UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
Commission File No. 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
-------------------------------
(Registrant's Telephone Number,
Including Area Code)
Indicate by checkmark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
----- -----
Indicate by checkmark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes: No: X
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Indicate the number of shares outstanding of each of the Issuer's classes
of common stock, as of May 12, 2003:
Class Number of Shares
----- ----------------
Common Stock, $.01 par value 16,644,625
INTELLIGROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)............... 1
Consolidated Balance Sheets as of March 31, 2003 and
December 31, 2002........................................... 2
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the Three Months Ended March 31, 2003
and 2002.................................................... 3
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2003 and 2002............................... 4
Notes to Consolidated Financial Statements.................. 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 37
Item 4. Controls and Procedures..................................... 37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 38
Item 3. Defaults Upon Senior Securities............................. 41
Item 5. Other Information........................................... 41
Item 6. Exhibits and Reports on Form 8-K............................ 42
SIGNATURES............................................................. 43
CERTIFICATIONS......................................................... 44
- i -
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- 1 -
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND DECEMBER 31, 2002
MARCH 31, DECEMBER 31,
2003 2002
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents..................................... $ 2,256,000 $ 1,163,000
Accounts receivable, less allowance for doubtful accounts of
$1,088,000 and $1,388,000 at March 31, 2003 and December
31, 2002, respectively.................................... 18,017,000 17,745,000
Unbilled services............................................. 5,727,000 6,818,000
Prepaid income taxes.......................................... 517,000 624,000
Deferred tax asset............................................ 1,088,000 1,088,000
Other current assets.......................................... 2,917,000 2,858,000
Note receivable - SeraNova.................................... -- 4,000,000
Assets held for sale.......................................... -- 3,069,000
------------ ------------
Total current assets................................... 30,522,000 37,365,000
Property and equipment, net................................... 5,229,000 5,725,000
Deferred tax asset............................................ 119,000 118,000
Other assets.................................................. 938,000 911,000
------------ ------------
$ 36,808,000 $ 44,119,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.............................................. $ 4,051,000 $ 5,229,000
Accrued payroll and related taxes............................. 7,123,000 5,891,000
Accrued expenses and other current liabilities................ 4,302,000 3,491,000
Deferred revenue.............................................. 1,050,000 1,280,000
Income taxes payable.......................................... 394,000 356,000
Current portion of long-term debt and obligations under
capital leases............................................ 6,051,000 6,374,000
Liabilities held for sale..................................... -- 1,681,000
------------ ------------
Total current liabilities.............................. 22,971,000 24,302,000
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Obligations under capital leases, less current portion.......... 64,000 63,000
Other long-term liabilities..................................... 932,000 1,028,000
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Total long-term liabilities............................ 996,000 1,091,000
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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 March 31,
2003 and December 31, 2002, respectively................. 166,000 166,000
Additional paid-in capital.................................... 41,366,000 41,366,000
Accumulated deficit........................................... (26,519,000) (19,168,000)
Accumulated other comprehensive loss.......................... (2,172,000) (3,638,000)
------------ ------------
Total shareholders' equity ............................. 12,841,000 18,726,000
------------ ------------
$ 36,808,000 $ 44,119,000
============ ============
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
- 2 -
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
THREE MONTHS
------------
ENDED MARCH 31,
---------------
2003 2002
-------------- --------------
Revenue ................................................ $ 27,235,000 $ 23,005,000
Cost of sales .......................................... 19,309,000 16,025,000
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Gross profit ....................................... 7,926,000 6,980,000
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Selling, general and administrative expenses ........... 6,868,000 5,996,000
Depreciation and amortization........................... 699,000 692,000
SeraNova receivable impairment and other charges........ 5,060,000 --
Proxy contest charges .................................. 297,000 --
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Total operating expenses ........................... 12,924,000 6,688,000
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Operating income (loss) ............................ (4,998,000) 292,000
Interest income ........................................ 13,000 7,000
Interest expense ....................................... (108,000) (105,000)
Other income (expense).................................. (49,000) 40,000
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Income (loss) from continuing operations before
income tax provision ............................... (5,142,000) 234,000
Income tax provision ................................... 75,000 104,000
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Income (loss) from continuing operations ............... (5,217,000) 130,000
Loss from discontinued operations (including loss
on sale of $1,706,000 in 2003), net of tax
provision of $15,000 and $27,000, respectively (2,134,000) (119,000)
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Net income (loss) ...................................... $ (7,351,000) $ 11,000
============= =============
Earnings per share:
Basic earnings (loss) per share:
Income (loss) from continuing operations ......... $ (0.31) $ 0.01
Loss from discontinued operations ................ (0.13) (0.01)
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Net income (loss) per share.................... $ (0.44) $ 0.00
============= =============
Weighted average number of common shares - basic.. 16,630,000 16,630,000
============= =============
Diluted earnings (loss) per share:
Income (loss) from continuing operations.......... $ (0.31) $ 0.01
Loss from discontinued operations ................ (0.13) (0.01)
------------- -------------
Net income (loss) per share.................... $ (0.44) $ 0.00
============= =============
Weighted average number of common shares -
diluted........................................ 16,630,000 16,631,000
============= =============
Comprehensive Income (Loss)
- ---------------------------
Net income (loss) ...................................... $ (7,351,000) $ 11,000
Other comprehensive income (loss) -
Currency translation adjustments ................... 1,466,000 (424,000)
------------- -------------
Comprehensive loss ..................................... $ (5,885,000) $ (413,000)
============= =============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
- 3 -
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
THREE MONTHS ENDED MARCH 31,
2003 2002
-------------- -------------
Cash flows from operating activities:
Net income (loss).................................................. $ (7,351,000) $ 11,000
Less: loss from discontinued operations, net of tax................ (2,134,000) (119,000)
------------- ------------
Income (loss) from continuing operations........................... (5,217,000) 130,000
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities of continuing operations:
Depreciation and amortization.................................. 880,000 954,000
Provision for doubtful accounts................................ 8,000 197,000
SeraNova receivable impairment and other charges............... 5,060,000 --
Deferred income taxes.......................................... (1,000) 358,000
Changes in operating assets and liabilities:
Accounts receivable.............................................. (280,000) (49,000)
Unbilled services................................................ 1,091,000 583,000
Prepaid income taxes............................................. 107,000 (38,000)
Other current assets............................................. (59,000) (183,000)
Other assets..................................................... (27,000) (384,000)
Accounts payable................................................. (1,178,000) (110,000)
Accrued payroll and related taxes................................ 1,232,000 138,000
Accrued expenses and other liabilities........................... (194,000) (225,000)
Accrued restructuring charges.................................... (55,000) (437,000)
Deferred revenue................................................. (230,000) (955,000)
Income taxes payable............................................. 38,000 (67,000)
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Net cash provided by (used in) operating activities of
continuing operations........................................... 1,175,000 (88,000)
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Cash flows from investing activities:
Purchase of equipment ........................................... (384,000) (298,000)
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Net cash used in investing activities of continuing operations...... (384,000) (298,000)
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Cash flows from financing activities:
Principal payments under capital leases.......................... (108,000) (165,000)
Other borrowings (repayments).................................... (94,000) --
Net change in line of credit borrowings.......................... (216,000) 659,000
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Net cash provided by (used in) financing activities of
continuing operations........................................... (418,000) 494,000
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Effect of foreign currency exchange rate changes on cash............ 1,466,000 (424,000)
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Net increase (decrease) in cash and cash equivalents from
continuing operations ............................................ 1,839,000 (316,000)
Net increase (decrease) in cash and cash equivalents from
discontinued operations .......................................... (746,000) 125,000
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Net increase (decrease) in cash and cash equivalents ................. 1,093,000 (191,000)
Cash and cash equivalents at beginning of period...................... 1,163,000 1,620,000
------------- ------------
Cash and cash equivalents at end of period............................ $ 2,256,000 $ 1,429,000
============= ============
Supplemental disclosures of cash flow information:
Cash paid for income taxes.......................................... $ -- $ 408,000
============= ============
Cash paid for interest.............................................. $ 108,000 $ 105,000
============= ============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
- 4 -
INTELLIGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements and accompanying financial
information as of March 31, 2003 and for the three months ended March 31, 2003
and 2002 are unaudited and, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the financial position of the
Company at such dates and the operating results and cash flows for those
periods. The consolidated financial statements included herein have been
prepared in accordance with accounting principles generally accepted in the
United States of America and the instructions of Form 10-Q and Rule 10-01 of
Regulation S-X. Pursuant to accounting requirements of the Securities and
Exchange Commission applicable to quarterly reports on Form 10-Q, the
accompanying consolidated financial statements and these notes do not include
all disclosures required by accounting principles generally accepted in the
United States of America for audited financial statements. Accordingly, these
statements should be read in conjunction with the accounting policies and Notes
to Consolidated Financial Statements included in the Company's most recent
annual financial statements. Such annual financial statements did not reflect
the classification of certain subsidiaries as held for sale (see Note 5). The
consolidated balance sheet as of December 31, 2002 included herein has been
derived from the audited consolidated balance sheet included the Company's
Annual Report on Form 10-K, in order to present this classification with respect
to all subsidiaries divested subsequent to that date.
