application management services ("AMS") provide the
resources, processes and tools needed for quality-driven user, technical and
operations support. Its experienced professionals use a well-defined set of
assessment, transition and long-term processes to deliver customized, affordable
and highly responsive support.
Companies around the world entrust Intelligroup to keep their complex ERP
and eCommerce environments and infrastructures stable and optimized, and aligned
with new business processes. Intelligroup delivers:
o Significant reduction in support costs;
o Predictable costs for easier budgeting;
o 24x7, on-demand access to skilled functional and technical
professionals through its Global Support Center and Application
Development Center in Hyderabad, India;
o Assured service levels and flexible, individualized support programs;
o Dedicated teams that are on-site, offshore or a combination, depending
on client requirements; and
o Improved reliability, availability and performance of the
infrastructure, databases, operations, applications and interfaces.
The Company's AMS services provide clients with management, support and
maintenance of their enterprise, e-commerce and m-commerce applications. These
services are provided using the Company's low cost, high quality onsite/offshore
delivery model, which allows the Company to aggressively compete for long term
fixed price/fixed time contracts.
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Key to the Company's ability to deliver AMS services is its offshore Global
Support Center ("GSC"), located in Hyderabad, India, which helps to provide
responsive global support to customers through delivery teams that work
around-the-clock. The GSC keeps customers' critical applications, systems and
infrastructure stable, current and optimized through efficient and
cost-effective user, technical and operations support. Intelligroup is able to
deliver high value services at attractive prices due to: (i) the high level of
expertise and experience of GSC support professionals; and (ii) the cost
structures associated with the GSC's offshore location.
The Company provides its AMS services directly to end-user organizations.
The cumulative number of AMS customers billed by the Company has grown
substantially from three customers in 1999 to over 35 customers in 2002. The
Company's customers are primarily Fortune 1000 and other large and mid-sized
companies in the United States and abroad. They have included Dade Behring, GE
Fanuc Automation North America, Joy Mining Machinery and Pearsons Technology
Centre.
ASP Hosting Services
The Company services the ASP market with its ASPPlus Solutions, which
include implementation, management and hosting of enterprise, e-commerce and
m-commerce solutions. ASPPlus utilizes a mass customization approach, providing
pre-configured vertical industry solutions of mission critical applications.
Through ASPPlus, the Company offers customized solutions to its client's
specific enterprise, e-commerce and m-commerce needs.
To provide the global infrastructure on which to deliver and support
solutions for customers worldwide, Intelligroup became a founding Platinum
member of AT&T's Ecosystem for ASPs. As our strategic partner and infrastructure
provider, AT&T provides the data center, hardware and operating systems, and
requisite bandwidth and communications capabilities.
THE INTELLIGROUP SOLUTION
Intelligroup improves its clients' business performance through the
intelligent application of information technology. We deliver to our clients
timely, cost-effective and innovative professional consulting services and
application management and support solutions by combining our:
Offshore Development and Maintenance Model: The Company has the ability to
develop, implement and maintain high-quality, low cost business solutions
through its offshore ADC and GSC. In May 2000, the ADC was awarded Level 2 of
the People Capability Maturity Model(R) by the Carnegie Mellon Software
Engineering Institute ("CMM-SEI"). The achievement recognizes Intelligroup for
its ability to attract, develop, motivate, organize and retain the talent needed
to continuously improve its software development capability. Intelligroup was
among the first in the IT industry to integrate CMM-SEI workforce improvement
with software process improvement, for which we have achieved the Software
CMM-SEI Level 5 certification for continuous improvement of our software
engineering. In addition, we are ISO 9001-certified for software development,
support and optimization.
The ADC and GSC are connected to the Company's operations centers in the
United States, Asia/Pacific and Europe via high-speed satellite links. The ADC
and GSC operate on a 24x7 basis, allowing next business day turn-around of work
units to customers. The Centers'
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quality processes, skilled development and support teams, and low cost of
operation allow the Company to aggressively compete for implementation and
maintenance contracts. As the Company expands, the ADC and GSC are prepared to
undertake projects in any of the three enterprise and e-commerce practices (SAP,
PeopleSoft and Oracle), as well as certain other advanced technologies,
including m-commerce.
Expertise in a Wide Range of Technologies, Industries and Disciplines: The
Company's consultants have expertise with SAP, Oracle and PeopleSoft products
and with a wide variety of leading computing technologies, including Internet,
client/server architectures, object-oriented technologies, CASE, distributed
database management systems, mainframe connectivity, LAN/WAN and
telecommunications technologies. The Company believes that its personnel are
effective because of their technical excellence, their industry experience and
their strong grounding in the disciplines of project implementation and
management.
Customer-Driven Approach: The Company's project managers and consultants
maintain on-going communication and close interaction with customers to ensure
that they are involved in all facets of a project and that the solutions
designed and implemented by the Company meet the customer's needs. The Company's
goal is to provide training to its customers during a project to achieve high
levels of self-sufficiency among its customers' end users and internal
information technology personnel. The Company believes that its ability to
deliver the requisite knowledge base to its customers is critical to fostering
long-term relationships with, and generating referrals from, existing customers.
Proprietary Methodologies: The Company has developed a proprietary
implementation methodology, as well as a software-based implementation toolset,
which are designed to minimize the time required to develop and implement SAP,
Oracle and PeopleSoft solutions for its customers.
Proprietary Toolsets: The Company has developed proprietary SAP toolsets
that reduce the cost and time of keeping an SAP environment stable and current.
The Company's Power Up Services are designed to size and analyze an upgrade
project and evaluate and test SAP Support Packages.
TRADEMARKS AND SERVICE MARKS
"Intelligroup," the Intelligroup logo and "Creating the Intelligent
Enterprise" are all trademarks of the Company.
"Power Up Services", "Uptimizer", "HotPac Analyzer", "Pharma Express",
"Contractor Express", "4Sight", "4Sight Plus", "EZ Path", "Implementation
Assistant", "myADVISOR" and "ASPPlus" are service marks of the Company.
"Empower Solutions" is a service mark of Empower Solutions, a subsidiary of
the Company.
All other trade names, trademarks or service marks referenced herein are
the property of their respective owners and are not the property of the Company.
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SAFE HARBOR STATEMENTS
This Form 10-K contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, including,
without limitation, statements regarding the Company's intention to shift 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;
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;
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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 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.
INDUSTRY BACKGROUND
Organizations face a rapidly changing business environment, including
intense global competition, accelerating technological change, and the need to
embrace emerging technology strategies. Such businesses continually seek to
improve the quality of products and services, lower costs, reduce cycle times,
optimize their supply chain and increase value to customers. As a result, many
businesses implement and utilize advanced information solutions, which enable
them to optimize their business processes in such areas as product development,
manufacturing, sales, distribution and financials.
Historically, many businesses have adopted information systems strategies
using packaged software applications. Client/server systems widely replaced
mainframe and legacy systems with the promise of more functional, flexible and
cost effective applications, which are critical to the competitive needs of
businesses.
As part of their client/server strategies, organizations often acquire, or
consider acquisition of, packaged enterprise-wide business software applications
offered by leading ERP vendors, such as SAP, Oracle and PeopleSoft. These
applications are then implemented and
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maintained to meet their particular business needs. Alternatively, the
organizations may develop, or commission the development of, customized software
applications to meet their needs. In both cases, customers have a set of core
operations applications, which they use to support their central business
processes. These customers must balance demands from their user departments for
new, innovative business applications against the absolute requirement to
maintain, manage and optimize the core operations applications. These competing
demands reflect areas of potential business opportunity for the Company.
The majority of customers who implement ERP solutions are Fortune 2000
companies. The Company believes that opportunities for new ERP implementations
will continue predominantly in subsidiaries and operating units and toward
mid-market clients. Many mid-size companies have the need for core financial and
other operations systems that can be addressed by ERP products. The Company
believes that opportunity exists for both professional consulting services and
application management services to mid-market clients. This segment is very cost
conscious and requires a highly efficient services delivery model, which the
Company believes it can provide through a combination of innovative tools and
templates to speed delivery and use of its offshore services.
The task of developing and implementing enterprise-wide, mission-critical,
information solutions is complex. It presents significant challenges for most
customer organizations and can be a time consuming and costly undertaking, which
typically requires significant allocation of organizational resources.
Information technology managers must integrate and manage information systems
environments consisting of multiple computing platforms, operating systems,
databases and networking protocols, as well as multiple packaged and custom
developed applications.
To support their information technology needs, many businesses increasingly
engage experienced outside specialists for assistance across the full life cycle
of their solutions. Because of the heightened business pressures they face,
these customers are demanding innovative solutions, in shorter timeframes, with
lower life cycle cost of ownership, at higher levels of quality and service, all
with lower risk to themselves and their businesses.
Companies must also continually keep pace with a broad and often confusing
array of new technological developments, which can render internal information
technology skills obsolete. Professionals with the requisite technology skills
often are in short supply and many organizations are reluctant to expand their
internal information systems department for particular projects. At the same
time, external economic factors encourage organizations to focus on their core
competencies and trim work forces in the information technology management area.
Accordingly, organizations often lack sufficient, and/or appropriate, technical
resources necessary to design, develop, implement and manage the information
technology solutions needed to support their business needs. Because of this,
the Company believes that there is significant potential business opportunity
for implementing ERP version-to-version upgrades as well as application
management and support services.
With such an established installed base of ERP applications, a January 8,
2003 Gartner report entitled, "2003 ERP Predictions Point to the Year of the
Version Upgrade" states, "Most enterprise resource planning (ERP) customers are
near the end of the supported life cycle of their software. To remain on a
supported version after 2005, or to hope to achieve ERP II, those
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enterprises must act in 2003." With its proven tools to accelerate upgrades, the
Company believes it is well positioned to capitalize on this market opportunity.
Another area of opportunity for the company is strategic offshore
outsourcing. With its history as a pioneer in providing offshore management and
support of mission critical applications, the Company can offer clients a
flexible, low cost option for managing ERP applications. In recent economic
times, this has been an area of growth within the IT sector. According to the
January 14, 2003 Gartner report entitled, "Applications Services Become Hottest
Growth Areas in IT Outsourcing," "Growth expectations are greatest among
outsourcers for offshore applications services, followed by near shore and
application management in general."
SALES AND MARKETING
The Company historically has generated new sales leads from (i) referrals
from existing customers, (ii) introductions to potential customers by the
Company's alliance partners, which often need to recommend qualified systems
integrators to implement or enhance their software products, and (iii) internal
sales efforts. In addition, the Company has been introduced to customers by
certain of its competitors, such as the consulting practices of the former "Big
Five" accounting firms, which at times use the Company's expertise and ability
to deliver qualified personnel for complex projects.
The Company has dedicated an increased level of resources to sales and
marketing efforts. The Company will continue to market to potential customers
with demonstrated needs for the Company's expertise in ERP solutions. The
Company intends to establish a brand presence to further differentiate itself in
the marketplace. The Company also intends to leverage public relations to raise
visibility for its brand and increase outbound email marketing campaigns to
remain at top of mind and expand its footprint in its customer base. The Company
will continue to implement focused sales management programs, to leverage its
relationships with existing customers, as well as those with ERP and other
product vendors.
Among its sales and marketing efforts, the Company's has exhibited and
presented the Company's expertise at trade events associated with the primary
ERP offerings. These include events such as SAPPHIRE, the annual SAP conference
for SAP service providers and end-users, the Americas SAP User Group, the Oracle
Americas User Group and the PeopleSoft Users Group and industry analyst shows
like Gartner IT Expo. The Company intends to continue participation in such
industry-recognized programs and trade shows.
Most importantly, however, the Company believes that satisfying customer
expectations within budgets and time schedules is critical to gaining repeat
business and obtaining new business from referrals. The Company believes that it
has consistently met customer expectations with respect to budgets and time
schedules.
The Company's services require a substantial financial commitment by
customers and, therefore, typically involve a long sales cycle. Once a lead is
generated, the Company endeavors to quickly understand the potential customer's
business needs and objectives in order to develop the appropriate solution and
bid accordingly. The Company's project managers are involved throughout the
sales cycle to ensure mutual understanding of customer goals, including time to
- 14 -
completion, and technological requirements. Sales cycles for complex business
solutions projects typically range from one to six months from the time the
Company initially meets with a prospective customer until the customer decides
whether to authorize commencement of an engagement.
As of December 31, 2002, the Company's sales and marketing group consisted
of 41 employees in the United States, 9 employees in the Asia-Pacific region, 4
employees in Europe, and 10 employees in India. The Company markets and delivers
its services to customers on an international basis through its network of
offices. The Company's headquarters in New Jersey and its branch office in
Atlanta, GA serve the United States market. In addition, the Company serves
markets in Asia Pacific (Australia, Hong Kong, Indonesia, Japan, New Zealand and
Singapore), Europe (Denmark, Sweden and the United Kingdom) and India.
CUSTOMERS
The Company provides its services directly to many Fortune 2000 companies,
as well as small to medium sized enterprises, or as a member of consulting teams
assembled by other information technology consultants, such as the consulting
practices of the former "Big Five" accounting firms. The cumulative number of
customers billed by the Company has grown substantially from 600 customers in
1999 to over 1000 customers in 2002.
In 2000, 2001 and 2002, 36%, 42% and 34%, respectively, of the Company's
revenue was generated by providing supplemental resources directly to the
end-customer or as part of a consulting team assembled by another information
technology consulting firm. The Company's ten largest customers accounted for,
in the aggregate, approximately 34%, 33% and 40% of its revenue in 2000, 2001
and 2002, respectively. During 2000 and 2002, one customer accounted for 10% or
more of total revenue. During 2001, no single customer accounted for more than
10% of total revenue.
During 2000 and 2002, one customer in the United States accounted for more
than 10% of the total revenue generated in the United States. During 2001, no
single customer in the United States accounted for more than 10% of total
revenue generated in the United States.
During 2000, one customer in Asia-Pacific accounted for more than 10% of
total revenue generated in the Asia-Pacific region. During 2001, two customers
in Asia-Pacific each accounted for more than 10% of total revenue generated in
the Asia-Pacific region. During 2002, no single customer in Asia-Pacific
accounted for more than 10% of total revenue generated in the Asia-Pacific
region.
During 2000, no single customer in Europe accounted for more than 10% of
total revenue generated in the European region. During 2001, one customer in
Europe accounted for more than 10% of total revenue generated in the European
region. During 2002, two customers in Europe each accounted for more than 10% of
total revenue generated in the European region.
During 2000, 2001 and 2002, no single unaffiliated customer in India
accounted for more than 10% of total revenue generated in India. 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.
- 15 -
Although the Company has contracts with many of its customers to provide
its services, in general such contracts are terminable upon relatively short
notice, typically not more than 30 days. When providing application management
and support services for customers, the Company expects to compete for
multi-year fixed term, fixed price contracts. There can be no assurance that the
Company's customers will continue to enter into contracts with the Company or
that existing contracts will not be terminated.
Many of the Company's engagements involve projects that are critical to the
operations of its customers' businesses and provide benefits that may be
difficult to quantify. The Company's failure or inability to meet a customer's
expectations in the performance of its services could result in a material
adverse change to the customer's operations giving rise to claims for damages
against the Company or causing damage to the Company's reputation, adversely
affecting its business, financial condition and results of operations. In
addition, certain of the Company's agreements with its customers require the
Company to indemnify the customer for damages arising from services provided to,
or on behalf of, such customer. Under certain of the Company's customer
contracts, the Company warrants that it will repair errors or defects in its
deliverables without additional charge to the customer. The Company has not
experienced, to date, any material claims against such warranties. The Company
has purchased and maintains errors and omissions insurance to insure the Company
for damages and expenses incurred in connection with alleged negligent acts,
errors or omissions.
COMPETITION
The markets for the Company's services are highly competitive. The Company
believes that its principal competitors include the internal information systems
groups of its prospective customers, as well as the following classes of
companies (some of which are also customers or referral sources of the Company):
o Consulting and software integration firms: including, IBM Global
Services, Electronic Data Systems, Computer Sciences Corporation, Cap
Gemini Ernst & Young, and BearingPoint.
o Software applications vendors: including, SAP, Oracle and PeopleSoft.
o Application management consulting firms: including, Covansys, Wipro
Technologies, Infosys Technologies Limited and Satyam Computer
Services Ltd.
Many of the Company's competitors have longer operating histories, possess
greater industry and name recognition and/or have significantly greater
financial, technical and marketing resources than the Company. In addition,
there are relatively low barriers to entry into the Company's markets and the
Company has faced, and expects to continue to face, additional competition from
new entrants into its markets.
The Company believes that the principal competitive factors in its markets
include quality of service and deliverables, speed of development and
implementation, price, project management capability and technical and business
expertise. The Company believes that its ability to compete also depends in part
on a number of competitive factors outside its control, including the ability of
its competitors to hire, retain and motivate project managers and other
- 16 -
senior technical staff, the development by others of services that are
competitive with the Company's services and the extent of its competitors'
responsiveness to customer needs.
The Company believes that it competes based on its expertise across the
full life cycle of its clients' ERP solutions. This expertise includes
management consulting skills, plus design and implementation skills in ERP
products (primarily SAP, PeopleSoft and Oracle), application integration and
application management and support related to those solutions. There can be no
assurance that the Company will be able to continue to compete successfully with
existing and new competitors.
EMPLOYEES
As of December 31, 2002, the Company employed 1,342 full-time employees, of
whom 1,112 were engaged as consultants or as software developers, 64 were
engaged in sales and marketing, and 166 were engaged in delivery management,
finance and administration. Of the total number of employees, 461 were based in
the United States, 101 were based in the Asia-Pacific region, 49 were based in
Europe and 731 were based in India. In addition, the Company engaged 184
independent contractors to perform information technology services as of
December 31, 2002.
None of the Company's employees are covered by a collective bargaining
agreement. Substantially all of the Company's employees have executed employment
agreements containing non-competition, non-disclosure and non-solicitation
clauses. In addition, the Company requires that all new employees execute such
agreements as a condition of employment by the Company. The Company believes
that it has been successful in attracting and retaining skilled and experienced
personnel. There is increasing competition for experienced sales and marketing
personnel and technical professionals. The Company's future success will depend
in part on its ability to continue to attract, retain, train and motivate highly
qualified personnel. The Company considers relations with its employees to be
good.
INTELLECTUAL PROPERTY RIGHTS
The Company's success is dependent, in part, upon its proprietary
implementation methodology, development tools and other intellectual property
rights. The Company relies upon a combination of trade secret, non-disclosure
and other contractual arrangements, and copyright and trademark laws, to protect
its proprietary rights. The Company generally enters into confidentiality
agreements with its employees, consultants and customers, and limits access to
and distribution of its proprietary information. The Company also requires that
substantially all of its employees and consultants assign to the Company their
rights in intellectual property developed while employed or engaged by the
Company. There can be no assurance that the steps taken by the Company in this
regard will be adequate to deter misappropriation of its proprietary information
or that the Company will be able to detect unauthorized use of and take
appropriate steps to enforce its intellectual property rights.
- 17 -
ITEM 2. PROPERTIES.
As of December 31, 2002, the Company owns no real property and currently
leases or subleases all of its office space. Within the United States, the
Company leases office space in Edison, NJ for certain technical and support
personnel, sales and marketing, administrative, finance and management
personnel, and in Atlanta, GA for certain other sales and operations personnel.
The Company also leases office space in Australia, Denmark, India, Japan, New
Zealand, Singapore and the United Kingdom. The following table summarizes the
Company's leased office space as of December 31, 2002:
AREA LEASE
---- -----
LOCATION (IN SQ. FEET) USE EXPIRATION
-------- ------------- --- ----------
o Corporate Headquarters
Edison, o Consulting Services - focus on SAP, PeopleSoft 9/9/2008
New Jersey 48,476 (A) commercial, Oracle and E-Business markets in the US
o Selling, General and Administrative functions in the US
o Consulting Services - focus on PeopleSoft public
Atlanta, sector market in the US
Georgia 4,051 o Limited Selling, General and Administrative 7/31/2005
functions in the US
o Consulting Services - focus on SAP market in
North Sydney, Australia
Australia 2,660 o Selling, General and Administrative functions in 3/31/2004
Australia
o Consulting Services - focus on SAP market in
Odense, Denmark
Denmark 9,900 o Selling, General and Administrative functions in 1/31/2006
Denmark
Hyderabad, 18,359 o Offshore Development Consulting Services 12/31/2007
India (Advanced Development Center)
o Selling, General and Administrative functions in
Hyderabad, India
India 15,858 o Global Sales and Marketing Support Services 1/31/2005
(Business Development Center)
Multiple
leases
Hyderabad, 15,968 o Consulting Services - focus on SAP, PeopleSoft expiring
India and Oracle markets in India 3/19/2003
- 6/1/2003
Hyderabad, 10,727 o Offshore Application Management and Support 2/15/2006
India Consulting Services (Global Support Center)
Tokyo, o Consulting Services - focus on SAP market in Japan
Japan 2,803 o Selling, General and Administrative functions in 1/31/2004
Japan
- 18 -
o Consulting Services - focus on SAP market in
Wellington, 5,354 New Zealand and Indonesia
New Zealand o Selling, General and Administrative functions in 2/6/2006
New Zealand
o Consulting Services - focus on SAP market in
Singapore, Singapore and Hong Kong
Singapore 1,299 o Selling, General and Administrative functions in 8/31/2005
Singapore and Hong Kong
o Consulting Services - focus on PeopleSoft and SAP
Milton Keynes, market in the UK
United Kingdom 650 o Selling, General and Administrative functions in 7/1/2003
the UK
(A) Approximately 21,840 square feet of this space has been subleased to an
unrelated third party.
Beginning in 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. (collectively,
the "SeraNova Group"). 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, 2002 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
(including attorney's fees) plus reimbursement of administrative fees, in favor
of the Company and against the SeraNova Group jointly and severally. In an
action filed in the Superior Court of New Jersey, the Court confirmed the
$624,000 award, jointly and severally as to the SeraNova Group, and issued a
writ of execution against the SeraNova Group's assets. The Sheriff of Middlesex
County levied this writ of execution on October 8, 2002 against a bank account
held by Silverline Technologies, Inc. On October 16, 2002, pursuant to this
writ, the bank turned over $626,247 to the Sheriff. On November 6, 2002 the
Sheriff sent the funds to the Company's attorneys and the funds were deposited
into an attorney trust account on November 8, 2002. On December 13, 2002, the
Company commenced an action in the Superior Court of New Jersey, Chancery
Division, to recover additional amounts due and owing from the SeraNova Group
under the Arbitration Award and to determine whether HSBC Bank USA ("HSBC"), a
creditor of the SeraNova Group, has priority to the funds levied upon by the
Sheriff. On January 31, 2003, the Court entered judgment in the Company's favor
in the amount of $218,805, representing the SeraNova Group's additional unpaid
rent arrearages under the arbitration award. On February 28, 2003, the Court
entered judgment in the Company's favor in the amount of $220,415, representing
the Company's attorney's fees in connection with the Company's efforts to
enforce the SeraNova Group's obligations under the arbitration award. On March
10, 2003, the Court ordered HSBC to produce discovery proving its priority to
the $626,247 being held in trust. The Court is expected to rule on this issue on
May 1, 2003. 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 (see Part I, Item 3, Legal Proceedings).
- 19 -
ITEM 3. LEGAL PROCEEDINGS
On February 7, 2001, NSA Investments II LLC filed a complaint in the United
States District Court for the District of Massachusetts naming, among others,
SeraNova, the Company and Rajkumar Koneru, a 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 same extent as
SeraNova for false and misleading statements constituting securities laws
violations and breach of contract. 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. On
September 30, 2002, the Court granted plaintiff's motion in part, finding
SeraNova liable for breach of contract as a matter of law. On March 27, 2003,
the parties agreed to the terms of a settlement agreement, which will be
effective upon payment of the settlement amount. Pursuant to such agreement, the
Company is obligated to pay its portion of the settlement amount equal to an
aggregate amount of $50,000 within two weeks. The payment by the Company of its
portion of the settlement amount will not have a material adverse effect 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 have completed the discovery process and the Company
has moved for summary judgment, which is scheduled to be heard by the Court on
April 4, 2003. 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.
