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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission file number 0-20943
INTELLIGROUP, INC.
(Exact Name of Registrant as Specified In Its Charter)
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New Jersey 11-2880025
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
499 Thornall Street, Edison, New Jersey 08837
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(Address of Principal Executive Offices) (Zip Code)
(732) 590-1600
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(Registrant's Telephone Number,
Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant: $373,363,733 at March 28, 2000 based on the
last sales price on that date.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of March 28, 2000:
Class Number of Shares
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Common Stock, $.01 par value 16,377,254
The following documents are incorporated by reference into the Annual
Report on Form 10-K: Portions of the Registrant's definitive Proxy Statement for
its 2000 Annual Meeting of Shareholders are incorporated by reference into Part
III of this Report.
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TABLE OF CONTENTS
Item Page
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PART I 1. Business.................................................... 4
2. Properties.................................................. 21
3. Legal Proceedings........................................... 21
4. Submission of Matters to a Vote of Security Holders......... 22
PART II 5. Market for the Company's Common Equity and Related
Shareholder Matters......................................... 23
6. Selected Financial Data..................................... 25
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 27
7A. Quantitative and Qualitative Disclosure About Market Risk... 38
8. Financial Statements........................................ 38
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 38
PART III 10. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16 (a) of the
Exchange Act................................................ 39
11. Executive Compensation...................................... 39
12. Security Ownership of Certain Beneficial Owners
and Management.............................................. 39
13. Certain Relationships and Related Transactions.............. 39
PART IV 14. Exhibits, List and Reports on Form 8-K...................... 40
SIGNATURES.................................................................. 41
EXHIBIT INDEX............................................................... 43
FINANCIAL STATEMENTS........................................................F-1
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PART I
ITEM 1. BUSINESS.
GENERAL
Overview
Intelligroup, Inc. ("Intelligroup" or the "Company") provides a wide range
of information technology services, including enterprise-wide business process
solutions, IT training solutions, systems integration and custom software
development based on leading technologies. In addition, through SeraNova, Inc.
("SeraNova"), a 95.2% owned subsidiary of the Company, the Company provides
professional services, primarily in the area of business to business
interactions on the Internet. Business to business interactions include
communication and commerce conducted between a company and its customers,
suppliers and partners. SeraNova offers a comprehensive set of services,
including strategic consulting, creative design, technology implementation and
management of Internet applications.
The Company was incorporated in New Jersey in October 1987 under the name
Intellicorp, Inc. to provide systems integration and custom software
development. The Company's name was changed to Intelligroup, Inc. in July 1992.
In March 1994, the Company acquired Oxford Systems Inc. ("Oxford"). On December
31, 1996, Oxford was merged into the Company and ceased to exist as an
independent entity. On September 9, 1999, the Company formed Infinient, Inc.
("Infinient") as its wholly-owned subsidiary. In November 1999, the Company
announced its intention to spin off its Internet services business to the
shareholders of Intelligroup, subject to certain conditions. On December 6,
1999, Infinient changed its name to SeraNova, Inc. On January 1, 2000 the
Company transferred its Internet services business to SeraNova. On January 27,
2000, SeraNova filed a Registration Statement with the Securities and Exchange
Commission relating to the proposed spin-off of SeraNova from Intelligroup. Such
spin-off is expected to be effective in the second quarter of 2000. The
Company's executive offices are located at 499 Thornall Street, Edison, New
Jersey 08837 and its telephone number is (732) 590-1600.
The Company has grown rapidly since 1994 when it made a strategic decision
to diversify its customer base by expanding the scope of its integration and
development services and to utilize software developed by SAP AG, based in
Germany, and distributed through its other subsidiaries including SAP America,
Inc. (collectively "SAP") as a primary tool to implement enterprise-wide
business process solutions.
SAP's software is representative of a class of application products known
as Enterprise Resource Planning ("ERP") software. ERP products are pre-packaged
solutions for business areas, including financial information, manufacturing and
human resources. For prospective customers, ERP products are an alternative to
the custom design and development of their own applications. Although ERP
products are pre-packaged, there is a significant amount of technical work
involved in implementing them and tailoring their use for a particular
customer's needs. The Company recognized that this implementation and
customization services work represented a significant potential business
opportunity.
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ERP vendors such as SAP, Oracle, PeopleSoft and Baan, have a vested
interest in encouraging third party service companies to provide implementation
and customization services to customers. These vendors have established formal
programs which are designed to recruit and authorize third party service
companies as service partners. Companies wishing to become authorized partners
must meet performance criteria established by the ERP vendor. They are then
allowed to use the vendor's partner designation and associated logo to promote
their own services. The ERP product vendors also promote these authorized
partners to customers and prospective customers of their ERP products. The
Company believes that such partner status with the ERP vendors has and will
continue to result in direct referrals and enhanced industry recognition.
In 1995, the Company achieved the status of a SAP National Implementation
Partner. In the same year, the Company also began to utilize Oracle's ERP
application products to diversify its service offerings. In 1997, the Company
enhanced its partner status with SAP, by first achieving National Logo Partner
status and then AcceleratedSAP Partner Status. Also, in 1997, the Company
further diversified its ERP-based service offerings, by beginning to provide
PeopleSoft and Baan implementation services. In July 1997, the Company was
awarded PeopleSoft implementation partnership status. In September 1997, the
Company was awarded Baan international consulting partnership status. In June
1998, the Company also expanded its Oracle applications implementation services
practice and added upgrade services to meet market demand of mid-size to large
companies that are implementing or upgrading Oracle applications.
The Company's software implementation, custom development and maintenance
services are enhanced by round-the-clock access to qualified and experienced
programmers at its offices in the United States, United Kingdom, New Zealand and
at its Advanced Development Center ("ADC") located in India. The ADC is
connected by dedicated, high speed satellite links to certain customer sites, as
well as to the Company's operations centers in the United States, the United
Kingdom and New Zealand.
The Company believes that the ADC is one of the world's largest offshore
SAP development centers. In 1998, the ADC was awarded ISO 9001 certification for
offshore SAP development. ISO 9001 is an international certification for
organizations, which achieve and demonstrate required levels of quality in
software development processes. The Company believes that it was the first
services company to achieve ISO 9001 certification for offshore SAP development.
In September 1999, the Company's ISO 9001 certification was extended to include
development, support and optimization services for all enterprise, Internet and
client/server solutions. Such certification covers the Company's work with all
major enterprise software vendors including SAP, Oracle, PeopleSoft and Baan, as
well as Internet applications. In November 1999, the ADC achieved SEI CMM
Level-3 process certification. Such certification is required for the Capability
Maturity Model of Carnegie Mellon University's Software Engineering Institute.
The ADC is operated by Intelligroup Asia Private Ltd. ("Intelligroup
Asia"). The Company owns 99.8% of the shares of Intelligroup Asia. The remaining
shares are expected to be transferred to the Company by the founders in 2000.
Upon consummation of such transfer, Intelligroup Asia will be a wholly owned
subsidiary of the Company.
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In October 1999, the Company created its Internet Development Center
("IDC") in Hyderabad, India. At its IDC, the Company provides Internet solutions
for its clients around the world. The IDC shares the same quality processes as
the ADC. Additionally, the IDC also houses the Company's Enterprise Information
Portal ("EIP") solutions architecture team and provides global support and
training for SeraNova'a consultants.
The Company provides its services directly to end-user organizations, or as
a member of consulting teams assembled by other information technology
consulting firms. The number of customers billed by the Company has grown
substantially from three customers in 1993 to approximately 600 customers in
1999. The Company's customers are Fortune 1000 and other large and mid-sized
companies in the United States and abroad. They have included Armstrong World
Industries, AT&T, Block Drug Company, Bristol-Myers Squibb, IMC Global, Simon &
Schuster, American Express and Volkswagen. The Company has also participated in
project teams lead by information technology consulting firms such as Ernst &
Young LLP, IBM Global Services, KPMG LLP and PricewaterhouseCoopers LLP.
During 1998, the Company made the decision to expand the portfolio of
services offered to existing and potential ERP customers, as well as customers
wishing to implement Internet-based solutions. These service offerings include
management consulting, Internet solutions and ERP and Internet application
outsourcing. This decision was based on the Company's business assessment of
customer needs over the life cycle of their solution. This assessment showed
that:
o many ERP and non-ERP customers need business and technology consulting
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assistance to prepare and optimize systems plans to support their
organization's business strategies;
o many ERP and non-ERP customers need assistance in designing,
implementing and managing Internet and advanced technology
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applications, in areas such as web commerce and procurement, customer
relationship management and supply chain management; and
o many customers who install ERP or related Internet solutions need
assistance to maintain, manage and operate those solutions and are open
to proposals to outsource those functions.
By providing a set of services throughout a customer's solution life cycle
and adding Internet solutions services, the Company believes that it is
leveraging its strengths in the ERP market, and broadening and expanding the
potential sources of future business opportunity.
The Company has expanded and intends to continue to expand its service
offerings through an appropriate mix of internal growth and acquisitions. During
1998, the Company expanded its service operations, both domestically and
internationally, through a number of acquisitions. In May 1998, the Company
expanded its PeopleSoft services business in Europe, by acquiring the
outstanding capital stock of each of CPI Consulting Limited and CPI Resources
Limited (the "CPI Companies") located in the United Kingdom. The CPI Companies
provide consulting and implementation services related to PeopleSoft
applications. In November 1998,
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the Company acquired the outstanding capital stock of each of Azimuth Consulting
Limited, Azimuth Holdings Limited, Braithwaite Richmond Limited and Azimuth
Corporation Limited (the "Azimuth Companies") located primarily in New Zealand.
The Azimuth Companies provide business and management consulting services in
Australia, New Zealand and Southeast Asia.
In December 1998, the Application Management Services practice was
reorganized as the worldwide Enterprise Sourcing Services ("ESS") practice. The
ESS practice focuses on selling, delivering and supporting outsourced ERP and
Internet implementation and maintenance services. The offshore ADC in Hyderabad,
India is part of the ESS practice. The ADC enables ESS to take on larger and
more complex implementation projects and outsourcing arrangements, while
maintaining the Company's aggressive implementation schedules and cost-effective
services.
In January 1999, in order to augment the Internet/Advanced Technology
practice, the Company acquired the outstanding capital stock of Network
Publishing, Inc. ("NPI") located in Provo, Utah. NPI provides web site design
and front-end application solutions services. In February 1999, by way of merger
transactions, the Company augmented the PeopleSoft practice in North America by
acquiring Empower Solutions, L.L.C. and its affiliate Empower, Inc. (the
"Empower Companies") located in Plymouth, Michigan.
In November 1999, the Company made a strategic decision (1) to refocus its
core business to capitalize upon the Applications Services Provider ("ASP")
market for customized eCommerce and enterprise applications implementation,
management, support and hosting and (2) to spin off its Internet services
business. The Company services the ASP market with its ASPPlus Solutions which
include implementation, management and hosting of e-commerce solutions and
enterprise applications, as well as its myADVISOR(sm) offering which provides
web-based customer-specific user support. ASPPlus is a mass customization of
mission critical e-commerce and enterprise business applications. Through
ASPPlus, the Company offers pre-configured industry vertical solutions to its
clients' specific e-commerce and enterprise needs.
The Company's Internet services business, operated through SeraNova,
addresses the rapidly growing eBusiness services market. The Company helps its
clients achieve improved time-to-market through a lifecycle suite of Internet
solutions services, from strategy, through design and implementation, to support
and hosting. The Company offers a comprehensive set of services, including
strategic consulting, creative design, technology implementation and management
of Internet applications. The Company uses its proprietary methodology, or
Time-to-Market Approach to deliver professional services. Such methodology
identifies and prioritizes initiatives, rapidly delivers them to market,
captures valuable market experience and feedback and immediately applies the
feedback to refine the solution. The Company believes that this process results
in a solution that provides measurable competitive advantage to its clients.
This approach allows the Company to identify, capture and re-use valuable
Internet frameworks that it develops in client projects.
The Company's services enable traditional businesses to combine the scope
and efficiencies of the Internet with their existing business practices to
provide an integrated eBusiness. The Company also works with emerging
Internet-based companies that conduct their
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business exclusively through the Internet. During the last three years, the
Company has performed Internet solutions services for over 80 clients in a
variety of industries.
Trademarks and Service Marks
"Intelligroup," "4Sight," "4Sight Plus," "myADVISOR," "ASPPlus" and the
Company's logo are service marks and "OIM" and "SeraNova" are trademarks of the
Company.
"Azimuth" is a trademark of Azimuth Consulting, a subsidiary of SeraNova.
"Empower Solutions" is a trademark of Empower Solutions, a subsidiary of
the Company.
All other trade names, trademarks or service marks referenced herein are
the property of their respective owners and are not the property of the Company.
Safe Harbor Statements
This Form 10-K contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, including,
without limitation, statements regarding the Company's intention to shift to
higher margin turnkey management assignments and more complex projects and to
utilize its proprietary implementation methodology in an increasing number of
projects. In addition, statements regarding the Company's intent to expand its
service offerings through internal growth and acquisitions and the Company's
intent to spin-off its Internet services business are also forward-looking
statements. Such forward-looking statements include risks and uncertainties,
including, but not limited to:
o the substantial variability of the Company's quarterly operating
results caused by a variety of factors, many of which are not within
the Company's control, including (a) patterns of software and hardware
capital spending by customers, (b) information technology outsourcing
trends, (c) the timing, size and stage of projects, (d) timing and
impact of acquisitions, (e) new service introductions by the Company
or its competitors and the timing of new product introductions by the
Company's ERP partners, (f) levels of market acceptance for the
Company's services, (g) general economic conditions, (h) the hiring of
additional staff and (i) fixed price contracts;
o changes in the Company's billing and employee utilization rates;
o the Company's ability to manage its growth effectively, which will
require the Company (a) to continue developing and improving its
operational, financial and other internal systems, as well as its
business development capabilities, (b) to attract, train, retain,
motivate and manage its employees, (c) to continue to maintain high
rates of employee utilization at profitable billing rates, (d) to
successfully integrate the personnel and businesses acquired by the
Company, and (e) to maintain project quality, particularly if the size
and scope of the Company's projects increase;
o the Company's ability to maintain an effective internal control
structure;
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o the Company's limited operating history within its current line of
business;
o the Company's reliance on a continued relationship with SAP America
and the Company's present status as a SAP National Logo Partner;
o the Company's substantial reliance on key customers and large
projects;
o the highly competitive nature of the markets for the Company's
services;
o the Company's ability to successfully address the continuing changes
in information technology, evolving industry standards and changing
customer objectives and preferences;
o the Company's reliance on the continued services of its key executive
officers and leading technical personnel;
o the Company's ability to attract and retain a sufficient number of
highly skilled employees in the future;
o the Company's ability to continue to diversify its offerings,
including growth in its Oracle, Baan and PeopleSoft services;
o uncertainties resulting from pending litigation matters and from
potential administrative and regulatory immigration and tax law
matters;
o the Company's ability to protect its intellectual property rights; and
o Year 2000 compliance of vendors' products and related issues,
including impact of the Year 2000 problem on customer buying patterns.
o the Company's ability to successfully spin off its Internet services
business. The risks relating to such spin-off are set forth more
specifically in the Registration Statement filed by SeraNova in
connection with the proposed spin-off.
As a result of these factors and others, the Company's actual results may
differ materially from the results disclosed in such forward-looking statements.
INDUSTRY BACKGROUND
Many large and mid-sized businesses face a rapidly changing business
environment, including intense global competition, accelerating technological
change, and the need to embrace emerging web commerce and procurement
strategies. Such businesses continually seek to improve the quality of products
and services, lower costs, reduce cycle times, optimize their supply chain and
increase value to customers. Businesses are implementing and utilizing advanced
information and Internet technology solutions, that enable them to redesign
their business processes in such areas as product development, service delivery,
manufacturing, sales and human resources.
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Many businesses have adopted information systems strategies using
client/server architectures based on personal computers, local area network/wide
area network ("LAN/WAN"), shared databases and packaged software applications.
Frequently these strategies are intended to replace legacy systems, which are
often mainframe-based, running proprietary software and applications. Such
client/server systems, when developed and implemented appropriately, enable the
creation and utilization of more functional, flexible and cost effective
applications, which are critical to the competitive needs of businesses.
As part of their client/server strategies, organizations often acquire, or
consider acquisition of, packaged enterprise-wide business software
applications, including those offered by leading ERP vendors, such as SAP,
Oracle, PeopleSoft or Baan. These applications are then implemented or
customized to meet their particular business needs. Alternatively, the
organizations may develop, or commission development of, customized software
applications to meet their needs.
For many customers, the issue of Year 2000 compliance has driven their
decisions to migrate to new client/server-based ERP solutions. Others have
decided to retain their legacy mainframe applications and make them Year 2000
compliant, rather than replacing them. In both cases, these customers now have a
set of core operations applications which they use to support their central
business processes. These customers may now face competing internal demands
against their budgets and resources. The customers must balance demands from
their user departments for new, innovative business applications against the
absolute requirement to maintain, manage and optimize the core operations
applications. These competing demands reflect areas of potential business
opportunity for the Company in the areas of management consulting, Internet
solutions and the outsourcing of ERP applications maintenance.