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.
The results of operations for interim periods are not necessarily
indicative of those that may be achieved for a full fiscal year.
- 5 -
NOTE 2 - 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. Financial Accounting Standards
Board ("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.
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:
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
2003 2002
----------------- -----------------
Net income (loss), as reported............................ $ (7,351,000) $ 11,000
Deduct: total stock-based employee compensation expense
determined under fair-value-based method for all awards,
net of related tax effects................................ (199,000) (1,267,000)
------------ ------------
Pro forma net loss........................................ $ (7,550,000) $ (1,256,000)
============ ============
Basic earnings (loss) per share:
as reported........................................... $ (0.44) $ 0.00
============ ============
pro forma............................................. $ (0.45) $ (0.08)
============ ============
Diluted earnings (loss) per share:
as reported........................................... $ (0.44) $ 0.00
============ ============
pro forma............................................. $ (0.45) $ (0.08)
============ ============
- 6 -
NOTE 2 - STOCK-BASED COMPENSATION (CONTINUED)
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 109% and 109%, risk-free
interest rate of 1.72% and 4.02% and expected lives of 2.3 years and 2.3 years,
in 2003 and 2002, respectively.
NOTE 3 - EARNINGS PER SHARE
Basic earnings (loss) per share is computed by dividing net income (loss)
attributable to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings (loss) per share is computed
by dividing net income (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:
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
2003 2002
Income (loss) from continuing operations.................... $ (5,217,000) $ 130,000
Loss from discontinued operations........................... (2,134,000) (119,000)
------------ ------------
Net income (loss)........................................... $ (7,351,000) $ 11,000
============ ============
Basic earnings (loss) per share:
Weighted average number of common shares - basic.......... 16,630,000 16,630,000
------------ ------------
Basic income (loss) per share from continuing operations.. $ (0.31) $ 0.01
Basic loss per share from discontinued operations......... (0.13) (0.01)
------------ ------------
Basic net income (loss) per share......................... $ (0.44) $ 0.00
============ ============
Diluted earnings (loss) per share:
Weighted average number of common shares - diluted ....... 16,630,000 16,631,000
------------ ------------
Diluted income (loss) per share from continuing
operations.............................................. $ (0.31) $ 0.01
Diluted loss per share from discontinued operations....... (0.13) (0.01)
------------ ------------
Diluted net income (loss) per share....................... $ (0.44) $ 0.00
============ ============
Stock options, which would be antidilutive (1,917,000 and 2,786,000 as of
March 31, 2003 and 2002, respectively) have been excluded from the calculations
of diluted shares outstanding and diluted earnings (loss) per share.
NOTE 4 - LINES OF CREDIT
On May 31, 2000, the Company and the Bank entered into a three-year
revolving credit facility. Such credit facility is comprised of a revolving line
of credit pursuant to which the Company can borrow up to $20,000,000 either at
the Bank's prime rate per annum or the Euro Rate plus 1.75% to 2.5% based upon
the Company's ratio of debt to earnings before interest, taxes, depreciation and
amortization ("EBITDA"). The credit facility is collateralized by substantially
all of the assets of the Company's United States based operations. The maximum
- 7 -
NOTE 4 - LINES OF CREDIT (CONTINUED)
borrowing availability under the line of credit is based upon a percentage of
eligible billed and unbilled accounts receivable, as defined. As of March 31,
2003, the Company had outstanding borrowings under the credit facility of
$5,843,000. The Company estimates undrawn availability under the credit facility
to be $7,544,000 as of March 31, 2003. As of December 31, 2002, the Company had
outstanding borrowings under the credit facility of $6,059,000.
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 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.
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, as of December
31, 2002 only, 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 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
- 8 -
NOTE 4 - LINES OF CREDIT (CONTINUED)
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.
As a result of the SeraNova receivable impairment and other related charges
and the Proxy Contest charges incurred during the quarter ended March 31, 2003,
the Company was not in compliance with the consolidated net worth,
unconsolidated net worth and EBITDA covenants as of March 31, 2003. The Company
is currently negotiating with the Bank and expects to receive a waiver of the
existing covenant defaults. There can be no assurance, however, that the Company
will be able to obtain a waiver to the agreement on terms acceptable to the
Company.
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.
Interest expense on debt and obligations under capital leases approximated
$108,000 and $105,000 for the three months ended March 31, 2003 and 2002,
respectively.
NOTE 5 - DISCONTINUED OPERATIONS
On April 2, 2003, the Company consummated the sale (the "Sale"), effective
as of March 1, 2003, of Intelligroup Singapore Pte Ltd., a Singapore
corporation; Intelligroup Hong Kong Limited, a Hong Kong corporation;
Intelligroup Australia Pty limited, an Australian corporation; and Intelligroup
New Zealand Limited, a New Zealand corporation, together representing the
Company's Asia-Pacific group of subsidiary companies, operating in Australia,
New Zealand, Singapore, Hong Kong and Indonesia (together, the "Subsidiaries"),
to Soltius Global Solutions PTE Ltd, a Singapore corporation ("Soltius"). As
consideration, the Company received a 5% minority shareholding in Soltius and
$650,000 in cash to be paid by Soltius to the Company over a period of 12
months. The consideration was determined as a result of arms-length negotiations
between the parties.
The Consolidated Financial Statements of the Company have been reclassified
to reflect the Sale of the Subsidiaries to Soltius as of March 31, 2003.