- 20 -
Beginning in 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. 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, 2002 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 (including attorney's fees) plus reimbursement of administrative fees,
in favor of the Company and against the SeraNova Group jointly and severally. In
an action filed in the Superior Court of New Jersey, the Court confirmed the
$624,000 award, jointly and severally as to the SeraNova Group, and issued a
writ of execution against the SeraNova Group's assets. The Sheriff of Middlesex
County levied this writ of execution on October 8, 2002 against a bank account
held by Silverline Technologies, Inc. On October 16, 2002, pursuant to this
writ, the bank turned over $626,247 to the Sheriff. On November 6, 2002 the
Sheriff sent the funds to the Company's attorneys and the funds were deposited
into an attorney trust account on November 8, 2002. On December 13, 2002, the
Company commenced an action in the Superior Court of New Jersey, Chancery
Division, to recover additional amounts due and owing from the SeraNova Group
under the Arbitration Award and to determine whether HSBC Bank USA ("HSBC"), a
creditor of the SeraNova Group, has priority to the funds levied upon by the
Sheriff. On January 31, 2003, the Court entered judgment in the Company's favor
in the amount of $218,805, representing the SeraNova Group's additional unpaid
rent arrearages under the arbitration award. On February 28, 2003, the Court
entered judgment in the Company's favor in the amount of $220,415, representing
the Company's attorney's fees in connection with the Company's efforts to
enforce the SeraNova Group's obligations under the arbitration award. On March
10, 2003, the Court ordered HSBC to produce discovery proving its priority to
the $626,247 being held in trust. The Court is expected to rule on this issue on
May 1, 2003. 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 filed an Answer to the Company's complaint denying the
Company's claims. Discovery is ongoing. 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 June 26, 2002, Ashok Pandey filed a Complaint in the United States
District Court for the District of New Jersey, alleging that certain
shareholders of the Company constituted a group that held more than 5% of the
outstanding shares of the Company's common stock and had not filed a Schedule
13D disclosure statement with the Securities and Exchange Commission. On June
28, 2002, plaintiff obtained an ex parte injunctive order from the Court barring
Srini Raju, an alleged member of the "group" and a shareholder holding 4.61% of
the Company's common stock, from voting in the annual election. On July 12,
2002, after reviewing actual evidence of
- 21 -
record, and hearing argument from Pandey's counsel, the Court held that there
was no basis to enjoin Mr. Raju from voting his shares at the Annual Meeting.
After the election, Pandey sought to file an amended complaint dropping certain
defendants, and adding others, including the Company. On September 27, 2002, the
Court granted plaintiff's motion, and allowed certain limited discovery to
proceed. On October 11, 2002, the Company filed a motion for Judgment on the
Pleadings in its favor, arguing that the relief sought by plaintiff, the
retroactive sterilization of Mr. Raju's shares and the invalidation of his votes
at the Annual Meeting, is not sanctioned by law, and is unavailable as a remedy.
In response, Pandey filed a motion seeking leave to file a Second Amended
Complaint, seeking to drop the Section 13D claims against the Company and
substitute them with claims brought under Section 14A of the Securities and
Exchange Act. On January 31, 2003, the Court denied each of the parties'
motions. The parties are continuing with the discovery process.
On July 2, 2002, Ashok Pandey filed a complaint in the Superior Court of
New Jersey, Middlesex County, in connection with the Company's recent Proxy
contest with respect to the Annual Meeting. In his Complaint, plaintiff claimed
that Intelligroup's Board of Directors violated their fiduciary duties by
adjourning the Annual Meeting from July 2, 2002 to July 16, 2002. On July 3,
2002, the Court denied Plaintiff's application for emergent relief, and ruled
that Intelligroup could adjourn its Annual Meeting, finding that plaintiff's
conduct in obtaining ex parte injunctive relief in federal court enjoining the
voting of 4.61% of the Company's outstanding common stock without notice to the
Company, "estopped [Pandey] from complaining about the adjournment." Despite the
court's denial of his emergent application, plaintiff indicated to the Court on
August 16, 2002, that he would continue the litigation in an effort to have the
court sanction his unilateral attempt to hold an annual meeting and election on
July 2, 2002, despite the Company's adjournment of the meeting and the absence
of its Board of Directors and a quorum of its shareholders on July 2, 2002. The
Company filed its Answer and Affirmative Defenses on August 30, 2002 and
discovery is ongoing. On November 6, 2002, the Company filed a Motion for
Summary Judgment and on January 7, 2003, the Court granted Partial Summary
Judgment. A trial date has been scheduled for May 5, 2003.
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 filed an Answer to the Company's complaint denying
the Company's claims and discovery is ongoing. 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 October 4, 2002, the Company filed a complaint in the Superior Court of
New Jersey, Middlesex County against the SeraNova Group and HSBC seeking
compensatory, consequential and punitive damages arising out of SeraNova's and
Silverline's failure to pay certain amounts due and owing the Company,
SeraNova's fraudulent conveyance of assets and customer accounts to Silverline,
and HSBC's allegedly knowing acceptance of a fraudulent guarantee of
Silverline's debt to HSBC from SeraNova. Defendants have been served. Defendants
SeraNova and Silverline answered the Complaint on January 2, 2003. The inability
of the Company to
- 22 -
collect the full amount due from SeraNova and/or Silverline could negatively
affect the Company's business, financial condition or results of operations.
On February 10, 2003, CA Metro Center Limited Partnership filed a complaint
in the Superior Court of California, County of San Mateo, against the Company
and SeraNova as defendants. The Complaint seeks damages against the defendants
in the amount of $186,312 for breach of a lease agreement. The plaintiff has
granted the Company an extension of time in which to answer the complaint while
the parties engage in settlement discussions.
During 2002, SeraNova failed to pay certain obligations under a telephone
equipment lease agreement, which the Company assigned to SeraNova in February of
2001. On March 12, 2003, CIT Communications Finance Corporation filed a
complaint in the Superior Court of New Jersey, Law Division, Morris County,
against Intelligroup and SeraNova, jointly and severally, as defendants. The
complaint, which seeks damages, alleges among other things that the defendants
failed to pay outstanding lease obligations in the amount of $217,899. The
Company has been served with the complaint and is in the process of
investigating the claim in order to prepare an answer. The Company does not
believe that the outcome of this claim will have a material adverse effect on
Intelligroup's business, financial condition or results of operations.
There is no other material litigation pending to which the Company is a
party or to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the quarter
ended December 31, 2002.
- 23 -
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Common Stock is quoted on the Nasdaq National Market (the "NNM") under
the symbol "ITIG." The following table sets forth, for each of the periods
indicated, the high and low sale prices per share of Common Stock as quoted on
the NNM. The prices shown represent quotations among securities dealers, do not
include retail markups, markdowns or commissions and may not represent actual
transactions.
QUARTER ENDED HIGH LOW
------------- ---- ---
March 31, 2001 $ 2 7/32 $ 25/32
June 30, 2001 $ 1 1/2 $ 25/32
September 30, 2001 $ 1 1/16 $ 21/32
December 31, 2001 $ 1 3/16 $ 25/32
March 31, 2002 $ 1 3/16 $ 27/32
June 30, 2002 $ 1 3/4 $ 15/16
September 30, 2002 $ 1 19/32 $ 27/32
December 31, 2002 $ 1 1/16 $ 9/16
As of March 18, 2003, the approximate number of holders of record of the
Common Stock was 79 and the approximate number of beneficial holders of the
Common Stock was 2,678.
The Company has never declared or paid any dividends on its capital stock.
The Company intends to retain any earnings to fund future growth and the
operation of its business, and, therefore, does not anticipate paying any cash
dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
You should read the selected financial data presented below, in conjunction
with our consolidated financial statements, the notes to those consolidated
financial statements and the management's discussion and analysis of financial
condition and results of operations section appearing elsewhere in this report
on Form 10-K.
The consolidated statement of operations data for the years ended December
31, 2002, 2001, and 2000 and the balance sheet data as of December 31, 2002 and
2001 have been derived from our audited consolidated financial statements
included elsewhere herein, and should be read in conjunction with those
financial statements (including notes thereto). The selected financial data as
of December 31, 2000, 1999 and 1998 and for the years ended December 31, 1999
and 1998 have been derived from audited consolidated financial statements not
included herein, but which were previously filed with the Securities and
Exchange Commission, or SEC. Our historical results are not necessarily
indicative of the operating results to be realized in the future.
- 24 -
The consolidated financial statements as of and for the year ended December
31, 2002 have been audited by Deloitte & Touche LLP, independent public
accountants. The previous periods referred to above were audited by Arthur
Andersen LLP, independent public accountants.
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue....................................... $ 152,066 $ 151,205 $ 115,118 $ 110,413 $ 108,331
Cost of sales................................. 100,628 102,315 77,724 75,291 75,774
--------- --------- --------- --------- ---------
Gross profit............................... 51,438 48,890 37,394 35,122 32,557
--------- --------- --------- --------- ---------
Selling, general and administrative expenses.. 30,977 39,892 42,004 30,206 27,576
Depreciation and amortization................. 1,387 2,930 3,187 3,695 2,872
Acquisition expenses.......................... 1,397 2,115 -- -- --
SeraNova receivable impairment and other
charges.................................... -- -- -- -- 8,362
Proxy contest charges......................... -- -- -- -- 1,073
Restructuring and other special charges....... -- 7,328 -- 13,261 30
--------- --------- --------- --------- ---------
Total operating expenses................... 33,761 52,265 45,191 47,162 39,913
--------- --------- --------- --------- ---------
Operating income (loss).................... 17,677 (3,375) (7,797) (12,040) (7,356)
Interest income............................... 181 99 1,178 538 37
Interest expense.............................. (53) (752) (603) (690) (454)
Other income (expense)........................ 78 140 (5) 191 (149)
--------- --------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes........................ 17,883 (3,888) (7,227) (12,001) (7,922)
Provision (benefit) for income taxes.......... 3,852 1,441 (573) 592 561
--------- --------- --------- --------- ---------
Income (loss) from continuing operations...... 14,031 (5,329) (6,654) (12,593) (8,483)
Income (loss) from discontinued operations,
net of income tax expense (benefit) of
$599, $(235), $(2,095), $0 and $0.......... (631) (1,261) (4,891) -- --
--------- --------- --------- --------- ---------
Net income (loss)........................ $ 13,400 $ (6,590) $ (11,545) $ (12,593) $ (8,483)
========= ========= ========= ========= =========
Earnings (loss) per share
Basic earnings (loss) per share:
Continuing operations.................... $ 0.91 $ (0.34) $ (0.40) $ (0.76) $ (0.51)
Discontinued operations.................. (0.04) (0.08) (0.30) -- --
--------- --------- --------- --------- ---------
Net income (loss)...................... $ 0.87 $ (0.42) $ (0.70) $ (0.76) $ (0.51)
========= ========= ========= ========= =========
Common shares - Basic......................... 15,387 15,766 16,485 16,630 16,630
========= ========= ========= ========= =========
Diluted earnings (loss) per share:
Continuing operations...................... $ 0.88 $ (0.34) $ (0.40) $ (0.76) $ (0.51)
Discontinued operations.................... (0.04) (0.08) (0.30) -- --
--------- --------- --------- --------- ---------
Net income (loss)........................ $ 0.84 $ (0.42) $ (0.70) $ (0.76) $ (0.51)
========= ========= ========= ========= =========
Common shares - Diluted....................... 15,969 15,766 16,485 16,630 16,630
========= ========= ========= ========= =========
AS OF DECEMBER 31,
----------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 3,568 $ 5,510 $ 1,327 $ 2,138 $ 1,574
Working capital............................... 32,641 29,133 23,236 18,182 12,387
Total assets.................................. 66,924 80,200 67,368 47,094 44,119
Short-term debt and current portion of
obligations under capital leases............ 11 10,585 5,623 4,712 6,374
Long-term debt and obligations under capital
leases, less current portion................ 60 -- 1,037 371 1,091
Shareholders' equity.......................... 47,949 48,654 41,201 26,782 18,726
- 25 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a strategic information technology services outsourcing
partner to the world's largest companies. Intelligroup develops, implements and
supports information technology solutions for global corporations and public
sector organizations. The Company's onsite/offshore delivery model has enabled
hundreds of customers to accelerate results and significantly reduce costs. With
extensive expertise in industry-specific enterprise solutions, Intelligroup has
earned a reputation for consistently exceeding client expectations.
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 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.
On July 5, 2000, the Company distributed all of the outstanding shares of
the common stock of SeraNova then held by the Company to holders of record of
the Company's common stock as of the close of business on May 12, 2000 (or to
their subsequent transferees) in accordance with the terms of a Distribution
Agreement dated as of January 1, 2000 between the Company and SeraNova.
Accordingly, the assets, liabilities and results of operations of SeraNova have
been reported as discontinued operations for all periods presented. (See
Discontinued Operations.)
During 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.
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. 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,
- 26 -
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 years
ended December 31, 2001 and 2002, revenues derived from projects under fixed
price contracts represented approximately 17% and 23%, respectively, of the
Company's total revenue. No single fixed price project was material to the
Company's business during 2001 or 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 years ended December 31, 2000, 2001 and 2002, the Company's
ten largest customers accounted for in the aggregate, approximately 34%, 33% and
40% of its revenue, respectively. During 2000 and 2002, one customer accounted
for more than 10% of revenue. During 2001, no single customer accounted for more
than 10% of revenue. For the years ended December 31, 2000, 2001 and 2002, 36%,
42% and 34%, respectively, of the Company's revenue was generated by providing
supplemental resources directly to the end-customer or as part of a consulting
team assembled by another information technology consulting firm. There can be
no assurance that such information technology consulting firms will continue to
engage the Company in the future at current levels of retention, if at all.
During the years ended December 31, 2000, 2001 and 2002, approximately 63%,
69% and 62%, 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 each of the years ended December 31,
2000, 2001 and 2002, approximately 24%, 17% and 22%, 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 each of the years ended December 31, 2000, 2001 and 2002,
approximately 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).
- 27 -
The Company currently serves the United States market with its headquarters
in Edison (New Jersey), and a branch office in Atlanta (Georgia). The Company
also serves the markets in Asia Pacific (Australia, Hong Kong, Indonesia, Japan,
New Zealand, and Singapore), Europe (Denmark and the United Kingdom) and India.
The Company leases its headquarters in Edison, New Jersey. Such lease has an
initial term of ten (10) years, which commenced in September 1998.
DISCONTINUED OPERATIONS - SERANOVA
On July 5, 2000, the Company completed the tax-free spin-off of SeraNova by
distributing all of the outstanding shares of the common stock of SeraNova then
held by the Company to holders of record of the Company's common stock as of the
close of business on May 12, 2000 (or to their subsequent transferees).
SeraNova represented a significant segment of the Company's business.
Pursuant to Accounting Principles Board ("APB") Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," the Consolidated Financial Statements of the Company have been
reclassified to reflect the spin-off of SeraNova. Accordingly, the results of
operations and cash flows of SeraNova have been segregated in the Consolidated
Statements of Operations and Consolidated Statements of Cash Flows. The net
operating results and net cash flows of SeraNova have been reported as
"Discontinued Operations." The historical carrying amount of the net assets of
SeraNova on the spin-off date has been recorded as a dividend.
The Company has reported a $4.9 million loss from discontinued operations
for the period from January 1, 2000 to July 5, 2000.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The preparation of our financial statements in conformity with generally
accepted accounting principles in the United States requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Our estimates, judgments and assumptions are
continually evaluated based on available information and experience. Because of
the use of estimates inherent in the financial reporting process, actual results
could differ from those estimates.
Certain of our accounting policies require higher degrees of judgment than
others in their application. These include revenue recognition and allowance for
doubtful accounts, impairments and estimation of useful lives of long-term
assets, income tax recognition of current and deferred tax items and accruals
for contingencies. In addition, the footnotes to the Consolidated Financial
Statements include further discussion of our significant accounting policies.
Revenue Recognition and Allowance for Doubtful Accounts. The Company
generates revenue from professional services rendered to customers. The majority
of the Company's revenue is generated under time-and-material contracts whereby
costs are generally incurred in proportion with contracted billing schedules and
revenue is recognized as services are
- 28 -
performed, with the corresponding cost of providing those services reflected as
cost of sales. The majority of customers are billed on an hourly or daily basis
whereby actual time is charged directly to the customer. Such method is expected
to result in reasonably consistent profit margins over the contract term.
The Company also derives a portion of its revenue from fixed-price,
fixed-time contracts. Revenue generated from most fixed-price contracts,
including most application management and support contracts, is recognized
ratably over the contract term, on a monthly basis in accordance with the terms
of the contract. Revenue generated from certain other fixed-price contracts is
recognized based on the ratio of labor hours incurred to estimated total labor
hours. This method is used because reasonably dependable estimates of the
revenues and costs applicable to various stages of a contract can be made, based
on historical experience and milestones set in the contract. The Company's
project delivery and business unit finance personnel continually review labor
hours incurred and estimated total labor hours, which may result in revisions to
the amount of recognized revenue for the contract. If the Company does not
accurately estimate the resources required or the scope of work to be performed
for a contract or if the Company does not manage the project properly within the
planned time period, then a loss may be recognized on the contract.
Any estimation process, including that used in preparing contract
accounting models, involves inherent risk. We reduce the inherent risk relating
to revenue and cost estimates in percentage-of-completion models through
approval and monitoring processes. Risks relating to service delivery, usage,
productivity and other factors are considered in the estimation process.
Unbilled services at December 31, 2002 and 2001 represent services provided
through December 31, 2002 and 2001, respectively, which are billed subsequent to
year-end. All such amounts are anticipated to be realized in the following year.
The Company recognizes revenue for services where collection from the
client is probable. The Company establishes billing terms at the time project
deliverables are agreed. The Company continually monitors timely payments from
customers and assesses collection issues. The Company maintains allowances for
doubtful accounts for estimated losses resulting from the inability of its
clients to make required payments. The Company bases its estimates on historical
collection and write-off experience, current trends, credit policy, detailed
analysis of specific client situations and percentage of accounts receivable by
aging category.
Valuation of Long-Term Assets. In accordance with Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the
carrying value of long-lived assets is reviewed on a regular basis for the
existence of facts or circumstances, both internally and externally, that may
suggest impairment. If such circumstances exist, the Company evaluates the
carrying value of long-lived assets to determine if impairment exists based upon
estimated undiscounted future cash flows over the remaining useful life of the
assets and comparing that value to the carrying value of the assets. If the
carrying value of the asset is greater than the estimated future cash flows, the
asset is written down to its estimated fair value.
- 29 -
Accounting for Income Taxes. The Company records income taxes using the
asset and liability method. Deferred income tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective income tax bases, and operating loss credit carryforwards. The
Company's consolidated financial statements contain certain deferred tax assets
which have arisen primarily as a result of operating losses incurred since 1999,
as well as other temporary differences between book and tax accounting. FASB
SFAS No. 109, "Accounting for Income Taxes," requires the establishment of a
valuation allowance to reflect the likelihood of realization of deferred tax
assets. Significant management judgment is required in determining the provision
for income taxes, deferred tax assets and liabilities and any valuation
allowance recorded against net deferred tax assets. The Company evaluates the
weight of all available evidence to determine whether it is more likely than not
that some portion or all of the deferred income tax assets will not be realized.
As a result of historical operating losses and uncertainty as to the extent and
timing of profitability in future periods, the Company has recorded a valuation
allowance of approximately $8.7 million against gross deferred tax assets of
$11.0 million. The decision to record the valuation allowance required
significant judgment. Had the Company not recorded this allowance, the Company
would have reported materially different results. If the realization of deferred
tax assets in the future is considered more likely than not, an adjustment to
the deferred tax assets would increase net income in the period such
determination was made. The amount of the deferred tax asset considered
realizable is based on significant estimates, and it is at least reasonably
possible that changes in these estimates in the near term could materially
affect our financial condition and results of operations. The Company's
effective tax rate may vary from period to period based on changes in estimated
taxable income or loss, changes to the valuation allowance, changes to federal,
state or foreign tax laws, future expansion into areas with varying country,
state, and local income tax rates and deductibility of certain costs and
expenses by jurisdiction.
Contingent Liabilities. The Company has certain contingent liabilities that
arise in the ordinary course of business. The Company accrues contingent
liabilities when it is probable that future expenditures will be made and such
expenditures can be reasonably estimated. The Company is subject to various
pending or threatened legal matters which have arisen in the ordinary course of
business. The ultimate outcome of these items is uncertain and the potential
loss, if any, may be significantly higher or lower than amounts previously
accrued by the Company.
- 30 -
RESULTS OF OPERATIONS - CONSOLIDATED
The following table sets forth for the periods indicated certain financial
data expressed as a percentage of total revenue, for continuing operations:
PERCENTAGE OF REVENUE
----------------------------------
YEAR ENDED DECEMBER 31
----------------------------------
2002 2001 2000
---- ---- ----
Revenue....................................... 100.0% 100.0% 100.0%
Cost of sales................................. 69.9 68.2 67.5
----- ----- -----
Gross profit.............................. 30.1 31.8 32.5
Selling, general and administrative expenses.. 25.5 27.4 36.5
Depreciation and amortization expense......... 2.7 3.3 2.8
SeraNova receivable impairment and other
charges................................... 7.7 -- --
Proxy contest charges......................... 1.0 -- --
Restructuring and other special charges....... 0.0 12.0 --
----- ----- -----
Total operating expenses.................. 36.9 42.7 39.3
----- ----- -----
Operating loss............................ (6.8) (10.9) (6.8)
Interest income............................... 0.0 0.5 1.0
Interest expense.............................. (0.4) (0.6) (0.5)
Other income (expense)........................ (0.1) 0.1 0.0
----- ----- -----
Loss from continuing operations before income
taxes..................................... (7.3) (10.9) (6.3)
Income tax provision (benefit)................ 0.5 0.5 (0.5)
----- ----- -----
Loss from continuing operations............... (7.8)% (11.4)% (5.8)%
===== =====- =====
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
The following discussion compares the consolidated results of continuing
operations for the year ended December 31, 2002 and the year ended December 31,
2001.
Revenue. Total revenue decreased by 1.9%, or $2.1 million, from $110.4
million in 2001 to $108.3 million in 2002. The decrease was attributable
primarily to a decline in revenue generated in Europe and Asia-Pacific
(decreases of $4.7 million and $3.0 million, respectively), partially offset by
growth in revenue generated in the United States (an increase of $4.7 million)
and India (an increase of $946,000). The decline in Europe and Asia-Pacific
reflects the continuing uncertain and weakened local economic climate, as
customers delayed, decreased and/or canceled IT projects. The revenue growth in
the United States and India results directly from increased demand for the
majority of the Company's services, including traditional consulting service
offerings, application management and support services, offshore development
services and Power Up services. The majority of the 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,
but most predominately with the United States.
In November 2001, the Emerging Issues Task Force ("EITF") of the FASB
issued EITF No. 01-14, which concluded that reimbursable "out-of-pocket"
expenses should be classified as revenue, and correspondingly cost of services,
in the statement of operations. Accordingly, effective January 1, 2002, the
Company has reported gross reimbursable "out-of-pocket"
- 31 -
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 No. 01-14 accounting guidance.
