Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,
2010
Commission file number
0-20943
INTELLIGROUP, INC.
INTELLIGROUP, INC.
(Exact Name of Registrant as Specified In Its Charter) |
New Jersey | 11-2880025 | |
(State or Other Jurisdiction of Incorporation or | (I.R.S. Employer Identification No.) | |
Organization) | ||
5 Independence Way, Suite 220, Princeton, New Jersey | 08540 | |
(Address of Principal Executive Offices) | (Zip Code) |
(646) 810-7400 |
(Registrant’s Telephone Number, Including Area Code) |
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.
Indicate by check
mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every interactive data file required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). o Yes o
No
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer or a smaller reporting company. See the definitions of
“large accelerated filer” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer: o | Accelerated filer: o | Non-accelerated filer: o | Smaller Reporting Company x |
Indicate by check
mark whether the registrant is a shell company (as defined in Exchange Act Rule
12b-2).
Yes o No x
Indicate the number
of shares outstanding of each of the registrant’s classes of common stock, as of
May 10, 2010:
Class | Number of Shares |
Common Stock, $.01 par value | 41,249,688 |
TABLE OF
CONTENTS
Page | |||
PART I. FINANCIAL INFORMATION | |||
Item 1. | Financial statements | ||
Condensed consolidated balance sheets as of March 31, 2010 (unaudited) and December 31, 2009 | 4 | ||
Condensed consolidated statements of operations and comprehensive income for the three month period ended March 31, 2010 and 2009 (unaudited) | 5 | ||
Consolidated statements of cash flows for the three month period ended March 31, 2010 and 2009 | 6 | ||
Notes to condensed consolidated financial statements | 7 | ||
Item 2. | Management’s discussion and analysis of financial condition and results of operations | 21 | |
Item 3. | Quantitative and qualitative disclosures about market risk | 31 | |
Item 4. | Controls and procedures | 31 | |
PART II. OTHER INFORMATION | |||
Item 1. | Legal proceedings | 32 | |
Item 1a. | Risk factors | 32 | |
Item 2. | Unregistered sales of equity securities and use of proceeds | 32 | |
Item 4. | Removed and Reserved | 32 | |
Item 5. | Other Information | 32 | |
Item 6. | Exhibits | 32 | |
Signatures | 34 |
2
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements include, among other things, business strategy and
expectations concerning industry conditions, market position, future operations,
margins, profitability, liquidity and capital resources. Forward-looking
statements generally can be identified by the use of terminology such as “may,”
“will,” “expect,” “intend,” “estimate,” “anticipate” or “believe” or similar
expressions or the negatives thereof. These expectations are based on
management’s assumptions and current beliefs based on currently available
information. Although the Company believes that the expectations reflected in
such statements are reasonable, it can give no assurance that such expectations
will be correct. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this quarterly
report on Form 10-Q and the Company does not have any obligation to update the
forward looking statements. The Company’s operations are subject to a number of
uncertainties, risks and other influences, many of which are outside its
control, and any one of which, or a combination of which, could cause its actual
results of operations to differ materially from the forward-looking statements.
Important factors that could cause actual results to differ materially from its
expectations are disclosed in Part I, Item 2, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” and listed under
Item 1A “Risk Factors” in our annual report on Form 10-K for the year ended
December 31, 2009 and elsewhere in this quarterly report on Form
10-Q.