Intense competitive and market pressures continue to force many
organizations to look for improvements in the quality, efficiency and
responsiveness of their end-to-end business models. This would normally require
an in-depth analysis of their business strategies, operational processes and
supporting delivery mechanisms, including information systems. Customers will
sometimes retain external business and management consulting organizations to
assist with this analysis and the preparation of relevant recommendations.
The Internet represents a revolutionary and powerful vehicle through which
businesses and entire industries will conduct day-to-day operations. As a
result, many companies are being forced to reevaluate their business models to
implement new or supplement current Internet-based business solutions. The
development and implementation of Internet-based services and solutions requires
the integration of strategic consulting, creative design and systems engineering
skills. Given the increasing pressure to bring products and offerings to market
quickly, training in-house employees to learn the requisite skills is
impractical. In addition, hiring and maintaining a full-service staff of trained
professionals can be inefficient and costly. Accordingly, many businesses have
chosen to outsource some or all of their Internet services requirements to
outside specialists with strategic, consulting, creative and technical
expertise.
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Two consistent conclusions result from customers' analyses. The first is
the importance of timely access to relevant information, tools and applications,
at reasonable cost, for customers, suppliers, business partners and employees.
The second conclusion is that, because of its low cost and universal
availability, the Internet and associated browser and web technology is becoming
the de-facto information access and delivery standard for many organizations
around the world. Together, these are leading to a new class of web site,
commonly called enterprise information portals. These sites need to be designed
and implemented to provide access to all information, applications and
communications tools required for internal and external users to perform their
designated business functions.
The majority of customers who have implemented, or are implementing, ERP
solutions have been Fortune 2000 companies. The Company believes that
opportunities for new ERP implementations will continue to exist in this
segment, as these companies deploy ERP solutions to subsidiaries and operating
units. In addition, these customers are also faced with the need to manage and
maintain their ERP applications. The Company believes that there is significant
potential business opportunity for implementing ERP version-to-version upgrades
and also for application outsourcing.
Because of the ERP penetration of Fortune 2000 customers, the marketing
focus of the ERP vendors has turned toward mid-market clients. In addition, the
leading ERP vendors are also realigning their sales organizations along industry
segments (e.g. manufacturing, finance etc.). The mid-market segment presents the
most opportunity for new ERP product sales and implementations. Many of these
companies are growing rapidly and are likely to have the need for core financial
and other operations systems that can be addressed by ERP products. The Company
believes that opportunity exists for ERP implementation services to mid-market
clients. This segment is very cost conscious and will require a highly efficient
services delivery model.
In both the Fortune 2000 and mid-market segments, the Company believes that
enterprise information portals will become a focus of many customers'
information systems plans. Enterprise information portals provide customized,
integrated access to information, tools and applications. Much of the demand for
new applications, to be accessed via the portals, will be driven by the
customers' need to compete on such fronts as web commerce, customer relationship
management, sales force automation and supply chain integration. A new wave of
product vendors has emerged, which address these new application requirements.
These include providers of packaged applications, as well as providers of
middleware frameworks designed to simplify the task of building or integrating
custom applications. Often, integration of these new applications with the
customers' core ERP or legacy-based business systems will be critical.
The task of developing and implementing enterprise-wide, mission-critical,
information solutions is complex. It presents significant challenges for most
customer organizations and can be a time consuming and costly undertaking, which
typically requires significant allocation of organizational resources.
Information technology managers must integrate and manage information systems
environments consisting of multiple computing platforms, operating systems,
databases and networking protocols, and as well as multiple packaged and custom
developed applications.
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Companies must also continually keep pace with a broad and often confusing
array of new technological developments, which can render internal information
technology skills obsolete. Professionals with the requisite technology skills
often are in short supply and many organizations are reluctant to expand their
internal information systems department for particular projects. At the same
time, external economic factors encourage organizations to focus on their core
competencies and trim work forces in the information technology management area.
Accordingly, organizations often lack sufficient, and/or appropriate, technical
resources necessary to design, develop, implement and manage the information
technology solutions needed to support their business needs.
To support their information technology needs, many businesses increasingly
engage experienced outside specialists for assistance across the full life cycle
of their solutions. Because of the heightened business pressures they face,
these customers are demanding innovative solutions, in shorter timeframes, with
lower life cycle cost of ownership, at higher levels of quality and service, all
with lower risk to themselves and their businesses.
As a result of these industry dynamics, demand for information technology
services has grown significantly and changed. It has moved from an
implementation focus to one addressing an integrated view of corporate business
and information processes; it has also moved to a focus on value-based pricing
and cost of ownership over the total life cycle of the solution. These changes
favor services companies which can provide high quality, low cost life cycle
services, and which address high value solution areas for clients' businesses.
THE INTELLIGROUP SOLUTION
Intelligroup improves its clients' business performance, through the
intelligent application of information technology. Intelligroup provides a
continuum of services throughout our clients' solution life cycle. These
services comprise management consulting, ERP solutions design and
implementation, Internet consulting and solution development and enterprise
outsourcing.
We deliver to our clients timely, cost-effective and innovative ERP,
Internet and maintenance solutions by combining our:
Proven Offshore Development and Maintenance Model: The Company has the
ability to develop, implement and maintain business solutions through its
offshore ADC, at high quality and low cost. The ADC, which the Company believes
is one of the world's largest SAP offshore development and maintenance centers,
is ISO 9001 certified for offshore development, support and optimization
services for all enterprise, Internet and client server solutions. Such
certification includes the Company's work with virtually all major enterprise
software vendors including SAP, Oracle, PeopleSoft and Baan, as well as Internet
applications. The ADC has also received SEI CMM Level-3 process certification.
Such certification is required for the Capability Maturity Model of Carnegie
Mellon University's Software Engineering Institute. The center is process driven
and connected to the Company's operations centers in Asia/Pacific, the United
States and Europe via high-speed satellite links. The center operates on a 24x7,
round-the-clock basis, allowing next business day turn-around of work units to
clients. Combining the
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center's quality processes, skilled development team and low cost of operation
allows the Company to compete for implementation and maintenance contracts on a
fixed price/fixed time basis.
The Company's offshore IDC provides Internet solutions, houses the
Company's Enterprise Information Portal (the "EIP") solutions architecture team
and provides global support and training for SeraNova's consultants. The IDC
shares the same quality processes as the ADC.
Expertise in a Wide Range of Technologies, Industries and Disciplines: The
Company's consultants have expertise with SAP, Oracle, PeopleSoft and Baan
products and with a wide variety of leading computing technologies, including
Internet, client/server architectures, object-oriented technologies, CASE,
distributed database management systems, mainframe connectivity, LAN/WAN and
telecommunications technologies. The Company believes that its personnel are
effective because of their technical excellence, their industry experience and
their strong grounding in the disciplines of project implementation and
management.
Customer-Driven Approach: The Company's project managers and consultants
maintain on-going communication and close interaction with customers to ensure
that they are involved in all facets of a project and that the solutions
designed and implemented by the Company meet the customer's needs. The Company's
goal is to provide training to its customers during a project to achieve high
levels of self-sufficiency among its customers' end users and internal
information technology personnel. The Company believes that its ability to
deliver the requisite knowledge base to its customers is critical to fostering
long-term relationships with, and generating referrals from, existing customers.
Proprietary Methodologies: The Company has developed a proprietary
implementation methodology, 4Sight, as well as a software-based implementation
toolset, 4Sight Plus, which are designed to minimize the time required to
develop and implement SAP, Oracle, PeopleSoft and Baan solutions for its
customers. 4Sight and 4Sight Plus are designed to be technology independent and
modular, and have also been extended to support the Company's Internet solutions
engagements. SeraNova's proprietary methodology is SeraNova's Time-to-Market
Approach. SeraNova's Time-to-Market Approach consists of five phases: eStrategy,
discover, plan, implement and optimize. SeraNova's Time-to-Market Approach is
designed to effectively strategize, design and rapidly deploy Internet
solutions.
INTELLIGROUP SERVICES
Intelligroup provides a wide range of information technology services,
including enterprise-wide business process solutions, IT training solutions,
systems integration and custom software development based on leading
technologies.
Historically, the Company's services have ranged from providing customers
with a single consultant to multi-personnel full-scale projects. The Company
provides these services to its customers primarily on a time and materials basis
and pursuant to agreements, which are terminable upon relatively short notice.
As the Company has re-oriented itself towards serving our clients' needs over
their solutions' entire life cycle, it is beginning to enter into outsourcing
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agreements with customers. The contractual arrangements in these situations will
typically be fixed term, fixed price and multi-year, as is common in the
outsourcing market. The Company's focus on life cycle services is also intended
to encourage ongoing and recurring service relationships, rather than one-time
implementation engagements.
ENTERPRISE RESOURCE PLANNING SOLUTIONS
The Company designs, develops, integrates and implements sophisticated
business process solutions based on SAP, Oracle, PeopleSoft and Baan products,
utilizing its best business practices, methodologies and toolsets. The Company
believes that its expertise in a wide variety of technologies, coupled with its
ability to provide comprehensive business process solutions and timely and
cost-effective implementation of new business systems, enables its customers to
achieve substantial improvements in efficiency and effectiveness in their
businesses and fosters long-term customer relationships.
Accelerated Implementation Methodology and Toolset: As a result of our
experience in implementing ERP software, the Company has developed a proprietary
methodology (4Sight) and associated toolset (4Sight Plus) for implementing
enterprise business software applications. 4Sight Plus also contains a project
management and tracking tool, which the Company utilizes to monitor
implementation projects undertaken for clients. The Company believes that the
use of 4Sight and 4Sight Plus, throughout an implementation project, may enable
its customers to realize significant savings in time and resources. Furthermore,
the Company believes that use of 4Sight Plus also shortens the turn-around time
for program development, as it streamlines the information flow between the
Company's offices and customer sites.
4Sight and 4Sight Plus, initially used by the Company in projects
implementing SAP, were designed to be portable to other packaged software
applications and to be adaptable to the scope of a particular project. 4Sight
and 4Sight Plus have been adapted for Baan, Oracle and PeopleSoft
implementations.
ENTERPRISE SOURCING SERVICES
The ESS practice focuses on selling, delivering and supporting outsourced
ERP and Internet implementation and maintenance services. The offshore ADC in
Hyderabad, India is part of the ESS practice. ESS provides full life cycle
support of ERP and Internet applications through the following service
offerings:
o Offshore Support: These services are provided in conjunction with the
Company's ERP and Internet practices, allowing them to provide
clients with high quality, low cost and time-dependent project
implementation services.
o Outsourcing: The Company provides clients with application
management, support and maintenance services. These services may be
provided on-site, off-site through the Company's operations centers
and ADC, or a combination of both on-site and off-site. The Company's
low cost, high quality ADC delivery model allows the Company to
compete for long term fixed price/fixed time contracts.
- 14 -
The ESS practice teams with the Company's various ERP and Internet
practices on their implementation projects, and will take the lead role in
selling and delivering longer term outsourcing relationships.
Advanced Development Center: The ADC is an important component of the
Company's value proposition to customers. The Company utilizes the programmers
at the ADC, in conjunction with its consultants in the United States who are on
site at customer locations, to provide its customers with savings in development
and implementation costs and time to project completion. The center allows the
Company to provide cost-effective, timely and high quality software development,
maintenance and support services to customers throughout the world. Intelligroup
and SeraNova are able to deliver high value services at attractive prices due to
the following: (i) the high level of expertise and experience of our ADC
consultant programmers; (ii) the rigorous application of the Company's
proprietary 4Sight software project methodologies, tools and project management
disciplines; and (iii) the cost structures associated with the ADC's offshore
location in Hyderabad, India.
The ADC is connected by dedicated, high-speed satellite links, to certain
customer sites, as well as the Company's headquarters in the United States, its
European headquarters in the United Kingdom and its office in New Zealand. The
ADC is staffed by over 200 qualified and experienced programmers. The ADC has
performed work on projects with SAP, as well as with Baan and certain custom
Internet solutions. As the Company expands both its ERP and Internet businesses,
the ADC is being prepared to undertake projects in any of the four ERP practices
(SAP, Baan, Oracle and PeopleSoft), as well as certain Internet and other
advanced technologies.
The IDC is central to the Company's global resourcing model for Internet
solutions. The IDC provides Internet solutions for the Company's clients around
the world. Through the IDC, the Company can provide its clients with 24x7
maintenance and support. The IDC shares the same quality processes as the ADC.
Consultants with expertise in technologies from Sun (Java), Microsoft, Vignette
and other leading Internet vendors work out of the center. Additionally, the
center houses the Company's EIP solutions architecture team. The Company intends
to add additional technical competencies at the center. Such competencies
include the technologies that form the basis of the Company's EIP solution
architecture such as Broadvision, Corechange, CrossWorlds, Epicentric, Plumtree
and WebMethods.
APPLICATION SERVICE PROVIDER MARKET SOLUTIONS
The Company services the ASP market with its ASPPlus Solutions which
include implementation, management and hosting of e-commerce solutions and
enterprise applications, as well as its myADVISOR(sm) offering which provides
web-based customer-specific user support. ASPPlus utilizes a mass customization
approach, providing pre-configured vertical industry solutions of mission
critical e-commerce and enterprise business applications. Through ASPPlus, the
Company offers customized solutions to its client's specific e-commerce and
enterprise needs.
- 15 -
INTERNET SOLUTIONS SERVICES
In 1998, the Company created a practice focusing on providing Internet
consulting and application development services, designed to help companies
develop innovative ways to reach their customers, suppliers and target markets
by leveraging the power of the Internet and corporate intranets. This practice
developed expertise in Internet technologies as well as the integration of those
technologies with ERP and legacy systems. Since January 1, 2000, the Company's
Internet solutions business has been conducted by its subsidiary SeraNova and
SeraNova's subsidiary, NPI.
The Company's core expertise has been in the technical development and
integration of these solutions. However, a key element of the new breed of
Internet solution relates to the projection of the customers' offerings to their
intended Internet audience. The Company, however, did not possess this required
expertise in brand marketing, graphic and multimedia design. With the
acquisition of NPI, the Company is now able to provide those services and
provide a complete Internet solution which combines NPI's web design capability
with the Company's expertise in Internet application development and integration
with ERP systems.
NPI has built a strong track record in designing web-sites that enable
clients to achieve the desired sales and marketing impact. Its customers include
a number of Fortune 500 companies in such industries as automotive, technology
and entertainment. SeraNova intends to leverage its proven 4Sight methodologies
and offshore development model to pursue Internet business opportunities.
SeraNova believes that the existing set of ERP customers will be a receptive
audience for Internet solutions. These customers represent a large and
well-defined target, which can be reached by SeraNova's direct sales and
marketing activities.
A wide variety of Internet solutions may be offered to prospective clients,
including electronic commerce, customer interaction, sales force automation and
web training. SeraNova intends to promote the use of enterprise information
portals in marketing its Internet solutions services. SeraNova's core platform
for business to business solutions development is the EIP. EIP for enterprises
is a customized browser-based interface which allows a company to aggregate all
disparate systems within an enterprise, such as ERP systems, workflow
applications, customer relationship management systems and other business
applications as well as databases under a common platform. Every constituent of
a company, including senior management, salespeople, engineers, suppliers or
customers interact with the enterprise through a single customized browser-based
interface. An EIP integrates all the internal systems, connects them to
applications residing outside the company while managing the security and access
to content and applications. In summary, it provides a flexible and scaleable
platform for business to business activities on the web.
- 16 -
MANAGEMENT CONSULTING SERVICES
The Company's management consulting practice has focused on two areas: (i)
Business Consulting (covering Business Process Re-engineering, Change
Management, IT Strategy and Software selection); and (ii) Leasing & Asset
Management.
The Company believes that significant value is provided to customers, by
providing business consulting services. Such services also have the potential to
stimulate additional revenue opportunities for the Company, in the execution of
recommendations made to clients. The acquisition of Azimuth Consulting
significantly strengthened Intelligroup's management consulting capabilities.
Founded in 1984, Azimuth has built a strong IT management consulting
organization with operations in New Zealand, Australia, the Philippines and
other Southeast Asian countries. Since its contribution to SeraNova by
Intelligroup on January 1, 2000, Azimuth now operates as a wholly-owned
subsidiary of SeraNova with headquarters in Wellington, New Zealand. The Company
has integrated its existing management consulting services groups in the United
States and Europe, under Azimuth worldwide.
SALES AND MARKETING
The Company historically has generated new sales leads from (i) referrals
from existing customers, (ii) introductions to potential customers by the
Company's alliance partners, which often need to recommend qualified systems
integrators to implement their software products, and (iii) internal sales
efforts. In addition, the Company has been introduced to customers by certain of
its competitors, such as the "Big Five" accounting firms, which at times require
the Company's expertise and ability to deliver qualified personnel for complex
projects.