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 increased by 0.6%, or $483,000, from $75.3 million in
2001 to $75.8 million in 2002. The Company's gross profit decreased by 7.3%, or
$2.5 million, from $35.1 million in 2001 to $32.6 million in 2002. Gross margin
decreased slightly to 30.1% in 2002 from 31.8% in 2001. The decrease in gross
margin results from competitive pricing pressures experienced throughout the
Company's global operations as well as 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 8.7%, or $2.6 million, from $30.2 million in 2001 to $27.6
million in 2002, and decreased as a percentage of revenue from 27.4% to 25.5%,
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 22.3% to $2.9 million in 2002, compared to $3.7 million in 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.
SeraNova receivable impairment and other charges. In 2002, the Company
recorded approximately $8.4 million in special charges associated with the note
receivable from SeraNova and certain other related issues. The Company is
continuing to pursue its various legal options to obtain payment from the
SeraNova Group on the Note and outstanding lease obligations. At the same time,
the Company has also been periodically 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. However, the Company believed that the liquidity issues
plaguing the SeraNova Group required a reassessment of the realizability of
these outstanding amounts. Although no final resolution had been reached, the
Company believed that the substance of these discussions provided 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 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.
- 32 -
Proxy contest charges. In 2002, the Company incurred approximately $1.1
million 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 $881,000, proxy solicitation services of
approximately $117,000, and printing, mailing and other costs of approximately
$75,000.
Restructuring and other special charges. In 2002, the Company recorded a
$30,000 restructuring and other special charges provision related to the
downsizing of the Company's operations in Australia. The charges resulted
primarily from severance costs associated with reducing employee headcount in
the region.
In 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 $13.3 million 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.
Interest income. The Company earned $37,000 in interest income in 2002,
compared with $538,000 in 2001. The Company discontinued accruing 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 I, Item 3, Legal
Proceedings).
Interest expense. The Company incurred $454,000 and $690,000 in interest
expense in 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 and the charges associated with the proxy contest. The
decrease in interest expense results from a combination of lower average
outstanding borrowings under the line of credit and lower interest rates charged
on outstanding borrowings in 2002.
Other income (expense). Other income (expense) results primarily from gains
or (losses) associated with changes in foreign currency exchange rates. The
Company reported other expense of $149,000 in 2002, compared with other income
of $191,000 in 2001. The change results from foreign currency fluctuations.
Provision for income taxes. Despite operating losses, a provision for
income taxes of $561,000 and $592,000 was required in 2002 and 2001,
respectively, due to taxable income in certain jurisdictions combined with a
valuation allowance offsetting other loss benefits in other jurisdictions. The
Company's net deferred tax asset as of December 31, 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
$1.6 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
- 33 -
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. Effective April 1, 2002, the
tax deduction incentive for income from the export of software and related
services is restricted to 90% of such income. Further, domestic revenue from
software and related services is taxable in India. In 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 each of the fiscal years ended March 31, 1997 through March 31, 1999. The
assessment is for 28 million rupees, or approximately $580,000. 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 December 31, 2002. If the Company were not successful with
its appeals, which were filed in 2001 and 2002, a future charge of approximately
$580,000 would be recorded and reflected in the Company's consolidated statement
of operations.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
The following discussion compares the consolidated results of continuing
operations for the year ended December 31, 2001 and the year ended December 31,
2000.
Revenue. Total revenue decreased by 4.1%, or $4.7 million, from $115.1
million in 2000 to $110.4 million in 2001. 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 accordance with EITF No. 01-14, the Company has reported gross
reimbursable "out-of-pocket" expenses incurred as both revenue and cost of sales
in the statement of operations, effective January 1, 2002. The Company has also
reclassified prior period financial information for presentation consistent with
EITF No. 01-14. The impact of this reclassification was an increase to both
revenue and cost of sales of $2.3 million in both 2001 and 2000.
Gross profit. The Company's cost of sales decreased by 3.1%, or $2.4
million, from $77.7 million in 2000 to $75.3 million in 2001. The Company's
gross profit decreased by 6.1%, or $2.3 million, from $37.4 million in 2000 to
$35.1 million in 2001. These decreases were attributable primarily to lower
revenues. Gross margin decreased slightly to 31.8% in 2001 from 32.5% in 2000.
The Company was able to maintain gross margins relatively comparable to the
prior year by reducing non-billable consultant time and other related costs.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased by 28.1%, or $11.8 million, from $42.0 million
in 2000 to $30.2 million in 2001, and decreased as a percentage of revenue from
36.5% to 27.4%, respectively. The decrease in selling, general and
administrative expenses, in absolute dollars and as a percentage of revenue, was
related primarily to the significant investments in marketing and developing the
- 34 -
application management services business in 2000. Subsequently, the Company has
been focused on improving operating efficiencies and controlling discretionary
expenditures throughout the organization to maintain a proper alignment with
revenue.
Depreciation and amortization. Depreciation and amortization expenses
increased 15.9% to $3.7 million in 2001, compared to $3.2 million in 2000. The
increase is due primarily to additional computers, equipment and software placed
in service since 2000.
Restructuring and other special charges. 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 $13.3 million restructuring and other
special charges provision in 2001. 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.
The charges associated with the ASP business in the United States included
a write-down of approximately $6.1 million in purchased computer software and
$469,000 in fixed assets, as well as $215,000 in severance costs and $152,000 in
exit costs. The Company determined that an impairment charge was required, since
the recoverability of the value of the computer software and fixed assets,
acquired for use in the ASP service offering, seemed unlikely given current and
future expected market conditions. The severance costs and exit costs relate to
the reduction of headcount associated with the ASP service offering.
The Company also determined that, based upon the current economic climate,
it did not need the expanded capacity associated with the planned technology
development and support center in Puerto Rico. Accordingly, the Company reached
an agreement with the Government of Puerto Rico to terminate the project and to
cancel the associated grant and other related contracts. As part of the
termination agreement, the Company was released from all future obligations
related to the project, but in exchange had to forego reimbursement of $1.3
million in previously incurred operating costs and fixed assets, which had
already been paid for by the Company.
Finally, the Company executed a plan to reorganize and downsize the
Company's operations in the United Kingdom ("UK"). The restructuring costs
included the write-down of $4.3 million of intangible assets and $174,000 of
fixed assets, as well as severance costs of $315,000 and exit costs of $273,000
associated with reducing employee headcount in the region. The Company's
operations in the UK now consist of a much smaller core group of billable
consultants, focused primarily on providing application management and support
services in the PeopleSoft market.
In conjunction with the reorganization of the UK operations, the Company
performed an assessment of the carrying value of the intangible assets. The
intangible asset balance, consisting primarily of goodwill and assembled
workforce, represents the excess purchase price associated with the acquisition
of CPI Consulting Limited during 1998. The analysis of intangible assets was
conducted in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" guidelines and
involved a
- 35 -
combination of financial forecasting and cash flow analysis. The Company
considered the recent trend in the UK operations of declining revenues and
increasing operating losses and the resulting impact on cash flows. The Company
also considered that certain key founders of CPI Consulting Limited have left
the Company to pursue other interests. Based upon the impairment test that was
conducted, the Company recorded an intangible asset impairment charge of $4.3
million.
Interest income. The Company earned $538,000 in interest income in 2001,
compared with $1,178,000 in 2000. The Company discontinued accruing 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 I, Item 3, Legal
Proceedings).
Interest expense. The Company incurred $690,000 and $603,000 in interest
expense in 2001 and 2000, respectively, related primarily to borrowings under
its line of credit. Borrowings under the line of credit were used to fund
operating activities. The increase in interest expense results from higher
average outstanding borrowings under the line of credit in 2001.
Other income (expense). Other income (expense) results primarily from gains
or (losses) associated with changes in foreign currency exchange rates. The
Company reported other income of $191,000 in 2001, compared with other expense
of $5,000 in 2000. The change results from foreign currency fluctuations.
Provision (benefit) for income taxes. The Company's effective rate was 4.9%
and (7.9)% for the years ended December 31, 2001 and 2000, respectively. The
Company's net deferred tax asset as of December 31, 2001 relates primarily to
the US operations. Based on anticipated profitability in the near future,
management believes it is more likely than not, that the net deferred tax asset
of $1.6 million will be realized.
During 2001 and 2000, the Company continued to generate overall pre-tax
losses even though there were profits generated in foreign jurisdictions. The
Company provided a valuation allowance against certain of these net operating
loss carryforwards, as the ability to utilize these losses may be limited in the
future. This negatively impacted the amount of income tax benefit recorded in
both 2001 and 2000.
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. In 2001 and 2000, 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 each of the fiscal years ended March 31, 1997 through March 31, 1999. The
assessment is for 28 million rupees,
- 36 -
or approximately $580,000. 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 December 31, 2001.
If the Company were not successful with its appeals, which were filed in 2001
and 2002, a future charge of approximately $580,000 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;
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. However, the Company has ceased
operations in Sweden as of January 1, 2003, due to continuing
operating losses. The European headquarters are located in Milton
Keynes, United Kingdom.
o India - includes the operations of the Company in India,
including services provided on behalf of other Company
subsidiaries. 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.
- 37 -
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
The following discussion compares the segment results for the year ended
December 31, 2002 and the year ended December 31, 2001.
Revenue. The following table displays revenues by reportable segment (in
thousands).
Year Ended December 31
-------------------------------------------------------
2002 2001
------------------------- --------------------------
Percentage of Percentage of
Dollars Total Dollars Total
------- ----- ------- -----
United States....... $ 78,712 72.7% $ 74,023 67.0%
Asia-Pacific........ 10,209 9.4 13,213 12.0
Europe.............. 6,024 5.6 10,737 9.7
India............... 13,386 12.3 12,440 11.3
-------- ----- -------- -----
Total............... $108,331 100.0% $110,413 100.0%
======== ===== ======== =====
US revenue increased by 6.3%, or $4.7 million, from $74.0 million in 2001
to $78.7 million in 2002. Since the latter half of 2001, the Company had
experienced challenging economic conditions that precluded many companies from
spending resources on IT projects, which had adversely impacted the demand for
the Company's services. Since mid-2002, the US has begun to experience an
increase in demand for services, including its professional consulting and
application management services.
APAC revenue decreased by 22.7%, or $3.0 million, from $13.2 million in
2001 to $10.2 million in 2002. The decrease was due primarily to challenging
economic conditions in Japan (a decrease of $1.6 million), Australia (a decrease
of $823,000), Indonesia (a decrease of $366,000), and New Zealand (a decrease of
$268,000).
Europe revenue decreased by 43.9%, or $4.7 million, from $10.7 million in
2001 to $6.0 million in 2002. The decrease was attributable primarily to the
United Kingdom ("UK") operations (a decrease of $4.2 million), while the Nordic
operations (Denmark and Sweden) decreased by $503,000. 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. The decrease in Nordic operations resulted primarily from
challenging economic conditions in Sweden. Accordingly, the Company has ceased
operations in Sweden as of January 1, 2003.
India revenue increased by 7.6%, or $1.0 million, from $12.4 million in
2001 to $13.4 million in 2002. The increase was attributable primarily to
increased demand for services in the US in the latter half of 2002, 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, but most
predominantly with the United States.
- 38 -
Operating Income (Loss). The following table displays operating income
(loss) by reportable segment (in thousands).
YEAR ENDED DECEMBER 31
------------------------------
2002 2001
--------- ---------
United States........................ $(7,037) $ (6,991)
Asia-Pacific......................... (1,510) 368
Europe............................... (1,093) (8,495)
India................................ 2,284 3,078
------- --------
Total................................ $(7,356) $(12,040)
========= ========
The US operating loss increased slightly by 0.6%, or $46,000, from just
under $7.0 million in 2001 to just over $7.0 million in 2002. The US operating
losses were generated primarily as a result of the $9.5 million of special
charges in 2002 associated with the SeraNova receivable impairment and the proxy
contest, and the $8.2 million of special charges in 2001 associated with the ASP
business and the termination of a project to build and operate a technology
development and support center in Puerto Rico (collectively, the "Special
Charges").
Excluding all Special Charges, US operating income improved by 98.9%, or
$1.2 million, from $1.2 million in 2001 to $2.4 million in 2002. This
improvement was attributable primarily to a $2.6 million reduction in selling,
general and administrative expenses to $27.6 million, or 25.5% of revenue, in
2002, compared with $30.2 million, or 27.4% of revenue in 2001. The decline in
selling, general and administrative expenses in 2002 was partially offset by a
decline in gross profit margin from 31.8% of revenue in 2001 to 30.1% of revenue
in 2002. The decline in gross profit margin results from competitive pricing
pressures in the US market.
APAC operating performance declined by 511%, or $1.9 million, from
operating income of $368,000 in 2001 to an operating loss of $1.5 million in
2002. The decrease was attributable primarily to competitive pricing pressures
on consultant bill rates as well as an increase in non-billable consultant time
in the local Asia-Pacific markets. Operating performance declined throughout the
Asia-Pacific region including Australia (a decrease of $588,000), Japan (a
decrease of $475,000), Singapore (a decrease of $379,000), Indonesia (a decrease
of $329,000) and New Zealand (a decrease of $106,000).
Europe operating loss decreased by 87%, or $7.4 million, from $8.5 million
in 2001 to $1.1 million in 2002. The improvement was attributable primarily to
an improvement in the operating performance of the UK of $8.0 million, while the
Nordic operations declined by $551,000. The improvement in the UK operating
performance in 2002 resulted primarily from the restructuring program initiated
in the UK during late 2001. Excluding the $5.1 million of special charges
associated with the 2001 restructuring program, the operating performance of the
UK in 2002 improved by $2.9 million. The improvement is attributed to
restructuring and downsizing of the Company's UK operations, which 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.
- 39 -
India operating income decreased by 25.8%, or $795,000, from $3.1 million
in 2001 to $2.3 million in 2002. The decrease was attributable primarily to an
increase in consultant salaries (as a result of both increased headcount and
local market adjustments to base consultant salaries), non-billable consultant
time and other related costs as well as a decrease in average consultant billing
rates.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
The following discussion compares the segment results for the year ended
December 31, 2001 and the year ended December 31, 2000.
Revenue. The following table displays revenues by reportable segment (in
thousands).
Year Ended December 31
-------------------------------------------------------
2001 2000
------------------------- --------------------------
Percentage of Percentage of
Dollars Total Dollars Total
------- ----- ------- -----
United States...... $ 74,023 67.0% $ 79,602 69.2%
Asia-Pacific....... 13,213 12.0 11,149 9.6
Europe............. 10,737 9.7 17,976 15.6
India.............. 12,440 11.3 6,391 5.6
-------- ----- -------- -----
Total.............. $110,413 100.0% $115,118 100.0%
======== ===== ======== =====
US revenue decreased by 7.0%, or $5.6 million, from $79.6 million in 2000
to $74.0 million in 2001. The decrease was attributable primarily to the
continued weakness in the US economy and the resulting impact on the IT services
market. Throughout the year, the effects of the uncertain and weakened economic
climate impacted the US, as customers delayed and/or decreased the scope of IT
projects, and as the US experienced competitive pricing pressures in the
provision of consulting services.
APAC revenue increased by 18.5%, or $2.1 million, from $11.1 million in
2000 to $13.2 million in 2001. The increase was due primarily to new business
signings in Indonesia (an increase of $1.5 million), Japan (an increase of $1.0
million) and Australia (an increase of $976,000). The increase was partially
offset by challenging economic conditions in New Zealand (a decrease of $1.3
million).
Europe revenue decreased by 40.3%, or $7.3 million, from $18.0 million in
2000 to $10.7 million in 2001. The decrease was attributable primarily to the
United Kingdom ("UK") operations (a decrease of $7.1 million), while the Nordic
operations (Denmark and Sweden) remained relatively stable. The UK operations
were negatively impacted by the competitive economic conditions and the
resulting impact on the IT services market, particularly the SAP market. As a
result, the Company executed a plan to reorganize and downsize the Company's
operations in the UK during late 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 increased by 94.7%, or $6.0 million, from $6.4 million in
2000 to $12.4 million in 2001. The increase was attributable primarily to the
growth in professional consulting
- 40 -
services delivered through the Advanced Development Center and application
management services delivered through the Global Support Center.
Operating Income (Loss). The following table displays operating income
(loss) by reportable segment (in thousands).
YEAR ENDED DECEMBER 31
------------------------------
2001 2000
--------- ---------
United States........................ $(6,991) $(6,228)
Asia-Pacific......................... 368 81
Europe............................... (8,495) (1,741)
India................................ 3,078 91
-------- -------
Total................................ $(12,040) $(7,797)
======== =======
The US operating loss increased by 12.3%, or $763,000, from $6.2 million in
2000 to $7.0 million in 2001. The increase in the operating loss was
attributable primarily to the $8.2 million of restructuring and other special
charges recorded in 2001. The restructuring and other special charges were
related primarily to the ASP business and the termination of a project to build
and operate a technology development and support center in Puerto Rico.
The charges associated with the ASP business included a write-down of
approximately $6.1 million in purchased computer software and $469,000 in fixed
assets, as well as $215,000 in severance costs and $152,000 in exit costs. The
charges associated with the center in Puerto Rico resulted from the Company
foregoing reimbursement of $1.3 million in previously incurred operating costs
and fixed assets in exchange for the Government of Puerto Rico releasing the
Company from all future obligations associated with the project.
Excluding the $8.2 million of charges, the US operating position improved
by 119.2%, or $7.4 million, from an operating loss of $6.2 million in 2000 to
operating income of $1.2 million in 2001. This improvement was attributable
primarily to a $12.5 million reduction in selling, general and administrative
expenses to $19.3 million, or 26.7% of revenue, in 2001, compared with $31.8
million, or 40.9% of revenue, in 2000. In 2000, the Company invested
significantly in marketing and developing the application management services
business. Since late 2000, the Company has been focused on improving operating
efficiencies and controlling discretionary expenditures throughout the
organization to maintain a proper alignment with revenue.
The decline in selling, general and administrative expenses in 2001 was
partially offset by a decline in gross profit margin from 32.5% of revenue in
2000 to 31.8% of revenue in 2001. The decline in gross profit margin results
from competitive pricing pressures in the US market as well as a decrease in
consultant utilization rates.
APAC operating income increased by 354.3%, or $287,000, from $81,000 in
2000 to $368,000 in 2001. The increase was attributable primarily to an
improvement in operating performance in Australia (an increase of $644,000) and
Indonesia (an increase of $557,000), as both countries realized an improvement
in gross profit margins as consultant utilization improved. The increase was
partially offset by a decline in operating income in Japan (a decrease of
$941,000), as gross margins declined as a result of local market conditions.
- 41 -
Europe operating loss increased by 387.9%, or $6.8 million, from $1.7
million in 2000 to $8.5 million in 2001. The increase was attributable primarily
to an increase in the operating loss from the UK operations of $6.9 million,
while the Nordic operations remained relatively stable. The significant
operating loss in the UK resulted primarily from the restructuring program
initiated in the UK during late 2001 as well as competitive pricing pressures
and low consultant utilization. The UK restructuring costs, which totaled
approximately $5.1 million, included the write-down of certain intangible assets
and other long-lived assets, as well as severance costs and exit costs
associated with reducing employee headcount in the region.
India operating income increased by 3,282.4%, or $3.0 million, from $91,000
in 2000 to $3.1 million in 2001. The increase was attributable primarily to a
significant improvement in gross margins and selling, general and administrative
expenses as a percentage of revenue.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its operations primarily from cash flow generated from
operations and financing activities.
The Company had cash and cash equivalents of $1.6 million at December 31,
2002 and $2.1 million at December 31, 2001. The Company had working capital of
$12.4 million at December 31, 2002 and $18.2 million at December 31, 2001.
Cash used in continuing operating activities was $717,000 during the year
ended December 31, 2002, resulting primarily from the net loss of $8.5 million,
increases in accounts receivable of $6.1 million and other current assets of
$786,000 and decreases in accrued expenses and other liabilities of $743,000 and
accrued restructuring charges of $710,000. These amounts were partially offset
by non-cash depreciation and amortization of $3.7 million, the provision for
doubtful accounts of $443,000, SeraNova receivable impairment and other charges
of $8.4 million and increases in accounts payable of $2.1 million and accrued
payroll and related taxes of $1.1 million. The increase in accounts receivable
results from an increase in year-end billings, driven by escalating revenues.
The decrease in accrued restructuring charges results from payments under the
various restructuring programs. The increases in other current assets, accounts
payable and accrued payroll and related taxes and decrease in accrued expenses
and other liabilities result primarily from timing differences.
The Company invested $1.6 million, $3.1 million and $3.2 million in
computer equipment, internal-use computer software and office furniture and
fixtures in 2002, 2001 and 2000, respectively. The decrease in 2002 results from
concerted efforts by management to closely monitor and curtail capital
expenditures.
As discussed in Note 3 to the Consolidated Financial Statements, the
Company maintains a revolving credit facility with PNC Bank, N.A. (the "Bank").
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
- 42 -
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.
During 2002, the Company incurred charges related to the Company's
contested 2002 Annual Meeting of Shareholders ("Proxy Contest"). The Proxy
Contest charges included legal fees, proxy solicitation services and printing,
mailing and other costs. As a direct result of the Proxy Contest charges, the
Company was not in compliance with the EBITDA covenant as of June 30, 2002 and
September 30, 2002. In January 2003, 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 EBITDA covenant
defaults as of June 30, 2002 and September 30, 2002, (2) a modification to the
definitions of EBITDA, total stockholders equity and unconsolidated stockholders
equity (for purposes of computing related covenant compliance) to exclude Proxy
Contest charges of $464,000 for the quarter ended June 30, 2002 and $413,000 for
the quarter ended September 30, 2002 only, (3), a reduction in the minimum
EBITDA covenant for the fourth quarter and full year 2002 only, and (4) 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 $12.6 million of
the note due from SeraNova.
The Company was in compliance with all covenants as of December 31, 2002.
The Company expects to be able to comply with all financial covenants in 2003.
The Company's current revolving credit facility with PNC Bank, N.A. (the
"Bank") is due to expire on May 31, 2003. The Company has requested an extension
of the current agreement and believes that such extension will be granted on
terms substantially similar to the previous credit facility. However, there is
no assurance that the Company will be granted such an extension on acceptable
terms, if at all. Should the Company not be able to obtain the credit facility
extension with the Bank, the Company believes that it has the ability to obtain
another revolving credit facility, with substantially similar terms, from
another financial institution.
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 had recorded total accrued interest of $1.0 million as of
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. 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
- 43 -
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 the SeraNova Group. 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. The parties have completed the discovery process and
the Company has moved for summary judgment, which is scheduled to be heard by
the Court on April 4, 2003. 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
the SeraNova Group 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.
As discussed in Note 5 to the Consolidated Financial Statements, 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. 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, 2002 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 (including attorney's fees) plus
reimbursement of administrative fees, in favor of the Company and against the
SeraNova Group jointly and severally. In an action filed in the Superior Court
of New Jersey, the Court confirmed the $624,000 award, jointly and severally as
to the SeraNova Group, and issued a writ of execution against the SeraNova
Group's assets. The Sheriff of Middlesex County levied this writ of execution on
October 8, 2002 against a bank account held by Silverline Technologies, Inc. On
October 16, 2002, pursuant to this writ, the bank turned over $626,247 to the
Sheriff. On November 6, 2002 the Sheriff sent the funds to the Company's
attorneys and the funds were deposited into an attorney trust account on
- 44 -
November 8, 2002. On December 13, 2002, the Company commenced an action in the
Superior Court of New Jersey, Chancery Division, to recover additional amounts
due and owing from the SeraNova Group under the Arbitration Award and to
determine whether HSBC Bank USA ("HSBC"), a creditor of the SeraNova Group, has
priority to the funds levied upon by the Sheriff. On January 31, 2003, the Court
entered judgment in the Company's favor in the amount of $218,805, representing
the SeraNova Group's additional unpaid rent arrearages under the arbitration
award. On February 28, 2003, the Court entered judgment in the Company's favor
in the amount of $220,415, representing the Company's attorney's fees in
connection with the Company's efforts to enforce the SeraNova Group's
obligations under the arbitration award. On March 10, 2003, the Court ordered
HSBC to produce discovery proving its priority to the $626,247 being held in
trust. The Court is expected to rule on this issue on May 1, 2003. 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.