Accordingly, the assets, liabilities, results of operations, and cash flows of
the Subsidiaries have been segregated in the Consolidated Balance Sheets,
Consolidated Statements of Operations and Comprehensive Income (Loss) and
Consolidated Statements of Cash Flows. The net operating results, assets,
liabilities and net cash flows of the Subsidiaries have been reported as
discontinued operations.
- 9 -
NOTE 5 - DISCONTINUED OPERATIONS (CONTINUED)
Summarized financial information for the discontinued operations of the
Subsidiaries is as follows:
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
2003 2002
---- ----
Revenue..................................................... $ 1,691,000 $ 1,604,000
Pre-tax loss................................................ (413,000) (92,000)
Income tax provision........................................ 15,000 27,000
Loss from discontinued operations, excluding loss on sale... (428,000) (119,000)
December 31, 2002
-----------------
Current assets.............................................. $ 2,393,000
Total assets................................................ 3,069,000
Current liabilities......................................... 1,681,000
Net intercompany liabilities................................ 3,619,000
Total liabilities........................................... 5,300,000
Net assets (deficit) of discontinued operations............. (2,231,000)
The Company reported a loss on the sale of the Subsidiaries of
$1,706,000 for the three months ended March 31, 2003.
NOTE 6 - NOTE RECEIVABLE - SERANOVA
On May 31, 2000, SeraNova, Inc. ("SeraNova") and the Company formalized a
$15,100,000 unsecured promissory note (the "Note") relating to net borrowings by
SeraNova from the Company through such date. The Note bears interest at the
prime rate plus 1/2%. The Company 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.
In September 2000, SeraNova consummated an $8,000,000 preferred stock
financing with two institutional investors. According to the mandatory
prepayment provisions of the Note, SeraNova was required to make a prepayment of
$3,000,000 on the Note as a result of the stock financing. Subsequently, the
Company finalized, with SeraNova, the terms of an agreement to waive, subject to
certain conditions, certain of the mandatory prepayment obligations arising as a
result of the financing. The terms of the new agreement included, among other
things, that SeraNova pay the Company (i) $500,000 upon execution of the
agreement; (ii) $500,000 on or before each of January 31, 2001, February 28,
2001, March 31, 2001, April 30, 2001 and May 31, 2001; and (iii) $400,000 on or
before December 15, 2000 to be applied either as (a) an advance payment towards
a contemplated services arrangement for hosting services to be provided to
SeraNova by Company (the "Hosting Agreement"); or (b) in the event that no such
Hosting Agreement is executed on or before December 15, 2000, an additional
advance prepayment toward the principal of the Note.
- 10 -
NOTE 6 - NOTE RECEIVABLE - SERANOVA (CONTINUED)
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 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. On April 17,
2003, the Court granted partial summary judgment and required supplemental
briefing on certain issues. A trial date is expected to be scheduled thereafter.
The Company believes that there is no basis to support the amounts claimed by
SeraNova in its counterclaim for compensatory and punitive damages. 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.
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
- 11 -
NOTE 6 - NOTE RECEIVABLE - SERANOVA (CONTINUED)
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 June 2, 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 as of June 30, 2002. 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 $8,362,000 of SeraNova receivable
impairment and other charges as of June 30, 2002. Specifically, the Company
recorded a $5,140,000 charge to write-down the carrying value of the Note to
$4,000,000. Additionally, the Company recorded a $1,257,000 charge to write-off
the carrying value of other SeraNova receivables (primarily, accrued interest on
the Note and a receivable for a system implementation project). Also, the
Company recorded a charge of $1,501,000 for certain lease exit costs. Such
charge represents primarily an accrued liability for obligated space and
equipment 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.
As of March 31, 2003, the Company believes there has been an apparent
deterioration in the financial condition of the SeraNova Group. Accordingly, the
Company re-assessed, as of March 31, 2003, the likelihood of recovering amounts
owed by the SeraNova Group as well as the assumptions used in recording the
original lease obligation charge. Additionally, the Company was notified during
the first quarter of 2003 of its obligation to pay additional office space and
equipment rentals, which had been previously assigned to SeraNova by the
Company, because the SeraNova Group had failed to make the required payments.
- 12 -
NOTE 6 - NOTE RECEIVABLE - SERANOVA (CONTINUED)
Although the Company expects to pursue the full legal prosecution of the
SeraNova Group, the Company believes the apparent financial condition of the
SeraNova Group warrants the write-off of any receivables due from the SeraNova
Group. Additionally, the Company has re-evaluated and adjusted its lease
obligations (including settlements negotiated by the Company) involving the
SeraNova Group as of March 31, 2003.
WRITE-DOWN WRITE-OFF LEASE
OF NOTE OF OTHER OBLIGATIONS LEGAL AND
RECEIVABLE RECEIVABLES AND OTHER
- SERANOVA - SERANOVA SETTLEMENTS 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
Charges to operations during 2003...... 4,000,000 -- 795,000 265,000 5,060,000
Costs paid during 2003................. -- -- (215,000) (180,000) (395,000)
Non-cash items......................... (4,000,000) -- -- -- (4,000,000)
------------- ------------ ------------- ------------ ------------
Accrued costs as of March 31, 2003..... $ -- $ -- $ 1,720,000 $ 231,000 $ 1,951,000
============= ============ ============= ============ ============
As of March 31, 2003, $1,951,000 of the liability remains outstanding, of
which $932,000 is included in other long-term liabilities.
NOTE 7 - RESTRUCTURING AND OTHER SPECIAL CHARGES
In December 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.
During the quarter ended December 31, 2001, in an effort to further refine
the Company's business strategy around its core competencies and to refocus on
more active markets, the Company recorded a $13,261,000 restructuring and other
special charges provision. The charges, which were mainly non-cash in nature,
were related primarily to the ASP business in the United States, the termination
of an agreement to build and operate a technology development and support center
in Puerto Rico, and to the restructuring and downsizing of the Company's
operations in the United Kingdom.
- 13 -
NOTE 7 - 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
Costs paid during 2003.................... (55,000) -- -- (55,000)
------------- ------------ ------------- ------------
Accrued costs as of March 31, 2003........ $ 34,000 $ -- $ 83,000 $ 117,000
============= ============ ============= ============
The Company expects to pay out the remaining costs above within the next 9
months.
NOTE 8 - SEGMENT DATA AND GEOGRAPHIC INFORMATION
The Company operates in one industry, information technology solutions and
services.
On April 2, 2003, the Company consummated the sale, effective as of March
1, 2003, of its Asia-Pacific group of subsidiary companies, operating in
Australia, New Zealand, Singapore, Hong Kong and Indonesia (See Note 5). The
operating results and financial position of the Asia-Pacific group of subsidiary
companies are reported as discontinued operations for all periods presented. The
Company now has four reportable operating segments from continuing operations,
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, Puerto Rico, South America and
Canada. 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 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;
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. The European headquarters are located in
Milton Keynes, United Kingdom; and
- 14 -
NOTE 8 - SEGMENT DATA AND GEOGRAPHIC INFORMATION (CONTINUED)
o Japan - includes the operations of the Company in Japan. The Japanese
headquarters are located in Tokyo, Japan.
Each of the operating segments has a Managing Director, or equivalent
position, which reports directly to the Chief Executive Officer (CEO).