The Company has dedicated an increased level of resources to sales and
marketing efforts. The Company will continue to market to potential customers
with demonstrated needs for the Company's expertise in ERP and Internet
solutions. The Company intends to implement focused sales management programs,
to leverage its relationships with existing customers, as well as those with ERP
and other product vendors. In particular, the Company has reorganized its SAP
practice along industry lines and will endeavor to partner with SAP's industry
sales organization to seek and close business opportunities.
Among its sales and marketing efforts, the Company's has exhibited and
presented the Company's expertise at trade events associated with the primary
ERP offerings. These include events such as SAPPHIRE, the annual SAP conference
for SAP service providers and end-users, the Americas SAP User Group, the Oracle
Americas User Group, BaanWorld and the PeopleSoft Users Group. The Company
intends to continue participation in such industry-recognized programs and trade
shows. On December 21, 1999, the Company and SeraNova entered into a consulting
services agreement with Mueller/Shields. Additionally, on February 4, 2000, the
Company entered into a consulting services agreement with Mueller/Shields.
Pursuant to such agreements, Mueller/Shields will provide the Company and
SeraNova with sales, marketing, training and strategic planning services.
- 17 -
Most importantly, however, the Company believes that satisfying customer
expectations within budgets and time schedules is critical to gaining repeat
business and obtaining new business from referrals. The Company believes that it
has consistently met customer expectations with respect to budgets and time
schedules.
As of December 31, 1999, the Company's sales and marketing group consisted
of 34 employees in the United States, 9 for Europe, and 30 for the Asia Pacific
region. The Company markets and delivers its services to customers on an
international basis through its network of offices. The Company's headquarters
in New Jersey and its branch offices in Phoenix, AZ; Foster City, CA;
Washington, D.C.; Atlanta, GA; Fayetteville, GA; Rosemont, IL; Auburn Hills, MI;
Houston, TX and Provo, UT serve the United States market. In addition, the
Company, also maintains offices in Europe (Denmark, the United Kingdom and
Sweden); Asia Pacific (Australia, India, Japan, New Zealand, Philippines,
Singapore and Thailand). Azimuth Consulting operates worldwide with headquarters
in Wellington, New Zealand. During 1999, the Company's existing management
consulting services groups in the United States and Europe, were merged with
Azimuth worldwide.
The Company's services require a substantial financial commitment by
customers and, therefore, typically involve a long sales cycle. Once a lead is
generated, the Company endeavors to understand quickly the potential customer's
business needs and objectives in order to develop the appropriate solution and
bid accordingly. The Company's project managers are involved throughout the
sales cycle to ensure mutual understanding of customer goals, including time to
completion, and technological requirements. Sales cycles for complex business
solutions projects typically range from one to six months from the time the
Company initially meets with a prospective customer until the customer decides
whether to authorize commencement of an engagement.
CUSTOMERS
The Company provides its services directly to Fortune 2000 and other large
and mid-sized companies, many of which have information-intensive, multinational
operations, or as a member of a consulting team assembled by other information
technology consultants, such as "Big Five" accounting firms. The number of
customers billed by the Company has grown substantially from three customers in
1993 to approximately 600 customers in the year ended December 31, 1999.
The Company's ten largest customers accounted for, in the aggregate,
approximately 44%, 38% and 38% of its revenue in 1997, 1998 and 1999,
respectively. During 1997, PricewaterhouseCoopers LLP and Bristol-Myers Squibb
each accounted for more than 10% of revenue. During 1998, no single customer
accounted for more than 10% of revenue. During 1999, the Government of Puerto
Rico accounted for more than 10% of revenue. In 1997, 1998 and 1999, 31%, 19%
and 38%, respectively, of the Company's revenue was generated by serving as a
member of consulting teams assembled by other information technology consulting
firms.
Although the Company has contracts with many of its large customers to
provide its services, in general such contracts are terminable upon relatively
short notice, typically not more
- 18 -
than 30 days. Under the ESS practice, the Company expects to compete for
multi-year fixed term, fixed price contracts. There can be no assurance that the
Company's customers will continue to enter into contracts with the Company or
that existing contracts will not be terminated.
Many of the Company's engagements involve projects that are critical to the
operations of its customers' businesses and provide benefits that may be
difficult to quantify. The Company's failure or inability to meet a customer's
expectations in the performance of its services could result in a material
adverse change to the customer's operations giving rise to claims for damages
against the Company or causing damage to the Company's reputation, adversely
affecting its business, financial condition and results of operations. In
addition, certain of the Company's agreements with its customers require the
Company to indemnify the customer for damages arising from services provided to,
or on behalf of, such customer. Under certain of the Company's customer
contracts, the Company warrants that it will repair errors or defects in its
deliverables without additional charge to the customer. The Company has not
experienced, to date, any material claims against such warranties. The Company
has purchased and maintains errors and omissions insurance to insure the Company
for damages and expenses incurred in connection with alleged negligent acts,
errors or omissions.
COMPETITION
The markets for the Company's services are highly competitive. The Company
believes that its principal competitors include the internal information systems
groups of its prospective customers, as well as the following classes of
companies (some of which are also customers of the Company):
o Consulting and software integration firms: including, IBM Global
Services, Cambridge Technology Partners, MCI Systemhouse, Computer
Sciences Corporation and others.
o "Big Five" accounting firms: Deloitte & Touche, Ernst & Young, KPMG,
PricewaterhouseCoopers.
o Software applications vendors: SAP, Oracle, Baan and PeopleSoft.
o Internet professional service providers: including Sapient, Scient,
Viant and Proxicom.
o General management consulting firms: such as McKinsey & Co., Bain &
Company.
o ASP service providers: Breakaway Solutions, Inc., USinternetworking,
Inc., Interliant, Inc. and Futurelink Corporation.
In addition, the Company competes with smaller companies such as Plaut,
Clarkson-Potomac and Origin.
Many of the Company's competitors have longer operating histories, possess
greater industry and name recognition and have significantly greater financial,
technical and marketing resources than the Company. In addition, there are
relatively low barriers to entry into the
- 19 -
Company's markets and the Company has faced, and expects to continue to face,
additional competition from new entrants into its markets.
The Company believes that the principal competitive factors in its markets
include quality of service and deliverables, speed of development and
implementation, price, project management capability and technical and business
expertise. The Company believes that its ability to compete also depends in part
on a number of competitive factors outside its control, including the ability of
its competitors to hire, retain and motivate project managers and other senior
technical staff, the development by others of services that are competitive with
the Company's services and the extent of its competitors' responsiveness to
customer needs.
The Company believes that it competes based on its expertise across the
full life cycle of its clients' ERP and Internet solutions. This expertise
includes management consulting skills, plus design and implementation skills in
ERP products (primarily SAP, Oracle, PeopleSoft and Baan), Internet and
application integration and application outsourcing related to those solutions.
There can be no assurance that the Company will be able to continue to compete
successfully with existing and new competitors.
EMPLOYEES
As of December 31, 1999, the Company employed 1,628 full-time employees, of
whom 1,268 were engaged as consultants or as software developers, 73 were
engaged in sales and marketing, and 287 were engaged in sales and delivery
management, finance and administration. Of the total number of employees, 718
were based in the United States, 810 were based in the Asia Pacific region and
100 were based in Europe. In addition, the Company engaged 112 independent
contractors to perform information technology services.
None of the Company's employees is covered by a collective bargaining
agreement. Substantially all of the Company's employees have executed employment
agreements containing non-competition, non-disclosure and non-solicitation
clauses. In addition, the Company requires that all new employees execute such
agreements as a condition of employment by the Company. The Company believes
that it has been successful in attracting and retaining skilled and experienced
personnel. There is increasing competition for experienced sales and marketing
personnel and technical professionals. The Company's future success will depend
in part on its ability to continue to attract, retain, train and motivate highly
qualified personnel. The Company considers relations with its employees to be
good.
INTELLECTUAL PROPERTY RIGHTS
The Company's success is dependent, in part, upon its proprietary
accelerated implementation methodology, development tools and other intellectual
property rights. The Company relies upon a combination of trade secret,
non-disclosure and other contractual arrangements, and copyright and trademark
laws, to protect its proprietary rights. The Company generally enters into
confidentiality agreements with its employees, consultants and customers, and
limits access to and distribution of its proprietary information. The Company
also requires that substantially all of its employees and consultants assign to
the Company their rights in
- 20 -
intellectual property developed while employed or engaged by the Company. There
can be no assurance that the steps taken by the Company in this regard will be
adequate to deter misappropriation of its proprietary information or that the
Company will be able to detect unauthorized use of and take appropriate steps to
enforce its intellectual property rights.
ITEM 2. PROPERTIES.
As of December 31, 1999, the Company owns no real property and currently
leases or subleases all of its office space. The Company leases its headquarters
in Edison, New Jersey, totaling approximately 48,475 square feet. Such lease has
an initial term of ten (10) years, which commenced in September 1998. The
Company uses such facility for certain technical and support personnel, sales
and marketing, administrative, finance and management personnel. The Company
also leases or subleases offices for its sales and operations in Phoenix, AZ;
Foster City, CA; Washington, D.C.; Atlanta, GA; Fayetteville, GA; Rosemont, IL;
Auburn Hills, MI; Houston, TX; and Provo, UT, and operations in Hyderabad,
India; Australia; Sweden, Denmark; Japan; New Zealand; Philippines, Singapore,
Thailand and the United Kingdom.
ITEM 3. LEGAL PROCEEDINGS.
On February 13, 1998, Russell Schultz, a former employee of the Company,
filed a complaint in the Superior Court of New Jersey, Law Division, Monmouth
County, naming the Company as a defendant. The complaint, which seeks damages,
alleges, among other things, that the Company misrepresented plaintiff's job
description in order to induce plaintiff to leave his prior employer, failed to
provide stock options to the plaintiff and violated plaintiff's written
employment contract. The Company was served with the complaint on March 16,
1998. Subsequently, on July 10, 1998, upon the Company's Motion to Compel
Arbitration, the court dismissed the plaintiff's complaint without prejudice.
Subsequently, the plaintiff's motion to reconsider the dismissal was denied. The
plaintiff filed his demand for Arbitration with the American Arbitration
Association on February 17, 1999 and the Company filed its answer on February
26, 1999. On October 12, 1999, the parties negotiated a settlement to dispose of
all claims asserted in this lawsuit. The Company drafted and circulated a
settlement agreement which has been executed by the parties and disposes of the
lawsuit with no material effect on the Company's business, financial condition
or results of operations.
On January 20, 1999, Tony Knight, a former employee of the Company, filed a
complaint in the Superior Court of the State of California, San Mateo County,
naming the Company, among others, as a defendant. The complaint, which seeks
damages, alleges, among other things, that the Company discriminated against
plaintiff because of his race, ancestry, religious creed and national origin and
thereafter wrongfully terminated the plaintiff's employment with the Company.
The Company, through its counsel, acknowledged receipt of the summons and
complaint on April 20, 1999. On May 19, 1999, the Company removed the action
from the California Superior Court to the United States District Court for the
Northern District of California. A discovery scheduling order was entered at the
case management conference held on December 2, 1999. 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.
- 21 -
There is no other material litigation pending to which the Company is a
party or to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
- 22 -
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Common Stock is quoted on the Nasdaq National Market (the "NNM") under
the symbol "ITIG." The following table sets forth, for each of the periods
indicated, the high and low sale prices per share of Common Stock as quoted on
the NNM. The prices shown represent quotations among securities dealers, do not
include retail markups, markdowns or commissions and may not represent actual
transactions.
Quarter Ended High Low
------------- ---- ---
March 31, 1998 $ 21 1/2 $14 1/2
June 30, 1998 $ 23 5/8 $15
September 30, 1998 $ 24 1/4 $16
December 31, 1998 $ 19 3/4 $10 5/8
March 31, 1999 $ 20 1/2 $ 5 1/4
June 30, 1999 $ 9 5/8 $ 5
September 30, 1999 $ 7 11/16 $ 5 1/8
December 31, 1999 $ 27 11/16 $ 6 7/8
As of March 28, 2000, the approximate number of holders of record of the
Common Stock was 89 and the approximate number of beneficial holders of the
Common Stock was 2,730.
The Company has never declared or paid any dividends on its capital stock.
The Company intends to retain any earnings to fund future growth and the
operation of its business, and, therefore, does not anticipate paying any cash
dividends in the foreseeable future.
All information relating to the Common Stock of the Company in this Annual
Report on Form 10-K reflects a 81,351.1111-for-1 stock split of the Common Stock
effected July 12, 1996, prior to the Company's initial public offering of its
Common Stock in September 1996.
The following information relates to all securities of the Company sold by
the Company which were not registered under the Securities Act of 1933, as
amended (the "Securities Act"), at the time of grant, issuance and/or sale, and
have not previously been disclosed in a Quarterly Report on Form 10-Q:
On May 7, 1998, the Company, through its wholly-owned
subsidiary Intelligroup Europe Limited (No. 3205142), a
corporation formed pursuant to the laws of England and Wales
("Intelligroup Europe"), consummated the acquisition (the
"Consulting Acquisition") of thirty percent (30%) of the equity
interests in CPI Consulting Limited (No. 3316554), a corporation
formed pursuant to the laws of England and Wales ("Consulting").
In addition, on May 21, 1998, the Company consummated the
acquisition (the "Resources Acquisition") of all of the equity
interests in CPI Resources Limited (No. 2080824), a corporation
formed pursuant to the laws of England and Wales ("Resources").
As a result of the Resources Acquisition, the Company acquired
Resources' seventy percent (70%) interest in Consulting. The
principal activity of each of Resources and Consulting is
providing information technology consulting staffing services in
the United Kingdom.
- 23 -
In connection with the Consulting Acquisition, on March 22,
1999, the Company issued an aggregate of 155,208 restricted
shares of its Common Stock, $0.01 par value per share, to the
minority investors relating to the earn-out provision of the
Agreement of Purchase and Sale. On June 10, 1999, the Company
filed an amendment to its Registration Statement on Form S-3 to
register an aggregate of 77,604 of such shares. On January 28,
2000, the Company filed an amendment to its Registration
Statement on Form S-3 to register an aggregate of 77,604,
representing the balance of such shares The Company did not and
will not receive any of the proceeds from sales of the shares by
the minority investors.
On February 16, 1999, the Company consummated (i) the merger
of Empower Solutions, L.L.C., a Michigan limited liability
company, with and into the Company's wholly-owned subsidiary ES
Merger Corp., a Michigan corporation ("ES Merger Corp."), and
(ii) the merger of ES Merger Corp. with and into Empower, Inc. a
Michigan corporation and an affiliate of Empower Solutions,
L.L.C. (the mergers of Empower Solutions, L.L.C. and its
affiliate Empower, Inc. shall be referred to herein collectively
as the "Merger"). As a result of the Merger, Empower, Inc.
("Empower") became a wholly-owned subsidiary of the Company.
Empower is an implementation partner of PeopleSoft and its
principle activities are business process reengineering, systems
design development, project management and training services. The
Merger was accounted for as a pooling of interests.
In connection with the Merger, on December 22, 1999, the
Company issued an aggregate of 179,611 restricted shares of its
Common Stock, $0.01 par value per share, to Patrick J. Kavanaugh,
Kurt A. Collins, Marcelo J. Casas and Jay D. Hiller relating to
the provisions of the Net Book Value Adjustment provision of the
Agreement and Plan of Merger. On January 28, 2000, the Company
filed an amendment to its Registration Statement on Form S-3 to
register such shares. The Company did not and will not receive
any of the proceeds from sales of the shares by Messrs.
Kavanaugh, Collins, Casas and Hiller.
On January 8, 1999, the Company consummated the acquisition
(the "NPI Acquisition") of all of the shares of outstanding
capital stock of Network Publishing, Inc. ("NPI"), a Utah
corporation located in Provo, Utah. As a result of the NPI
Acquisition, NPI became a wholly-owned subsidiary of the Company.
The principal activities of NPI are web site design and front-end
application solutions services.
Subsequent to the year ended December 31, 1999, and in
connection with the NPI Acquisition, on January 11, 2000, the
Company issued an aggregate of 99,558 restricted shares of its
Common Stock, $0.01 par value per share, to Richard Maw, Richard
Farr and Michael Donahue relating to the provisions of the
earn-out provision of the Stock Purchase Agreement. On January
28, 2000, the Company filed an amendment to its Registration
Statement on Form S-3 to register such shares. The Company did
not and will not receive any of the proceeds from sales of the
shares by Messrs. Maw, Farr and Donahue.
- 24 -
ITEM 6. SELECTED FINANCIAL DATA.
The selected statement of operations data for the years ended December 31,
1997, 1998 and 1999 and the selected balance sheet data as of December 31, 1998
and 1999 are derived from, are qualified by reference to, and should be read in
conjunction with, the more detailed audited consolidated financial statements
and the related notes thereto included elsewhere herein. The selected statement
of operations data for the year ended December 31, 1995 and 1996 and the
selected balance sheet data as of December 31, 1995, 1996 and 1997 have been
derived from audited financial statements of the Company which are not included
elsewhere herein. Prior period financial information has been restated to
reflect the Company's acquisitions of Empower Solutions, L.L.C. and its
affiliate Empower, Inc. during 1999, which were accounted for in accordance with
the pooling of interests rules under generally accepted accounting principles.