The Company is continuing to pursue its various legal options to obtain
payment from the SeraNova Group on the Note and outstanding lease obligations.
At the same time, the Company has also been periodically 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. However, the Company believed that the
liquidity issues plaguing the SeraNova Group required a reassessment of the
realizability of these outstanding amounts. Although no final resolution had
been reached, the Company believed that the substance of these discussions
provided 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 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.............. -- -- (361,000) (318,000) (679,000)
Non-cash items...................... (5,140,000) (1,257,000) -- -- (6,397,000)
------------- ------------ ------------- ------------ ------------
Accrued costs as of December 31,
2002 $ -- $ -- $ 1,140,000 $ 146,000 $ 1,286,000
============= ============ ============= ============ ============
In 2002, 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 charge of $1.5
million for certain lease exit costs. Such charge represents primarily an
accrued liability for 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. As of December 31, 2002,
$1.3 million of the liability remains outstanding, of which $1.0 million is
included in other long-term liabilities.
At December 31, 2002, the Company re-evaluated the realizability of the
carrying value of the Note, as well as any required change to the obligations
associated with the office space
- 45 -
costs. Based upon the current status of the negotiations with the SeraNova
Group, the Company determined that no change to the carrying value of the Note
or the recorded liability was appropriate as of December 31, 2002. However, if
the Company were to collect less than $4.0 million on the Note recorded as of
December 31, 2002, or incur additional obligations or costs, the SeraNova
receivable impairment and/or charges would be increased in future periods.
The Company's 2003 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.
The Company believes that its available 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.
During the first quarter of 2003, the Company has been actively evaluating
strategic alternatives related to its Asia-Pacific operations, as a result of
continuing operating underperformance and the resulting negative impact on cash
flows within the region. Although no definitive agreement has been executed, the
Company has been negotiating the divestiture of certain of its Asia-Pacific
entities to an unrelated third party. The divesture transaction would involve
the sale of stock of the Company's subsidiaries in Australia, Hong Kong, New
Zealand (including Indonesia) and Singapore (the "APAC Subsidiaries") in
exchange for a nominal ownership interest in a newly created company. The
Company plans on continuing to conduct negotiations with such unrelated third
party.
- 46 -
The following is summarized financial information for the APAC
Subsidiaries:
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
2002 2001 2000
------------------- ------------------- -------------------
Revenue............................. $ 7,029,000 $ 8,426,000 $ 7,372,000
Pre-tax income (loss)............... (976,000) 582,000 (715,000)
Income tax provision (benefit)...... 69,000 252,000 48,000
Income (loss) from operations....... (1,045,000) 330,000 (763,000)
December 31, 2002 December 31, 2001
----------------- -----------------
Current assets...................... $ 3,136,000 $ 2,677,000
Total assets........................ 3,811,000 3,251,000
Current liabilities................. 6,042,000 4,456,000
Total liabilities................... 6,042,000 4,460,000
Net assets of operations............ (2,231,000) (1,209,000)
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
The following tables summarize the Company's contractual obligations and
other commercial commitments as of December 31, 2002:
PAYMENTS DUE BY PERIOD
-----------------------------------------------------------------------------
DESCRIPTION OF LESS THAN 1 - 3 3 - 5 MORE THAN
- --------------- --------- ----- ----- ---------
CONTRACTUAL OBLIGATION TOTAL 1 YEAR YEARS YEARS 5 YEARS
- ---------------------- ----- ------ ----- ----- -------
Revolving Credit Facility $6,059,000 $6,059,000 $ -- $ -- $ --
Capital Lease Obligations 378,000 315,000 63,000 -- --
Operating Lease Obligations 9,451,000 2,227,000 3,743,000 2,586,000 895,000
Other Long-Term Liabilities 1,028,000 213,000 426,000 389,000 --
----------- ----------- ---------- ---------- ---------
Total Contractual Obligations $16,916,000 $ 8,814,000 $4,232,000 $2,975,000 $895,000
=========== =========== ========== ========== ========
The Company uses its $20.0 million revolving credit facility with PNC Bank
to fund the working capital needs of the business; therefore, the outstanding
borrowings under the credit facility fluctuate accordingly. The credit facility
is collateralized by substantially all of the assets of the United States based
operations. The maximum borrowing availability under the line of credit is based
upon a percentage of eligible billed and unbilled accounts receivable, as
defined. As of December 31, 2002, the Company had outstanding borrowings under
the credit facility of $6.1 million. The Company estimates undrawn availability
under the credit facility to be $7.4 million as of December 31, 2002.
The Company's current revolving credit facility with PNC Bank, N.A. (the
"Bank") is due to expire on May 31, 2003. The Company has requested an extension
of the current agreement and believes that such extension will be granted on
terms substantially similar to the
- 47 -
previous credit facility. However, there is no assurance that the Company will
be granted such an extension on acceptable terms, if at all. Should the Company
not be able to obtain the credit facility extension with the Bank, the Company
believes that it has the ability to obtain another revolving credit facility,
with substantially similar terms, from another financial institution.
The Company has also entered into various contractual arrangements to
obtain certain office space, office equipment and vehicles under capital and
operating leases.
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.
On November 7, 2002, the Company received another letter from 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 January 28, 2003, 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 180 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 180-day compliance period. A delisting from the Nasdaq National
Market could severely and adversely affect the market liquidity of the Company's
Common Stock.
RELATED PARTY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
Nagarjun Valluripalli, the Chief Executive Officer and a Director of the
Company, Rajkumar Koneru, a former Director of the Company, and Ashok Pandey, an
affiliate of the Company, were the sole shareholders of Intelligroup Asia
Private Ltd. ("Intelligroup Asia"). Historically, Intelligroup Asia operated the
Advanced Development Center in Hyderabad, India for the sole and exclusive use
and benefit of the Company and all contracts and commercial arrangements of
Intelligroup Asia were subject to prior approval by the Company. The Company and
Messrs. Valluripalli, Koneru and Pandey entered into an agreement pursuant to
which the Company would, subject to necessary Indian government approvals,
acquire the shares of Intelligroup Asia for nominal consideration. Such Indian
government approvals were received in September 1997. As a result, the Company
currently owns 99.8% of the shares of Intelligroup Asia.
The Board of Directors of the Company has adopted a policy requiring that
any future transactions between the Company and its officers, directors,
principal shareholders and their affiliates be on terms no less favorable to the
Company than could be obtained from unrelated
- 48 -
third parties. In addition, New Jersey law requires that any such transactions
be approved by a majority of the disinterested members of the Company's Board of
Directors.
During 2002, the Company provided services to FirePond, which produced
revenues for the Company totaling approximately $329,000. A member of the
Company's Board of Directors, Klaus P. Besier, serves as the Chief Executive
Officer of FirePond. The Company provided implementation services to various end
clients, as a sub-contractor to FirePond. Services were priced at rates
comparable to other similar sub-contracting arrangements in which the Company
regularly participates.
During 2002, the Company provided implementation services to McCann
Erickson, which produced revenues for the Company totaling approximately
$242,000. A member of the Company's Board of Directors, Nic Di Iorio, serves as
the Chief Technology Officer of McCann Erickson. Services were priced at rates
comparable to other similar arrangements in which the Company regularly
participates.
RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2001, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 143, "Accounting
for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting
and reporting obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective for
fiscal years beginning after June 14, 2002. The Company has evaluated the impact
of the adoption of SFAS No. 143, which is effective for the Company as of
January 1, 2003, and does not believe it will have a material impact on the
Company's consolidated financial position or consolidated results of operations.
In June 2002, 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 consolidated financial position or consolidated results
of operations.
In November 2002, the FASB issued Interpretation ("FIN") No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN No. 45 expands the
disclosures made by a guarantor in its financial statements about its
obligations under certain guarantees and requires the guarantor to recognize a
liability (with a corresponding reduction in revenue) for the fair value of the
obligation assumed under certain guarantees. FIN No. 45 clarifies the
requirements of SFAS No.5, "Accounting for Contingencies," relating to
guarantees. In general, FIN No. 45 applies to contracts or indemnification
agreements that contingently require the guarantor to make payments to the
guaranteed party based on changes in a specified interest rate, security price,
foreign exchange rate or other variable that is related to an asset, liability,
or equity security of the guaranteed party, or failure of another party to
perform under an obligating agreement
- 49 -
(performance guarantees). Certain guarantee contracts are excluded from both the
disclosure and recognition requirements of this interpretation, including, among
others, guarantees relating to employee compensation, residual value guarantees
under capital lease arrangements, commercial letters of credit, loan
commitments, subordinated interests in a special purpose entity and guarantees
of a company's own future performance. Other guarantees are subject to the
disclosure requirements of FIN No. 45 but not to the recognition provisions and
include, among others, a guarantee accounted for as a derivative instrument
under SFAS No. 133, and a guarantee covering product performance, not product
price. The disclosure requirements of FIN No. 45 are effective for the Company
as of December 31, 2002, and require disclosure of the nature of the guarantee,
the maximum potential amount of future payments that the guarantor could be
required to make under the guarantee, and the current amount of the liability,
if any, for the guarantor's obligations under the guarantee. The recognition
requirements of FIN No. 45 are to be applied prospectively to guarantees issued
or modified after December 31, 2002. The Company has evaluated the impact of the
adoption of FIN No. 45, and does not believe it will have a material impact on
the Company's consolidated financial position or consolidated results of
operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value-based method of accounting
for stock-based employee compensation ("Transition Provisions"). In addition,
SFAS No. 148 amends the disclosure requirements of Accounting Principal Board
("APB") Opinion No. 28, "Interim Financial Reporting," to require pro forma
disclosure in interim financial statements by companies that elect to account
for stock-based compensation using the intrinsic value method prescribed in APB
Opinion No. 25 ("Disclosure Provisions"). The Transition Provisions of SFAS No.
148 are effective for financial statements for fiscal years ending after
December 31, 2002. The Company continues to use the intrinsic value method of
accounting for stock-based compensation. As a result, the Transition Provisions
do not have an effect on the Company's consolidated financial statements. The
Company has adopted the Disclosure Provisions of SFAS No. 148.
EUROPEAN MONETARY UNION (EMU)
The Company currently only operates in certain European countries that do
not participate in the EMU. Therefore, the Company believes that the recent
conversion to the euro did not have a material financial impact on its
operations in Europe. However, the Company would re-evaluate the financial
impact of the conversion to the euro on its operations should those countries in
which the Company operates decide to join the EMU.
- 50 -
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Although the Company cannot accurately determine the precise effect thereof
on its operations, it does not believe inflation, currency fluctuations or
interest rate changes have historically had a material effect on its revenues or
results of operations. Any significant effects of inflation, currency
fluctuations and changes in interest rates on the economies of the United
States, Europe or Asia Pacific could adversely impact the Company's revenues and
results of operations in the future. If there is a material adverse change in
the relationship between European currencies and/or Asian currencies and the
United States Dollar, such change would adversely affect the result of the
Company's European and/or Asia Pacific operations as reflected in the Company's
financial statements. The Company has not hedged its exposure with respect to
this currency risk, and does not expect to do so in the future, since it does
not believe that it is practicable for it to do so at a reasonable cost.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required to be filed
pursuant to this Item 8 are included in this Annual Report on Form 10-K. A list
of the financial statements and supplementary data filed herewith is found at
"Item 15. Exhibits, List, and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
In June 2002, after a review of the 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
qualifications 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.
- 51 -
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
All of the persons whose names and biographies appear below are at present
Directors of the Company. Nominees for election to the Company's Board of
Directors at the Company's Annual Meeting of Shareholders have not yet been
determined.
The current members of the Board of Directors are:
SERVED AS A
NAME AGE DIRECTOR SINCE POSITIONS WITH THE COMPANY
---- --- -------------- --------------------------
Nagarjun Valluripalli...... 34 1994 Chairman of the Board,
President, Chief Executive
Officer and Director
Klaus P. Besier............ 51 1996 Director
Dennis McIntosh............ 47 2000 Director
Alexander Graham Wilson.... 54 2002 Director
Prabhas Panigrahi.......... 43 2002 Director
Nic Di Iorio............... 43 2002 Director
The principal occupations and business experience, for at least the past
five years, of each Director and nominee is as follows:
Nagarjun Valluripalli joined the Company in March 1994 and currently serves
as Chairman of the Board, President, Chief Executive Officer and as a Director
of the Company. From January 4, 2000 until December 15, 2000, Mr. Valluripalli
served as Co-Chief Executive Officer. From March 1994 through October 1997, Mr.
Valluripalli served as an Executive Vice President of the Company. In May 1993,
Mr. Valluripalli co-founded Oxford Systems, Inc., a systems integration company
("Oxford"). In March 1994, Mr. Valluripalli and his co-founder sold all of the
issued and outstanding capital stock of Oxford to the Company. Prior to founding
Oxford, from 1990, Mr. Valluripalli was marketing manager for VJ Infosystems, a
software training and services company. From September 9, 1999 until March 8,
2001, Mr. Valluripalli also served on the Board of Directors of SeraNova, Inc.,
formerly a majority-owned subsidiary of the Company spun off from the Company in
a tax-free distribution to its shareholders on July 5, 2000.
Klaus P. Besier served as a Director of the Company from December 1996
until his resignation in April 1999. Mr. Besier rejoined the Board upon his
election by the Board in May 1999. Since July 1997, Mr. Besier has served as
President, Chief Executive Officer and a Director of FirePond, Inc., a
publicly-traded provider of e-business solutions. From 1996 to 1997, Mr. Besier
was Chairman and Chief Executive Officer of Primix Solutions. From 1992 to
- 52 -
1996, Mr. Besier served as Chief Executive Officer and President of SAP America,
Inc., a subsidiary of SAP AG and a leading provider of client/service business
application solutions software. Prior to joining SAP America, Inc., Mr. Besier
was Corporate Vice President and general manager of a subsidiary of Hoechst
Celanese.
Dennis McIntosh was elected to the Board of Directors of the Company in
February 2000. Since April 1999, Mr. McIntosh has served as Executive Vice
President of SBLI Mutual Life Insurance Company of New York, Inc., and has
fifteen years of business experience in insurance operations and technology,
financial management and consulting. From March 1997 until April 1999, Mr.
McIntosh served as Senior Manager at Ernst & Young Consulting, LLP. Prior to
that, from September 1993 until March 1997, Mr. McIntosh served as CIO & Vice
President of Operations at Blue Cross and Blue Shield of Massachusetts. From May
1986 to September 1993, Mr. McIntosh served as Audit Director for Reed Elsevier
Corporation. From May 1985 to May 1986, Mr. McIntosh served as Audit Manager for
Chelsea Industries. From May 1981 to May 1985 he served as an auditor for GTE
Corporation. From May 1981 to May 1983, Mr. McIntosh served as an auditor at
Coopers and Lybrand. Mr. McIntosh received a Masters of Business Administration
degree from The University of Connecticut in 1981 and is a certified public
accountant.
Alexander Graham Wilson was elected to the Board of Directors in June 2002.
He currently serves as a Director of Xendra Limited, a Wellington, New Zealand
company, and has been pursuing private business interests including several IT
management and consulting assignments since 1998. Since 1999, Mr. Wilson has
also been a member of the Technology New Zealand Advisory Committee for the
Foundation of Research, Science and Technology. From 1984 to 1998, Mr. Wilson
worked for Azimuth Consulting Limited, an independent technology consultant
company located in Wellington, New Zealand, which he co-founded in 1983 and
which was acquired in late 1998 by Intelligroup, Inc. From 1992 to 1997, he was
a member of the Executive Committee of the Information Technology Association of
New Zealand. From 1994 until 1995 Mr. Wilson was a Director of Public Record
Access New Zealand Limited, a joint venture between Telecom New Zealand, Unisys
New Zealand and Azimuth. Mr. Wilson received a degree with honors from Auckland
University in New Zealand and did post-graduate work at Monash University in
Melbourne, Australia.
Prabhas Panigrahi was elected to the Board of Directors in June 2002. Mr.
Panigrahi currently serves as a Director of Research at Kevin Dann & Partners, a
New York based investment banking firm. From August 2001 until March 2002 Mr.
Panigrahi served as Partner, Managing Director and Head of Research at Brask and
Company, a European investment bank, based in London, where he covered European
technology strategy and software and services sectors. From July 1998 to August
2001, Mr. Panigrahi worked as Senior Vice President and Director in equity
research for Dresdner Kleinwort Wasserstein in New York and London covering
multiple sectors, including the global technology sector. Prior to that, from
June 1996 to July 1998, Mr. Panigrahi worked at Credit Suisse First Boston in
New York as Vice President in equity research and from 1992 to 1996 with Bankers
Trust Company (Deutsche Bank) in New York as an Associate in corporate finance
and mergers and acquisition departments. Prior to his investment-banking career,
from 1984-1989 Mr. Panigrahi worked with McDermott, Inc. in Houston, Texas as a
Professional Engineer. As an analyst, Institutional Investors, Reuters, Latin
Finance, Global Investors and Greenwich polls have ranked Mr. Panigrahi. Mr.
Panigrahi has a
- 53 -
Bachelor of Technology (with Honors) degree in engineering from the Indian
Institute of Technology, a Masters degree in Engineering from Texas A&M
University, a Masters of Business Administration in International Business from
Katholieke Universiteit, Belgium and a Masters of Business Administration in
Finance from the University of Chicago.
Nic Di Iorio was elected to the Board of Directors in July 2002. Mr. Di
Iorio joined McCann-Erickson Worldwide in April 1995 as Senior Vice President,
Director of Information Technology, with overall responsibilities for
McCann-Erickson's worldwide IT strategy and implementation. Mr. Di Iorio
emphasizes the use of technology to enhance the quality of McCann's product,
business development and management decision-making. He sets overall direction
and strategies on IT, working with management from every level of professional
and administrative discipline. Additionally, Mr. Di Iorio heads MCT Inc., a
wholly owned subsidiary of the McCann-Erickson WorldGroup, that specializes in
general and industry-specific IT services. MCT operates as an applications
services provider and delivers financial, production and media management
systems, and collaborative/strategic Intranet/Extranet web tools worldwide.
Prior to joining McCann, Mr. Di Iorio spent four years at Young & Rubicam as
Vice President, Director of Global Network Services, responsible for the
worldwide strategy and implementation of its IT infrastructure. Prior to that,
he spent ten years in Research and Development organizations at GTE and AT&T
Bell Laboratories working on new technologies in the area of distributed
systems, data networking, security and telecommunications. He held various
leadership roles in the ISO and CCITT international standards committees, where
he authored two international standards and chaired two subcommittees. He also
participated in the Internet's IETF committee. Mr. Di Iorio holds Bachelor and
Master degrees in Computer Science, has published in both trade and professional
publications and has been a key speaker at trade and professional conferences.
All Directors hold office until the next Annual Meeting of Shareholders and
until their successors are duly elected and qualified. There are no family
relationships among any of the executive officers, Directors and key employees
of the Company.
COMPENSATION OF DIRECTORS
On August 8, 2002, the Company's Board of Directors (the "Board") amended
its policy to compensate each of its non-employee Directors. Pursuant to the
Company's amended policy, each non-employee director will receive the following
cash payments and option grants: (i) $30,000 annual fee to be paid in arrears
after the Company's Annual Meeting of Shareholders (the "Annual Meeting"); (ii)
$3,000 per each meeting of the Board attended; (iii) $2,000 per each meeting of
the Audit Committee attended; (iv) $1,000 per each meeting of any other
committee of the Board attended; and (v) an annual stock option grant of 10,000
shares of the Company's Common Stock to be granted in arrears after the Annual
Meeting. The option grant is subject to the Company's standard vesting program.
With respect to Directors who serve less than one year, the $30,000 annual fee
is pro rated as to the number of Board meetings held during the year for which
such compensation is being paid. Other than Messrs. Besier, McIntosh, Wilson,
Panigrahi and Di Iorio, who are compensated pursuant to such policy, Directors
do not otherwise receive cash compensation pursuant to such policy. The Company
reimburses Directors for reasonable and necessary expenses incurred in
connection with attendance at meetings of the Board.
- 54 -
In addition, on June 3, 1996, the Board of Directors approved and the
shareholders adopted the Company's 1996 Non-Employee Director Stock Option Plan
(the "Director Plan"), which became effective on July 12, 1996. The Director
Plan provides for the grant of options to purchase a maximum of 140,000 shares
of Common Stock of the Company to non-employee Directors of the Company. The
Board of Directors administers the Director Plan.
Each person who was a Director of the Company on the effective date of the
Company's initial public offering or became or will become a Director of the
Company thereafter, and who is not also an employee or officer of the Company,
was or shall be granted, on the date of such initial public offering or the date
on which he or she became or becomes a Director, whichever is later, an option
to purchase 20,000 shares of Common Stock, at an exercise price per share equal
to the then fair market value of the shares. No subsequent grants are permitted
to such individuals under the Director Plan. All options become exercisable in
five equal annual installments commencing one year after the date of grant
provided that the optionee then remains a Director at the time of vesting of the
installments. The right to exercise annual installments of options will be
reduced proportionately based on the optionee's actual attendance at Directors'
meetings if the optionee fails to attend at least 80% of the Board of Directors'
meetings held in any calendar year. The term of each option will be for a period
of ten years from the date of grant, unless sooner terminated in accordance with
the Director Plan. Options may not be transferred except by will or by the laws
of descent and distribution or pursuant to a domestic relations order and are
exercisable to the extent vested at any time prior to the scheduled expiration
date of the option. The Director Plan terminates on the earlier of May 31, 2006
or at such time as all shares of Common Stock currently or hereafter reserved
for issuance shall have been issued.
Members of the Board of Directors, including non-employee Directors, also
are eligible to receive option grants pursuant to the 1996 Plan.
On June 6, 2002, each of Messrs. Wilson and Panigrahi received options to
purchase 20,000 shares of the Company's Common Stock under the Company's
Director Plan at an exercise price of $1.62 per share, the fair market value of
the Company's Common Stock at the date of grant.
On July 25, 2002, Mr. Di Iorio received options to purchase 20,000 shares
of the Company's Common Stock under the Company's Director Plan at an exercise
price of $1.09 per share, the fair market value of the Company's Common Stock at
the date of grant.
On August 8, 2002, each of Messrs. Besier and McIntosh received options to
purchase 10,000 shares of the Company's Common Stock under the Company's 1996
Stock Plan at an exercise price of $1.15 per share, the fair market value of the
Company's Common Stock at the date of grant.
- 55 -
EXECUTIVE OFFICERS
The following table identifies the current executive officers of the
Company:
CAPACITIES IN IN CURRENT
NAME AGE WHICH SERVED POSITION SINCE
- ---- --- ------------- --------------
Nagarjun Valluripalli.... 34 Chairman of the Board, 2000
President, Chief Executive
Officer and Director
Nicholas Visco(1)........ 43 Senior Vice 2000
President-Finance &
Administration, Chief
Financial Officer,
Treasurer and Secretary
- -------------------
(1) Nicholas Visco joined the Company in July 1998 and currently serves as
Senior Vice President - Finance & Administration, Chief Financial Officer,
Treasurer and Secretary. Mr. Visco was appointed Vice President-Finance and
Chief Financial Officer in October 1999. Additionally, Mr. Visco was
appointed Treasurer and Secretary in November 1999. From July 1998 through
September 1999, Mr. Visco served as the Company's Corporate Controller.
Prior to joining the Company, from September 1993 until July 1998, Mr.
Visco served as Director of Financial Planning and Corporate Controller for
Xpedite Systems, Inc., a provider of enhanced messaging services. Mr. Visco
received his undergraduate degree from Rutgers University in Economics and
Accounting and is a Certified Public Accountant.