Currently, the CEO and President is fulfilling the requirements of this position
in the US. The CEO has been identified as the Chief Operating Decision Maker
(CODM) because he has final authority over resource allocation decisions and
performance assessment. The CODM regularly receives certain discrete financial
information about the geographical operating segments, including primarily
revenue and operating income, to evaluate segment performance.
Accordingly, the Company's operating results and financial position for its
continuing operations are presented in the following geographic segments for the
three months ended March 31, 2003 and 2002.
UNITED STATES INDIA EUROPE JAPAN TOTAL
------------- ----- ------ ----- -----
THREE MONTHS ENDED MARCH 31, 2003
- ---------------------------------
Revenue....................... $ 21,349,000 $ 3,487,000 $ 1,481,000 $ 918,000 $ 27,235,000
Depreciation & amortization... 451,000 204,000 36,000 8,000 699,000 (1)
Operating income (loss)....... (5,549,000) 493,000 (3,000) 61,000 (4,998,000) (2)
Total assets.................. 25,453,000 7,556,000 2,032,000 1,767,000 36,808,000
THREE MONTHS ENDED MARCH 31, 2002
- ---------------------------------
Revenue....................... $ 17,469,000 $ 3,054,000 $ 1,585,000 $ 897,000 $ 23,005,000
Depreciation & amortization... 474,000 148,000 57,000 13,000 692,000 (3)
Operating income (loss)....... 115,000 483,000 (189,000) (117,000) 292,000
Total assets.................. 33,371,000 5,877,000 1,917,000 2,138,000 43,303,000 (4)
- -----------
(1) Excludes $181,000 of depreciation and amortization included in cost of
sales for the three months ended March 31, 2003.
(2) Includes $5,060,000 of SeraNova receivable impairment and other
charges and $297,000 of proxy contest charges for the three months
ended March 31, 2003.
(3) Excludes $262,000 of depreciation and amortization included in cost of
sales for the three months ended March 31, 2002.
(4) Excludes $3,087,000 of net assets from discontinued operations as of
March 31, 2002.
Included above are application management and support revenues of
$6,691,000 and $6,171,000 for the three months ended March 31, 2003 and 2002,
respectively. Other information related to the application management and
support business is not maintained and the Company determined that it would be
impractical to calculate such data.
- 15 -
NOTE 9 - 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"). 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 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.
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 March 31, 2003. 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
During the three months ended March 31, 2003, the Company incurred $297,000
of Proxy Contest charges. As discussed in Note 4, 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. Since the second
quarter of 2002, the Company has incurred cumulative Proxy Contest charges of
$1,370,000. The cumulative Proxy Contest charges included legal fees, proxy
solicitation services and printing, mailing and other costs. Legal costs related
to this matter continue to be incurred.
- 16 -
NOTE 9 - 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 continued 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. The discovery process is ongoing and a
discovery master has been appointed to hear discovery disputes. The trial date,
originally scheduled for May 5, 2003, has been adjourned and will be
rescheduled.
- 17 -
NOTE 9 - CONTINGENCIES (CONTINUED)
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.
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. The parties executed
a settlement agreement, which became effective upon payment of the settlement
amount, including the Company's portion of the settlement amount equal to an
aggregate amount of $50,000. The Company has accrued such amount in the
consolidated balance sheet as of March 31, 2003.
The Company is engaged in other legal and administrative proceedings.
Management believes the outcome of these proceedings will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
- 18 -
ITEM 2. 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 October 1987, the Company first began to provide systems integration and
custom software development services to customers. In 1994, the Company began to
diversify its customer base by expanding the scope of its systems integration
and custom development services to include Enterprise Resource Planning ("ERP")
software. ERP software products are pre-packaged solutions for a wide-range of
business areas, including financial information, manufacturing and human
resources. For prospective customers, ERP products are an alternative to the
custom design and development of their own applications. Although ERP products
are pre-packaged solutions, there is a significant amount of technical work
involved in implementing them and tailoring their use for a particular
customer's needs.
Throughout the mid-to-late 1990s, the Company grew significantly by
capitalizing on the business opportunity to provide implementation and
customization services work to the expanding ERP market. The Company first began
to provide these technical services to customers implementing SAP software
before expanding its service offerings to include ERP products developed by
Oracle in 1995 and PeopleSoft in 1997.
In late 1999, the Company made the strategic decision to leverage its
traditional application integration and consulting experience and reposition
Intelligroup for future growth by focusing on the emerging Application Service
Provider ("ASP") market. At the same time, the Company made the strategic
decision to spin-off its Internet services business to its shareholders.
Accordingly, on January 1, 2000, the Company transferred its Internet
applications services and management consulting businesses to SeraNova, Inc.
("SeraNova"), a wholly owned subsidiary of the Company on such date.
On July 5, 2000, the Company distributed all of the outstanding shares of
the common stock of SeraNova then held by the Company to holders of record of
the Company's common stock as of the close of business on May 12, 2000 (or to
their subsequent transferees) in accordance with the terms of a Distribution
Agreement dated as of January 1, 2000 between the Company and SeraNova.
During the second half of 2000, finding that the market for ASP services
had not developed and grown as projected by market analysts, the Company
significantly reduced its investment in the ASP business model. Expenditures for
marketing and direct selling initiatives were significantly decreased, as were
the infrastructure and personnel that supported the
- 19 -
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.
On April 2, 2003, the Company consummated the sale (the "Sale"), effective
as of March 1, 2003, of its Asia-Pacific group of subsidiary companies,
operating in Australia, New Zealand, Singapore, Hong Kong and Indonesia
(together, the "Subsidiaries"), to Soltius Global Solutions PTE Ltd, a Singapore
corporation ("Soltius"). As consideration, the Company received a 5% minority
shareholding in Soltius and $650,000 in cash to be paid by Soltius to the
Company over a period of 12 months. The consideration was determined as a result
of arms-length negotiations between the parties.
The Consolidated Financial Statements of the Company have been reclassified
to reflect the Sale of the Subsidiaries to Soltius as of March 31, 2003.
Accordingly, the assets, liabilities, results of operations, and cash flows of
the Subsidiaries have been segregated in the Consolidated Balance Sheets,
Consolidated Statements of Operations and Comprehensive Income (Loss) and
Consolidated Statements of Cash Flows and have been reported as discontinued
operations.
Financial information regarding the Company's geographic areas and results
of operations for continuing operations appears in the footnote entitled Segment
Data and Geographic Information in the Notes to the Consolidated Financial
Statements included in Part 1. Financial Information.
The majority of the Company's revenues are derived from professional
services rendered to customers. Revenue is typically recognized as services are
performed. The Company's services range from providing customers with a single
consultant to multi-personnel full-scale projects. Although the Company has
contracts with many of its customers to provide its services, in general, such
contracts are terminable upon relatively short notice, typically not more than
30 days. There can be no assurance that the Company's customers will continue to
enter into contracts with the Company or that existing contracts will not be
terminated. The Company provides its services either directly to end-user
organizations, or as a member of a consulting team assembled by another
information technology consulting firm. Where contractual provisions permit,
customers also are billed for reimbursement of expenses incurred by the Company
on the customers' behalf.