The following should be read in conjunction with the consolidated financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus:
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenue................................................ $ 39,283 $ 61,699 $ 98,301 $ 162,840 $ 186,067
Cost of sales.......................................... 29,263 43,142 67,452 104,984 119,857
-------- -------- -------- --------- ---------
Gross profit......................................... 10,020 18,557 30,849 57,856 66,210
-------- -------- -------- --------- ---------
Selling, general and administrative expenses........... 8,401 14,544 22,449 38,074 60,807
Acquisition expenses................................... -- -- -- 2,118 2,115
Spin-off costs......................................... -- -- -- -- 751
Restructuring and other special charges................ -- -- -- -- 7,328
-------- -------- -------- --------- ---------
Total selling, general and administrative expenses... 8,401 14,544 22,449 40,192 71,001
-------- -------- -------- --------- ---------
Operating (loss) income.............................. 1,619 4,013 8,400 17,664 (4,791)
Factor charges/interest expense (income), net.......... 1,327 1,335 (265) (187) 593
-------- -------- -------- --------- ---------
(Loss) income before provision for income taxes and
extraordinary charge................................. 292 2,678 8,665 17,851 (5,384)
Provision for income taxes............................. 587 748 2,327 4,451 1,206
-------- -------- -------- --------- ---------
(Loss) Income before extraordinary charge.............. (295) 1,930 6,338 13,400 (6,590)
Extraordinary charge, net of income tax
benefit of $296...................................... -- 1,148 -- -- --
-------- -------- -------- --------- ---------
Net (loss) income................................ $ (295) $ 782 $ 6,338 $ 13,400 $ (6,590)
======== ======== ======== ========= =========
Earnings (loss) per share(1):
Basic earnings (loss) per share:
(Loss) income before extraordinary charge.......... $ (0.02) $ 0.18 $ 0.43 $ 0.87 $ (0.42)
Extraordinary charge, net of income tax benefit.... -- 0.11 -- -- --
-------- -------- -------- --------- ---------
Net (loss) income................................ $ (0.02) $ 0.07 $ 0.43 $ 0.87 $ (0.42)
======== ======== ======== ========= =========
Weighted average number of common shares - Basic....... 15,011 11,003 14,637 15,387 15,766
======== ======== ======== ========= =========
Diluted earnings (loss) per share:
(Loss) income before extraordinary charge............ $ (0.02) $ 0.16 $ 0.42 $ 0.84 $ (0.42)
Extraordinary charge, net of income tax benefit...... -- 0.10 -- -- --
-------- -------- -------- --------- ---------
Net (loss) income................................ $ (0.02) $ 0.06 $ 0.42 0.84 $ (0.42)
======== ======== ======== ========= =========
Weighted average number of common shares - Diluted..... 15,011 12,263 15,117 15,969 15,766
======== ======== ======== ========= =========
- 25 -
As of December 31,
-----------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ---------- ----------
(In thousands)
Balance Sheet Data:
Cash and cash equivalents........................... $ 1,412 $ 8,301 $ 8,825 $ 4,245 $ 6,121
Working capital surplus (deficit)................... (991) 16,246 30,500 32,641 29,133
Total assets........................................ 12,571 24,945 43,064 69,565 83,062
Short-term debt, including subordinated
debentures........................................ 3,608 226 386 11 10,705
Long-term debt and obligations under capital leases,
less current portion............................... 206 108 355 60 618
Shareholders' equity................................ 128 18,280 34,036 47,949 48,654
(1) Basic and diluted earnings per share have replaced primary and fully diluted
earnings per share in accordance with SFAS No. 128.
- 26 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
RESULTS OF OPERATIONS
OVERVIEW
The Company provides a wide range of information technology services,
including enterprise-wide business process solutions, IT training solutions,
systems integration and custom software development based on leading
technologies. In November 1999, the Company announced its intentions to spin-off
its Internet applications services business (SeraNova). Through SeraNova, the
Company provides professional services, primarily in the area of business to
business interactions on the Internet. Business to business interactions include
communication and commerce conducted between a company and its customers,
suppliers and partners. SeraNova offers a comprehensive set of services,
including strategic consulting, creative design, technology implementation and
management of Internet applications. The Company has grown rapidly since 1994
when it made a strategic decision to diversify its customer base by expanding
the scope of its integration and development services and to utilize software
developed by SAP as a primary tool to implement enterprise-wide business process
solutions. In 1995, the Company achieved the status of a SAP National
Implementation Partner. In the same year, the Company also began to utilize
Oracle's ERP application products to diversify its service offerings. In 1997,
the Company enhanced its partner status with SAP, by first achieving National
Logo Partner status and then AcceleratedSAP Partner Status. Also, in 1997, the
Company further diversified its ERP-based service offerings, by beginning to
provide PeopleSoft and Baan implementation services. In July 1997, the Company
was awarded PeopleSoft implementation partnership status. In September 1997, the
Company was awarded Baan international consulting partnership status. In June
1998, the Company also expanded its Oracle applications implementation services
practice and added upgrade services to meet market demand of mid-size to large
companies that are implementing or upgrading Oracle applications.
During 1998 and 1999, the Company expanded its operations through
acquisitions. On May 7, 1998, the Company acquired thirty percent of the
outstanding share capital of CPI Consulting Limited. The acquisition of CPI
Consulting Limited was accounted for utilizing the purchase method of
accounting. The consideration paid by the Company included the issuance of
165,696 shares of the Company's Common Stock with a fair market value of $3.1
million at the time of purchase. An additional 155,208 shares of the Company's
Common Stock with a fair market value of $2.5 million was paid on March 22, 1999
pursuant to an earn-out relating to the operational results for the balance of
1998. The excess of the purchase price over the fair value of the net assets
acquired was attributed to intangible assets, amounting in the aggregate to $5.8
million.
On May 21, 1998, the Company acquired all of the outstanding share capital
of CPI Resources Limited. The acquisition of CPI Resources Limited was accounted
for as a pooling of interests. Prior results for all periods have been restated
in accordance with pooling of interests accounting. As consideration for this
acquisition, the Company issued 371,000 shares of the Company's Common Stock. At
the time of the acquisition, CPI Resources Limited owned seventy percent of the
outstanding share capital of CPI Consulting Limited.
- 27 -
The CPI Companies provide consulting and implementation services related to
PeopleSoft applications.
On November 25, 1998, the Company consummated the acquisition of all of the
outstanding capital stock of each of Azimuth Consulting Limited, Azimuth
Holdings Limited, Braithwaite Richmond Limited and Azimuth Corporation Limited
(collectively the "Azimuth Companies"). The acquisition of the Azimuth Companies
was accounted for as a pooling of interests. Prior results for all periods have
been restated in accordance with pooling of interests accounting. As
consideration for this acquisition, the Company issued 902,928 shares of the
Company's Common Stock.
The Azimuth Companies provide business and management consulting services.
Founded in 1984, Azimuth has built a strong IT management consulting
organization with operations in New Zealand, Australia, the Philippines and
Southeast Asian countries.
On January 8, 1999, in order to augment the Internet/Advanced Technology
Practice, the Company acquired the outstanding capital stock of NPI located in
Provo, Utah. The purchase price included an initial cash payment in the
aggregate of $1,800,000 together with a cash payment of $200,000 to be held in
escrow. In addition, the purchase price included an earn-out payment of up to
$2,212,650 in restricted shares of the Company's Common Stock payable on or
before April 15, 2000 and a potential lump sum cash payment of $354,024 payable
no later than March 31, 2000. The value of the earn-out was determined to be
$2,430,000 which was payable by the issuance of an additional 99,558 shares of
the Company's Common Stock and cash of $340,000. Such shares were issued by the
Company on January 11, 2000, however, such transaction was accounted for in
1999. This acquisition has been accounted for utilizing the purchase method of
accounting. The excess of the purchase price over the fair value of the net
assets acquired was attributed to intangible assets amounting to $4,061,471 in
the aggregate. NPI provides web site design and front-end application solutions
services. NPI has built a strong track record in designing web-sites that enable
clients to achieve the desired sales and marketing impact.
In addition, by way of merger transactions, the Company augmented its
PeopleSoft practice in North America by acquiring the Empower Companies located
in Plymouth, Michigan on February 16, 1999. The purchase price consisted of the
issuance of an aggregate of 1,831,091 restricted shares of the Company's Common
Stock. In addition, the Company issued an additional 179,611 shares of its
Common Stock in connection with a net worth adjustment determined as of the
closing date. The acquisition of the Empower Companies was accounted for as a
pooling of interests. Prior results for all periods have been restated in
accordance with pooling of interests accounting. The Empower Companies provide
business process reengineering, system design and development, project
management and training services.
The Company generates revenue from professional services rendered to
customers. Revenue is recognized as services are performed. The Company's
services range from providing customers with a single consultant to
multi-personnel full-scale projects. The Company provides these services to its
customers primarily on a time and materials basis and pursuant to written
contracts which can be terminated with limited advance notice, typically not
more than 30 days, and without significant penalty, generally limited to fees
earned and expenses incurred by the
- 28 -
Company through the date of termination. The Company provides its services
directly to end-user organizations or as a member of a consulting team assembled
by another information technology consulting firm to Fortune 1000 and other
large and mid-sized companies. The Company generally bills its customers
semi-monthly for the services provided by its consultants at contracted rates.
Where contractual provisions permit, customers also are billed for reimbursement
of expenses incurred by the Company on the customers' behalf.
The Company has provided services on certain projects in which it, at the
request of the clients, offered a fixed price for its services. For the year
ended December 31, 1999, revenues derived from projects under fixed price
contracts represented approximately 9% of the Company's total revenue. No single
fixed price project was material to the Company's business during 1999. However,
one fixed price project, which began late in 1998 and is expected to be
completed in early 2000, represented 4% of the Company's revenue during 1999.
The Company believes that, as it pursues its strategy of making turnkey project
management a larger portion of its business, it will continue to offer fixed
price projects. The Company has had limited prior experience in pricing and
performing under fixed price arrangements and believes that there are certain
risks related thereto and thus prices such arrangements to reflect the
associated risk. There can be no assurance that the Company will be able to
complete such projects within the fixed price timeframes. The failure to perform
within such fixed price contracts, if entered into, could have a material
adverse effect on the Company's business financial condition and results of
operations.
The Company has derived and believes that it will continue to derive a
significant portion of its revenue from a limited number of customers and
projects. For the years ended December 31, 1997, 1998 and 1999, the Company's
ten largest customers accounted for in the aggregate, approximately 44%, 38% and
38% of its revenue, respectively. In 1997, PricewaterhouseCoopers LLP accounted
for approximately 10% of revenue. During 1998, no customer accounted for more
than 10% of revenue. During 1999, the Government of Puerto Rico accounted for
more than 10% of revenue. For the years ended December 31, 1997, 1998 and 1999,
31%, 19% and 38%, respectively, of the Company's revenue was generated by
serving as a member of consulting teams assembled by other information
technology consulting firms. There can be no assurance that such information
technology consulting firms will continue to engage the Company in the future at
current levels of retention, if at all. During the years ended December 31,
1997, 1998 and 1999, 56%, 52% and 42%, respectively, of the Company's total
revenue was derived from projects in which the Company implemented software
developed by SAP. For each of the years ended December 31, 1997 1998 and 1999,
approximately 12% 11% and 7%, respectively, of the Company's total revenue was
derived from projects in which the Company implemented software developed by
Oracle. For each of the years ended December 31, 1997, 1998 and 1999,
approximately 12%, 19% and 26%, respectively, of the Company's total revenue was
derived from projects in which the Company implemented software developed by
PeopleSoft.
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
believes that turnkey project management assignments
- 29 -
typically carry higher margins. The Company has been shifting to such
higher-margin turnkey management assignments and more complex projects by
leveraging its reputation, existing capabilities, proprietary implementation
methodology, development tools and offshore development capabilities with
expanded sales and marketing efforts and new service offerings to develop
turnkey project sales opportunities with both new and existing customers. The
Company's inability to continue its shift to higher-margin turnkey management
assignments and more complex projects may adversely impact the Company's future
growth.
Since late 1994, the Company has made substantial investments in its
infrastructure in order to support its rapid growth. For example, in 1994, the
Company established and funded an operations facility in India, the ADC, and in
1995 established a sales office in California. In addition, from 1994 to date,
the Company has incurred expenses to develop proprietary development tools and
its proprietary accelerated implementation methodology and toolset. Since 1995,
the Company has also been increasing its sales force and its marketing, finance,
accounting and administrative staff, in order to manage its growth.
Additionally, in September 1999, the Company established its IDC in India to
provide Internet solutions for its clients around the world. The Company
currently maintains its headquarters in Edison, New Jersey, and branch offices
in Houston, Fayetteville (Georgia), Rosemont (Illinois), Auburn Hills
(Michigan), Foster City (California), Atlanta, Phoenix, Washington, D.C. and
Provo (Utah). The Company also currently maintains offices in Europe (the United
Kingdom, Denmark, and Sweden), and Asia Pacific (Australia, India, Japan, New
Zealand, the Philippines, Singapore and Thailand). The Company leases its
headquarters in Edison, New Jersey, totaling approximately 48,475 square feet.
Such lease has an initial term of ten (10) years, which commenced in September
1998.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data expressed as a percentage of total revenue:
Percentage of Revenue
-------------------------------------------
Year Ended
December 31,
-------------------------------------------
1999 1998 1997
---- ---- ----
Revenue.......................................... 100.0% 100.0% 100.0%
Cost of sales.................................... 64.4 64.5 68.6
------ ------ ------
Gross profit................................... 35.6 35.5 31.4
Selling, general and administrative expenses..... 32.7 23.4 22.8
Acquisition expenses............................. 1.1 1.3 --
Spin-off costs................................... 0.4 -- --
Restructuring and other special charges.......... 3.9 -- --
------ ------ ------
Operating (loss) income........................ (2.5) 10.8 8.6
Interest and other (expense) income, net......... (0.3) 0.1 0.3
------ ------ ------
(Loss) income before provision for income taxes
and extraordinary charge......................... (2.8) 10.9 8.9
Provision for income taxes....................... 0.7 2.7 2.4
------ ------ ------
(Loss) income before extraordinary charge........ (3.5) 8.2 6.5
Extraordinary charge, net of income tax benefit.. -- -- --
------ ------ ------
Net (loss) income ............................. (3.5)% 8.2% 6.5%
====== ====== ======
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Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenue. Total revenue increased by 14.3% or $23.3 million, from $162.8
million in 1998 to $186.1 million in 1999. Enterprise applications services
("EAS") revenue declined by 0.8% or $1.2 million from $147.5 million in 1998 to
$146.3 million in 1999. This decrease was primarily attributable to a decrease
in expenditures on ERP implementations, related to Y2K concerns as companies
shifted resources away from mission critical, enterprise-wide applications.
Internet applications services ("IAS") revenue increased by 158.4%, or $24.4
million, from $15.4 million in 1998 to $39.8 million in 1999. The increase in
revenue is the result of an increase in the number of clients and an increase in
the average size of engagements, as well as the acquisition of Network
Publishing, Inc. on January 8, 1999.
Gross profit. The Company's cost of sales includes primarily the cost of
salaries to consultants and related employee benefits and payroll taxes. The
Company's cost of sales increased by 14.2%, or $14.9 million, from $105.0
million in 1998 to $119.9 million in 1999. The Company's gross profit increased
$8.4 million, or 14.5%, from $57.8 million in 1998 to $66.2 million in 1999. The
Company's gross profit margin remained relatively constant at 35.5% of revenue
in 1998 and 35.6% of revenue in 1999. The EAS cost of sales increased 1.4%, or
$1.3 million, from $96.0 million in 1998 to $97.3 million in 1999. The EAS gross
profit margin decreased from 34.9% in 1998 to 33.4% in 1999. The decrease was
primarily attributable to lower staff utilization, experienced as a result of a
decrease in the ERP implementation market. IAS cost of sales increased by $13.5
million, or 150.0%, from $9.0 million in 1998 to $22.5 million in 1999. The
increase was due to personnel costs resulting from the hiring of additional
consultants to support the increase in demand for IAS. IAS gross profit margins
increased from 41.6% in 1998 to 43.5% in 1999, primarily attributable to the
higher margins generated by Network Publishing, Inc.
Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of administrative salaries, and
related benefits costs, occupancy costs, sales person compensation, travel and
entertainment, costs associated with the ADC and the IDC and related development
costs and professional fees. Selling, general and administrative expenses
increased by 59.7%, or $22.7 million, from $38.1 million in 1998 to $60.8
million in 1999, and increased as a percentage of revenue from 23.4% to 32.7%,
respectively. EAS selling, general and administrative expenses increased by
35.4%, or $11.2 million, from $31.6 million in 1998 to $42.8 million in 1999.
IAS selling, general, and administrative expenses increased by $11.6 million, or
181.3%, from $6.4 million in 1998 to $18.0 million in 1999. The increases in
such expenses in absolute dollars and as a percentage of revenue were primarily
due to the increase in salaries and related benefits, reflecting headcount
increases in the Company's sales force and its marketing, finance, accounting
and administrative staff through acquisitions and in order to manage its growth.