None of the Company's executive officers is related to any other executive
officer or to any Director of the Company. Executive officers of the Company are
elected annually by the Board of Directors and serve until their successors are
duly elected and qualified.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's Directors, officers and shareholders who
beneficially own more than 10% of any class of equity securities of the Company
registered pursuant to Section 12 of the Exchange Act (collectively, the
"Reporting Persons") to file initial statements of beneficial ownership of
securities and statements of changes in beneficial ownership of securities with
respect to the Company's equity securities with the Securities and Exchange
Commission (the "SEC"). All Reporting Persons are required by SEC regulation to
furnish the Company with copies of all reports that such Reporting Persons file
with the SEC pursuant to Section 16(a). Except as set forth below, based solely
on the Company's review of the copies of such forms received by the Company and
upon written representations of the Company's Reporting Persons received by the
Company, the Company believes that there has been compliance with all Section
16(a) filing requirements applicable to such Reporting Persons.
Each of Prabhas Panigrahi and Alexander Graham Wilson filed a Form 3 on
June 18, 2002. Such Form 3 should have been filed no later than June 17, 2002.
- 56 -
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY OF COMPENSATION
The following Summary Compensation Table sets forth information concerning
compensation for services in all capacities awarded to, earned by or paid to
each person who served as the Company's Chief Executive Officer at any time
during 2002 and each other executive officer of the Company whose aggregate cash
compensation exceeded $100,000 (collectively, the "Named Executives") during the
years ended December 31, 2000, 2001 and 2002.
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------
LONG-TERM
ANNUAL COMPENSATION COMPEN-
SATION
AWARDS
----------------------------------------------------------------------
OTHER
ANNUAL SECURITIES ALL OTHER
COMPEN- UNDERLYING COMPEN-
NAME AND PRINCIPAL YEAR SALARY BONUS SATION OPTIONS SATION
POSITION ($) ($) ($) (#) ($)
(a) (b) (c) (d) (e)(1) (g) (i)
- ------------------------------------------------------------------------------------------------------------------
Nagarjun Valluripalli........... 2002 350,000 -- -- 1,050,000 10,202(3)
Chairman of the Board, 2001 350,000 200,000(2) -- -- 10,202(3)
President, and Chief 2000 349,992 -- -- 300,000(4) 10,202(3)
Executive Officer
Nicholas Visco.................. 2002 200,000 -- -- 25,000 --
Senior Vice President - 2001 200,000 75,000(5) -- -- --
Finance & Administration, 2000 158,333 50,000(5) -- 117,500(6) --
Chief Financial Officer,
Treasurer and Secretary
- ------------------------------------------------------------------------------------------------------------------
- ----------
(1) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
have been omitted in those instances where such perquisites and other
personal benefits constituted less than the lesser of $50,000 or 10% of the
total annual salary and bonus for the Named Executive for the fiscal year.
(2) Represents a bonus for the full year 2001, which was approved by the
Company's Compensation Committee in March 2002. A $60,000 compensation
advance provided to Mr. Valluripalli in May 2001 was offset against such
bonus. The balance of such bonus was paid in August 2002.
- 57 -
(3) Represents the value of insurance premiums paid by the Company with respect
to term and whole life insurance for the benefit of the Named Executive.
(4) Represents stock options granted during fiscal year 1999 and which were
outstanding as of July 5, 2000, the exercise price of which the Company
adjusted in 2000 to reflect the impact of the spin-off by the Company of
SeraNova, Inc.
(5) Mr. Visco earned a bonus of $75,000 and $50,000 for the fiscal years 2000
and 1999, respectively. Such bonuses were paid in 2001 and 2000,
respectively.
(6) Represents stock options previously granted to Mr. Visco during fiscal
1998, 1999 and 2000 and which were outstanding as of July 5, 2000, the
exercise price of which the Company adjusted in 2000 to reflect the impact
of the spin-off by the Company of SeraNova, Inc.
OPTION GRANTS IN 2002
The following table sets forth information concerning individual grants of
stock options made pursuant to the Company's 1996 Plan during 2002 to each of
the Named Executives. The Company has never granted any stock appreciation
rights.
OPTION GRANTS IN LAST FISCAL YEAR
- -------------------------------------------------------------------------------------------------------------
Individual Grants
- -------------------------------------------------------------------------------------------------------------
Number of Percent of Potential Realizable
Securities Total Options Value At Assumed
Underlying Granted to Annual Rates of Stock
Name Options Employees in Exercise Price Appreciation For
Granted Fiscal Year(2) or Base Expiration Date Option Term(3)
Price
(#) (1) ($/SH) 5%($) 10%($)
(a) (b) (c) (d) (e) (f) (g)
- ---------------------- -------------- --------------- ----------- ------------------ ----------- ------------
Nagarjun Valluripalli.. 750,000 67.9% 0.90 9/22/12 424,508 1,075,748
300,000 27.1% 0.90 9/22/12 169,803 430,299
Nicholas Visco......... 25,000 2.3% 1.07 2/7/12 16,823 42,631
- ---------
(1) Such options were granted pursuant to the Company's 1996 Plan. The 1996
Plan was adopted by the Board of Directors and approved by the shareholders
of the Company on June 3, 1996, and became effective on July 12, 1996. A
total of 5,200,000 shares are reserved for issuance upon the exercise of
options and/or stock purchase rights granted under the 1996 Plan, 3,962,034
of which have been granted as of December 31, 2002. Those eligible to
receive stock option grants or stock purchase rights under the 1996 Plan
include employees, non-employee Directors and consultants. The Compensation
Committee of the Board of Directors of the Company administers the 1996
Plan. Subject to the provisions of the 1996 Plan, the administrator of the
1996 Plan has the discretion to
- 58 -
determine the optionees and/or grantees, the type of options to be granted
(incentive stock options ("ISOs") or non-qualified stock options
("NQSOs")), the vesting provisions, the terms of the grants and such other
related provisions as are consistent with the 1996 Plan. The exercise price
of an ISO may not be less than the fair market value per share of the
Common Stock on the date of grant or, in the case of an optionee who
beneficially owns 10% or more of the outstanding capital stock of the
Company, not less than 110% of the fair market value per share on the date
of grant. The exercise price of a NQSO may not be less than 85% of the fair
market value per share of the Common Stock on the date of grant or, in the
case of an optionee who beneficially owns 10% or more of the outstanding
capital stock of the Company, not less than 110% of the fair market value
per share on the date of grant. The purchase price of shares issued
pursuant to stock purchase rights may not be less than 50% of the fair
market value of such shares as of the offer date of such rights. The
options terminate not more than ten years from the date of grant, subject
to earlier termination on the optionee's death, disability or termination
of employment with the Company, but provide that the term of any options
granted to a holder of more than 10% of the outstanding shares of capital
stock may be no longer than five years. Options are not assignable or
otherwise transferable except by will or the laws of descent and
distribution. In the event of a merger or consolidation of the Company with
or into another corporation or the sale of all or substantially all of the
Company's assets in which the successor corporation does not assume
outstanding options or issue equivalent options, the Board of Directors of
the Company is required to provide accelerated vesting of outstanding
options. The 1996 Plan terminates on July 11, 2006 unless sooner terminated
by the Board of Directors.
(2) Based on an aggregate of 1,105,000 options granted to employees in 2002,
including options granted to the Named Executives.
(3) Based on a grant date fair market value of $0.90 for the grants to Mr.
Valluripalli and $1.07 for the grant to Mr. Visco.
- 59 -
AGGREGATED OPTION EXERCISES IN FISCAL 2002 AND YEAR-END OPTION VALUES
The following table sets forth information concerning each exercise of
options during 2002 by each of the Named Executives and the year-end number and
value of unexercised options held by each of the Named Executives.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
- --------------------------------------------------------------------------------------------
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL FISCAL
SHARES YEAR-END YEAR-END
ACQUIRED ON VALUE (#) ($)(1)
NAME EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
(#) ($) UNEXERCISABLE UNEXERCISABLE
(a) (b) (c) (d) (e)
- --------------------------------------------------------------------------------------------
Nagarjun Valluripalli... -- -- 225,000/ -- /
1,125,000 $94,500
Nicholas Visco.......... -- -- 105,000/ -- / --
37,500
- --------------
(1) Based on a year-end fair market value of the underlying securities equal to
$0.99 less the exercise price for such shares.
EMPLOYMENT AGREEMENTS, CHANGE-IN-CONTROL AGREEMENTS, INDEMNIFICATION AGREEMENTS,
NON-COMPETITION, NON-DISCLOSURE AND NON-SOLICITATION AGREEMENTS
Mr. Valluripalli entered into a two-year employment agreement with the
Company commencing on September 20, 2002. Pursuant to the terms of such
agreement, Mr. Valluripalli is entitled to, among other things, (i) an annual
base salary of $350,000; (ii) a potential annual bonus based upon meeting and
exceeding the Company's annual budget approved by the Company's Board of
Directors for pre-tax income; (iii) continuation of base salary payments for a
fifteen (15) month period and reimbursement for medical benefits pursuant to an
election under COBRA in the event of the Company's termination of Mr.
Valluripalli's employment with the Company without cause. In addition to the
provisions of such agreement requiring Mr. Valluripalli to maintain the
confidentiality of the Company's proprietary information and assign inventions
to the Company, Mr. Valluripalli has agreed that during the term of his
employment and for a period of fifteen (15) months following the termination of
his employment with the Company, he shall not, among other things, (i) interfere
with the Company's customer relationships or (ii) solicit the Company's
employees, executives and affiliates. In the event that Mr. Valluripalli's
employment is terminated during the period beginning one (1) month before, and
ending twelve (12) months after, a Change in Control (as such term is defined in
the
- 60 -
Employment Agreement), then (i) Mr. Valluripalli shall receive continuation of
base salary payments for a fifteen (15) month period and reimbursement for
medical benefits pursuant to an election under COBRA; (ii) the non-competition
restrictions, including the restrictions that Mr. Valluripalli not solicit the
Company's customers or solicit the Company's employees, executives and
affiliates shall lapse; and (iii) the unvested portion of any stock options
granted by the Company to Mr. Valluripalli shall vest in full and become
exercisable.
On November 4, 1998, Mr. Visco entered into a change-in-control agreement
with the Company. Mr. Visco entered into an employment agreement with the
Company commencing October 1, 1999, which, in addition to terms of employment,
amended certain provisions of his change-in-control agreement. Pursuant to his
change-in-control agreement, as amended, if Mr. Visco's employment is terminated
during the three-month period before or during the one-year period after a
Change-in-Control (as defined therein) then Mr. Visco is entitled to, among
other things, (i) twelve times his regular monthly salary minus the number of
months since the change-in-control, (ii) the Company's cost of the then
available health insurance benefits for a period of twenty-four (24) months and
(iii) eighty (80%) percent of the unvested portion of any stock options granted
by the Company to Mr. Visco shall vest in full and become immediately
exercisable. Such employment agreement, as amended on November 1, 2000, is
terminable at will by either party upon 30 days notice. Pursuant to the terms of
such agreement, Mr. Visco is entitled to, among other things, (i) an annual base
salary of $200,000; (ii) a potential annual bonus of 50% of such base salary;
and (iii) continuation of base salary payments for a twelve (12) month period
and a pro-rata bonus payment in the event of the Company's termination of Mr.
Visco's employment with the Company without cause. In addition to the provisions
of such agreement requiring Mr. Visco to maintain the confidentiality of the
Company's proprietary information and assign inventions to the Company, Mr.
Visco has agreed that during the term of his employment and for a period of one
year following the termination of his employment with the Company, he shall not,
among other things, (i) interfere with the Company's customer relationships or
(ii) solicit the Company's employees, executives and affiliates.
In addition to the foregoing, the Company has executed indemnification
agreements with each of its executive officers and Directors pursuant to which
the Company has agreed to indemnify such party to the full extent permitted by
law, subject to certain exceptions, if such party becomes subject to an action
because such party is a Director, officer, employee, agent or fiduciary of the
Company.
Substantially all of the Company's employees have agreed, pursuant to
written agreement, not to compete with the Company, not to disclose Company
information and not to solicit Company employees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Messrs. Besier, McIntosh
and Panigrahi. Messrs. Besier, McIntosh and Panigrahi have not served as either
an officer or employee of the Company or any of its subsidiaries at any time.
Mr. Besier serves as the Chief Executive Officer of FirePond, Inc. (formerly
Clear With Computers, Inc.) ("FirePond"). During 2002, the Company provided
services to FirePond, which produced revenues for the Company totaling
approximately $329,000. The Company also provided implementation services to
- 61 -
various end clients, as a sub-contractor to FirePond. Services were priced at
rates comparable to other similar sub-contracting arrangements in which the
Company regularly participates. There are no, and during 2002 there were no,
Compensation Committee Interlocks.
PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on the
Company's Common Stock with the cumulative total return on the Nasdaq Market
Index and Peer Group Index (capitalization weighted) for the period beginning on
December 31, 1997 and ending on the last day of the Company's last completed
fiscal year. The stock performance shown on the graph below is not indicative of
future price performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN (1)(2)
AMONG INTELLIGROUP, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND A PEER GROUP (3)
[GRAPH INSERTED HERE]
12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02
-------- -------- -------- -------- -------- --------
Intelligroup, Inc.......... $100.00 $ 93.46 $129.41 $ 4.58 $ 5.12 $ 5.18
Nasdaq Market Index........ $100.00 $140.99 $261.48 $157.42 $124.89 $ 86.34
Peer Group Index
(Capitalization Weighted).. $100.00 $117.59 $236.60 $ 38.55 $ 32.79 $ 12.97
- -----------
(1) Graph assumes $100 invested on December 31, 1997 in the Company's Common
Stock, the Nasdaq Composite Index and the Peer Group Index (capitalization
weighted).
(2) Cumulative total return assumes reinvestment of dividends.
(3) The Company has constructed a Peer Group Index of other information
technology consulting firms consisting of Sapient Corporation, Technology
Solutions Company, Answer Think Consulting Group, Inc., Igate Capital
Corporation, Covansys Corporation (formerly known as Complete Business
Solutions, Inc.) and Computer Horizons Corp.
- 62 -
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee has furnished the following report:
The Company's executive compensation policy is designed to attract and
retain highly qualified individuals for its executive positions and to provide
incentives for such executives to achieve maximum Company performance by
aligning the executives' interest with that of shareholders by basing a portion
of compensation on corporate performance.
Some of the Named Executives are subject to employment agreements, which
establish salaries and other terms of employment. The Compensation Committee,
however, generally reviews and approves base salary levels for executive
officers of the Company at or about the start of the fiscal year and approves
actual bonuses after the end of the fiscal year based upon Company and
individual performance. The Compensation Committee also administers the
Company's 1996 Plan.
The Company's executive officer compensation program is comprised of base
salary, discretionary and contractual annual cash bonuses, stock options and
various other benefits, including medical insurance and a 401(k) Plan, which are
generally available to all employees of the Company.
Salaries, whether established pursuant to contract or otherwise, are
established in accordance with industry standards through review of publicly
available information concerning the compensation of officers of comparable
companies. Consideration is also given to relative responsibility, seniority,
individual experience and performance. Salary increases are generally made based
on increases in the industry for similar companies with similar performance
profiles and/or attainment of certain division or Company goals.
Bonuses are paid on an annual basis and are discretionary or contractual.
The amount of bonus is based on criteria which are designed to effectively
measure a particular executive's attainment of goals which relate to his or her
duties and responsibilities as well as overall Company performance. In general,
the annual incentive bonus is based on operational and financial results of the
Company and focuses on the contribution to these results of a business unit or
division, and the executive's individual performance in achieving the results.
The stock option program is designed to relate executives' and certain
middle managers' and other key personnel long-term interests to shareholders'
long-term interests. In general, stock option awards are granted if warranted by
the Company's growth and profitability. Stock options are awarded on the basis
of individual performance and/or the achievement of internal strategic
objectives.
When considering information relevant to the Chief Executive Officer's
compensation, the Committee is comprised solely of Messrs. Besier, McIntosh and
Panigrahi. Based on review of available information, the Committee believes that
the Chief Executive Officer's current total annual compensation is reasonable
and appropriate given the size, complexity and historical performance of the
Company's business, the Company's position as compared to its peers in the
industry, and the specific challenges faced by the Company during the year, such
as changes in
- 63 -
the market for computer products and services and other industry factors. No
specific weight was assigned to any of the criteria relative to the Chief
Executive Officer's compensation.
Section 162(m) of the Internal Revenue Code of 1986, as amended, generally
disallows a tax deduction to public companies for certain compensation in excess
of $1 million paid to the company's Chief Executive Officer and the four other
most highly compensated executive officers. Certain compensation, including
qualified performance-based compensation, will not be subject to the deduction
limit if certain requirements are met. The Company does not currently meet these
requirements and therefore the Company will be subject to the limitations of
Section 162(m).
Compensation Committee Members
(as currently constituted)
Klaus P. Besier
Dennis McIntosh
Prabhas Panigrahi
- 64 -
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS.
EQUITY COMPENSATION PLANS
The following table provides information about the securities authorized
for issuance under the Company's equity compensation plans as of December 31,
2002.
EQUITY COMPENSATION PLAN INFORMATION
- -------------------------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF SECURITIES
SECURITIES TO BE REMAINING AVAILABLE FOR
ISSUED UPON WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION
OUTSTANDING OUTSTANDING PLANS (EXCLUDING
OPTIONS, WARRANTS OPTIONS, WARRANTS SECURITIES REFLECTED IN
PLAN CATEGORY AND RIGHTS AND RIGHTS COLUMN (A))
(a) (b) (c)
- -------------------------------------------------------------------------------------------------------------
(i) Equity compensation plans
approved by security holders:
Option Plans(1)................. 3,033,201 $2.39 1,267,966
(ii) Equity compensation plans not
approved by security holders.... 165,000 $2.04 --
----------- ------- -----------
Total........................... 3,198,201 $2.37 1,267,966
- -----------
(1) Includes information regarding the following stockholder-approved equity
compensation plans: (i) 1996 Non-Employee Director Stock Option Plan; and (ii)
the 1996 Stock Plan.
EQUITY COMPENSATION PLANS NOT APPROVED BY SECURITY HOLDERS
On October 31, 2000, the Company's Board of Directors approved the grant of
an option to several employees for an aggregate of 105,000 shares of Common
Stock at an exercise price of $2.063 per share. On November 1, 2000, the
Company's Board of Directors approved the grant of an option to Nicholas Visco
for 60,000 shares of Common Stock at an exercise price of $2.00 per share. Each
of the above options vest in four equal semiannual installments beginning on the
first six-month anniversary of the date of grant and expire on the tenth
anniversary of the date of grant. If the grantee's employment relationship
terminates on account of disability or death, the grantee or grantee's estate,
as the case may be, may exercise any outstanding options for one year following
the termination. If termination is for any other reason, the grantee may
exercise any outstanding options for 90 days following such termination. The
options are not assignable or otherwise transferable except by will or the laws
of descent and distribution and shall be exercisable during the grantee's
lifetime only by the grantee. The Company's Board of Directors is required to
make appropriate adjustments in connection with such option grants in October
and November to reflect stock splits, stock dividends and other similar changes
in capitalization. The option grants also contain provisions addressing the
consequences of a merger, consolidation or sale of all or substantially all of
the Company's assets. Upon the occurrence of such events, all outstanding
options are to be assumed, or substituted for, by the acquiring or succeeding
corporation. However, if the acquiring or succeeding corporation does not agree
to assume, or substitute for, outstanding options, then the Board of Directors
must accelerate the options to make them fully exercisable and notify the
grantee that the option shall be fully exercisable for a period of 15 days from
the date of such notice.
- 65 -
COMMON STOCK
There were, as of March 18, 2003, approximately 79 holders of record and
2,678 beneficial holders of the Company's Common Stock. The following table sets
forth certain information, as of March 18, 2003, with respect to holdings of the
Company's Common Stock by (i) each person known by the Company to beneficially
own more than 5% of the total number of shares of Common Stock outstanding as of
such date, (ii) each of the Company's Directors (which includes all nominees),
(iii) each of the Company's Named Executives, and (iv) all Directors and
executive officers as a group. This information is based upon information
furnished to the Company by each such person and/or based upon public filings
with the Securities and Exchange Commission. Unless otherwise indicated, the
address for the individuals below is that of the Company address.
AMOUNT AND NATURE OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OF CLASS(2)
- ------------------------------------ -------------------- --------
(i) Certain Beneficial Owners:
Ashok Pandey(3).............................. 2,141,583 12.9%
Beechrock Holdings Limited(4)................ 1,762,740 10.6%
Braydon Holdings Limited(5).................. 1,563,185 9.4%
(ii) Directors (which includes all nominees)
and Named Executives who are not set
forth above:
Nagarjun Valluripalli(6)..................... 251,500 1.5%
Klaus Besier(7).............................. 32,000 *
Dennis McIntosh(8)........................... 15,000 *
Alexander Graham Wilson(9)................... 451,164 2.7%
Prabhas Panigrahi(10)........................ -- --
Nic Di Iorio(11)............................. 7,500 *
Nicholas Visco(12)........................... 112,050 *
(iii) All Directors and executive officers
as a group (7 persons)(13)............. 869,214 5.1%
- ---------------
* Less than one percent.
(1) Except as set forth in the footnotes to this table and subject to
applicable community property law, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by such shareholder.
(2) Applicable percentage of ownership is based on 16,630,125 shares of Common
Stock outstanding on March 18, 2003, plus any presently exercisable stock
options held by each such holder, and options which will become exercisable
within 60 days after March 18, 2003.
- 66 -
(3) The address for Mr. Pandey is 944 Stuart Road, Princeton, New Jersey 08540.
The information set forth relating to the number of shares owned of record
is based solely upon data derived from a Form 4 filed by such shareholder.
(4) The address for Beechrock Holdings Limited is 3rd Floor, Cerne House, La
Chaussee, Port Luis, Mauritius. The information set forth on the table is
based solely upon data derived from a Schedule 13D filed by such
shareholder.
(5) The address for Braydon Holdings Limited is 3rd Floor, Cerne House, La
Chaussee, Port Luis, Mauritius. The information set forth on the table is
based solely upon data derived from a Schedule 13D filed by such
shareholder.
(6) Represents 4,500 shares of Common Stock owned of record, 22,000 shares of
Common Stock owned indirectly as spouse and 225,000 shares of Common Stock
underlying options, granted to Mr. Valluripalli, which are exercisable as
of March 18, 2003, or sixty (60) days after such date. Excludes 1,125,000
shares of Common Stock underlying options, which become exercisable over
time after such period.
(7) Includes 2,000 shares of Common Stock owned indirectly as spouse and 30,000
shares of Common Stock underlying options, granted to Mr. Besier, which are
exercisable as of March 18, 2003 or sixty (60) days after such date.
Excludes 20,000 shares of Common Stock underlying options, which became
exercisable over time after such period.
(8) Represents 15,000 shares of Common Stock underlying options, which are
exercisable as of March 18, 2003, or sixty (60) days after such date.
Excludes 15,000 shares of Common Stock underlying options, which become
exercisable over time after such period.
(9) Represents 451,164 shares of Common Stock owned of record as of March 18,
2003. Excludes 20,000 shares of Common Stock underlying options, which
become exercisable as of March 18, 2003 or sixty (60) days after such date.
(10) Excludes 20,000 shares of Common Stock underlying options, which become
exercisable over time after March 18, 2003 or sixty (60) days after such
date.
(11) Represents 7,500 shares of Common Stock owned of record as of March 18,
2003. Excludes 20,000 shares of Common Stock underlying options, which
become exercisable as of March 18, 2003 or sixty (60) days after such
date.