- 20 -
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 has provided services on certain projects in which it, at the
request of the clients, offered a fixed price for its services. For the year
ended December 31, 2002, revenues derived from projects under fixed price
contracts represented 35% of the Company's total revenue. Fixed price contracts,
in the aggregate, represented 43% of the Company's total revenue during the
three months ended March 31, 2003. No single fixed price project was material to
the Company's business during 2002 or during the three months ended March 31,
2003. 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 three months ended March 31, 2003 and the year ended December
31, 2002, the Company's ten largest customers accounted for in the aggregate,
approximately 49% and 42% of its revenue, respectively. For the three months
ended March 31, 2003, no single customer accounted for more than 10% of revenue.
For the year ended December 31, 2002, one customer accounted for more than 10%
of revenue. For the three months ended March 31, 2003 and the year ended
December 31, 2002, 18% and 24%, 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.
- 21 -
For each of the three months ended March 31, 2003 and the year ended
December 31, 2002, approximately 62% 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 three months ended March
31, 2003 and the year ended December 31, 2002, approximately 22% of the
Company's total revenue was derived from projects in which the Company
implemented, extended, maintained, managed or supported software developed by
PeopleSoft. For the three months ended March 31, 2003 and the year ended
December 31, 2002, approximately 7% and 9%, respectively, of the Company's total
revenue was derived from projects in which the Company implemented, extended,
maintained, managed or supported software developed by Oracle.
The Company's most significant cost is project personnel expenses, which
consist of consultant salaries, benefits and payroll-related expenses. Thus, the
Company's financial performance is based primarily upon billing margin (billable
hourly rate less the cost to the Company of a consultant on an hourly basis) and
personnel utilization rates (billable hours divided by paid hours).
The Company currently serves the United States market with its headquarters
in Edison (New Jersey), and a branch office in Atlanta (Georgia). The Company
also maintains local offices to serve the markets in Denmark, India, Japan and
the United Kingdom. The Company leases its headquarters in Edison, New Jersey.
Such lease has an initial term of ten (10) years, which commenced in September
1998.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND RISKS
The Company's critical accounting policies are set forth in its Annual
Report on Form 10-K for the year ended December 31, 2002. There has been no
change, update or revision to the Company's critical accounting policies
subsequent to the filing of the Company's Form 10-K for the year ended December
31, 2002.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, including,
without limitation, statements regarding the Company's intention to shift more
of its focus towards the management and support of customers' enterprise,
e-commerce and m-commerce applications. Such forward-looking statements include
risks and uncertainties, including, but not limited to:
o the continued uncertainty associated with the slowdown in economies
worldwide, including its impact on IT spending habits by customers;
o the continued uncertainty of the outsourcing market and revenues
derived from anticipated application management and support business;
- 22 -
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) risks associated with fixed price contracts;
o changes in the Company's billing and employee utilization rates;
o the Company's ability to manage its business effectively, which will
require the Company (a) to continue developing and improving its
operational, financial and other internal systems, as well as its
business development capabilities, (b) to attract, train, retain,
motivate and manage its employees, (c) to continue to maintain high
rates of employee utilization at profitable billing rates, (d) to
successfully integrate the personnel and businesses acquired by the
Company, and (e) to maintain project quality, particularly if the size
and scope of the Company's projects increase;
o the Company's limited operating history within the outsourcing line of
business;
o the Company's reliance on continued relationships with SAP America,
Oracle and PeopleSoft, and the Company's present partnership status;
o the Company's substantial reliance on key customers and large
projects;
o the highly competitive nature of the markets for the Company's
services;
o the Company's ability to successfully address the continuing changes
in information technology, evolving industry standards and changing
customer objectives and preferences;
o the Company's reliance on the continued services of its key executive
officers and leading technical personnel;
o the Company's ability to attract and retain a sufficient number of
highly skilled employees in the future;
o the Company's ability to protect its intellectual property rights;
- 23 -
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.
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
----------------------------------
THREE MONTHS ENDED
----------------------------------
MARCH 31,
----------------------------------
2003 2002
---- ----
Revenue.............................................. 100.0% 100.0%
Cost of sales........................................ 70.9 69.7
------ ------
Gross profit..................................... 29.1 30.3
Selling, general and administrative
expenses........................................... 25.2 26.0
Depreciation and amortization expenses............... 2.6 3.0
SeraNova receivable settlement and related charges... 18.6 --
Proxy contest charges................................ 1.1 --
------ ------
Total operating expenses......................... 47.5 29.0
------ ------
Operating income (loss).......................... (18.4) 1.3
Interest income...................................... 0.0 0.0
Interest expense..................................... (0.4) (0.5)
Other income (expense)............................... (0.1) 0.2
------ ------
Income (loss) from continuing operations before
income tax provision.............................. (18.9) 1.0
Income tax provision................................. 0.3 0.4
------ ------
Income (loss) from continuing operations............. (19.2)% 0.6%
====== ======
- 24 -
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31,
2002
The following discussion compares the consolidated results from continuing
operations for the three months ended March 31, 2003 and the three months ended
March 31, 2002.
Revenue. Total revenue increased by 18.4%, or $4.2 million, from $23.0
million for the three months ended March 31, 2002, to $27.2 million for the
three months ended March 31, 2003. The increase was attributable primarily to
growth in revenue generated in the United States (an increase of $3.9 million)
and India (an increase of $433,000), offset by a slight decline in revenue
generated in Europe (a decrease of $104,000). 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.
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 20.5%, or $3.3 million, from $16.0 million
for the three months ended March 31, 2002, to $19.3 million for the three months
ended March 31, 2003. The Company's gross profit increased by 13.6%, or
$946,000, from $7.0 million for the three months ended March 31, 2002, to $7.9
million for the three months ended March 31, 2003. The increase in gross profit
results from the increase in revenue. Gross margin decreased to 29.1% for the
three months ended March 31, 2003, from 30.3% for the three months ended March
31, 2002. The decline in gross margin results primarily from a combination of
factors affecting revenue recognition including timing of project milestones,
unanticipated weather related downtime and customer driven project commencement
delays. Additionally, the Company has continued to experience pricing pressures,
due to the increased competition for new projects.
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 increased by 14.5% or $872,000, to $6.9 million for the three months
ended March 31, 2003, from $6.0 million for the three months ended March 31,
2002, but decreased as a percentage of revenue to 25.2% from 26.0%,
respectively. The increase in selling, general and administrative expenses, in
absolute dollars, was related primarily to discretionary sales and marketing
expenditures, which vary in proportion to changes in revenue. The decrease in
selling, general and administrative expenses, as a percentage of revenue,
reflects concerted efforts by management to control expenditures in conjunction
with growth in revenue.
Depreciation and amortization. Depreciation and amortization expenses
increased to $699,000 for the three months ended March 31, 2003, compared to
$692,000 for the three months ended March 31, 2002. The increase is due
primarily to additional capital expenditures during the quarter ended March 31,
2003.
- 25 -
SeraNova receivable impairment and other charges. During the three months
ended March 31, 2003, the Company incurred approximately $5.1 million of charges
associated with the note receivable from SeraNova and certain other related
issues. The Company has recognized an additional impairment charge of $4.0
million related to the note, approximately $321,000 related to other assets,
approximately $424,000 in costs required to exit certain lease obligations and
$315,000 in legal fees. The Company has determined that due to the apparent
financial condition of SeraNova, Silverline and Silverline Technologies, Inc.
(collectively, the "SeraNova Group") that recovery of this asset is not
probable.