The Company's occupancy costs increased as a result of the relocation of its
corporate headquarters into approximately 48,000 square feet of office space,
from its former location, which consisted of approximately 17,000 square feet.
In addition, the Company experienced increases in sales and management
recruiting costs, occupancy costs as additional offices were opened in the
United States, support services and the provision for doubtful accounts. The
Company has also entered into an agreement with a strategic marketing
- 31 -
consulting company, which will generate sales leads, support sales force, and
build a salessystems infrastructure, for both the enterprise applications
services and Internet applications services businesses.
Acquisition expense. During the year ended December 31, 1999, the Company
incurred costs of $2.1 million in connection with the acquisition of the Empower
Companies. This acquisition was accounted for as a pooling of interests.
Acquisition costs primarily consisted of professional fees associated with such
acquisition.
Spin-off costs. During the year ended December 31, 1999, the Company
incurred costs of $751,000 in connection with the proposed spin-off of SeraNova
from the Company. These costs primarily consisted of professional fees.
Restructuring and other special charges. In connection with management's
plan to reduce costs and improve operating efficiencies, the Company incurred a
non-recurring charge of $5.6 million related to restructuring initiatives during
the year ended December 31, 1999. The restructuring charge included settlement
of the former chief executive officer's employment agreement and additional
severance payment, expenses associated with the termination of certain employees
in the United States and the United Kingdom, the closing of certain satellite
offices in the United States and an additional office in Belgium, and costs to
exit certain contractual obligations. Over 83% of the restructuring charges were
paid out in 1999. Additionally, the Company recorded a reserve of approximately
$1.7 million against an outstanding receivable from a large ERP account, whose
parent corporation filed for protection under Chapter 11 of the U.S. bankruptcy
laws.
Interest expense (income). Interest income has been earned on interest
bearing cash accounts and short term investments. In accordance with investment
guidelines approved by the Company's Board of Directors, cash balances in excess
of those required to fund operations have been invested in short-term U.S.
Treasury securities and commercial paper with a credit rating no lower than
A1/P1. The Company incurred approximately $800,000 in interest expense during
the year ended December 31, 1999, primarily related to its borrowings under its
line of credit. Borrowings under the line of credit were used to fund operating
activities, purchases of computer equipment and office furniture and fixtures,
as well as for acquisitions. The interest expense was partially offset by
interest income of $207,000 in 1999.
Provision for income taxes. While the Company experienced an overall
pre-tax loss, profits generated in certain foreign jurisdictions resulted in tax
expense for the year ended December 31, 1999. Although the Company expects these
foreign taxes to produce foreign tax credits in the United States, the ability
to apply these credits may be limited and, therefore, the Company has provided a
valuation allowance against such tax credits which has negatively impacted
income tax expense. The Company's effective income tax rate was 22% and 25% for
the years ended December 31, 1999 and 1998, respectively. The 1999 effective
income tax rate was negatively impacted by nondeductible amortization from the
NPI Acquisition. In 1996, the Company elected a five year tax holiday in India
in accordance with a local tax incentive program whereby no income tax will be
due during such period. Such tax holiday was extended
- 32 -
an additional five years in 1999. For the year ended December 31, 1999 and 1998,
the taxholiday favorably impacted the effective tax rate by approximately 18%
and 7%, respectively. Based on current and anticipated profitability, management
believes all recorded net deferred tax assets are more likely than not to be
realized.
As discussed in Note 11 to the consolidated financial statements, on
February 16, 1999, the Company acquired Empower Solutions, L.L.C. and Empower,
Inc. (a corporation organized under subchapter S of the Internal Revenue Code).
The acquisitions were accounted for as poolings of interests and thus prior year
financial statements have been restated in accordance with the pooling of
interests rules. The Empower Companies were pass-through entities for tax
reporting purposes, thus their income was not taxed at the corporate level.
Accordingly, the Company's federal statutory tax rate was reduced by 17% and 13%
for 1999 and 1998, respectively.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue. Revenue increased by 65.7% or $64.5 million, from $98.3 million in
1997 to $162.8 million in 1998. EAS revenue increased by 65.5%, or $58.4
million, from $89.1 million in 1997 to $147.5 million in 1998. This increase was
attributable primarily to increased demand for the Company's ERP implementation
consulting services. IAS revenue increased by 67.4%, or $6.2 million, from $9.2
million in 1997 to $15.4 million in 1998. The increase in revenue is the result
of an increase in the number of clients and an increase in the average size of
engagements.
Gross profit. The Company's cost of sales increased by 55.6%, or $37.5
million, from $67.5 million in 1997 to $105.0 million in 1998. The increase was
due to increased personnel costs resulting from the hiring of additional
consultants to support the increase in demand for the Company's services. The
Company's gross profit increased by 87.5%, or $27.0 million, from $30.8 million
in 1997 to $57.9 million in 1998. The Company's gross profit margin increased
from 31.4% of revenue in 1997 to 35.5% of revenue in 1998. The EAS cost of sales
increased 53.6%, or $33.5 million, from $62.5 million in 1997 to $96.0 million
in 1998. The EAS gross profit margin increased from 29.9% in 1997 to 34.9% in
1998. These increases in gross profit and margin reflect both the expanded
utilization of the Company's offshore development facility in India, and the
increase in implementation service projects where the Company has project
management responsibilities, which typically carry higher gross margins, than
those in which the Company provides supplemental staffing for client managed
projects. IAS cost of sales increased by $4.1 million, or 83.7%, from $4.9
million in 1997 to $9.0 million in 1998. IAS gross profit margins decreased from
46.7% in 1997 to 41.6% in 1998, primarily attributable to lower utilization
rates attained during expansion of the United States operations, and therefore,
higher costs as compared with established foreign operations.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 69.6%, or $15.6 million, from $22.4 million
in 1997 to $38.1 million in 1998, and increased as a percentage of revenue from
22.8% to 23.4%, respectively. EAS selling, general and administrative expenses
increased by 73.6%, or $13.4 million, from $18.2 million in 1997 to $31.6
million in 1998. IAS selling, general, and administrative expenses increased by
- 33 -
$2.2 million, or 52.4%, from $4.2 million in 1997 to $6.4 million in 1998. The
increases in such expenses in absolute dollars and as a percentage of revenue
were due primarily to the increase in salaries and related benefits, reflecting
headcount increases in the Company's sales force and its marketing, finance,
accounting and administrative staff through acquisitions and in order to manage
its growth. The Company's occupancy costs increased as a result of the
relocation of its corporate headquarters into approximately 48,000 square feet
of office space, from its former location, which consisted of approximately
17,000 square feet. In addition, the Company experienced increases in sales and
management recruiting costs, occupancy costs as additional offices were opened
in the United States, support services and the provision for doubtful accounts.
Acquisition expense. During the year ended 1998, the Company incurred costs
of $2,118,000 in connection with the acquisitions of the CPI Resources Limited
and the Azimuth Companies, each of which was accounted for as a pooling of
interests. These costs primarily consisted of professional fees associated with
such acquisitions.
Provision for income taxes. The Company's effective income tax rate was 25%
and 27% for the years ended December 31, 1998 and 1997. During 1997, the Company
reduced its valuation allowance by $207,000 as management determined that it was
more likely than not, that the applicable portion of the net deferred tax asset
would be or had been realized. The 1997 valuation allowance reduction favorably
impacted the effective income tax rate by 3%. In 1996, the Company elected a
five year tax holiday in India in accordance with a local tax incentive program
whereby no income tax will be due during such period. For the year ended
December 31, 1998 and 1997, the tax holiday favorably impacted the effective tax
rate by approximately 7% and 6%, respectively. Based on current and anticipated
profitability, management believes all net deferred tax assets are more likely
than not to be realized.
As discussed in Note 11 to the consolidated financial statements, on
February 16, 1999, the Company acquired Empower Solutions, L.L.C. and Empower,
Inc. (a corporation organized under subchapter S of the Internal Revenue Code).
The acquisitions were accounted for as poolings of interests and thus prior year
financial statements have been restated in accordance with the pooling of
interests rules. The Empower Companies were pass-through entities for tax
reporting purposes, thus their income was not taxed at the corporate level.
Accordingly, the Company's federal statutory tax rate was reduced by 13% and 6%
for 1998 and 1997, respectively.
BACKLOG
The Company normally enters into written contracts with its customers at
the time it commences work on a project. These written contracts contain varying
terms and conditions and the Company does not generally believe it is
appropriate to characterize such written contracts as creating backlog. In
addition, because these written contracts often provide that the arrangement can
be terminated with limited advance notice and without significant penalty, the
Company does not believe that projects in process at any one time are a reliable
indicator or measure of expected
- 34 -
future revenue. In the event that a customer terminates a project, the customer
remains obligated to pay the Company for services performed by it through the
date of termination.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its operations primarily from cash flow generated from
operations and financing activities, and prior to 1998 from cash balances
generated from the Company's initial and follow-on public offerings consummated
in October 1996 and July 1997, respectively.
The Company had cash and cash equivalents of $6.1 million at December 31,
1999 and $4.2 million at December 31, 1998. The Company had working capital of
$29.1 million at December 31, 1999 and $32.6 million at December 31, 1998.
Cash used in operating activities was $4.8 million during the year ended
December 31, 1999, resulting primarily from the net loss, as well as growth in
accounts receivable, unbilled services and income taxes receivable. This was
offset partially by depreciation and amortization of $4.1 million, a provision
for doubtful accounts of $4.9 million and increases in accrued payroll and
related taxes, accrued expenses and other liabilities and income taxes payable.
Cash provided by operating activities was $6.1 million during the year ended
December 31, 1998. Cash used in operating activities during the year ended
December 31, 1997 was $6.6 million.
In accordance with investment guidelines approved by the Company's Board of
Directors, cash balances in excess of those required to fund operations have
been invested in short-term U.S. Treasury securities and commercial paper with a
credit rating no lower than A1/P1.
The Company invested $4.3 million, $7.1 million and $2.4 million in
computer equipment and office furniture and fixtures in 1999, 1998 and 1997,
respectively. The increase reflects purchases of computer and telecommunications
equipment for consultants and administrative staff and office furniture and
fixtures related to the Company's headquarters in Edison, New Jersey, and other
offices opened during 1999.
On January 8, 1999, the Company acquired Network Publishing, Inc., based in
Provo, Utah. The purchase price included an initial cash payment in the
aggregate of $1,800,000 together with a cash payment of $200,000 to be held in
escrow. In addition, the purchase price included an earn-out payment of up to
$2,212,650 in restricted shares of the Company's Common Stock payable on or
before April 15, 2000, and a potential lump sum cash payment of $354,024 payable
not later than March 31, 2000. The earn-out was determined to be $2,430,000
which was payable by the issuance of an additional 99,558 shares of the
Company's Common Stock and $340,000 in cash. The Company issued such shares on
January 11, 2000.
From January 1997 until January 1999, the Company had a credit facility
with a bank, which included a revolving line of credit and a component for
equipment term loans. Such credit facility was terminated in January 1999.
- 35 -
On January 29, 1999, the Company entered into an unsecured three-year $30
million Revolving Credit Loan Agreement (the "Loan Agreement") with PNC Bank,
N.A. (the "Bank"). The proceeds of the credit facility may be used by the
Company for financing acquisitions and general corporate purposes. At the
Company's option, for each loan, interest shall be computed either at the Bank's
prime rate per annum or the Adjusted Libor Rate plus the Applicable Margin, as
such terms are defined in the Loan Agreement. The Company's obligations under
the credit agreement are payable at the expiration of such facility on January
29, 2002. Approximately $10.6 million was outstanding under this credit facility
at December 31, 1999.
The credit agreement contains financial covenants which require the Company
to (i) maintain a consolidated cash flow leverage ratio equal to or less than
2.5 to 1.0 for the period of four fiscal quarters preceding the date of
determination taken together as one accounting period ("Consolidated Cash Flow
Leverage Ratio"), (ii) maintain a consolidated net worth of not less than
consolidated net worth of the prior fiscal year plus 50% of positive net income
for such fiscal year ("Consolidated Net Worth"), (iii) not enter into any
agreement to purchase and/or pay for, or become obligated to pay for capital
expenditures, long term leases, capital leases or sale lease-backs, in an amount
at any time outstanding aggregating in excess of $5,000,000 during any fiscal
year, provided, however, in a one year carry-forward basis, the Company may
incur capital expenditures not to exceed $8,000,000 during any fiscal year, and
(iv) not cause or permit the minimum fixed charge coverage ratio, calculated on
the basis of a rolling four quarters to be less than 1.4 to 1.0 as at the end of
each fiscal quarter ("Minimum Fixed Charge Coverage Ratio").
As a result of the restructuring and other special charges incurred during
the quarter ended June 30, 1999, the Company was not in compliance with the
Consolidated Cash Flow Leverage Ratio and Consolidated Net Worth financial
covenants at June 30, 1999. On August 12, 1999, the Bank notified the Company
that such non-compliance constituted an Event of Default under the Loan
Agreement. At September 30, 1999, while the Company was in compliance with the
Consolidated Net Worth financial covenant, it was not in compliance with the
Consolidated Cash Flow Leverage Ratio and Minimum Fixed Charge Coverage Ratio
financial covenants. On January 26, 2000, the Company finalized with the Bank
the terms of a waiver and amendment to the Loan Agreement to remedy defaults
which existed under the Loan Agreement. The terms of the waiver and amendment
include, among other things, (i) a $15 million reduction in availability under
the Loan Agreement, (ii) a first priority perfected security interest on all of
the assets of the Company and its domestic subsidiaries and (iii) modification
of certain financial covenants and a waiver of prior covenant defaults.
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.
- 36 -
RECENTLY ISSUED ACCOUNTING STANDARDS
In April, 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities." The SOP requires all costs incurred as start-up costs or
organization costs be expenses as incurred. The Company adopted the SOP on
January 1, 1999 and it did not have any impact on the Company's consolidated
financial statements.
In March, 1998, the Accounting Standards Executive Committee issued SOP
98-1. Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This SOP requires that computer software costs that are incurred
in the preliminary project stage be expensed as incurred and that criteria be
met before capitalization of costs to develop or obtain internal use computer
software. The Company adopted the SOP on January 1, 1999 and it did not have a
material impact on the Company's consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because the
Company does not currently hold any derivative instruments and does not engage
in hedging activities, the Company expects the adoption of SFAS No. 133 will not
have a material impact on its financial position, results of operations, or cash
flows. The Company will be required to adopt SFAS No. 133 in fiscal 2001 in
accordance with SFAS No. 137, which delays the required implementation of SFAS
No. 133 for one year.
YEAR 2000 COMPLIANCE
The Company did not experience any significant computer or systems problems
relating to the Year 2000. Upon review of the Company's internal and external
systems during 1999, the Company determined that it did not have any material
exposure to such computer problems and that the software and systems required to
operate its business and provide its services were Year 2000 compliant. As a
result, the Company did not incur, and does not expect to incur, any material
expenditures relating to Year 2000 systems issues.
EUROPEAN MONETARY UNION (EMU)
The euro was introduced on January 1, 1999, at which time the eleven
participating EMU member countries established fixed conversion rates between
their existing currencies (legacy currencies) and the euro. The legacy
currencies will continue to be used as legal tender through January 1, 2002;
thereafter, the legacy currencies will be canceled and euro bills and coins will
be used for cash transactions in the participating countries. The Company's
European sales and operations offices affected by the euro conversion have
established plans to address the systems issues raised by the euro currency
conversion and are cognizant of the potential business implications of
converting to a common currency. The Company is unable to determine the ultimate
financial impact of the conversion on its operations, if any, given that the
impact will be dependent upon the competitive situations which exist in the
various regional markets in which
- 37 -
the Company participates and the potential actions which may or may not be taken
by the Company's competitors and suppliers.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS.
The financial statements required to be filed pursuant to this Item 8 are
included in this Annual Report on Form 10-K. A list of the financial statements
filed herewith is found at "Item 14. Exhibits, List, and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
- 38 -
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information relating to the Company's directors, nominees for
election as directors and executive officers under the headings "Election of
Directors" and "Executive Officers" in the Company's definitive proxy statement
for the 2000 Annual Meeting of Shareholders is incorporated herein by reference
to such proxy statement.
ITEM 11. EXECUTIVE COMPENSATION.
The discussion under the heading "Executive Compensation" in the
Company's definitive proxy statement for the 2000 Annual Meeting of Shareholders
is incorporated herein by reference to such proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The discussion under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement
for the 2000 Annual Meeting of Shareholders is incorporated herein by reference
to such proxy statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The discussion under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for the 2000 Annual
Meeting of Shareholders is incorporated herein by reference to such proxy
statement.
- 39 -
PART IV
ITEM 14. EXHIBITS, LIST, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements.
Reference is made to the Index to Financial Statements on Page F-1.
(a) (2) Financial Statement Schedules.
None.
(a) (3) Exhibits.
Reference is made to the Index to Exhibits on Page 43.
(b) Reports on Form 8-K.