(12) Includes 800 shares of Common Stock owned of record and 111,250 shares of
Common Stock underlying options, which are exercisable as of March 18,
2003, or sixty (60) days after such date. Excludes 31,250 shares of Common
Stock underlying options, which become exercisable after such period.
(13) Includes an aggregate of 381,250 shares of Common Stock underlying options
granted to Directors and executive officers listed in the table which are
exercisable as of March 18, 2003 or within sixty (60) days after such date.
Excludes 1,251,250 shares underlying options granted to executive officers
and Directors, which become exercisable over time after such period.
- 67 -
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Nagarjun Valluripalli, the Chairman of the Board, President, Chief
Executive Officer and a Director of the Company, Rajkumar Koneru, a former
officer and director of the Company, and Ashok Pandey, a shareholder and former
officer and director of the Company, were the sole shareholders of Intelligroup
Asia Private Ltd. ("Intelligroup Asia"). Historically, Intelligroup Asia
operated the Advanced Development Center in Hyderabad, India for the sole and
exclusive use and benefit of the Company and all contracts and commercial
arrangements of Intelligroup Asia were subject to prior approval by the Company.
The Company and Messrs. Valluripalli, Koneru and Pandey entered into an
agreement pursuant to which the Company would, subject to necessary Indian
government approvals, acquire the shares of Intelligroup Asia for nominal
consideration. Such Indian government approvals were received in September 1997.
As a result, the Company currently owns 99.8% of the shares of Intelligroup
Asia.
The Board of Directors of the Company has adopted a policy requiring that
any future transactions between the Company and its officers, directors,
principal shareholders and their affiliates be on terms no less favorable to the
Company than could be obtained from unrelated third parties. In addition, New
Jersey law requires that any such transactions be approved by a majority of the
disinterested members of the Company's Board of Directors.
During 2002, the Company provided services to FirePond, which produced
revenues for the Company totaling approximately $329,000. A member of the
Company's Board of Directors, Klaus P. Besier, serves as the Chief Executive
Officer of FirePond. The Company provided implementation services to various end
clients, as a sub-contractor to FirePond. Services were priced at rates
comparable to other similar sub-contracting arrangements in which the Company
regularly participates.
During 2002, the Company provided implementation services to McCann
Erickson, which produced revenues for the Company totaling approximately
$242,000. A member of the Company's Board of Directors, Nic Di Iorio, serves as
the Chief Technology Officer of McCann Erickson. Services were priced at rates
comparable to other similar arrangements in which the Company regularly
participates.
- 68 -
ITEM 14. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed by the Company in the
reports that it files or submits under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the Company's management, President and Chief Executive
Officer and Senior Vice President-Finance and Administration and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, President and Chief Executive Officer and Senior Vice
President-Finance and Administration and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based upon that evaluation, the Company's President and Chief
Executive Officer and Senior Vice President-Finance and Administration and Chief
Financial Officer, have concluded that the Company's disclosure controls and
procedures are effective. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
the internal controls subsequent to the date the Company completed its
evaluation.
- 69 -
PART IV
ITEM 15. EXHIBITS, LIST, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements.
Reference is made to the Index to Financial Statements on Page F-1.
(2) Financial Statement Schedules.
None.
(3) Exhibits.
Reference is made to the Exhibit Index on Page 76.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December
31, 2002.
- 70 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 28th day of March
2003.
INTELLIGROUP, INC.
By: /s/ Nagarjun Valluripalli
----------------------------
Nagarjun Valluripalli,
Chief Executive Officer
- 71 -
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Nagarjun Valluripalli Chief Executive Officer and March 28, 2003
- ---------------------------
Nagarjun Valluripalli Director (principal executive
officer)
/s/ Nicholas Visco Senior Vice President- Finance March 28, 2003
- ---------------------------
Nicholas Visco and Administration (principal
financial and accounting officer)
/s/ Klaus Besier Director March 28, 2003
- ---------------------------
Klaus Besier
/s/ Dennis McIntosh Director March 28, 2003
- ---------------------------
Dennis McIntosh
/s/ Alexander Graham Wilson Director March 28, 2003
- ---------------------------
Alexander Graham Wilson
/s/ Prabhas Panigrahi Director March 28, 2003
- ---------------------------
Prabhas Panigrahi
/s/ Nic Di Iorio Director March 28, 2003
- ---------------------------
Nic Di Iorio
- 72 -
CERTIFICATIONS
I, Nagarjun Valluripalli certify that:
1. I have reviewed this Annual Report on Form 10-K of Intelligroup, Inc.;
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Annual Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this Annual Report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this Annual Report (the "Evaluation
Date"); and
c. presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
- 73 -
6. The registrant's other certifying officers and I have indicated in
this Annual Report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
DATE: March 28, 2003 By: /s/ Nagarjun Valluripalli
-----------------------------
Nagarjun Valluripalli
Chairman of the Board, President
and Chief Executive Officer
I, Nicholas Visco certify that:
1. I have reviewed this Annual Report on Form 10-K of Intelligroup, Inc.;
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Annual Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this Annual Report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this Annual Report (the "Evaluation
Date"); and
c. presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
- 74 -
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this Annual Report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
DATE: March 28, 2003 By: /s/ Nicholas Visco
---------------------------------------------
Nicholas Visco
Senior Vice President-Finance and Administration
and Chief Financial Officer
- 75 -
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
2 Agreement and Plan of Merger of the Company and its wholly owned
subsidiary Oxford Systems Inc. (Incorporated by reference to the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996.)
3.1 Amended and Restated Certificate of Incorporation. (Incorporated
by reference to the Company's Registration Statement on Form SB-2
(Registration Statement No. 333-5981) declared effective on
September 26, 1996.)
3.2 Amended and Restated Bylaws. (Incorporated by reference to the
Company's Registration Statement on Form SB-2 (Registration
Statement No. 333-5981) declared effective on September 26,
1996.)
4.1 Shareholder Protection Rights Agreement dated as of November 6,
1998, between the Company and American Stock Transfer & Trust
Company which includes (I) the Form of Rights Certificate and
(ii) the Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of Intelligroup, Inc. (Incorporated
by reference to Exhibit No. 4.1 of the Company's Report on Form
8-K dated November 9, 1998, filed with the Securities and
Exchange Commission on November 9, 1998.)
10.1* 1996 Stock Plan, as amended, of the Company.
10.2* 1996 Non-Employee Director Stock Option Plan. (Incorporated by
reference to the Company's Registration Statement on Form SB-2
(Registration Statement No. 333-5981) declared effective on
September 26, 1996.)
10.3* Form of Indemnification Agreement entered into by the Company and
each of its Directors and officers. (Incorporated by reference to
the Company's Registration Statement on Form SB-2 (Registration
Statement No. 333-5981) declared effective on September 26,
1996.)
10.4* Employment Agreement dated October 1, 1999 between the Company
and Nicholas Visco. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.)
See Exhibit 10.23.
10.5* Employee's Invention Assignment and Confidentiality Agreement.
(Incorporated by reference to the Company's Registration
Statement on Form SB-2 (Registration Statement No. 333-5981)
declared effective on September 26, 1996.)
- 76 -
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.6 Services Provider Agreement by and between Oracle Corporation and
the Company dated July 26, 1994. (Incorporated by reference to
the Company's Registration Statement on Form SB-2 (Registration
Statement No. 333-5981) declared effective on September 26,
1996.) See Exhibit 10.8.
10.7 Agreement by and between the Company and Intelligroup Asia
Private Limited ("Intelligroup Asia") relating to operational
control of Intelligroup Asia, with related agreements.
(Incorporated by reference to the Company's Registration
Statement on Form SB-2 (Registration Statement No. 333-5981)
declared effective on September 26, 1996.)
10.8 Amendment No. 1 to Services Provider Agreement by and between
Oracle Corporation and the Company dated December 30, 1996.
(Incorporated by reference to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1996.) See Exhibit 10.6.
10.9 R/3 National Logo Partner Agreement by and between SAP America,
Inc. and the Company dated as of April 29, 1997. (Incorporated by
reference to the Company's Registration Statement on Form SB-2
(Registration Statement No. 333-29119) declared effective on June
26, 1997.) See Exhibits 10.10, 10.14 and 10.24.
10.10 ASAP Partner Addendum to R/3 National Logo Partner Agreement
between SAP America, Inc. and the Company effective July 1, 1997
(amends existing R/3 National Logo Partner Agreement).
(Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1997.) See
Exhibits 10.9, 10.14 and 10.24.
10.11 Implementation Partner Agreement between PeopleSoft, Inc. and the
Company effective July 15, 1997. (Incorporated by reference to
the Company's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1997.) See Exhibit 10.13.
10.12 Lease Agreement between Alfieri-Parkway Associates, as Landlord,
and Intelligroup, Inc., as Tenant, dated March 17, 1998.
(Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998.)
10.13 Fifth Amendment to the Implementation Partner Agreement dated
July 15, 1998, between the Company and PeopleSoft, Inc. See
Exhibit 10.11.
10.14 Amendment to the National Implementation Partner Agreement dated
as of January 1, 1999, between SAP America and the Company. See
Exhibits 10.9, 10.10 and 10.24.
- 77 -
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.15 Contribution Agreement by and between Intelligroup, Inc. and
SeraNova, Inc. dated as of January 1, 2000. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.)
10.16 Distribution Agreement by and between Intelligroup, Inc. and
SeraNova, Inc. dated as of January 1, 2000. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.)
10.17 Services Agreement by and between Intelligroup, Inc. and
SeraNova, Inc. dated as of January 1, 2000. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.)
10.18 Space Sharing Agreement by and among Intelligroup, Inc. and
SeraNova, Inc. dated as of January 1, 2000. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.)
10.19 Tax Sharing Agreement by and between Intelligroup, Inc. and
SeraNova, Inc. dated as of January 1, 2000. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.)
10.20 Amended and Restated Revolving Credit Loan and Security Agreement
among the Company, Empower, Inc. and PNC Bank, National
Association. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000.)
10.21 Amended and Restated Promissory Note by and between the Company
and SeraNova, Inc. dated as of May 31, 2000. (Incorporated by
reference to the Company's Report on Form 8-K/A filed September
14, 2000.) See Exhibit 10.22.
10.22 Agreement and Waiver with respect to Amended and Restated
Promissory Note by and between the Company and SeraNova, Inc.
dated as of September 29, 2000. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000.) See Exhibit 10.21.
10.23* First Amendment to Employment Agreement between the Company and
Nicholas Visco dated November 1, 2000. (Incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended
December 31, 2000.) See Exhibit 10.4.
- 78 -
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.24 mySap.com Partner-Services Addendum effective June 7, 2000 to R/3
National Logo Partner Agreement between SAP America, Inc. and the
Company. (Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 2000.) See
Exhibits 10.9, 10.10 and 10.14.
10.25 Service Alliance Master Agreement and Addendums dated May 5, 2000
between PeopleSoft, Inc. and the Company. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 2000.)
10.26 First Amendment to Loan Documents and Waiver Agreement dated
March 27, 2002 between the Company, Empower, Inc. and PNC Bank,
National Association.
10.27* Amended and Restated Employment Agreement dated September 20,
2002 between the Company and Nagarjun Valluripalli. (Incorporated
by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2002.)
10.28+ Second Amendment to Loan Documents and Waiver Agreement dated
January 6, 2003 between the Company, Empower, Inc. and PNC Bank,
National Association.
21+ Subsidiaries of the Registrant.
23+ Consent of Deloitte & Touche LLP.
99.1+ Statement pursuant to 18 U.S.C. Section 1350.
- --------------
* A management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 15(c) of Form 10-K.
+ Filed herewith. All other exhibits previously filed.
- 79 -
INTELLIGROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report - Deloitte & Touche LLP.................. F-2
Report of Independent Public Accountants - Arthur Andersen LLP........ F-3
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2002 and 2001.......... F-4
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000.............................. F-5
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2002, 2001 and 2000.............................. F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000.............................. F-7
Notes to Consolidated Financial Statements............................ F-8
Financial Statement Schedules
Financial Statement Schedules required by the Securities and
Exchange Commission have been omitted, as the required
information is included in the Notes to Consolidated Financial
Statements or is not applicable.
F - 1
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Intelligroup, Inc.:
We have audited the accompanying consolidated balance sheet of
Intelligroup, Inc. and subsidiaries as of December 31, 2002, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
consolidated financial statements of Intelligroup, Inc. as of December 31, 2001
and 2000, and for the years then ended, were audited by other auditors who have
ceased operations. Those auditors expressed an unqualified opinion on those
consolidated financial statements in their report dated February 1, 2002 (except
with respect to paragraph 4 of Note 3, as to which the date is March 27, 2002).
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such 2002 consolidated financial statements present fairly,
in all material respects, the financial position of Intelligroup, Inc. and
subsidiaries as of December 31, 2002, and the results of their operations and
their cash flows for the year ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.
As discussed above, the consolidated financial statements of Intelligroup,
Inc. as of December 31, 2001 and 2000, and for the years then ended, were
audited by other auditors who have ceased operations. As described in Note 1,
these consolidated financial statements have been revised. We audited the
adjustments described in Note 1 that were applied to revise the 2001 and 2000
consolidated financial statements. In our opinion, such adjustments are
appropriate and have been properly applied. However, we were not engaged to
audit, review, or apply any procedures to the 2001 and 2000 consolidated
financial statements of the Company other than with respect to such adjustments
and, accordingly, we do not express an opinion or any other form of assurance on
the 2001 and 2000 consolidated financial statements taken as a whole.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 10, 2003
F - 2
INFORMATION REGARDING PREDECESSOR INDEPENDENT PUBLIC ACCOUNTANTS' REPORT
THE FOLLOWING REPORT IS A COPY OF A PREVIOUSLY ISSUED REPORT BY ARTHUR ANDERSEN
LLP ("ANDERSEN"). THE REPORT HAS NOT BEEN REISSUED BY ANDERSEN NOR HAS ANDERSEN
CONSENTED TO ITS INCLUSION IN THIS ANNUAL REPORT ON FORM 10-K. THE ANDERSEN
REPORT REFERS TO THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2000 AND THE
CONSOLIDATED STATEMENTS OF OPERATIONS, SHAREHOLDERS' EQUITY AND CASH FLOWS FOR
THE YEAR ENDED DECEMBER 31, 1999, WHICH ARE NO LONGER INCLUDED IN THE
ACCOMPANYING FINANCIAL STATEMENTS.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Intelligroup, Inc.:
We have audited the accompanying consolidated balance sheets of
Intelligroup, Inc. (a New Jersey corporation) and subsidiaries as of December
31, 2001 and 2000, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Intelligroup, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 1, 2002
(except with respect to paragraph 4
of Note 3, as to which the
date is March 27, 2002)
F - 3
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 1,574,000 $ 2,138,000
Accounts receivable, less allowance for doubtful accounts
of $1,453,000 and $2,073,000 at December 31, 2002
and 2001, respectively.................................. 19,212,000 13,519,000
Unbilled services........................................... 7,141,000 7,536,000
Prepaid income taxes........................................ 624,000 342,000
Deferred tax asset.......................................... 1,088,000 1,736,000
Other current assets........................................ 3,050,000 3,548,000
Note receivable - SeraNova.................................. 4,000,000 9,140,000
------------- -------------
Total current assets................................ 36,689,000 37,959,000
Property and equipment, net................................. 6,025,000 8,099,000
Deferred tax asset.......................................... 490,000 --
Other assets................................................ 915,000 1,036,000
------------- -------------
$ 44,119,000 $ 47,094,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................ $ 5,606,000 $ 3,548,000
Accrued payroll and related taxes........................... 6,590,000 5,465,000
Accrued expenses and other current liabilities.............. 3,901,000 4,414,000
Deferred revenue............................................ 1,280,000 1,211,000
Income taxes payable........................................ 551,000 427,000
Current portion of long-term debt and obligations under
capital leases........................................... 6,374,000 4,712,000
------------- -------------
Total current liabilities........................... 24,302,000 19,777,000
------------- -------------
Deferred tax liability........................................ -- 164,000
Obligations under capital leases, less current portion........ 63,000 371,000
Other long-term liabilities................................... 1,028,000 --
------------- -------------
Total long-term liabilities......................... 1,091,000 535,000
------------- -------------
Commitments and contingencies
Shareholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued or outstanding................... -- --
Common stock, $.01 par value, 25,000,000 shares
authorized, 16,630,000 shares issued and outstanding
at December 31, 2002 and 2001............................ 166,000 166,000
Additional paid-in capital.................................. 41,366,000 41,366,000
Accumulated deficit......................................... (19,168,000) (10,685,000)
Accumulated other comprehensive loss........................ (3,638,000) (4,065,000)
------------- -------------
Total shareholders' equity ........................... 18,726,000 26,782,000
------------- -------------
$ 44,119,000 $ 47,094,000
============= =============
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F - 4
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------- ------------- -------------
Revenue...................................... $ 108,331,000 $ 110,413,000 $ 115,118,000
Cost of sales................................ 75,774,000 75,291,000 77,724,000
------------- ------------- -------------
Gross profit............................. 32,557,000 35,122,000 37,394,000
------------- ------------- -------------
Selling, general and administrative expenses. 27,576,000 30,206,000 42,004,000
Depreciation and amortization................ 2,872,000 3,695,000 3,187,000
SeraNova receivable impairment and other
charges.................................. 8,362,000 -- --
Proxy contest charges........................ 1,073,000 -- --
Restructuring and other special charges...... 30,000 13,261,000 --
------------- ------------- -------------
Total operating expenses................. 39,913,000 47,162,000 45,191,000
------------- ------------- -------------
Operating loss........................... (7,356,000) (12,040,000) (7,797,000)
Interest income.............................. 37,000 538,000 1,178,000
Interest expense............................. (454,000) (690,000) (603,000)
Other income (expense)....................... (149,000) 191,000 (5,000)
------------- ------------- -------------
Loss from continuing operations before
income tax provision (benefit)........... (7,922,000) (12,001,000) (7,227,000)
Income tax provision (benefit)............... 561,000 592,000 (573,000)
------------- ------------- -------------
Loss from continuing operations.............. (8,483,000) (12,593,000) (6,654,000)
Loss from discontinued operations, net of
tax benefit of $0, $0 and
$(2,095,000), respectively............... -- -- (4,891,000)
------------- ------------- -------------
Net loss..................................... $ (8,483,000) $ (12,593,000) $ (11,545,000)
============= ============= =============
Earnings (loss) per share:
Basic and diluted earnings (loss)
per share:
Loss from continuing operations ..... $ (0.51) $ (0.76) $ (0.40)
Discontinued operations ............. -- -- (0.30)
------------- ------------- -------------
Net loss per share................ $ (0.51) $ (0.76) $ (0.70)
============= ============= =============
Weighted average number of common
shares - basic and diluted........ 16,630,000 16,630,000 16,485,000
============= ============= =============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F - 5
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
RETAINED ACCUMULATED
COMMON STOCK ADDITIONAL EARNINGS OTHER TOTAL COMPREHENSIVE
---------------------- PAID-IN (ACCUMULATED COMPREHENSIVE SHAREHOLDERS' INCOME (LOSS)
SHARES AMOUNT CAPITAL DEFICIT) INCOME (LOSS) EQUITY FOR THE PERIOD
------ ------ ------- -------- ------------- ------ --------------
Balance at December 31, 1999... 15,949,000 $160,000 $43,356,000 $ 6,317,000 $(1,179,000) $48,654,000
Issuance of common stock in
connection with acquisitions... 100,000 1,000 -- -- -- 1,000
Spin-off distribution of
SeraNova common stock.......... -- -- (7,733,000) 7,136,000 (107,000) (704,000)
Exercise of stock options...... 581,000 5,000 5,743,000 -- -- 5,748,000
Currency translation
adjustments.................... -- -- -- -- (953,000) (953,000) $ (953,000)
Net loss....................... -- -- -- (11,545,000) -- (11,545,000) (11,545,000)
---------- -------- ----------- ------------ ----------- ----------- ------------
Balance at December 31, 2000... 16,630,000 166,000 41,366,000 1,908,000 (2,239,000) 41,201,000 $(12,498,000)
============
Currency translation
adjustments.................... -- -- -- -- (1,826,000) (1,826,000) $ (1,826,000)
Net loss....................... -- -- -- (12,593,000) -- (12,593,000) (12,593,000)
---------- -------- ----------- ------------ ----------- ----------- ------------
Balance at December 31, 2001... 16,630,000 166,000 41,366,000 (10,685,000) (4,065,000) 26,782,000 $(14,419,000)
============
Currency translation
adjustments.................... -- -- -- -- 427,000 427,000 $ 427,000
Net loss....................... -- -- -- (8,483,000) -- (8,483,000) (8,483,000)
---------- -------- ----------- ------------ ----------- ----------- ------------
Balance at December 31, 2002... 16,630,000 $166,000 $41,366,000 $(19,168,000) $(3,638,000) $18,726,000 $ (8,056,000)
========== ======== =========== ============ =========== =========== ============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F - 6
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------- ------------- -------------
Cash flows from operating activities:
Net loss.......................................................... $ (8,483,000) $ (12,593,000) $ (11,545,000)
Less: Loss from discontinued operations, net of tax............... -- -- (4,891,000)
------------- ------------- -------------
Loss from continuing operations................................... (8,483,000) (12,593,000) (6,654,000)
Adjustments to reconcile loss from continuing operations to
net cash (used in) provided by operating activities of
continuing operations:
Depreciation and amortization................................. 3,702,000 4,475,000 3,480,000
Provision for doubtful accounts............................... 443,000 1,821,000 3,293,000
SeraNova receivable impairment and other charges.............. 8,362,000 -- --
Restructuring and other special charges....................... 30,000 13,261,000 --
Deferred income taxes......................................... (6,000) (430,000) 533,000
Changes in operating assets and liabilities:
Accounts receivable............................................. (6,136,000) 7,098,000 1,876,000
Unbilled services............................................... 395,000 (1,603,000) 1,759,000
Prepaid income taxes............................................ (282,000) 42,000 3,228,000
Other current assets............................................ (786,000) 805,000 (2,121,000)
Other assets.................................................... 121,000 424,000 735,000
Accounts payable................................................ 2,058,000 (3,299,000) 3,049,000
Accrued payroll and related taxes............................... 1,125,000 (1,015,000) 953,000
Accrued expenses and other current liabilities.................. (743,000) (439,000) 677,000
Accrued restructuring charges................................... (710,000) (574,000) (608,000)
Deferred revenue................................................ 69,000 208,000 1,003,000
Income taxes payable............................................ 124,000 (200,000) (3,277,000)
------------- ------------- -------------
Net cash (used in) provided by operating activities of
continuing operations........................................... (717,000) 7,981,000 7,926,000
------------- ------------- -------------
Cash flows from investing activities:
Purchases of equipment ......................................... (1,628,000) (3,149,000) (3,212,000)
Purchases of software licenses.................................. -- (2,678,000) (3,957,000)
------------- ------------- -------------
Net cash used in investing activities of continuing operations.... (1,628,000) (5,827,000) (7,169,000)
------------- ------------- -------------
Cash flows from financing activities:
Principal payments under capital leases........................... (646,000) (594,000) (117,000)
Proceeds from exercise of stock options........................... -- -- 5,749,000
Other borrowings (repayments)..................................... 7,000 (36,000) 91,000
Net change in line of credit borrowings........................... 1,993,000 (947,000) (5,572,000)
Net change in note receivable-SeraNova prior to spin-off date..... -- -- (6,662,000)
Repayment of note receivable-SeraNova subsequent to spin-off date. -- 2,060,000 3,149,000
------------- ------------- -------------
Net cash provided by (used in) financing activities of
continuing operations......................................... 1,354,000 483,000 (3,362,000)
------------- ------------- -------------
Effect of foreign currency exchange rate changes on cash........ 427,000 (1,826,000) (953,000)
------------- ------------- -------------
Net cash (used in) provided by continuing operations ................ (564,000) 811,000 (3,558,000)
Net cash used in discontinued operations ............................ -- -- (625,000)
------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents ................ (564,000) 811,000 (4,183,000)
Cash and cash equivalents at beginning of period..................... 2,138,000 1,327,000 5,510,000
------------- ------------- -------------
Cash and cash equivalents at end of period........................... $ 1,574,000 $ 2,138,000 $ 1,327,000
============= ============= =============
Supplemental disclosures of cash flow information:
Cash paid for income taxes........................................ $ 1,058,000 $ 1,216,000 $ 4,053,000
============= ============= =============
Cash paid for interest............................................ $ 454,000 $ 690,000 $ 603,000
============= ============= =============
Supplemental disclosures of non-cash transactions:
Issuance of common stock in connection with acquisitions.......... $ -- $ -- $ 1,000
============= ============= =============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F - 7
INTELLIGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Operations
Intelligroup, Inc., and its subsidiaries (the "Company") provide 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 to companies of all sizes. The Company markets its
services to a wide variety of industries, the majority of which are in the
United States. The majority of the Company's business is with large established
companies, including consulting firms serving numerous industries.