Proxy contest charges. During the three months ended March 31, 2003, the
Company incurred $297,000 in legal fees and other 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. Since the second quarter of 2002, the Company has incurred cumulative
proxy charges of $1,370,000. The cumulative Proxy Contest charges included legal
fees, proxy solicitation services and printing, mailing and other costs. The
Company expects to continue to incur charges until the litigation is resolved.
Interest income. The Company earned $13,000 in interest income during the
three months ended March 31, 2003, compared with $7,000 during the three months
ended March 31, 2002.
Interest expense. The Company incurred $108,000 and $105,000 in interest
expense during the three months ended March 31, 2003 and 2002, 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 increase in interest expense results from slightly
higher average outstanding borrowings under the line of credit during the three
months ended March 31, 2003.
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 $49,000 during the three months ended March
31, 2003, compared with other income of $40,000 during the three months ended
March 31, 2002. The change results from foreign currency fluctuations.
Provision for income taxes. Despite an operating loss, a provision for
income taxes of $75,000 was required for the three months ended March 31, 2003,
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 March 31, 2003 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 $1.2 million
will be realized. The Company's effective rate was 44.4% for the three months
ended March 31, 2002.
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
- 26 -
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. For the three months ended
March 31, 2003 and 2002, 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 March 31, 2003. 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 operates in one industry, information technology solutions and
services.
On April 2, 2003, the Company consummated the sale, effective as of March
1, 2003, of its Asia-Pacific group of subsidiary companies, operating in
Australia, New Zealand, Singapore, Hong Kong and Indonesia. The operating
results and financial position of the Asia-Pacific group of subsidiary companies
are reported as discontinued operations for all periods presented. The Company
now has four reportable operating segments from continuing operations, 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, Puerto Rico, South America and
Canada. 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 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;
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. The European headquarters are located in
Milton Keynes, United Kingdom; and
o Japan - includes the operations of the Company in Japan. The Japanese
headquarters are located in Tokyo, Japan.
- 27 -
Each of the operating segments has a Managing Director, or manager with an
equivalent position, who reports directly to the Chief Executive Officer (CEO).
Currently, the CEO is fulfilling the requirements of this position in the US.
The CEO has been identified as the Chief Operating Decision Maker (CODM) because
he has final authority over resource allocation decisions and performance
assessment. The CODM regularly receives certain discrete financial information
about the geographical operating segments, including primarily revenue and
operating income, to evaluate segment performance.
Three months Ended March 31, 2003 Compared to Three months Ended March 31,
2002
The following discussion compares the segment results for continuing
operations for the three months ended March 31, 2003 and the three months ended
March 31, 2002.
Revenue. The following table displays revenues by reportable segment (in
thousands).
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------
2003 2002
-------------------------------------------------------------
PERCENTAGE OF PERCENTAGE OF
DOLLARS TOTAL DOLLARS TOTAL
----------- ------------- ----------- -------------
United States........... $ 21,349 78.4% $ 17,469 75.9%
India................... 3,487 12.8 3,054 13.3
Europe................., 1,481 5.4 1,585 6.9
Japan................... 918 3.4 897 3.9
----------- ---------- ----------- ----------
Total................... $ 27,235 100.0% $ 23,005 100.0%
=========== ========== =========== ==========
US revenue increased by 22.2%, or $3.9 million, from $17.5 million for the
three months ended March 31, 2002, to $21.4 million for the three months ended
March 31, 2003. The increase was attributable primarily to increased demand for
the majority of the Company's service offerings, including traditional
consulting service offerings, application management and support services,
offshore development services and Power Up services.
India revenue increased by 14.2%, or $433,000, from $3.1 million for the
three months ended March 31, 2002, to $3.5 million for the three months ended
March 31, 2003. The increase was attributable primarily to increased demand for
services in the United States, 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.
Europe revenue decreased by 6.6%, or $104,000, from $1.6 million for the
three months ended March 31, 2002, to $1.5 million for the three months ended
March 31, 2003. The decrease was attributable primarily to the Company's
operations in the United Kingdom (a decrease of $112,000).
Japan revenue increased by 2.3% or $21,000, from $897,000 for the three
months ended March 31, 2002, to $918,000 for the three months ended March 31,
2003. The increase was due primarily to a small increase in demand for the
Company's consulting services.
- 28 -
Operating Income (Loss). The following table displays operating income
(loss) by reportable segment (in thousands).
THREE MONTHS ENDED MARCH 31,
---------------------------------
2003 2002
------------ ------------
United States.................... $ (5,549) $ 115
India............................ 493 483
Europe........................... (3) (189)
Japan............................ 61 (117)
------------ ------------
Total............................ $ (4,998) $ 292
============ ============
US operating performance declined by $5,664,000, from operating income of
$115,000 for the three months ended March 31, 2002, to an operating loss of $5.5
million for the three months ended March 31, 2003. The decrease in operating
performance was attributable primarily to the approximately $5.1 million of
SeraNova receivable impairment and other charges and the $297,000 of charges
associated with the proxy contest during the three months ended March 31, 2003.
India operating income decreased by $10,000, from $483,000 for the three
months ended March 31, 2002, to $493,000 for the three months ended March 31,
2003. The marginal decrease was attributable primarily to an increase in
revenue, which was partially offset by a decrease in gross margins.
Europe operating performance improved by $186,000, from an operating loss
of $189,000 for the three months ended March 31, 2002, to an operating loss of
$3,000 for the three months ended March 31, 2003. The improvement was
attributable primarily to an improvement in the operating performance of Denmark
(an improvement of $79,000) and the UK (an improvement of $29,000).
Japan operating performance improved by $178,000, from an operating loss of
$117,000 for the three months ended March 31, 2002, to operating income of
$61,000 for the three months ended March 31, 2003. The improvement was
attributable primarily to management efforts to re-organize and restructure the
local operations during late 2002. In December 2002, management initiated
efforts to decrease total operating expenses by reducing employee headcount and
eliminating discretionary expenditures such as sales and marketing programs,
training, etc.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $2.3 million at March 31, 2003
and $1.2 million at December 31, 2002. The Company had working capital of $7.6
million at March 31, 2003 and $13.1 million at December 31, 2002.
Cash provided by operating activities of continuing operations was $1.2
million for the three months ended March 31, 2003, resulting primarily from the
SeraNova receivable impairment and other charges of $5.1 million, depreciation
and amortization of $880,000, a decrease in unbilled services of $1.1 million
and an increase in accrued payroll and related taxes
- 29 -
of $1.2 million. These amounts were partially offset by the net loss, an
increase in accounts receivable of $280,000 and decreases in accounts payable of
$1.2 million, accrued expenses and other liabilities of $194,000 and deferred
revenue of $230,000. The changes in operating assets and liabilities result
primarily from timing differences. Cash used in operating activities of
continuing operations the three months ended March 31, 2002 was $88,000.
The Company invested $384,000 and $298,000 in computer equipment,
internal-use computer software and office furniture and fixtures during the
three months ended March 31, 2003 and 2002, respectively. The increase results
primarily from the replacement of certain outdated computer equipment.