Subsequent to the year ended December 31, 1999, the Company, on
March 22, 2000, filed a report on Form 8-K relating to the sale
by SeraNova, Inc., the Company's wholly-owned subsidiary, of
approximately 4.8% of its common stock to four institutional
investors for an aggregate purchase price of $10 million.
- 40 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 30th day of March,
2000.
INTELLIGROUP, INC.
By: /s/ Ashok Pandey
---------------------------------
Ashok Pandey, Co-Chief Executive
Officer
- 41 -
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Ashok Pandey Co-Chief Executive Officer and March 30, 2000
- --------------------------
Ashok Pandey Director (principal executive
officer)
/s/ Nagarjun Valluripalli Co-Chief Executive Officer and March 30, 2000
- --------------------------
Nagarjun Valluripalli Director
/s/ Nicholas Visco Vice President- Finance March 30, 2000
- --------------------------
Nicholas Visco (principal financial and
accounting officer)
/s/ Rajkumar Koneru Director March 30, 2000
- --------------------------
Rajkumar Koneru
/s/ Klaus Besier Director March 30, 2000
- --------------------------
Klaus Besier
/s/ Dennis McIntosh Director March 30, 2000
- --------------------------
Dennis McIntosh
- 42 -
EXHIBIT INDEX
Exhibit No. Description of Exhibit
2 Agreement and Plan of Merger of the Company and its wholly owned
subsidiary Oxford Systems Inc. (Incorporated by reference to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1996).
3.1 Amended and Restated Certificate of Incorporation. (Incorporated by
reference to the Company's Registration Statement on Form SB-2
(Registration Statement No. 333-5981) declared effective on September
26, 1996).
3.2 Amended and Restated Bylaws. (Incorporated by reference to the
Company's Registration Statement on Form SB-2 (Registration Statement
No. 333-5981) declared effective on September 26, 1996).
4.1 Shareholder Protection Rights Agreement dated as of November 6, 1998,
between the Company and American Stock Transfer & Trust Company which
includes (I) the Form of Rights Certificate and (ii) the Certificate
of Amendment to the Amended and Restated Certificate of Incorporation
of Intelligroup, Inc. (Incorporated by reference to Exhibit No. 4.1 of
the Company's Report on Form 8-K dated November 9, 1998, filed with
the Securities and Exchange Commission on November 9, 1998).
10.1* 1996 Stock Plan, as amended, of the Company. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999).
10.2* 1996 Non-Employee Director Stock Option Plan. (Incorporated by
reference to the Company's Registration Statement on Form SB-2
(Registration Statement No. 333-5981) declared effective on September
26, 1996).
10.3 Form of Indemnification Agreement entered into by the Company and each
of its Directors and officers. (Incorporated by reference to the
Company's Registration Statement on Form SB-2 (Registration Statement
No. 333-5981) declared effective on September 26, 1996).
10.4+ Employment Agreement dated October 1, 1999 between the Company and
Nicholas Visco.
10.5 Employee's Invention Assignment and Confidentiality Agreement.
(Incorporated by reference to the Company's Registration Statement on
Form SB-2 (Registration Statement No. 333-5981) declared effective on
September 26, 1996).
- 43 -
10.6 Services Provider Agreement by and between Oracle Corporation and the
Company dated July 26, 1994. (Incorporated by reference to the
Company's Registration Statement on Form SB-2 (Registration Statement
No. 333-5981) declared effective on September 26, 1996). See Exhibit
10.9.
10.7 Amended and Restated Agreement by Messrs. Pandey, Koneru and
Valluripalli dated July 16, 1996 to indemnify the Company for certain
losses. (Incorporated by reference to the Company's Registration
Statement on Form SB-2 (Registration Statement No. 333-5981) declared
effective on September 26, 1996).
10.8 Agreement by and between the Company and Intelligroup Asia Private
Limited ("Intelligroup Asia") relating to operational control of
Intelligroup Asia, with related agreements. (Incorporated by reference
to the Company's Registration Statement on Form SB-2 (Registration
Statement No. 333-5981) declared effective on September 26, 1996).
10.9 Amendment No. 1 to Services Provider Agreement by and between Oracle
Corporation and the Company dated December 30, 1996. (Incorporated by
reference to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996). See Exhibit 10.6.
10.10 R/3 National Logo Partner Agreement by and between SAP America, Inc.
and the Company dated as of April 29, 1997. (Incorporated by reference
to the Company's Registration Statement on Form SB-2 (Registration
Statement No. 333-29119) declared effective on June 26, 1997). See
Exhibits 10.12 and 10.28.
10.11* Employment Agreement dated December 6, 1996 between the Company and
Anthony Knight, as amended on February 18, 1997 (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1997).
10.12 ASAP Partner Addendum to R/3 National Logo Partner Agreement between
SAP America, Inc. and the Company effective July 1, 1997 (amends
existing R/3 National Logo Partner Agreement). (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1997). See Exhibits 10.10 and 10.28.
10.13 Implementation Partner Agreement between PeopleSoft, Inc. and the
Company effective July 15, 1997. (Incorporated by reference to the
Company's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1997). See Exhibit 10.27.
- 44 -
10.14 Consulting Alliance Agreement with Baan International B.V. and the
Company effective September 29, 1997. (Incorporated by reference to
the Company's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1997).
10.15 Lease Agreement between Alfieri-Parkway Associates, as Landlord, and
Intelligroup, Inc., as Tenant, dated March 17, 1998. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998).
10.16* Employment Agreement dated April 22, 1998 between the Company and
Gerard E. Dorsey. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998).
10.17* Employment Agreement dated April 27, 1998 between the Company and
Stephen A. Carns. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998).
10.18* Change in Control Severance Pay Agreement dated November 4, 1998
between the Company and Gerard Dorsey.
10.19* Change in Control Severance Pay Agreement dated November 4, 1998
between the Company and Alan Ziegler.
10.20* Revolving Credit Loan Agreement between PNC Bank, National Association
and the Company dated January 29, 1999. See Exhibit 10.36 and 10.37.
10.21 Agreement of Purchase and Sale dated as of May 7, 1998 among the
Company, Intelligroup Europe Limited and the Shareholders of CPI
Consulting Limited. (Incorporated by reference to the Company's Report
on Form 8-K filed May 27, 1998).
10.22 Agreement of Purchase and Sale dated as of May 21, 1998 among the
Company, Intelligroup Europe Limited and the Shareholders of CPI
Resources Limited. (Incorporated by reference to the Company's Report
on Form 8-K filed May 27, 1998).
10.23 Agreement of Purchase and Sale dated as of November 25, 1998 among the
Company and the Shareholders of each of Azimuth Consulting Limited,
Azimuth Holdings Limited, Braithwaite Richmond Limited and Azimuth
Corporation Limited. (Incorporated by reference to the Company's
Report on Form 8-K filed December 8, 1998).
- 45 -
10.24 Stock Purchase Agreement dated as of December 21, 1998 among the
Company and the Shareholders of Network Publishing, Inc. (Incorporated
by reference to the Company's Report on Form 8-K filed January 8,
1999).
10.25 Agreement and Plan of Merger dated as of February 16, 1999 by and
among the Company, ES Merger Corp., Empower Solutions, LLC and the
members of Empower Solutions, LLC. (Incorporated by reference to the
Company's Report on Form 8-K filed February 24, 1999.)
10.26 Agreement and Plan of Merger dated as of February 16, 1999 by and
among the Company, ES Merger Corp., Empower Solutions, Inc. and the
stockholders of Empower, Inc. (Incorporated by reference to the
Company's Report on Form 8-K filed February 24, 1999.)
10.27* Fifth Amendment to the Implementation Partner Agreement dated July 15,
1998, between the Company and PeopleSoft, Inc. See Exhibit 10.13.
10.28* Amendment to the National Implementation Partner Agreement dated as of
January 1, 1999, between SAP America and the Company. See Exhibits
10.10 and 10.12.
10.29+ Contribution Agreement by and between Intelligroup, Inc. and SeraNova,
Inc. dated as of January 1, 2000.
10.30+ Distribution Agreement by and between Intelligroup, Inc. and SeraNova,
Inc. dated as of January 1, 2000.
10.31+ Services Agreement by and between Intelligroup, Inc. and SeraNova,
Inc. dated as of January 1, 2000.
10.32+ Space Sharing Agreement by and among Intelligroup, Inc. and SeraNova,
Inc. dated as of January 1, 2000.
10.33+ Tax Sharing Agreement by and between Intelligroup, Inc. and SeraNova,
Inc. dated as of January 1, 2000.
10.34+ Master Consulting Services Agreement by and between Intelligroup, Inc.
and Mueller/Shields dated as of February 4, 2000.
10.35+ Master Consulting Services Agreement by and among Intelligroup,
SeraNova, Inc. and Mueller/Shields dated as of December 21, 1999.
- 46 -
10.36* First Amendment to Revolving Credit Loan Agreement by and between
Intelligroup, Inc., a New Jersey corporation, and PNC Bank, National
Association, a national banking association. (Incorporated by
reference to the Company's Amendment No. 1 to Registration Statement
on Form S-3 (Registration No. 333-94285) declared effective on
February 9, 2000. See Exhibit 10.20 and 10.37.
10.37+ Second Amendment to Revolving Credit Loan Agreement by and between
Intelligroup, Inc., a New Jersey corporation, and SeraNova, Inc., a
New Jersey corporation, and PNC Bank, National Association, a national
banking association. See Exhibit 10.20 and 10.36.
21+ Subsidiaries of the Registrant.
23+ Consent of Arthur Andersen LLP.
27.1+ Financial Data Schedule for the year ended December 31, 1999.
27.2+ Financial Data Schedule for the year ended December 31, 1998.
27.3+ Financial Data Schedule for the year ended December 31, 1997.
- ----------
* A management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
+ Filed herewith. All other exhibits previously filed.
- 47 -
INTELLIGROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants.................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and 1998................ F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.................................. F-4
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997............................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997................................. F-6
Notes to Consolidated Financial Statements.................................. F-7
Financial Statement Schedules
Financial Statement Schedules required by the Securities and
Exchange Commission have been omitted as the required information
is included in the Notes to the Consolidated Financial Statements
or are not applicable.
F - 1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Intelligroup, Inc.:
We have audited the accompanying consolidated balance sheets of
Intelligroup, Inc. (a New Jersey corporation) and subsidiaries as of December
31, 1999 and 1998, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Intelligroup, Inc.
and its subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 6, 2000 (except with
respect to Note 13, as to which
the date is March 14, 2000).
F - 2
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
1999 1998
---- ----
ASSETS
Current Assets:
Cash and cash equivalents............................. $ 6,121,000 $ 4,245,000
Accounts receivable, less allowance for doubtful
accounts of $3,292,000 and $1,053,000 at
December 31, 1999 and 1998, respectively............ 35,063,000 33,622,000
Unbilled services..................................... 11,372,000 10,842,000
Income taxes receivable............................... 3,612,000 --
Deferred tax asset.................................... 2,481,000 808,000
Other current assets.................................. 3,468,000 4,197,000
------------- -------------
Total current assets.............................. 62,117,000 53,714,000
Property and equipment, net............................. 11,420,000 9,506,000
Intangible assets, net.................................. 8,681,000 5,629,000
Other assets............................................ 844,000 716,000
------------- -------------
$ 83,062,000 $ 69,565,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable...................................... $ 4,672,000 $ 5,347,000
Accrued payroll and related taxes..................... 7,078,000 6,254,000
Accrued expenses and other liabilities................ 5,599,000 2,999,000
Accrued acquisition costs............................. 810,000 3,302,000
Income taxes payable.................................. 4,120,000 3,160,000
Current portion of long term debt and obligations
under capital leases................................ 10,705,000 11,000
------------- -------------
Total current liabilities......................... 32,984,000 21,073,000
------------- -------------
Long term debt and obligations under capital leases, less
current portion....................................... 618,000 60,000
------------- -------------
Deferred tax liability.................................. 806,000 483,000
------------- -------------
Commitments and contingencies
Shareholders' Equity
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued or outstanding.............. -- --
Common stock, $.01 par value, 25,000,000 shares
authorized, 15,949,000 and 15,573,000 shares issued
and outstanding at December 31, 1999 and 1998,
respectively........................................ 160,000 156,000
Additional paid-in capital............................ 43,356,000 35,261,000
Retained earnings..................................... 6,317,000 13,077,000
Currency translation adjustments...................... (1,179,000) (545,000)
------------- -------------
Total shareholders' equity ....................... 48,654,000 47,949,000
------------- -------------
$ 83,062,000 $ 69,565,000
============= =============
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F - 3
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
------------- ------------- -------------
Revenue................................................. $ 186,067,000 $ 162,840,000 $ 98,301,000
Cost of sales........................................... 119,857,000 104,984,000 67,452,000
------------- ------------- -------------
Gross profit...................................... 66,210,000 57,856,000 30,849,000
------------- ------------- -------------
Selling, general and administrative expenses............ 60,807,000 38,074,000 22,449,000
Acquisition expenses.................................... 2,115,000 2,118,000 --
Spin-off costs.......................................... 751,000 -- --
Restructuring and other special charges................. 7,328,000 -- --
------------- ------------- -------------
Total operating expenses.......................... 71,001,000 40,192,000 22,449,000
------------- ------------- -------------
Operating (loss) income........................... (4,791,000) 17,664,000 8,400,000
-------------- ------------- -------------
Other expenses:
Interest expense (income), net........................ 593,000 (187,000) (265,000)
------------- -------------- --------------
(Loss) income before provision for income taxes......... (5,384,000) 17,851,000 8,665,000
Provision for income taxes.............................. 1,206,000 4,451,000 2,327,000
------------- ------------- -------------
Net (loss) income....................................... $ (6,590,000) $ 13,400,000 $ 6,338,000
============= ============= =============
Earnings per share:
Basic earnings per share:
Net (loss) income per share..................... $ (0.42) $ 0.87 $ 0.43
============= ============ =============
Weighted average number of common shares - Basic.. 15,766,000 15,387,000 14,637,000
============ ============ =============
Diluted earnings per share:
Net (loss) income per share..................... $ (0.42) $ 0.84 $ 0.42
============= ============ =============
Weighted average number of common shares - Diluted 15,766,000 15,969,000 15,117,000
============ ============ =============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F - 4
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
CUMULATIVE
RETAINED FOREIGN COMPREHENSIVE
ADDITIONAL EARNINGS CURRENCY TOTAL (LOSS) INCOME
COMMON STOCK PAID-IN (ACCUMULATED TRANSLATION SHAREHOLDERS' FOR THE
SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENTS EQUITY PERIOD
---------- ---------- ---------- ------------ ----------- ------------ -------------
Balance at December 31, 1996..... 14,011,000 $ 140,000 $19,838,000 $(2,319,000) $ 85,000 $17,744,000 $ 850,000
===========
Issuance of common stock, net of
related costs.................... 1,150,000 12,000 9,888,000 -- -- 9,900,000 --
Exercise of stock options........ 102,000 1,000 838,000 -- -- 839,000 --
Tax benefit from exercise of
stock options.................... -- -- 248,000 -- -- 248,000 --
Shareholder dividends............ -- -- -- (849,000) -- (849,000) --
Currency translation adjustments -- -- -- -- (184,000) (184,000) $ (184,000)
Net income....................... -- -- -- 6,338,000 -- 6,338,000 6,338,000
---------- ---------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997..... 15,263,000 153,000 30,812,000 3,170,000 (99,000) 34,036,000 $ 6,154,000
===========
Issuance of common stock in
connection with acquisitions..... 166,000 2,000 3,126,000 -- -- 3,128,000 --
Exercise of stock options........ 144,000 1,000 1,021,000 -- -- 1,022,000 --
Tax benefit from exercise of
stock options.................... -- -- 302,000 -- -- 302,000 --
Adjustment for difference in
Azimuth fiscal periods........... -- -- -- 32,000 -- 32,000 --
Shareholder dividends............ -- -- -- (3,525,000) -- (3,525,000) --
Currency translation adjustments -- -- -- -- (446,000) (446,000) $ (446,000)
Net income....................... -- -- -- 13,400,000 -- 13,400,000 13,400,000
---------- ---------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998..... 15,573,000 156,000 35,261,000 13,077,000 (545,000) 47,949,000 $12,954,000
===========
Issuance of common stock in
connection with acquisitions..... 155,000 2,000 4,589,000 -- -- 4,591,000 --
Exercise of stock options........ 221,000 2,000 2,996,000 -- -- 2,998,000 --
Tax benefit from exercise of
stock options.................... -- -- 510,000 -- -- 510,000 --
Shareholder dividends............ -- -- -- (170,000) -- (170,000) --
Currency translation adjustments -- -- -- -- (634,000) (634,000) $ (634,000)
Net loss......................... -- -- -- (6,590,000) -- (6,590,000) (6,590,000)
---------- ---------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999..... 15,949,000 $ 160,000 $43,356,000 $ 6,317,000 $(1,179,000) $48,654,000 $(7,224,000)
========== ========== =========== =========== =========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F - 5
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net (loss) income.................................................... $ (6,590,000) $ 13,400,000 $ 6,338,000
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation and amortization.................................... 4,061,000 1,538,000 571,000
Provision for doubtful accounts.................................. 4,931,000 1,268,000 765,000
Deferred income taxes............................................ (1,400,000) (92,000) 98,000
Tax benefit from exercise of stock options....................... 510,000 302,000 248,000
Other............................................................ -- -- 78,000
Changes in operating assets and liabilities, net of acquired
businesses:
Accounts receivable.............................................. (5,461,000) (13,826,000) (11,194,000)
Unbilled services................................................ (530,000) (3,002,000) (4,920,000)
Income taxes receivable.......................................... (3,612,000) -- --
Other current assets............................................. 786,000 (3,406,000) (255,000)
Other assets..................................................... (128,000) (357,000) (134,000)
Accounts payable................................................. (680,000) 3,388,000 1,086,000
Accrued payroll and related taxes................................ 412,000 2,685,000 743,000
Accrued expenses and other liabilities........................... 2,179,000 2,130,000 (563,000)
Income taxes payable............................................. 772,000 2,081,000 521,000
------------- ------------- -------------
Net cash (used in) provided by operating activities.......... (4,750,000) 6,109,000 (6,618,000)
------------- ------------- -------------
Cash flows from investing activities:
Purchases of equipment............................................... (4,349,000) (7,116,000) (2,436,000)
Acquisition of businesses, net of cash acquired...................... (1,682,000) -- --
------------- ------------- -------------
Net cash used in investing activities........................ (6,031,000) (7,116,000) (2,436,000)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs........ -- -- 9,918,000
Proceeds from exercise of stock options.............................. 2,998,000 1,022,000 839,000
Proceeds from shareholder loans...................................... -- -- 235,000
Repayments of shareholders' loans.................................... -- (618,000) (375,000)
Shareholder dividends - Empower Companies............................ (170,000) (3,525,000) (849,000)
Proceeds from line of credit borrowings, net......................... 10,585,000 -- --
Repayments of other borrowings....................................... (110,000) -- --
Principal payments under capital leases.............................. (12,000) (6,000) (6,000)
------------- ------------- -------------
Net cash provided by (used in) financing activities.......... 13,291,000 (3,127,000) 9,762,000
------------- ------------- -------------
Effect of foreign currency exchange rate changes on cash............. (634,000) (446,000) (184,000)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents......... 1,876,000 (4,580,000) 524,000
Cash and cash equivalents at beginning of year.......................... 4,245,000 8,825,000 8,301,000
------------- ------------- -------------
Cash and cash equivalents at end of year................................ $ 6,121,000 $ 4,245,000 $ 8,825,000
============= ============= =============
Supplemental disclosures of cash flow information:
Cash paid for interest............................................... $ 834,000 $ 24,000 $ --
============= ============= =============
Cash paid for income taxes........................................... $ 3,858,000 $ 2,428,000 $ 1,707,000
============= ============= =============
Supplemental disclosures of non-cash transactions:
Issuance of common stock in connection with acquisitions............. $ 4,591,000 $ 3,128,000 $ --
============= ============= =============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F - 6
INTELLIGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Intelligroup, Inc., and its subsidiaries (the "Company") provide a wide
range of information technology services, including management consulting,
enterprise-wide business process solutions, Internet applications services,
applications outsourcing and maintenance, systems integration and custom
software development based on leading technologies. The Company markets its
services to a wide variety of industries, the majority of which are in the
United States. The majority of the Company's business is with large established
companies, including consulting firms serving numerous industries.