The Company's 2003 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 satisfy its operating requirements in the normal course of business.
The Company's current revolving credit facility with PNC Bank, N.A. (the
"Bank") is due to expire on May 31, 2003. The Company has requested an extension
of the current agreement and believes that such extension will be granted on
terms substantially similar to the previous credit facility. However, there is
no assurance that the Company will be granted such an extension on acceptable
terms, if at all. Should the Company not be able to obtain the credit facility
extension with the Bank, the Company believes that it has the ability to obtain
another revolving credit facility, with substantially similar terms, from
another financial institution.
Principles of Consolidation and Use of Estimates
The accompanying consolidated financial statements include the accounts of
Intelligroup, Inc. and its majority owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the recorded amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
F - 8
NOTE 1 - BUSINESS AND OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Reclassifications
Certain prior year amounts have been reclassified to conform to the 2002
presentation.
Cash and Cash Equivalents
Cash and cash equivalents consist of investments in highly liquid
short-term instruments, with maturities of three months or less from the date of
purchase.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts, which is based
upon a review of outstanding receivables as well as historical collection
information. Credit is granted to substantially all customers on an unsecured
basis. In determining the amount of the allowance, management is required to
make certain estimates and assumptions. The provision for doubtful accounts
totaled $443,000, $1,821,000 and $3,293,000 in 2002, 2001 and 2000,
respectively. Accounts written off totaled $1,063,000, $1,809,000 and $4,171,000
in 2002, 2001 and 2000, respectively.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the related assets (primarily three to five years). Leasehold
improvements are amortized over the shorter of the lease term or the estimated
useful life (ten years). Costs of maintenance and repairs are charged to expense
as incurred.
The Company capitalizes direct costs incurred in connection with developing
or obtaining software for internal use, including external direct costs of
materials and services and payroll and payroll related costs for employees who
are directly associated with and devote time to an internal-use software
development project. The cost of the internal-use software and the capitalized
implementation-related costs are included within computer software in property
and equipment as of December 31, 2002 and 2001 (See Note 2). Such capitalized
costs are amortized on a straight-line basis over the software's estimated
useful life of three years.
Recoverability of Long-Lived Assets
The Company reviews the recoverability of its long-lived assets on a
periodic basis whenever events and changes in circumstances have occurred which
may indicate a possible impairment. The assessment for potential impairment is
based primarily on the Company's ability to recover the carrying value of its
long-lived assets from expected future cash flows from its operations on an
undiscounted basis.
F - 9
NOTE 1 - BUSINESS AND OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Revenue Recognition
The Company generates revenue from professional services rendered to
customers. The majority of the Company's revenue is generated under
time-and-material contracts whereby costs are generally incurred in proportion
with contracted billing schedules and revenue is recognized as services are
performed, with the corresponding cost of providing those services reflected as
cost of sales. The majority of customers are billed on an hourly or daily basis
whereby actual time is charged directly to the customer. Such method is expected
to result in reasonably consistent profit margins over the contract term.
The Company also derives a portion of its revenue from fixed-price,
fixed-time contracts. Revenue generated from most fixed-price contracts,
including most application management and support contracts, is recognized
ratably over the contract term, on a monthly basis in accordance with the terms
of the contract. Revenue generated from certain other fixed-price contracts is
recognized based on the ratio of labor hours incurred to estimated total labor
hours. This method is used because reasonably dependable estimates of the
revenues and costs applicable to various stages of a contract can be made, based
on historical experience and milestones set in the contract. The Company's
project delivery and business unit finance personnel continually review labor
hours incurred and estimated total labor hours, which may result in revisions to
the amount of recognized revenue for the contract. If the Company does not
accurately estimate the resources required or the scope of work to be performed
for a contract or if the Company does not manage the project properly within the
planned time period, then a loss may be recognized on the contract. The Company
has committed unanticipated additional resources to complete projects in the
past, which has resulted in lower than anticipated profitability or losses on
those contracts.
In November 2001, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") issued EITF No. 01-14, which concluded that
reimbursable "out-of-pocket" expenses should be classified as revenue, and
correspondingly cost of services, 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 EITF No. 01-14. The
impact of this reclassification was an increase to both revenue and cost of
sales of $2,489,000, $2,307,000 and $2,280,000 in 2002, 2001 and 2000,
respectively.
F - 10
NOTE 1 - BUSINESS AND OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The following table reconciles the revenue and cost of sales amounts as
reported prior to the adoption of EITF No. 01-14 to the amounts now reported in
the statement of operations, which reflect the adoption of EITF No. 01-14:
2001 2000
------------- -------------
Amounts Prior to Adoption of EITF No. 01-14:
Revenue....................................... $ 108,106,000 $ 112,838,000
Cost of sales................................. $ 72,984,000 $ 75,444,000
Amount of reimbursable expense
reclassification as per EITF No. 01-14........ $ 2,307,000 $ 2,280,000
Amounts After Adoption of EITF No. 01-14:
Revenue....................................... $ 110,413,000 $ 115,118,000
Cost of sales................................. $ 75,291,000 $ 77,724,000
Unbilled services at December 31, 2002 and 2001 represent services provided
through December 31, 2002 and 2001, respectively, which are billed subsequent to
year-end. All such amounts are anticipated to be realized in the following year.
Deferred revenue at December 31, 2002 and 2001 represents amounts billed to
customers but not yet earned or included as revenue as of December 31, 2002 and
2001, respectively. Such amounts are anticipated to be recorded as revenue as
services are performed in the subsequent year.
Stock-Based Compensation
Stock-based compensation issued to employees and directors is valued using
the intrinsic value method under Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees." Under this method, compensation
expense is recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. FASB Statement of Financial
Accounting Standard ("SFAS") No.123, "Accounting for Stock-Based Compensation,"
established accounting and disclosure requirements using a fair-value-based
method of accounting for stock-based employee compensation plans. As allowed by
SFAS No. 123, the Company has elected to continue to apply the
intrinsic-value-based method of accounting described above, and has adopted only
the disclosure requirements of SFAS No. 123. Stock-based compensation issued to
non-employees is valued using the fair value method.
F - 11
NOTE 1 - BUSINESS AND OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value-based method of accounting
for stock-based employee compensation ("Transition Provisions"). In addition,
SFAS No. 148 amends the disclosure requirements of APB Opinion No. 28, "Interim
Financial Reporting," to require pro forma disclosure in interim financial
statements by companies that elect to account for stock-based compensation using
the intrinsic value method prescribed in APB Opinion No. 25 ("Disclosure
Provisions"). The Transition Provisions of SFAS No. 148 are effective for
financial statements for fiscal years ending after December 31, 2002. The
Company continues to use the intrinsic value method of accounting for
stock-based compensation. As a result, the Transition Provisions do not have an
effect on the Company's consolidated financial statements. The Company has
adopted the Disclosure Provisions of SFAS No. 148; however, the Company will
continue to apply the intrinsic value method under APB Opinion No. 25.
For disclosure purposes, pro forma net income (loss) and earnings (loss)
per share impacts are provided as if the fair market value method under SFAS No.
123 had been applied:
2002 2001 2000
------------- -------------- -------------
Net loss, as reported.......................... $ (8,483,000) $ (12,593,000) $ (11,545,000)
Deduct: total stock-based employee
compensation expense determined under
fair-value-based method for all awards,
net of related tax effects..................... (7,884,000) (10,301,000) (20,445,000)
------------- -------------- -------------
Pro forma net loss............................. $ (16,367,000) $ (22,894,000) $ (31,990,000)
============= ============== =============
Basic and diluted earnings (loss) per share:
as reported............................... $ (0.51) $ (0.76) $ (0.70)
============= ============== =============
pro forma................................. $ (0.98) $ (1.38) $ (1.94)
============= ============== =============
The fair value of option grants for disclosure purposes is estimated on the
date of grant using the Black-Scholes option-pricing model using the following
weighted-average assumptions: expected volatility of 111%, 110% and 121%,
risk-free interest rate of 1.8%, 3.3% and 5.2% and expected lives of 2.4, 2.7
and 3.4, in 2002, 2001 and 2000, respectively. The weighted average fair value
of options granted during 2002, 2001 and 2000 was $0.58, $0.70 and $4.68,
respectively.
F - 12
NOTE 1 - BUSINESS AND OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Currency Translation
Assets and liabilities relating to foreign operations are translated into
U.S. dollars using exchange rates in effect at the balance sheet date. Income
and expenses are translated into U.S. dollars using monthly average exchange
rates during the year. Translation adjustments associated with assets and
liabilities are excluded from income and credited or charged directly to
accumulated other comprehensive loss.
Concentrations
For the years ended December 31, 2002, 2001 and 2000, approximately 62%,
69% and 63% of revenue, respectively, was derived from projects in which the
Company's personnel implemented, extended, maintained, managed or supported
software developed by SAP. The Company's future success in its SAP-related
consulting services depends largely on its continued relationship with SAP and
on its continued status as a SAP National Implementation Partner, which was
first obtained in 1995. The Company's agreement with SAP (the "Agreement") is
awarded on an annual basis. The Company's current contract expires on December
31, 2003 and is automatically renewed for successive one-year periods, unless
terminated by either party. This Agreement contains no minimum revenue
requirements or cost sharing arrangements and does not provide for commissions
or royalties to either party. In July 1997, the Company achieved Accelerated SAP
Partner Status with SAP by meeting certain criteria established by SAP. For each
of the years ended December 31, 2002, 2001 and 2000, approximately 22%, 17% and
24% of revenue, respectively, was derived from projects in which the Company's
personnel implemented, extended, maintained, managed or supported software
developed by PeopleSoft. For each of the years ended December 31, 2002, 2001 and
2000, approximately 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.
A substantial portion of the Company's revenue was generated by providing
supplemental resources for consulting teams assembled by other information
technology consulting firms or directly to the end-customer. For years ended
December 31, 2002, 2001 and 2000, 34%, 42% and 36%, respectively, of the
Company's revenue was generated by serving as a member of consulting teams
assembled by other information technology consulting firms.
During 2002 and 2000, one customer accounted for approximately 10% of
revenue. During 2001, no single customer accounted for more than 10% of revenue.
Income Taxes
Deferred income taxes are recognized for the tax consequences of temporary
differences between the financial statement and tax bases of assets and
liabilities, using enacted tax rates currently in effect. The Company does not
provide for additional U.S. income taxes on undistributed earnings considered to
be permanently invested in foreign subsidiaries.
F - 13
NOTE 1 - BUSINESS AND OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net loss attributable to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share is computed by dividing net loss
available to common shareholders by the weighted average number of common shares
outstanding, adjusted for the incremental dilution of outstanding stock options,
if applicable. The computation of basic earnings (loss) per share and diluted
earnings (loss) per share were as follows:
2002 2001 2000
------------ ------------ ------------
Loss from continuing operations............... $(8,483,000) $(12,593,000) $ (6,654,000)
Loss from discontinued operations............. -- -- (4,891,000)
----------- ------------ ------------
Net loss...................................... $(8,483,000) $(12,593,000) $(11,545,000)
=========== ============ ============
Basic and diluted earnings (loss) per share:
Weighted average number of common shares.... 16,630,000 16,630,000 16,485,000
----------- ------------ ------------
Basic and diluted loss per share from
continuing operations..................... $ (0.51) $ (0.76) $ (0.40)
Basic and diluted loss per share from
discontinued operations................... -- -- (0.30)
----------- ------------ ------------
Basic and diluted net loss per share........ $ (0.51) $ (0.76) $ (0.70)
=========== ============ ============
Stock options, which would be antidilutive (3,198,201, 2,833,849 and
3,369,746 as of December 31, 2002, 2001 and 2000, respectively) have been
excluded from the calculations of diluted shares outstanding and diluted
earnings (loss) per share.
Financial Instruments
Financial instruments that potentially subject the Company to credit risk
consist principally of trade receivables and unbilled services. Management of
the Company believes the fair value of accounts receivable and unbilled services
approximates the carrying value. The Company does not utilize derivative
instruments. The carrying amount of the Company's line of credit approximates
fair market value based upon current borrowing rates available to the Company.
Recently Issued Accounting Standards
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective for
fiscal years beginning after June 14, 2002. The Company has evaluated the impact
of the adoption of SFAS No. 143, which is effective for the Company as of
January 1, 2003, and does not believe it will have a material impact on the
Company's consolidated financial position or consolidated results of operations.
F - 14
NOTE 1 - BUSINESS AND OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
In June 2002, 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 EITF 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
consolidated financial position or consolidated results of operations.
In November 2002, the FASB issued Interpretation ("FIN") No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN No. 45 expands the
disclosures made by a guarantor in its financial statements about its
obligations under certain guarantees and requires the guarantor to recognize a
liability (with a corresponding reduction in revenue) for the fair value of the
obligation assumed under certain guarantees. FIN No. 45 clarifies the
requirements of SFAS No.5, "Accounting for Contingencies," relating to
guarantees. In general, FIN No. 45 applies to contracts or indemnification
agreements that contingently require the guarantor to make payments to the
guaranteed party based on changes in a specified interest rate, security price,
foreign exchange rate or other variable that is related to an asset, liability,
or equity security of the guaranteed party, or failure of another party to
perform under an obligating agreement (performance guarantees). Certain
guarantee contracts are excluded from both the disclosure and recognition
requirements of this interpretation, including, among others, guarantees
relating to employee compensation, residual value guarantees under capital lease
arrangements, commercial letters of credit, loan commitments, subordinated
interests in a special purpose entity and guarantees of a company's own future
performance. Other guarantees are subject to the disclosure requirements of FIN
No. 45 but not to the recognition provisions and include, among others, a
guarantee accounted for as a derivative instrument under SFAS No. 133, and a
guarantee covering product performance, not product price. The disclosure
requirements of FIN No. 45 are effective for the Company as of December 31,
2002, and require disclosure of the nature of the guarantee, the maximum
potential amount of future payments that the guarantor could be required to make
under the guarantee, and the current amount of the liability, if any, for the
guarantor's obligations under the guarantee. The recognition requirements of FIN
No. 45 are to be applied prospectively to guarantees issued or modified after
December 31, 2002. The Company has evaluated the impact of the adoption of FIN
No. 45, and does not believe it will have a material impact on the Company's
consolidated financial position or consolidated results of operations.
F - 15
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31:
2002 2001
-------------- --------------
Vehicles............................ $ 171,000 $ 158,000
Furniture........................... 3,470,000 3,347,000
Equipment........................... 11,439,000 10,520,000
Computer software................... 4,361,000 3,987,000
Leasehold improvements.............. 1,109,000 1,046,000
-------------- --------------
20,550,000 19,058,000
Less-Accumulated depreciation....... (14,525,000) (10,959,000)
-------------- --------------
$ 6,025,000 $ 8,099,000
============== ==============
Depreciation expense was $3,702,000, $4,057,000 and $3,024,000 (including
$830,000, $780,000 and $293,000 of depreciation expense recorded within cost of
sales, respectively) in 2002, 2001 and 2000, respectively.
NOTE 3 - LINES OF CREDIT
On May 31, 2000, the Company and the Bank entered into an agreement to
replace a previous facility with 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 United States based operations. The maximum borrowing availability under
the line of credit is based upon a percentage of eligible billed and unbilled
accounts receivable, as defined. As of December 31, 2002, the Company had
outstanding borrowings under the credit facility of $6,059,000. The Company
estimates undrawn availability under the credit facility to be $7,394,000 as of
December 31, 2002. As of December 31, 2001, the Company had outstanding
borrowings under the credit facility of $4,066,000.
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
F - 16
NOTE 3 - LINES OF CREDIT (CONTINUED)
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.
During 2002, the Company incurred charges related to the Company's
contested 2002 Annual Meeting of Shareholders ("Proxy Contest"). The Proxy
Contest charges included legal fees, proxy solicitation services and printing,
mailing and other costs. As a direct result of the Proxy Contest charges, the
Company was not in compliance with the EBITDA covenant as of June 30, 2002 and
September 30, 2002. In January 2003, 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 EBITDA covenant
defaults as of June 30, 2002 and September 30, 2002, (2) a modification to the
definitions of EBITDA, total stockholders equity and unconsolidated stockholders
equity (for purposes of computing related covenant compliance) to exclude Proxy
Contest charges of $464,000 for the quarter ended June 30, 2002 and $413,000 for
the quarter ended September 30, 2002 only, (3), a reduction in the minimum
EBITDA covenant for the fourth quarter and full year 2002 only, and (4) 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 $12,600,000 of the
note due from SeraNova.
The Company was in compliance with all covenants as of December 31, 2002.
The Company expects to be able to comply with all financial covenants in 2003.
The Company's current revolving credit facility with the Bank is due to
expire on May 31, 2003. The Company has requested an extension of the current
agreement and believes that such extension will be granted on terms
substantially similar to the previous credit facility. However, there is no
assurance that the Company will be granted such an extension on acceptable
terms, if at all.
F - 17
NOTE 3 - LINES OF CREDIT (CONTINUED)
Interest expense on debt and obligations under capital leases approximated
$454,000, $690,000 and $603,000 for the years ended December 31, 2002, 2001 and
2000, respectively.
NOTE 4 - DISCONTINUED OPERATIONS
In November 1999, the Company announced its intentions to spin off its
Internet applications services and management consulting business subject to
certain approvals and conditions. On January 1, 2000, the Company transferred
its Internet applications services and management consulting businesses to
SeraNova, a wholly-owned subsidiary of the Company on such date.
On July 5, 2000, the Company completed the tax-free spin-off of SeraNova by
distributing all of the outstanding shares of the common stock of SeraNova then
held by the Company to holders of record of the Company's common stock as of the
close of business on May 12, 2000 (or to their subsequent transferees) in
accordance with the terms of a Distribution Agreement dated as of January 1,
2000 between the Company and SeraNova. SeraNova represented a significant
segment of the Company's business.
Pursuant to APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," the Consolidated
Financial Statements of the Company have been reclassified to reflect the
spin-off of SeraNova. Accordingly, the results of operations and cash flows of
SeraNova have been segregated in the Consolidated Statements of Operations and
Consolidated Statements of Cash Flows. The net operating results and net cash
flows of SeraNova have been reported as "Discontinued Operations." The
historical carrying amount of the net assets of SeraNova on the spin-off date
has been recorded as a dividend.
The following is summarized financial information for the discontinued
operations of SeraNova:
JANUARY 1, 2000 TO
JULY 5, 2000
-------------------
Revenue............................. $ 36,019,000
Pre-tax loss........................ (6,986,000)
Income tax benefit.................. (2,095,000)
Loss from discontinued operations... (4,891,000)
NOTE 5 - NOTE RECEIVABLE - SERANOVA
On May 31, 2000, SeraNova and the Company formalized a $15,100,000
unsecured promissory note (the "Note") relating to net borrowings by SeraNova
from the Company through such date. The Note bears interest at the prime rate
plus 1/2%. The Company had recorded total accrued interest of $940,000 as of
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. On
September 29, 2000, the Company received a $3,000,000 payment from SeraNova.
F - 18
NOTE 5 - NOTE RECEIVABLE - SERANOVA (CONTINUED)
In September 2000, SeraNova consummated an $8,000,000 preferred stock
financing with two institutional investors. According to the mandatory
prepayment provisions of the Note, SeraNova was required to make a prepayment of
$3,000,000 on the Note as a result of the stock financing. Subsequently, the
Company finalized with SeraNova the terms of an agreement to waive, subject to
certain conditions, certain of the mandatory prepayment obligations arising as a
result of the financing. The terms of the new agreement included, among other
things, that SeraNova pay the Company (i) $500,000 upon execution of the
agreement; (ii) $500,000 on or before each of January 31, 2001, February 28,
2001, March 31, 2001, April 30, 2001 and May 31, 2001; and (iii) $400,000 on or
before December 15, 2000 to be applied either as (a) an advance payment towards
a contemplated services arrangement for hosting services to be provided to
SeraNova by 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 $2,060,000 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. 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
million and punitive damages in the amount of $10,000,000. The parties have
completed the discovery process and the Company has moved for summary judgment,
which is scheduled to be heard by the Court on April 4, 2003. 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.
F - 19
NOTE 5 - NOTE RECEIVABLE - SERANOVA (CONTINUED)
In addition, 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. (collectively, the "SeraNova
Group"). 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, 2002
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 (including attorney's
fees) plus reimbursement of administrative fees, in favor of the Company and
against the SeraNova Group jointly and severally. In an action filed in the
Superior Court of New Jersey, the Court confirmed the $624,000 award, jointly
and severally as to the SeraNova Group, and issued a writ of execution against
the SeraNova Group's assets. The Sheriff of Middlesex County levied this writ of
execution on October 8, 2002 against a bank account held by Silverline
Technologies, Inc. On October 16, 2002, pursuant to this writ, the bank turned
over $626,247 to the Sheriff. On November 6, 2002 the Sheriff sent the funds to
the Company's attorneys and the funds were deposited into an attorney trust
account on November 8, 2002. On December 13, 2002, the Company commenced an
action in the Superior Court of New Jersey, Chancery Division, to recover
additional amounts due and owing from the SeraNova Group under the Arbitration
Award and to determine whether HSBC Bank USA ("HSBC"), a creditor of the
SeraNova Group, has priority to the funds levied upon by the Sheriff. On January
31, 2003, the Court entered judgment in the Company's favor in the amount of
$218,805, representing the SeraNova Group's additional unpaid rent arrearages
under the arbitration award. On February 28, 2003, the Court entered judgment in
the Company's favor in the amount of $220,415, representing the Company's
attorney's fees in connection with the Company's efforts to enforce the SeraNova
Group's obligations under the arbitration award. On March 10, 2003, the Court
ordered HSBC to produce discovery proving its priority to the $626,247 being
held in trust. The Court is expected to rule on this issue on May 1, 2003. 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.
The Company is continuing to pursue its various legal options to obtain
payment from the SeraNova Group on the Note and outstanding lease obligations.
At the same time, the Company has also been periodically 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. However, the Company believed that the
liquidity issues plaguing the SeraNova Group required a reassessment of the
realizability of these outstanding amounts. Although no final resolution had
been reached, the Company believed that the substance of these discussions
provided 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 2002:
F - 20
NOTE 5 - 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.............. -- -- (361,000) (318,000) (679,000)
Non-cash items...................... (5,140,000) (1,257,000) -- -- (6,397,000)
------------- ------------ ------------- ------------ ------------
Accrued costs as of December 31,
2002 $ -- $ -- $ 1,140,000 $ 146,000 $ 1,286,000
============= ============ ============= ============ ============
In 2002, 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 charge of
$1,501,000 for certain lease exit costs. Such charge represents primarily an
accrued liability for 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. As of December 31, 2002,
$1,286,000 of the liability remains outstanding, of which $1,028,000 is included
in other long-term liabilities.