On May 31, 2000, the Company and PNC Bank, N.A. (the "Bank") entered into a
three-year revolving credit facility. Such credit facility is comprised of a
revolving line of credit pursuant to which the Company can borrow up to
$20,000,000 either at the Bank's prime rate per annum or the Euro Rate plus
1.75% to 2.5% based upon the Company's ratio of debt to earnings before
interest, taxes, depreciation and amortization ("EBITDA"). The credit facility
is collateralized by substantially all of the assets of the Company's United
States based operations. The maximum borrowing availability under the line of
credit is based upon a percentage of eligible billed and unbilled accounts
receivable, as defined. As of March 31, 2003, the Company had outstanding
borrowings under the credit facility of $5.8 million. The Company estimates
undrawn availability under the credit facility to be $7.5 million as of March
31, 2003. As of December 31, 2002, the Company had outstanding borrowings under
the credit facility of $6.1 million.
The credit facility provides for the following financial covenants, among
other things, (1) the Company must maintain consolidated net worth, as defined
("consolidated net worth") of (a) not less than 95% of the Company's
consolidated net worth of the immediately preceding fiscal year-end as at each
such fiscal quarter after December 31, 2000; and (b) at least 105% of the
Company's consolidated net worth as of the immediately preceding fiscal year-end
as at each such fiscal year-end subsequent to December 31, 2000; provided,
however, the foregoing covenant shall not be tested for any quarter so long as
the Company maintains, at all times during such fiscal quarter, undrawn
availability of more than $5.0 million and (2) the Company must maintain
unconsolidated net worth, as defined ("unconsolidated net worth") of (a) not
less than 95% of the Company's unconsolidated net worth of the immediately
preceding fiscal year-end as at each such fiscal quarter after December 31,
2000; and (b) at least 105% of the Company's unconsolidated net worth as of the
immediately preceding fiscal year-end as at each such fiscal year-end subsequent
to December 31, 2000; provided, however, the foregoing covenant shall not be
tested for any quarter so long as the Company maintains, at all times during
such fiscal quarter, undrawn availability of more than $5.0 million.
Additionally, the credit facility contains material adverse change clauses with
regard to the financial condition of the assets, liabilities and operations of
the Company.
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, as of December
31, 2002 only, to require that consolidated net worth and
- 30 -
unconsolidated net worth as of December 31, 2002 be not less than 102% of
consolidated net worth and unconsolidated net worth, respectively, as of
December 31, 2001, (3) a modification to the consolidated net worth and
unconsolidated net worth covenants to exclude any changes to consolidated net
worth and unconsolidated net worth resulting from the write-down or write-off of
up to $10.8 million of the note due from SeraNova, and (4) a new financial
covenant requiring that the Company generate EBITDA of at least 90% of the prior
year's EBITDA.
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.
As a result of the SeraNova receivable impairment and other related charges
and the Proxy Contest charges incurred during the quarter ended March 31, 2003,
the Company was not in compliance with the consolidated net worth,
unconsolidated net worth and EBITDA covenants as of March 31, 2003. The Company
is currently negotiating with the Bank and expects to receive a waiver of the
existing covenant defaults. There can be no assurance, however, that the Company
will be able to obtain a waiver to the agreement on terms acceptable to the
Company.
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.
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 $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 $3.0 million payment from SeraNova.
In September 2000, SeraNova consummated an $8.0 million preferred stock
financing with two institutional investors. According to the mandatory
prepayment provisions of the Note, SeraNova was required to make a prepayment of
$3.0 million on the Note as a result of the stock financing. Subsequently, the
Company finalized, with SeraNova, the terms of an agreement to waive, subject to
certain conditions, certain of the mandatory prepayment obligations arising as a
result of the financing. The terms of the new agreement included, among other
things, that
- 31 -
SeraNova pay the Company (i) $500,000 upon execution of the agreement; (ii)
$500,000 on or before each of January 31, 2001, February 28, 2001, March 31,
2001, April 30, 2001 and May 31, 2001; and (iii) $400,000 on or before December
15, 2000 to be applied either as (a) an advance payment towards a contemplated
services arrangement for hosting services to be provided to SeraNova by Company
(the "Hosting Agreement"); or (b) in the event that no such Hosting Agreement is
executed on or before December 15, 2000, an additional advance prepayment toward
the principal of the Note.
The Company received from SeraNova the $500,000 payment that was due upon
execution of the agreement and a $400,000 payment in December 2000 as an advance
payment towards the principal of the Note since no Hosting Agreement was
executed before December 15, 2000.
In 2001, the Company received principal payments totaling $2.1 million from
SeraNova. However, SeraNova failed to make final payment of all amounts due
under the Note to the Company as of July 31, 2001. On August 16, 2001, the
Company filed a complaint against SeraNova and Silverline. 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. 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 $5.5 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. On April 17, 2003, the Court granted partial summary judgment
and required supplemental briefing on certain issues. A trial date is expected
to be scheduled thereafter. 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.
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 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,
- 32 -
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 June 2, 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 as of June 30, 2002. 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 $8,362,000 of SeraNova receivable
impairment and other charges as of June 30, 2002. Specifically, the Company
recorded a $5,140,000 charge to write-down the carrying value of the Note to
$4,000,000. Additionally, the Company recorded a $1,257,000 charge to write-off
the carrying value of other SeraNova receivables (primarily, accrued interest on
the Note and a receivable for a system implementation project). Also, the
Company recorded a charge of $1,501,000 for certain lease exit costs. Such
charge represents primarily an accrued liability for obligated space and
equipment 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.
As of March 31, 2003, the Company believes there has been an apparent
deterioration in the financial condition of the SeraNova Group. Accordingly, the
Company re-assessed, as of March 31, 2003, the likelihood of recovering amounts
owed by the SeraNova Group as well as the assumptions used in recording the
original lease obligation charge. Additionally, the Company was notified during
the first quarter of 2003 of its obligation to pay additional office space and
equipment rentals, which had been previously assigned to SeraNova by the
Company, because the SeraNova Group had failed to make the required payments.
- 33 -
Although the Company expects to pursue the full legal prosecution of the
SeraNova Group, the Company believes the apparent financial condition of the
SeraNova Group warrants the write-off of any receivables due from the SeraNova
Group. Additionally, the Company has re-evaluated and adjusted its lease
obligations (including settlements negotiated by the Company) involving the
SeraNova Group as of March 31, 2003.
WRITE-DOWN WRITE-OFF LEASE
OF NOTE OF OTHER OBLIGATIONS LEGAL AND
RECEIVABLE RECEIVABLES AND OTHER
- SERANOVA - SERANOVA SETTLEMENTS 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
Charges to operations during 2003...... 4,000,000 -- 795,000 265,000 5,060,000
Costs paid during 2003................. -- -- (215,000) (180,000) (395,000)
Non-cash items......................... (4,000,000) -- -- -- (4,000,000)
------------- ------------ ------------- ------------ ------------
Accrued costs as of March 31, 2003..... $ -- $ -- $ 1,720,000 $ 231,000 $ 1,951,000
============= ============ ============= ============ ============
As of March 31, 2003, $1,951,000 of the liability remains outstanding, of
which $932,000 is included in other long-term liabilities.
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. However, no assurance can be given that
sufficient cash will be generated from operations.
The Company believes that its available funds, together with current credit
arrangements and the cash flow expected to be generated from operations, will be
adequate to satisfy its current and planned operations for at least the next 12
months.
NASDAQ NATIONAL MARKET
On April 4, 2002, the Company received a letter from the Nasdaq Stock
Market ("Nasdaq") advising the Company that it failed to meet Nasdaq
requirements for continued listing as the closing "bid" price of the Company's
common stock was less than $1.00 for 30
- 34 -
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.