Principles of Consolidation and Use of Estimates
The accompanying financial statements include the accounts of Intelligroup,
Inc. and its majority owned subsidiaries. All significant intercompany balances
and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the recorded amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of investments in highly liquid
short-term instruments, with original maturities of three months or less from
the date of purchase.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the related assets (five years). Leasehold improvements are
amortized over the shorter of the lease term or the estimated useful life (ten
years). Costs of maintenance and repairs are charged to expense as incurred.
Intangible Assets
Intangible assets at December 31, 1999 and 1998 include goodwill and other
intangibles totaling $8,681,000 and $5,629,000, respectively, that were
attributable to the acquisitions of Network Publishing, Inc. and CPI Consulting
(See Note 11). These intangible assets are being amortized over the estimated
useful lives ranging from 5 to 15 years using the straight-line method.
Amortization expense was $1,009,000 and $147,000 in 1999 and 1998, respectively.
F - 7
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
The Company generates revenue from professional services rendered. Revenue
is recognized as services are performed with the corresponding cost of providing
those services reflected as cost of sales. Substantially all customers are
billed on an hourly or per diem basis whereby actual time is charged directly to
the customer. Billings to customers for out-of-pocket expenses are recorded as a
reduction of expenses incurred. Unbilled services at December 31, 1999 and 1998
represent services provided which are billed subsequent to year-end. All such
amounts are anticipated to be realized in the following year.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts arising from
services, which is based upon a review of outstanding receivables as well as
historical collection information. Credit is granted to substantially all
customers on an unsecured basis. In determining the amount of the allowance,
management is required to make certain estimates and assumptions. The provision
for doubtful accounts totaled $4,931,000, $1,268,000 and $765,000 in 1999, 1998
and 1997, respectively. Accounts written off totaled $2,692,000, $1,143,000 and
$512,000 in 1999, 1998 and 1997, respectively.
Recoverability of Long-Lived Assets
The Company reviews the recoverability of its long-lived assets on a
periodic basis whenever events and changes in circumstances have occurred which
may indicate a possible impairment. The assessment for potential impairment is
based primarily on the Company's ability to recover the carrying value of its
long-lived assets from expected future cash flows from its operations on an
undiscounted basis. The Company does not believe that any such events or changes
in circumstances have occurred. The amount of impairment of goodwill would be
determined as part of the long-lived asset groupings being evaluated.
Stock-Based Compensation
Stock-based compensation is recognized using the intrinsic value method
under Accounting Principles Board (APB) No. 25. For disclosure purposes, pro
forma net (loss) income and earnings per share impacts are provided as if the
fair market value method had been applied.
Currency Translation
Assets and liabilities relating to foreign operations are translated into
U.S. dollars using exchange rates in effect at the balance sheet date; income
and expenses are translated into U.S. dollars using monthly average exchange
rates during the year. Translation adjustments associated with assets and
liabilities are excluded from income and credited or charged directly to
shareholders' equity.
F - 8
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentrations
For the years ended December 31, 1999, 1998 and 1997, approximately 42%,
52% and 56% of revenue, respectively, was derived from projects in which the
Company's personnel implemented software developed by SAP. The Company's future
success in its SAP-related consulting services depends largely on its continued
relationship with SAP and on its continued status as a SAP National
Implementation Partner, which was first obtained in 1995. The Company's
agreement with SAP (the "Agreement") is awarded on an annual basis. The
Company's current contract expires on December 31, 2000 and is automatically
renewed for successive one-year periods, unless terminated by either party. This
Agreement contains no minimum revenue requirements or cost sharing arrangements
and does not provide for commissions or royalties to either party. In July 1997,
the Company achieved Accelerated SAP Partner Status with SAP by meeting certain
established criteria established by SAP. Additionally, for each of the years
ended December 31, 1999, 1998 and 1997, approximately 7%, 11% and 12%,
respectively, of revenue was derived from projects in which the Company's
personnel implemented software developed by Oracle. For each of the years ended
December 31, 1999, 1998 and 1997, approximately 26%, 19% and 12%, respectively,
of the Company's total revenue was derived from projects in which the Company
implemented software developed by PeopleSoft.
A substantial portion of the Company's revenue is derived from projects in
which an information technology consulting firm other than the Company has been
retained by the end-user organization to manage the overall project. For years
ended December 31, 1999, 1998 and 1997, 38%, 19% and 31%, respectively, of the
Company's revenue was generated by serving as a member of consulting teams
assembled by other information technology consulting firms.
One customer accounted for approximately 11% and 8% of revenue in 1999 and
1998, respectively. Accounts receivable due from this customer was approximately
$5,900,000 and $2,560,000 as of December 31, 1999, and 1998, respectively. One
customer accounted for approximately 10% of revenue in 1997.
During 1999 and 1998, the Company derived revenues totaling $58,000 and
$1.7 million, respectively, from contracts with an entity whose chief executive
officer is a director of the Company.
Income Taxes
The provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," ("SFAS No. 109") utilizes the liability method
and results in the determination of deferred taxes based on the estimated future
tax effects of differences between the financial statement and tax bases of
assets and liabilities, using enacted tax rates currently in effect. The Company
does not provide for additional U.S. income taxes on undistributed earnings
considered to be permanently invested in foreign subsidiaries.
F - 9
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings Per Share
Basic earnings per share is computed by dividing income attributable to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding, adjusted for the incremental dilution of outstanding stock options.
The computation of basic earnings per share and diluted earnings per share were
as follows:
1999 1998 1997
------------- ------------- --------------
Net (Loss) Income......................... $(6,590,000) $13,400,000 $ 6,338,000
---------- ---------- ----------
Denominator:
Weighted average number of common
shares................................. 15,766,000 15,387,000 14,637,000
Basic (loss) earnings per share........ $ (0.42) $ 0.87 $ 0.43
========== ========== ==========
Denominator:
Weighted average number of common
shares................................. 15,766,000 15,387,000 14,637,000
Common share equivalents of
outstanding stock options.............. -- 582,000 480,000
---------- ---------- ----------
Total shares.............................. 15,766,000 15,969,000 15,117,000
---------- ---------- ----------
Diluted (loss) earnings per share......... $ (0.42) $ 0.84 $ 0.42
========== ========== ==========
Stock options, which would be antidilutive (3,927,280 as of December 31,
1999), have been excluded from the calculations of diluted shares outstanding
and diluted earnings per share.
Financial Instruments
Financial instruments that potentially subject the Company to credit risk
consist principally of trade receivables and unbilled services. Management of
the Company believes the fair value of accounts receivable and unbilled services
approximates the carrying value.
F - 10
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31:
1999 1998
------------ -----------
Vehicles............................... $ 172,000 $ 109,000
Furniture.............................. 3,105,000 2,459,000
Equipment.............................. 11,907,000 8,438,000
Computer software...................... 1,708,000 816,000
Leasehold improvements................. 648,000 474,000
------------ -----------
17,540,000 12,296,000
Less-Accumulated depreciation.......... (6,120,000) (2,790,000)
------------ -----------
$ 11,420,000 $ 9,506,000
============ ===========
Depreciation expense was $3,052,000, $1,391,000 and $571,000 in 1999, 1998
and 1997, respectively.
NOTE 3 - LINES OF CREDIT
From January 1997 until January 1999, the Company had a credit facility
with a bank, which included a revolving line of credit and a component for
equipment term loans. Such credit facility was terminated in January 1999.
On January 29, 1999, the Company entered into an unsecured three-year $30
million Revolving Credit Loan Agreement (the "Loan Agreement") with PNC Bank,
N.A. (the "Bank"). The proceeds of the credit facility may be used by the
Company for financing acquisitions and general corporate purposes. At the
Company's option, for each loan, interest shall be computed either at the Bank's
prime rate per annum or the Adjusted LIBOR Rate plus the Applicable Margin, as
such terms are defined in the Loan Agreement. The Company's obligations under
the credit agreement are payable at the expiration of such facility on January
29, 2002.
The credit agreement contains financial covenants which require the Company
to (i) maintain a consolidated cash flow leverage ratio equal to or less than
2.5 to 1.0 for the period of four fiscal quarters preceding the date of
determination taken together as one accounting period ("Consolidated Cash Flow
Leverage Ratio"), (ii) maintain a consolidated net worth of not less than
consolidated net worth of the prior fiscal year plus 50% of positive net income
for such fiscal year ("Consolidated Net Worth"), (iii) not enter into any
agreement to purchase and/or pay for, or become obligated to pay for capital
expenditures, long term leases, capital leases or sale lease-backs, in an amount
at any time outstanding aggregating in excess of $5,000,000 during any fiscal
year, provided, however, in a one year carry-forward basis, the Company may
incur capital expenditures not to exceed $8,000,000 during any fiscal year, and
(iv) not cause or permit the minimum fixed charge coverage ratio, calculated on
the basis of a rolling four quarters to be less than 1.4 to 1.0 as at the end of
each fiscal quarter ("Minimum Fixed Charge Coverage Ratio").
F - 11
NOTE 3 - LINES OF CREDIT (CONTINUED)
As a result of the restructuring and other special charges incurred during
the quarter-ended June 30, 1999, the Company was not in compliance with the
Consolidated Cash Flow Leverage Ratio and Consolidated Net Worth financial
covenants at June 30, 1999. On August 12, 1999, the Bank notified the Company
that such non-compliance constituted an Event of Default under the Loan
Agreement. At September 30, 1999, while the Company was in compliance with the
Consolidated Net Worth financial covenant, it was not in compliance with the
Consolidated Cash Flow Leverage Ratio and Minimum Fixed Charge Coverage Ratio
financial covenants. On January 26, 2000, the Company finalized with the Bank
the terms of a waiver and amendment to the Loan Agreement to remedy defaults
which existed under the Loan Agreement. The terms of the waiver and amendment
include, among other things, (i) a $15 million reduction in availability under
the Loan Agreement, (ii) a first priority perfected security interest on all of
the assets of the Company and its domestic subsidiaries and (iii) modification
of certain financial covenants and a waiver of prior covenant defaults. As of
December 31, 1999 and 1998, the Company had outstanding borrowings on the Loan
Agreement of $10,585,000 and $0, respectively.
In addition, the Company assumed an $875,000 note payable between Network
Publishing, Inc. and a bank in connection with the acquisition of Network
Publishing, Inc. on January 8, 1999 (See Note 11). The note, which is secured by
certain equipment, furniture and fixtures of Network Publishing, Inc., bears
interest at the bank's prime rate (8.5% as of December 31, 1999) plus 2% and
matures on April 25, 2007. Principal and interest are payable in monthly
installments. The aggregate amount of principal maturities of long-term debt as
of December 31, 1999 are as follows:
For the Years Ending December 31, Amount
------------------------------------------- -----------
2000..................................... $ 120,000
2001..................................... 73,000
2002..................................... 81,000
2003..................................... 89,000
2004..................................... 99,000
Thereafter............................... 276,000
---------
$ 738,000
NOTE 4 - PROPOSED SPIN-OFF OF INTERNET APPLICATIONS SERVICES BUSINESS
In November 1999, the Company announced its intentions to spin off its
Internet applications services business to SeraNova, Inc., subject to certain
approvals and conditions. On January 1, 2000, the Company transferred its
Internet applications services business to SeraNova, a wholly-owned subsidiary
(see Note 13). Internet applications services revenues and net loss totaled
$39.8 million and $1.3 million for the year ended December 31, 1999,
respectively, and $15.4 million and $631,000 for the year ended December 31,
1998, respectively. Total assets of SeraNova were $18.9 million as of December
31, 1999.
F - 12
NOTE 4 - PROPOSED SPIN-OFF OF INTERNET APPLICATIONS SERVICES BUSINESS
(CONTINUED)
In connection with the spin off, the Company incurred a non-recurring
charge of $751,000 related to professional fees during the year ended December
31, 1999.
NOTE 5 - RESTRUCTURING AND OTHER SPECIAL CHARGES
In connection with the Company's plan to reduce costs and improve operating
efficiencies, the Company incurred a non-recurring charge of approximately $5.6
million related to restructuring initiatives during the year ended December 31,
1999. The restructuring charge included settlement of the former chief executive
officer's employment agreement and additional severance payment, expenses
associated with the termination of certain employees in the United States and
United Kingdom, the closing of certain satellite offices in the United States
and an additional office in Belgium, and costs to exit certain contractual
obligations.
Activity in accrued costs for restructuring and other special charges
during the year ended December 31, 1999 is as follows:
Charges to Costs Accrued Costs
Operations Paid December 31, 1999
------------- -------------- -------------------
Severance and related costs.... $5,027,000 $4,162,000 $865,000
Other costs primarily to exit
facilities, contracts, and
certain activities ............ 601,000 517,000 84,000
---------- ---------- --------
$5,628,000 $4,679,000 $949,000
========== ========== ========
Additionally, in 1999 the Company recorded a reserve of approximately $1.7
million against an outstanding receivable from a large account, whose parent
corporation filed for protection under Chapter 11 of the U.S. bankruptcy laws.