At December 31, 2002, the Company re-evaluated the realizability of the
carrying value of the Note, as well as any required change to the obligations
associated with the office space costs. Based upon the current status of the
negotiations with the SeraNova Group, the Company determined that no change to
the carrying value of the Note or the recorded liability was appropriate as of
December 31, 2002. However, if the Company were to collect less than $4,000,000
on the Note recorded as of December 31, 2002, or incur additional obligations or
costs, the SeraNova receivable impairment and/or charges would be increased in
future periods.
NOTE 6 - RESTRUCTURING AND OTHER SPECIAL CHARGES
In 2002, the Company recorded a $30,000 restructuring and other special
charges provision related to the downsizing of the Company's operations in
Australia. The charges resulted primarily from severance costs associated with
reducing employee headcount in the region.
In connection with the Company's plan to reduce costs and improve operating
efficiencies, the Company incurred a non-recurring charge of $5,628,000 related
to restructuring initiatives during the year ended December 31, 1999. The
restructuring charge included settlement of the former chief executive officer's
employment agreement and additional severance payment, expenses associated with
the termination of certain employees in the United States and United Kingdom,
the closing of certain satellite offices in the United States and an additional
office in Belgium, and costs to exit certain contractual obligations.
F - 21
NOTE 6 - RESTRUCTURING AND OTHER SPECIAL CHARGES (CONTINUED)
During the year 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 ("UK").
The charges associated with the ASP business in the United States included
a write-down of approximately $6,044,000 in purchased computer software and
$469,000 in fixed assets, as well as $215,000 in severance costs and $152,000 in
exit costs. The Company determined that an impairment charge was required, since
the recoverability of the value of the computer software and fixed assets,
acquired for use in the ASP service offering, seemed unlikely given current and
future expected market conditions. The severance costs and exit costs relate to
the reduction of headcount associated with the ASP service offering.
The Company determined that it did not need the expanded capacity
associated with a planned technology development and support center in Puerto
Rico. Accordingly, the Company reached an agreement with the Government of
Puerto Rico to terminate the project and to cancel the associated grant and
other related contracts. As part of the termination agreement, the Company was
released from all future obligations related to the project, but in exchange had
to forego reimbursement of $1,307,000 in previously incurred operating costs and
fixed assets, which had already been paid for by the Company. Accordingly, the
Company recorded a charge of $1,307,000, which is included in restructuring and
other special charges in the Consolidated Statements of Operations.
Finally, the Company executed a plan to reorganize and downsize the
Company's operations in the UK. The restructuring costs included the write-down
of $4,314,000 of intangible assets and $172,000 of fixed assets, as well as
severance costs of $315,000 and exit costs of $273,000 associated with reducing
employee headcount in the region.
In conjunction with the reorganization of the UK operations, the Company
performed an assessment of the carrying value of the intangible assets. The
intangible asset balance, consisting primarily of goodwill and assembled
workforce, represents the excess purchase price associated with the acquisition
of CPI Consulting Limited during 1998. The analysis of intangible assets was
conducted in accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" guidelines and involved a combination of
financial forecasting and cash flow analysis. The Company considered the recent
trend in the UK operations of declining revenues and increasing operating losses
and the resulting impact on cash flows. The Company also considered that certain
key founders of CPI Consulting Limited have left the Company to pursue other
interests. Based upon the impairment test that was conducted, the Company
recorded an intangible asset impairment charge of $4,314,000.
F - 22
NOTE 6 - 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
-------------------------------------------------------------------
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
Charges to operations during 2002......... 30,000 -- -- 30,000
Costs paid during 2002.................... (326,000) -- (384,000) (710,000)
------------- ------------ ------------ ------------
Accrued costs as of December 31, 2002..... $ 89,000 $ -- $ 83,000 $ 172,000
============= ============ ============ ============
The Company expects to pay out the remaining costs above within the next 12
months.
NOTE 7 - INCOME TAXES
Income taxes provision (benefit) consists of the following:
2002 2001 2000
------------ ------------ -------------
Current:
Federal......... $ -- $ 636,000 $ (1,951,000)
State........... 170,000 -- --
Foreign......... 397,000 386,000 506,000
------------ ------------ -------------
567,000 1,022,000 (1,445,000)
------------ ------------ -------------
Deferred:
Federal......... -- (430,000) 872,000
State........... -- -- --
Foreign......... (6,000) -- --
------------ ------------ -------------
(6,000) (430,000) 872,000
------------ ------------ -------------
Total............... $ 561,000 $ 592,000 $ (573,000)
============ ============ ============
F - 23
NOTE 7 - INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amount computed by applying
the statutory rate of 34% to income before income taxes. The principal reasons
for this difference are:
2002 2001 2000
------ ------ ------
Tax at federal statutory rate............... (34)% (34)% (34)%
Nondeductible expenses...................... 1 -- 1
State income tax, net of federal benefit.... 1 -- --
Foreign losses for which no benefit is
available............................... 12 25 7
Changes in valuation allowance.............. 12 8 16
Foreign operations taxed at less than U.S.
statutory rate, primarily India......... 10 10 2
Other....................................... 5 (4) --
------ ------ ------
Effective tax rate.......................... 7% 5% (8)%
====== ====== ======
In 1996, the Company elected a five-year tax holiday in India in accordance
with a local tax incentive program whereby no income taxes will be due for such
period. Such tax holiday was extended for an additional five years in 1999.
Effective April 1, 2000 pursuant to changes introduced by the Indian Finance
Act, 2000, the tax holiday previously granted is no longer available and has
been replaced in the form of a tax deduction incentive. Effective April 1, 2002,
the tax deduction incentive for income from the export of software and related
services is restricted to 90% of such income. Further, domestic revenue from
software and related services is taxable in India. The impact of this change is
not expected to be material to the consolidated financial statements of the
Company.
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities as of December
31, 2002 and 2001 are as follows:
2002 2001
---- ----
Deferred tax assets:
Allowance for doubtful accounts........ $ 574,000 $ 731,000
Vacation accrual....................... 213,000 326,000
Net operating losses................... 9,903,000 6,688,000
Other accrued liabilities.............. 301,000 293,000
----------- ----------
Total deferred tax assets................ 10,991,000 8,038,000
Deferred tax liability-accelerated
depreciation............................. (745,000) (621,000)
Valuation allowance...................... (8,668,000) (5,845,000)
----------- ----------
Net deferred tax asset................... $ 1,578,000 $1,572,000
=========== ==========
F - 24
NOTE 7 - INCOME TAXES (CONTINUED)
During 2002 and 2001, the Company generated operating losses. The Company
has provided a valuation allowance against certain of these net operating
losses, as the ability to utilize these losses may be limited in the future. Net
operating loss carryforwards expire in various years through 2022. Although the
realization of the deferred tax assets is not assured, management believes it is
more likely than not, that the 2002 net deferred tax asset of $1,578,000 will be
realized.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Tax-Free Spin-off of SeraNova
On July 5, 2000, the Company distributed SeraNova common stock to
shareholders in a transaction that was intended to be a tax-free spin-off
pursuant to Section 355 of the Internal Revenue Code ("Section 355") (See Note
4). If the distribution qualifies as a tax-free spin-off, neither the Company
nor the Company's shareholders recognize any gain or income in connection with
the transaction. However, Section 355 provides that the Company may be required
to recognize a gain on the transaction if the distribution is part of a plan
pursuant to which one or more persons acquire 50% or more of SeraNova common
stock within two years of the distribution date. The Company and SeraNova
executed a Tax Sharing Agreement, dated January 1, 2000 ("Tax Sharing
Agreement"), whereby SeraNova would indemnify the Company for any tax
liabilities in the event a future transaction of SeraNova results in the
spin-off being deemed a taxable event.
On October 27, 2000, SeraNova and Silverline Technologies Limited
("Silverline") announced that they had entered into an agreement and plan of
merger, under which Silverline would acquire SeraNova in exchange for American
depositary shares of Silverline and the assumption by Silverline of SeraNova
indebtedness. However, SeraNova management has represented that the merger with
Silverline was not contemplated at the time of the spin-off and accordingly, the
spin-off should be tax-free. Should the spin-off ultimately be construed as
taxable, the resultant tax liability could be up to $65,000,000, plus interest
and, depending on the facts that ultimately are established, penalties. SeraNova
and/or Silverline would be obligated to indemnify the Company for these amounts
under the Tax Sharing Agreement.
Employment Agreements
As of December 31, 2002, the Company had employment agreements with certain
of its executives, which provide for minimum payments in the event of
termination for reasons other than just cause. The aggregate amount of
compensation commitment in the event of termination under such agreements is
approximately $550,000.
F - 25
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Leases
The Company leases office space, office equipment and vehicles under
capital and operating leases that have initial or remaining non-cancelable lease
terms in excess of one year as of December 31, 2002. Future minimum aggregate
annual lease payments are as follows:
For the Years
Ending December 31, Capital Operating
------------------------------ ----------- ----------
2003.......................... $ 330,000 $2,227,000
2004.......................... 63,000 1,956,000
2005.......................... -- 1,787,000
2006.......................... -- 1,297,000
2007.......................... -- 1,289,000
Thereafter.................... -- 895,000
---------- ----------
Subtotal...................... 393,000 9,451,000
Less-Interest................. 15,000 --
378,000 9,451,000
Less-Current Portion.......... 315,000 2,227,000
---------- ----------
$ 63,000 $7,224,000
========== ==========
Rent expense for the years ended December 31, 2002, 2001 and 2000 was
$4,544,000, $4,647,000 and $3,940,000, respectively.
Tax Contingency in India
The Company's Indian subsidiary has received an assessment from the Indian
taxing authority denying tax exemptions claimed for certain revenue earned
during each of the fiscal years ended March 31, 1997 through March 31, 1999. The
assessment is for 28 million rupees, or approximately $580,000. 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 December 31, 2002. If the Company were not successful with
its appeals, which were filed in 2001 and 2002, a future charge of approximately
$580,000 would be recorded and reflected in the Company's consolidated statement
of operations.
Proxy Contest and Related Legal Matters
In 2002, the Company incurred $1,073,000 of charges related to the
Company's contested 2002 Annual Meeting of Shareholders ("Proxy Contest"). The
Proxy Contest 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 Proxy Contest charges included legal fees, proxy solicitation
services and printing, mailing and other costs.
F - 26
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
On June 26, 2002, Ashok Pandey filed a Complaint in the United States
District Court for the District of New Jersey, alleging that certain
shareholders of the Company constituted a group that held more than 5% of the
outstanding shares of the Company's common stock and had not filed a Schedule
13D disclosure statement with the Securities and Exchange Commission. On June
28, 2002, plaintiff obtained an ex parte injunctive order from the Court barring
Srini Raju, an alleged member of the "group" and a shareholder holding 4.61% of
the Company's common stock, from voting in the annual election. On July 12,
2002, after reviewing actual evidence of record, and hearing argument from
Pandey's counsel, the Court held that there was no basis to enjoin Mr. Raju from
voting his shares at the Annual Meeting. After the election, Pandey sought to
file an amended complaint dropping certain defendants, and adding others,
including the Company. On September 27, 2002, the Court granted plaintiff's
motion, and allowed certain limited discovery to proceed. On October 11, 2002,
the Company filed a motion for Judgment on the Pleadings in its favor, arguing
that the relief sought by plaintiff, the retroactive sterilization of Mr. Raju's
shares and the invalidation of his votes at the Annual Meeting, is not
sanctioned by law, and is unavailable as a remedy. In response, Pandey filed a
motion seeking leave to file a Second Amended Complaint, seeking to drop the
Section 13D claims against the Company and substitute them with claims brought
under Section 14A of the Securities and Exchange Act. On January 31, 2003, the
Court denied each of the parties' motions. The parties are continuing with the
discovery process.
On July 2, 2002, Ashok Pandey filed a complaint in the Superior Court of
New Jersey, Middlesex County, in connection with the Company's recent Proxy
contest with respect to the Annual Meeting. In his Complaint, plaintiff claimed
that Intelligroup's Board of Directors violated their fiduciary duties by
adjourning the Annual Meeting from July 2, 2002 to July 16, 2002. On July 3,
2002, the Court denied Plaintiff's application for emergent relief, and ruled
that Intelligroup could adjourn its Annual Meeting, finding that plaintiff's
conduct in obtaining ex parte injunctive relief in federal court enjoining the
voting of 4.61% of the Company's outstanding common stock without notice to the
Company, "estopped [Pandey] from complaining about the adjournment." Despite the
court's denial of his emergent application, plaintiff indicated to the Court on
August 16, 2002, that he would continue the litigation in an effort to have the
court sanction his unilateral attempt to hold an annual meeting and election on
July 2, 2002, despite the Company's adjournment of the meeting and the absence
of its Board of Directors and a quorum of its shareholders on July 2, 2002. The
Company filed its Answer and Affirmative Defenses on August 30, 2002 and
discovery is ongoing. On November 6, 2002, the Company filed a Motion for
Summary Judgment and on January 7, 2003, the Court granted Partial Summary
Judgment. A trial date has been scheduled for May 5, 2003.
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 filed an Answer to the Company's complaint denying
the Company's claims and discovery is ongoing. The Company does not believe that
the outcome of this claim will have a material adverse effect on the Company's
business, consolidated financial condition or consolidated results of
operations.
F - 27
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Other Legal Matters
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 same extent as
SeraNova for false and misleading statements constituting securities laws
violations and breach of contract. 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. On
September 30, 2002, the Court granted plaintiff's motion in part, finding
SeraNova liable for breach of contract as a matter of law. On March 27, 2003,
the parties agreed to the terms of a settlement agreement, which will be
effective upon payment of the settlement amount. Pursuant to such agreement, the
Company is obligated to pay its portion of the settlement amount equal to an
aggregate amount of $50,000 within two weeks. The payment by the Company of its
portion of the settlement amount will not have a material adverse effect upon
the Company's business, financial condition or results of operations.
The Company is engaged in other legal and administrative proceedings.
Except for the litigation related to the SeraNova Note (See Note 5), management
believes the outcome of these proceedings will not have a material adverse
effect on the Company's consolidated financial position or consolidated results
of operations.
F - 28
NOTE 9 - STOCK OPTION PLANS
The Company's stock option plans permit the granting of options to
employees, non-employee directors and consultants. The Option Committee of the
Board of Directors generally has the authority to select individuals who are to
receive options and to specify the terms and conditions of each option so
granted, including the number of shares covered by the option, the type of
option (incentive stock option or non-qualified stock option), the exercise
price, vesting provisions, and the overall option term. A total of 5,340,000
shares of common stock have been reserved for issuance under the plans. All of
the options issued pursuant to these plans expire ten years from the date of
grant.
Weighted Average
Number of Shares Exercise Price
--------------------------------------------------------------------------------------
Options Outstanding, December 31, 1999
(336,090 exercisable)................... 3,927,280 $ 9.55
Granted................................. 4,842,931 $ 4.94
Exercised............................... (581,450) $ 10.06
Canceled................................ (4,819,015) $ 9.31
--------------------------------------------------------------------------------------
Options Outstanding, December 31, 2000
(1,038,275 exercisable)................. 3,369,746 $ 3.18
Granted................................. 157,810 $ 1.07
Exercised............................... -- $ --
Canceled................................ (693,707) $ 3.41
--------------------------------------------------------------------------------------
Options Outstanding, December 31, 2001
(1,658,764 exercisable)................. 2,833,849 $ 3.10
Granted................................. 1,165,000 $ 0.94
Exercised............................... -- $ --
Canceled................................ (800,648) $ 2.86
--------------------------------------------------------------------------------------
Options Outstanding, December 31, 2002
(1,615,300 exercisable)................. 3,198,201 $ 2.37
============== =============
Effective with the spin-off of SeraNova on July 5, 2000, all unvested
Intelligroup stock options held by SeraNova employees were canceled.
Additionally, as of July 6, 2000, the exercise price of all employee and
director stock options was adjusted to offset the reduction in option value
caused by the spin-off of SeraNova. The exercise price of each stock option
grant outstanding as of July 5, 2000, was adjusted based on the percentage
change in closing price of the Company's stock on the distribution date of July
5, 2000, and the ex-dividend date of July 6, 2000. In accordance with FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation," the Company has concluded that there are no accounting
consequences for changing the exercise price of outstanding stock options as a
result of the spin-off.
F - 29
NOTE 9 - STOCK OPTION PLANS (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable at December 31, 2002:
Outstanding Exercisable
---------------------------------------- -----------------------------
Weighted
Average
Remaining Weighted Weighted
Exercise Price Number Life (in Average Number of Average
Range of shares years) Exercise Price shares Exercise Price
- ----------------------------------------------------------------- -----------------------------
$0.9000 to 0.9499 1,050,000 9.7 $ 0.9000 -- $ --
$0.9500 to 0.9999 19,250 8.5 $ 0.9717 3,750 $ 0.9750
$1.0000 to 1.4999 169,625 8.6 $ 1.1091 69,500 $ 1.1232
$1.5000 to 2.2499 337,803 7.4 $ 2.0244 261,453 $ 2.0756
$2.2500 to 2.7499 833,887 6.5 $ 2.5445 733,976 $ 2.5443
$2.7500 to 2.9999 304,500 6.8 $ 2.8005 228,000 $ 2.8004
$3.0000 to 4.4999 244,660 6.6 $ 4.2738 137,110 $ 4.2144
$4.5000 to 6.7499 165,176 5.5 $ 5.2977 128,611 $ 5.3527
$6.7500 to 9.9999 23,300 7.2 $ 8.6874 12,900 $ 8.6734
$10.0000 to 13.7500 50,000 6.6 $ 13.0760 40,000 $ 13.1464
--------- ---- ---------- --------- ----------
$0.9000 to 13.7500 3,198,201 7.8 $ 2.3723 1,615,300 $ 3.1167
========= =========
NOTE 10 - STOCK RIGHTS
In October 1998 the Company's Board of Directors declared a dividend
distribution of one Preferred Share Purchase Right ("Rights") for each
outstanding share of the Company's common stock. These Rights will expire in
November 2008 and trade with the Company's common stock. Such Rights are not
presently exercisable and have no voting power. In the event a person or
affiliated group of persons, acquires 20% or more, or makes a tender or exchange
offer for 20% or more of the Company's common stock, the Rights detach from the
common stock and become exercisable and entitle a holder to buy one
one-hundredth (1/100) of a share of preferred stock at $100.00.
If, after the Rights become exercisable, the Company is acquired or merged,
each Right will entitle its holder to purchase $200.00 market value of the
surviving company's stock for $100.00, based upon the current exercise price of
the Rights. The Company may redeem the Rights, at its option, at $.01 per Right
prior to a public announcement that any person has acquired beneficial ownership
of at least 20% of the Company's common stock. These Rights are designed
primarily to encourage anyone interested in acquiring the Company to negotiate
with the Board of Directors.
F - 30
NOTE 11 - RELATED PARTY TRANSACTIONS
During 2002, 2001 and 2000, the Company provided services to FirePond,
which produced revenues for the Company totaling approximately $329,000,
$156,000 and $307,000, respectively. A member of the Company's Board of
Directors, Klaus P. Besier, serves as the Chief Executive Officer of FirePond.
The Company provided implementation services to various end clients, as a
sub-contractor to FirePond. Services were priced at rates comparable to other
similar sub-contracting arrangements in which the Company regularly
participates.
During 2002, the Company provided implementation services to McCann
Erickson, which produced revenues for the Company totaling approximately
$242,000. A member of the Company's Board of Directors, Nic Di Iorio, serves as
the Chief Technology Officer of McCann Erickson. Services were priced at rates
comparable to other similar arrangements in which the Company regularly
participates.
NOTE 12 - 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. However, the Company has ceased
operations in Sweden as of January 1, 2003, due to continuing
operating losses. The European headquarters are located in Milton
Keynes, United Kingdom; and
o India - includes the operations of the Company in India,
including services provided on behalf of other Company
subsidiaries. The Indian headquarters are located in Hyderabad,
India.
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.
F - 31
NOTE 12 - SEGMENT DATA AND GEOGRAPHIC INFORMATION (CONTINUED)
Accordingly, the Company's operating results and financial position are
presented in the following geographic segments for the years ended December 31,
2002, 2001 and 2000.
UNITED STATES ASIA-PACIFIC EUROPE INDIA TOTAL
------------- ------------ ------ ----- -----
2002
- ----
Revenue....................... $ 78,712,000 $ 10,209,000 $ 6,024,000 $ 13,386,000 $ 108,331,000
Depreciation & amortization... 1,796,000 197,000 222,000 657,000 2,872,000 (1)
Operating income (loss)....... (7,037,000) (1,510,000) (1,093,000) 2,284,000 (7,356,000) (2)
Total assets.................. 30,633,000 4,851,000 2,170,000 6,465,000 44,119,000
2001
- ----
Revenue....................... $ 74,023,000 $ 13,213,000 $ 10,737,000 $ 12,440,000 $ 110,413,000
Depreciation & amortization... 2,167,000 253,000 684,000 591,000 3,695,000 (3)
Operating income (loss)....... (6,991,000) 368,000 (8,495,000) 3,078,000 (12,040,000) (4)
Total assets.................. 34,720,000 4,788,000 2,183,000 5,403,000 47,094,000
2000
- ----
Revenue....................... $ 79,602,000 $ 11,149,000 $ 17,976,000 $ 6,391,000 $ 115,118,000
Depreciation & amortization... 2,023,000 145,000 697,000 322,000 3,187,000 (5)
Operating income (loss)....... (6,228,000) 81,000 (1,741,000) 91,000 (7,797,000)
Total assets.................. 44,749,000 5,918,000 9,309,000 7,392,000 67,368,000
- ---------
(1) Excludes $830,000 of depreciation and amortization included in cost of
sales for the year ended December 31, 2002.
(2) Includes $8,362,000 of SeraNova receivable impairment and other charges,
$1,073,000 of proxy contest charges and $30,000 of restructuring and other
special charges for the year ended December 31, 2002.
(3) Excludes $780,000 of depreciation and amortization included in cost of
sales for the year ended December 31, 2001.
(4) Includes $13,261,000 of restructuring and other special charges for the
year ended December 31, 2001. Of the total restructuring and other special
charge, approximately $8,187,000 and $5,074,000 are included within the
operating losses of the United States and Europe, respectively.
(5) Excludes $293,000 of depreciation and amortization included in cost of
sales for the year ended December 31, 2000.
Included above is application maintenance and support revenues of
$27,601,000, $23,240,000 and $20,173,000 for the years ended December 31, 2002,
2001 and 2000, respectively. Other information related to the application
maintenance and support business is not available and the Company determined
that it would be impractical to calculate such data.
F - 32
NOTE 13 -QUARTERLY INFORMATION (UNAUDITED)
Fiscal Year Quarters
----------------------------------------------------------------------
First Second Third Fourth Total
----------------------------------------------------------------------
Year Ended December 31, 2002
- ----------------------------
Revenue.......................... $24,609,000 $26,476,000 $28,358,000 $28,888,000 $108,331,000
Gross margin..................... 7,421,000 8,264,000 8,355,000 8,517,000 32,557,000
Net income (loss)................ 11,000 (8,561,000) 13,000 54,000 (8,483,000)
Earnings per share - basic and
diluted:
Net income (loss) per share...... 0.00 (0.51) 0.00 0.00 (0.51)
YEAR ENDED DECEMBER 31, 2001
- ----------------------------
Revenue.......................... $30,789,000 $28,734,000 $25,538,000 $25,352,000 $110,413,000
Gross margin..................... 9,165,000 9,387,000 8,641,000 7,929,000 35,122,000
Net income (loss)................ 188,000 179,000 146,000 (13,106,000) (12,593,000)
Earnings per share - basic and
diluted:
Net income (loss) per share...... 0.01 0.01 0.01 (0.79) (0.76)
F - 33