COMMITMENTS
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, 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 12, 2003. The
Company does not believe that the outcome of this claim
- 35 -
will have a materially 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 collect the full amount due from SeraNova and/or Silverline
could negatively affect the Company's business, financial condition or results
of operations.
On January 30, 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 relating to the lease
of premises occupied by SeraNova. The plaintiff granted the Company an extension
of time in which to answer the complaint while the parties engaged in settlement
discussions. The parties have executed a settlement agreement whereby the
Company will pay an aggregate of $160,000 over time, with the last payment being
due on or before November 30, 2003. The Company has accrued such amount in the
consolidated balance sheet as of March 31, 2003.
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
parties have executed a settlement agreement whereby the Company will pay an
aggregate of $127,000. The Company has accrued such amount in the consolidated
balance sheet as of March 31, 2003.
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.
- 36 -
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Although the Company cannot accurately determine the precise effect thereof
on its operations, it does not believe inflation, currency fluctuations or
interest rate changes have historically had a material effect on its revenues,
sales or results of operations. Any significant effects of inflation, currency
fluctuations and changes in interest rates on the economies of the United
States, Asia and Europe could adversely impact the Company's revenues, sales and
results of operations in the future. If there were a material adverse change in
the relationship between European currencies and/or Asian currencies and the
United States Dollar, such change would adversely affect the results of the
Company's European and/or Asian operations as reflected in the Company's
financial statements. The Company has not hedged its exposure with respect to
this currency risk, and does not expect to do so in the future, since it does
not believe that it is practicable for it to do so at a reasonable cost.
ITEM 4. 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.
- 37 -
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 7, 2001, NSA Investments II LLC filed a complaint in the United
States District Court for the District of Massachusetts naming, among others,
SeraNova, the Company and Rajkumar Koneru, a former director of the Company, as
defendants. The plaintiff alleges that it invested $4,000,000 in SeraNova as
part of a private placement of SeraNova common stock in March 2000, prior to the
spin-off of SeraNova by the Company. The complaint, which seeks compensatory and
punitive damages, alleges that the Company, as a "controlling person" of
SeraNova, is jointly and severally liable with and to the 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. The parties executed
a settlement agreement, which became effective upon payment of the settlement
amount, including the Company's portion of the settlement amount equal to an
aggregate amount of $50,000. The Company has accrued such amount in the
consolidated balance sheet as of March 31, 2003.
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
moved for summary judgment. On April 17, 2003, the Court granted partial summary
judgment and required supplemental briefing on certain issues. A trial date is
expected to be scheduled thereafter. 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.
- 38 -
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
June 2, 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. The parties have completed the discovery process and the
Company has moved for summary judgment. A trial date is currently scheduled for
May 19, 2003. 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
- 39 -
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 continued 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. The discovery process is ongoing and a
discovery master has been appointed to hear discovery disputes. The trial date,
originally scheduled for May 5, 2003, has been adjourned and will be
rescheduled.
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
- 40 -
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 collect the full amount due from SeraNova and/or Silverline could
negatively affect the Company's business, financial condition or results of
operations.
On January 30, 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 relating to the lease
of premises occupied by SeraNova. The plaintiff granted the Company an extension
of time in which to answer the complaint while the parties engaged in settlement
discussions. The parties have executed a settlement agreement whereby the
Company will pay an aggregate of $160,000 over time, with the last payment being
due on or before November 30, 2003. The Company has accrued such amount in the
consolidated balance sheet as of March 31, 2003.
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
parties have executed a settlement agreement whereby the Company will pay an
aggregate of $127,000. The Company has accrued such amount in the consolidated
balance sheet as of March 31, 2003.
There is no other material litigation pending to which the Company is a
party or to which any of its property is subject.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On May 31, 2000, the Company and PNC Bank, N.A. (the "Bank") entered into a
three-year revolving credit facility. As a result of the SeraNova receivable
impairment and other related charges and the Proxy Contest charges incurred
during the quarter ended March 31, 2003, the Company was not in compliance with
the consolidated net worth, unconsolidated net worth and EBITDA covenants as of
March 31, 2003. The Company is currently negotiating with the Bank and expects
to receive a waiver of the existing covenant defaults. There can be no
assurance, however, that the Company will be able to obtain a waiver to the
agreement on terms acceptable to the Company.
ITEM 5. OTHER INFORMATION
On April 2, 2003, the Company consummated the sale, effective as of March
1, 2003, of its Asia-Pacific group of subsidiary companies, operating in
Australia, New Zealand, Singapore, Hong Kong and Indonesia to Soltius Global
Solutions PTE Ltd, a Singapore corporation ("Soltius"). As consideration, the
Company received a 5% minority shareholding in Soltius and $650,000 in cash to
be paid by Soltius to the Company over a period of 12 months. The consideration
was determined as a result of arms-length negotiations between the parties.
- 41 -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
99.1 Certification pursuant to 18 U.S.C Section 1350.
(b) Reports on Form 8-K.
On April 4, 2003, the Company filed a Form 8-K to report that on
April 2, 2003, the Company consummated the sale of Intelligroup
Singapore Pte Ltd., a Singapore corporation, Intelligroup Hong
Kong Limited, a Hong Kong corporation, Intelligroup Australia Pty
Limited, an Australian corporation and Intelligroup New Zealand
Limited, a New Zealand corporation, together representing the
Company's Asia-Pacific group of subsidiary companies, operating
in Australia, New Zealand, Singapore, Hong Kong and Indonesia, to
Soltius Global Solutions PTE Ltd., a Singapore corporation.
On April 17, 2003, the Company filed a Form 8-K/A with the
Securities and Exchange Commission to provide the financial
statements and pro forma financial required under Item 7 related
to the sale of the Company's Asia-Pacific Group of subsidiary
companies to Soltius Global Solutions PTE Ltd.
On May 13, 2003, the Company furnished a Form 8-K under Item 9,
containing a copy of its earnings release for the period ending
March 31, 2003 (including financial statements) pursuant to Item
12 (Results of Operations and Financial Condition).
- 42 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Intelligroup, Inc.
DATE: May 15, 2003 By: /s/ Nagarjun Valluripalli
--------------------------------------------
Nagarjun Valluripalli,
Chairman of the Board, President and Chief
Executive Officer
(Principal Executive Officer)
DATE: May 15, 2003 By: /s/ Nicholas Visco
--------------------------------------------
Nicholas Visco,
Senior Vice President-Finance and
Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)
- 43 -
CERTIFICATIONS
I, Nagarjun Valluripalli certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Intelligroup,
Inc.;
2. Based on my knowledge, this Quarterly 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 Quarterly Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly 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 Quarterly 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 Quarterly 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 Quarterly Report (the "Evaluation
Date"); and
c. presented in this Quarterly 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
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6. The registrant's other certifying officers and I have indicated in
this Quarterly 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: May 15, 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 Quarterly Report on Form 10-Q of Intelligroup,
Inc.;
2. Based on my knowledge, this Quarterly 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 Quarterly Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly 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 Quarterly 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 Quarterly 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 Quarterly Report (the "Evaluation
Date"); and
c. presented in this Quarterly 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):
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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 Quarterly 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: May 15, 2003 By: /s/ Nicholas Visco
---------------------------------------------
Nicholas Visco
Senior Vice President-Finance and Administration
and Chief Financial Officer
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