NOTE 6 - INCOME TAXES
Income taxes consist of the following:
1999 1998 1997
------------- -------------- ---------------
Current:
Federal.............................. $1,737,000 $2,878,000 $1,384,000
State................................ 290,000 783,000 389,000
Foreign.............................. 579,000 882,000 456,000
---------- ---------- ----------
2,606,000 4,543,000 2,229,000
---------- ---------- ---------
Deferred:
Federal.............................. (1,239,000) (71,000) 76,000
State................................ (161,000) (21,000) 22,000
---------- ----------- ----------
(1,400,000) (92,000) 98,000
----------- ---------- ----------
Total.................................. $1,206,000 $4,451,000 $2,327,000
========== ========== ==========
F - 13
NOTE 6 - INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amount computed by applying
the statutory rate of 34% to income before income taxes. The principal reasons
for this difference are:
1999 1998 1997
-------- -------- --------
Tax at federal statutory rate...................... (34)% 34% 34%
Nondeductible expenses............................. 77 5 1
State income tax, net of federal benefit........... 4 4 4
Foreign losses for which no benefit is available... 8 7 --
Changes in valuation allowance..................... -- -- (3)
Foreign operations taxed at less than U.S.
statutory rate, primarily India.................. (12) (11) (7)
S Corp and L.L.C. income passed through
to shareholders.................................. (17) (13) (6)
Other.............................................. (4) (1) 4
---- ---- ----
Effective tax rate................................. 22% 25% 27%
==== ==== ====
Nondeductible expenses in 1999 primarily represent amortization of
intangibles related to the Network Publishing, Inc. acquisition. In 1996, the
Company elected a five year tax holiday in India in accordance with a local tax
incentive program whereby no income taxes will be due for such period. Such tax
holiday was extended for an additional five years in 1999. Prior to their
acquisition, the Empower Companies (see Note 11) were pass-through entities for
tax reporting purposes, thus their income was not taxed at the corporate level.
Accordingly, the Company's federal statutory tax rate was reduced by 17%, 13%
and 6% for 1999, 1998 and 1997, respectively.
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities as of December
31, 1999 and 1998 are as follows:
1999 1998
---------- ----------
Deferred tax assets:
Allowance for doubtful accounts................. $1,247,000 $ 432,000
Vacation accrual................................ 334,000 280,000
Net operating losses............................ 570,000 --
Foreign tax credits............................. 2,200,000 --
Other accrued liabilities....................... 739,000 96,000
--------- ---------
Total deferred tax assets......................... 5,090,000 808,000
Deferred tax liability-accelerated depreciation... (806,000) (483,000)
Valuation allowance............................... (2,609,000) --
--------- ---------
Net deferred tax asset............................ $1,675,000 $ 325,000
========= =========
F - 14
NOTE 6 - INCOME TAXES (CONTINUED)
Realization of the net deferred tax assets is dependent on the timing of
the reversal of temporary differences. The Company has provided a valuation
allowance against foreign tax credits and certain foreign net operating losses
as the ability to apply these credits and losses may be limited in the future.
Although realization of the net deferred tax asset is not assured, management
believes it is more likely than not, that the 1999 and 1998 net deferred tax
asset will be realized.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Employment Agreements
As of December 31, 1999, the Company had employment agreements with certain
of its executives which provide for minimum payments in the event of termination
in other than for just cause. The aggregate amount of compensation commitment in
the event of termination under such agreements is approximately $1,500,000.
Leases
The Company leases office space and office equipment and vehicles under
operating leases that have initial or remaining non-cancelable lease terms in
excess of one year as of December 31, 1999. Future minimum aggregate annual
lease payments are as follows:
For the Years Ending December 31,
-------------------------------------------
2000..................................... $ 3,651,000
2001..................................... 3,204,000
2002..................................... 2,896,000
2003..................................... 2,515,000
2004..................................... 2,624,000
Thereafter............................... 4,488,000
Rent expense for the years ended December 31, 1999, 1998 and 1997 was
$3,941,000, $2,217,000 and $713,000, respectively.
Legal
The Company is engaged in certain legal and administrative proceedings.
Management believes the outcome of these proceedings will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
NOTE 8 - STOCK OPTION PLANS
The Company's stock option plans permit the granting of options to
employees, non-employee directors and consultants. The Option Committee of the
Board of Directors generally has the authority to select individuals who are to
receive options and to specify the terms and conditions of each option so
granted, including the number of shares covered by the option, the type of
option (incentive stock option or non-qualified stock option), the exercise
price, vesting
F - 15
NOTE 8 - STOCK OPTION PLANS (CONTINUED)
provisions, and the overall option term. A total of 1,590,000 shares of Common
Stock have been reserved for issuance under the plans. Subsequent to December
31, 1999, the Company granted options to purchase an aggregate of 23,750 shares
of its Common Stock to certain employees. All of the options issued pursuant to
these plans expire ten years from the date of grant.
Weighted
Number of Average
Shares Exercise Price
-------------------------------------------------------------------------
Options Outstanding,
December 31, 1996 (none
exercisable) 571,800 $ 8.39
Granted 647,640 $ 11.52
Exercised (102,381) $ 8.20
Canceled (74,113) $ 9.78
-------------------------------------------------------------------------
Options Outstanding,
December 31, 1997
(93,674 exercisable) 1,042,946 $ 10.25
Granted 1,257,630 $ 16.81
Exercised (143,297) $ 9.32
Canceled (258,138) $ 14.91
-------------------------------------------------------------------------
Options Outstanding,
December 31, 1998
(262,156 exercisable) 1,899,141 $ 14.14
Granted 3,465,759 $ 8.82
Exercised (220,645) $ 13.47
Canceled (1,216,975) $ 14.00
-------------------------------------------------------------------------
Options Outstanding,
December 31, 1999
(336,090 exercisable) 3,927,280 $ 9.55
========= =======
F - 16
NOTE 8 - STOCK OPTION PLANS (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1999:
Outstanding Exercisable
----------- -----------
Weighted Weighted Weighted
Average Average Average
Exercise Price Number of Remaining Exercise Number of Exercise
Range shares Life (in years) Price shares Price
- -----------------------------------------------------------------------------------------------
$5 to 8 2,103,308 9.0 $ 7.44 190,624 $ 7.65
$8 to 10 940,500 9.7 $ 8.60 -- --
$10 to 12 151,592 6.6 $ 10.71 46,203 $ 10.90
$12 to 15 54,500 7.9 $ 14.34 8,000 $ 12.13
$15 to 18 509,380 8.4 $ 16.00 71,576 $ 16.28
$18 to 24 168,000 8.4 $ 19.04 19,687 $ 18.82
---------- ----- ------ --------- -------
$5 to 24 3,927,280 9.0 $ 9.55 336,090 $ 10.69
========= =========
As permitted by SFAS 123, the Company has chosen to continue accounting for
stock options at their intrinsic value. Accordingly, no compensation cost has
been recognized for the stock option plans. Had compensation cost for the
Company's stock option plans been determined based on the fair value option
pricing method, the tax-effective impact would be as follows:
1999 1998 1997
- ----------------------------------------------------------------------------------------------
Net (Loss) Income:
as reported ($6,590,000) $ 13,400,000 $ 6,338,000
pro forma ($14,975,000) $ 8,894,000 $ 5,336,000
- ----------------------------------------------------------------------------------------------
Basic Earnings per Share:
as reported ($0.42) $0.87 $0.43
pro forma ($0.95) $0.58 $0.36
- ----------------------------------------------------------------------------------------------
Diluted Earnings per Share:
as reported ($0.42) $0.84 $0.42
pro forma ($0.95) $0.56 $0.35
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 82%, 78% and 62%, risk-free
interest rate of 5.6%, 5.4% and 7.0% and expected lives of 2.9, 8.5 and 4.5
years, in 1999, 1998 and 1997, respectively. The
F - 17
NOTE 8 - STOCK OPTION PLANS (CONTINUED)
weighted average fair value of options granted during 1999, 1998 and 1997 was
$9.75, $13.49 and $6.96, respectively.
The Company's subsidiary, SeraNova, Inc. adopted the SeraNova, Inc. 1999
Stock Plan covering its employees, officers and directors and certain
consultants, agents and key contractors and reserved 5 million shares of its
common stock for future issuances. During 1999, SeraNova granted employees
3,236,092 (2,694,711 that were outside the Plan) options to purchase its common
stock as of December 31, 1999. After year-end, an additional 1,667,575 options
were granted.
NOTE 9 - STOCK RIGHTS
In October 1998 the Company's Board of Directors declared a dividend
distribution of one Preferred Share Purchase Right for each outstanding share of
the Company's Common Stock. These Rights will expire in November 2008 and trade
with the Company's Common Stock. Such Rights are not presently exercisable and
have no voting power. In the event a person or affiliated group of persons,
acquires 20% or more, or makes a tender or exchange offer for 20% or more of the
Company's Common Stock, the Rights detach from the Common Stock and become
exercisable and entitle a holder to buy one one-hundredth (1/100) of a share of
Preferred Stock at $100.00.
If, after the Rights become exercisable, the Company is acquired or merged,
each Right will entitle its holder to purchase $200.00 market value of the
surviving company's stock for $100.00, based upon the current exercise price of
the Rights. The Company may redeem the Rights, at its option, at $.01 per Right
prior to a public announcement that any person has acquired beneficial ownership
of at least 20% of the Company's Common Stock. These Rights are designed
primarily to encourage anyone interested in acquiring the Company to negotiate
with the Board of Directors.
NOTE 10 - FOLLOW-ON PUBLIC OFFERING
In July 1997, the Company consummated a follow-on public offering (the
"Offering") of 1,150,000 shares of its Common Stock at a price to the public of
$9.50 per share. The net proceeds to the Company from the Offering, after
underwriting discounts and commissions and other expenses of the Offering, were
approximately $9,900,000.
NOTE 11 - ACQUISITIONS
On February 16, 1999, the Company acquired both Empower Solutions, L.L.C.
and its affiliate Empower, Inc. (a corporation organized under sub-chapter S of
the Internal Revenue Code). The acquisitions were accounted for as poolings of
interests. The accompanying consolidated financial statements as of December 31,
1998 and 1997 and each of the three years in the period ended December 31, 1999,
have been restated in accordance with pooling of interests accounting. In
connection with these acquisitions, the Company issued approximately 2,000,000
shares of the Company's Common Stock. The pre-merger results of the Empower
F - 18
NOTE 11 - ACQUISITIONS
Companies were revenues of $18.0 million and net income of $6.2 million for 1998
and revenues of $4.0 million and net income of $1.7 million for 1997. In
connection with the mergers, acquisition expenses of $2.1 million were expensed
during 1999. These costs primarily relate to professional fees incurred.
On January 8, 1999, the Company acquired Network Publishing, Inc., based in
Provo, Utah. The purchase price included an initial cash payment in the
aggregate of $1,800,000 together with a cash payment of $200,000 to be held in
escrow. In addition, the purchase price included an earn-out payment of up to
$2,212,650 in restricted shares of the Company's Common Stock payable on or
before April 15, 2000 and a potential lump sum cash payment of $354,024 payable
not later than March 31, 2000. The value of the earn-out was determined to be
$2,430,000 which was payable by the issuance of an additional 99,558 shares of
the Company's Common Stock and $340,000 in cash. The Company issued such shares
on January 11, 2000. This acquisition has been accounted for utilizing the
purchase method of accounting. The excess of the purchase price over the fair
value of the net assets acquired was attributed to intangible assets amounting
to $4,061,471. Pro-forma financial information has not been presented as this
acquisition was immaterial to the Company's operations.
On November 25, 1998, the Company consummated the acquisition of all of the
outstanding capital stock of each of Azimuth Consulting Limited, Azimuth
Holdings Limited, Braithwaite Richmond Limited and Azimuth Corporation Limited
(collectively the "Azimuth Companies"). The acquisition of the Azimuth Companies
was accounted for as a pooling of interests. Prior results for all periods have
been restated in accordance with pooling of interests accounting. As
consideration for this acquisition, the Company issued 902,928 shares of the
Company's Common Stock.
On May 21, 1998, the Company acquired all of the outstanding share capital
of CPI Resources Limited. The acquisition of CPI Resources Limited was accounted
for as a pooling of interests. Prior results for all periods have been restated
in accordance with pooling of interests accounting. As consideration for this
acquisition, the Company issued 371,000 shares of the Company's Common Stock. At
the time of the acquisition, CPI Resources Limited owned seventy percent of the
outstanding share capital of CPI Consulting Limited.
The pre-merger results of CPI Resources Limited and the Azimuth Companies
were revenues of $14,137,000 and net income of $190,000 for 1997. In connection
with these mergers, $2,118,000 of non-recurring acquisition related charges were
incurred and have been charged to expense during the year ended December 31,
1998. These costs primarily relate to professional fees incurred in connection
with the mergers.
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NOTE 11 - ACQUISITIONS (CONTINUED)
On May 7, 1998, the Company acquired thirty percent of the outstanding
share capital of CPI Consulting Limited. This acquisition was accounted for
utilizing the purchase method of accounting. The consideration paid by the
Company included the issuance of 165,696 shares of the Company's Common Stock
with a fair market value of $3.1 million at the time of purchase. An additional
155,208 shares of the Company's Common Stock with a fair market value of $2.5
million was paid during 1999 pursuant to an earn-out relating to the operating
results for the balance of 1998. The excess of purchase price over the fair
value of the net assets acquired was attributed to intangible assets, amounting
in the aggregate to $5.8 million.
NOTE 12 - SEGMENT DATA AND GEOGRAPHIC INFORMATION
The Company operates in one industry, IT Services. The Company's service
lines share similar customer bases. The Company's identifiable business segments
can be categorized into two groups:
o Enterprise Applications Services is the largest business segment of
the Company's operations, and includes the implementation,
integration, and development of solutions for clients utilizing a
class of application products known as Enterprise Resource Planning
software. This class of products include software developed by such
companies as SAP, Oracle, PeopleSoft, and Baan.
o Internet Applications Services provides professional services,
primarily in the area of business to business interactions on the
Internet. Business to business interactions include communication and
commerce conducted between a company and its customers, suppliers and
partners.
The following table presents financial information based upon the Company's
identifiable business segments for the years ended December 31, 1999 and 1998.
Information on revenue, operating income and margins for these segments is not
available for the year ended December 31, 1997, and the Company determined that
it would be impractical to recreate such data.
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NOTE 12 - SEGMENT DATA AND GEOGRAPHIC INFORMATION (CONTINUED)
Enterprise Internet
Applications Applications
Year ended December 31, 1999 Services Services Total
- ------------------------------ ------------ ------------ ------------
Revenue $146,272,000 $39,795,000 $186,067,000
Depreciation & amortization 2,930,000 1,131,000 4,061,000
Operating loss (3,375,000) (1,416,000) (4,791,000)
Capital expenditures 2,174,000 2,175,000 4,349,000
Total assets 64,182,000 18,880,000 83,062,000
Year ended December 31, 1998
- ------------------------------
Revenue $147,462,000 $15,378,000 $162,840,000
Depreciation & amortization 1,387,000 151,000 1,538,000
Operating income (loss) 17,680,000 (16,000) 17,664,000
Capital expenditures 6,513,000 603,000 7,116,000
Total assets 65,331,000 4,234,000 69,565,000
Included in the Enterprise Applications Services segment are application
maintenance and support revenues of $16.3 million and $3.5 million for the years
ended December 31, 1999 and 1998, respectively. Other information related to the
application maintenance and support business is not available and the Company
determined that it would be impractical to recreate such data.
Included in the above operating income (loss) figures are corporate
expenses for selling, general and administrative activities of $24,582,000 and
$12,820,000 and non-recurring and other special charges of $10,194,000 and
$2,118,000 for the years ended December 31, 1999 and 1998, respectively.
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NOTE 12 - SEGMENT DATA AND GEOGRAPHIC INFORMATION (CONTINUED)
The following table presents financial information based upon the Company's
geographic segments for the years ended December 31, 1999, 1998 and 1997.
Information on depreciation and amortization for these segments is not available
for the year ended December 31, 1997, and the Company determined that it would
be impractical to recreate such data.
UNITED STATES ASIA-PACIFIC EUROPE INDIA TOTAL
1999
Revenue $134,639,000 $19,951,000 $24,601,000 $6,876,000 $186,067,000
Depreciation & amortization 2,725,000 237,000 806,000 293,000 4,061,000
Operating income (loss) (7,655,000) 213,000 (115,000) 2,766,000 (4,791,000)
Total assets 59,456,000 6,772,000 12,174,000 4,660,000 83,062,000
1998
Revenue $119,543,000 $13,650,000 $23,831,000 $5,816,000 $162,840,000
Depreciation & amortization 1,286,000 78,000 115,000 59,000 1,538,000
Operating income (loss) 13,419,000 (945,000) 1,945,000 3,245,000 17,664,000
Total assets 52,820,000 6,382,000 8,270,000 2,093,000 69,565,000
1997
Revenue $73,253,000 $9,642,000 $12,610,000 $2,796,000 $98,301,000
Operating income 5,744,000 403,000 781,000 1,472,000 8,400,000
Total assets 35,103,000 2,635,000 4,112,000 1,214,000 43,064,000
NOTE 13 - SUBSEQUENT EVENT
On March 14, 2000, SeraNova, a wholly-owned subsidiary of the
Company, entered into an agreement with four institutional investors pursuant to
which such investors purchased an aggregate of 50 shares of SeraNova's common
stock as a price per share of $200,000, for an aggregate purchase price of $10
million. The investment represents approximately 4.8% of SeraNova's issued and
outstanding shares of common stock. In connection with such sale of its common
stock, SeraNova granted certain demand and piggyback registration rights to such
investors. In addition, at its option, SeraNova may sell an additional 25 shares
of its common stock for an additional $5 million to another investor.
F - 22