3
INTELLIGROUP,
INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2010 and DECEMBER 31, 2009
(In thousands except par value)
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2010 and DECEMBER 31, 2009
(In thousands except par value)
March 31 | December 31 | |||||||
2010 | 2009 | |||||||
ASSETS | (Unaudited) | |||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 23,232 | $ | 20,783 | ||||
Short-term investments | 2,818 | 2,441 | ||||||
Accounts receivable, less allowance for doubtful accounts of $2,105 and $2,176 | ||||||||
at March 31, 2010 and December 31, 2009, respectively | 20,663 | 23,677 | ||||||
Unbilled services, less allowance for doubtful accounts of $105 and $136 at | ||||||||
March 31, 2010 and December 31, 2009, respectively | 9,085 | 6,433 | ||||||
Deferred tax assets | 783 | 644 | ||||||
Prepaid expenses and prepaid taxes | 1,125 | 1,092 | ||||||
Other current assets | 805 | 741 | ||||||
Total current assets | 58,511 | 55,811 | ||||||
Property and equipment, net | 2,825 | 3,085 | ||||||
Goodwill | 1,518 | 1,616 | ||||||
Intangible assets, net | 192 | 272 | ||||||
Restricted cash and investments | 522 | 1,202 | ||||||
Prepaid taxes - Non-adjustable, less allowance for doubtful accounts of $108 and | ||||||||
$104 at March 31, 2010 and December 31, 2009, respectively | 1,416 | 1,130 | ||||||
Deferred tax assets | 535 | 856 | ||||||
Other assets | 4,242 | 3,431 | ||||||
Total Assets | $ | 69,761 | $ | 67,403 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 1,878 | $ | 1,418 | ||||
Liability on derivative instruments | 17 | 389 | ||||||
Accrued payroll and related taxes | 10,098 | 10,899 | ||||||
Accrued expenses | 3,091 | 3,493 | ||||||
Other current liabilities | 2,104 | 1,425 | ||||||
Unearned revenue | 1,155 | 1,353 | ||||||
Income tax payable | 186 | 261 | ||||||
Capital lease and deferred payments | 341 | 481 | ||||||
Total current liabilities | 18,870 | 19,719 | ||||||
Obligations under capital lease, net of current portion | 176 | 214 | ||||||
Unearned revenue, net of current portion | 267 | 322 | ||||||
Other long-term liabilities | 849 | 844 | ||||||
Total Liabilities | 20,162 | 21,099 | ||||||
SHAREHOLDERS' EQUITY | ||||||||
Preferred stock, $.01 par value, 5,000 shares authorized, none issued or outstanding | — | — | ||||||
Common stock, $.01 par value, 65,000 shares authorized | ||||||||
at March 31, 2010 and December 31, 2009; 41,250 and 41,137 shares issued | ||||||||
and outstanding at March 31, 2010 and December 31, 2009, respectively | 413 | 411 | ||||||
Additional paid-in capital | 71,337 | 71,090 | ||||||
Accumulated deficit | (21,287 | ) | (23,300 | ) | ||||
Accumulated other comprehensive loss | (864 | ) | (1,897 | ) | ||||
Total shareholders’ equity | 49,599 | 46,304 | ||||||
Total liabilities and shareholders’ equity | $ | 69,761 | $ | 67,403 | ||||
See accompanying
notes
4
INTELLIGROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(In thousands, except per share data)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(In thousands, except per share data)
THREE MONTHS PERIOD ENDED | ||||||||
MARCH 31, | ||||||||
2010 | 2009 | |||||||
Revenue | $ | 33,544 | $ | 30,869 | ||||
Cost of revenue (exclusive of depreciation and amortization) | 22,886 | 21,248 | ||||||
Gross profit | 10,658 | 9,621 | ||||||
Selling, general and administrative expenses | 7,032 | 7,257 | ||||||
Depreciation and amortization | 552 | 554 | ||||||
Total operating expenses | 7,584 | 7,811 | ||||||
Operating income | 3,074 | 1,810 | ||||||
Interest income | 54 | 32 | ||||||
Interest expense | (20 | ) | (20 | ) | ||||
Foreign currency transaction gain (loss), net | (782 | ) | (615 | ) | ||||
Other income (expense), net | 176 | 99 | ||||||
Income before income taxes | 2,502 | 1,307 | ||||||
Provision for income taxes | 489 | 530 | ||||||
Net income | $ | 2,013 | $ | 777 | ||||
Basic net income per share | $ | 0.05 | $ | 0.02 | ||||
Diluted net income per share | $ | 0.05 | $ | 0.02 | ||||
Weighted average no. of common shares | ||||||||
outstanding - Basic | 41,167 | 41,719 | ||||||
- Diluted | 42,459 | 41,740 | ||||||
Comprehensive income | ||||||||
Net income | $ | 2,013 | $ | 777 | ||||
Other comprehensive income (loss) | ||||||||
Currency translation adjustments | 1,033 | (979 | ) | |||||
Comprehensive income | $ | 3,046 | $ | (202 | ) | |||
See accompanying
notes.
5
INTELLIGROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THREE MONTH ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
(USD in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THREE MONTH ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
(USD in thousands)
THREE MONTHS PERIOD | ||||||||
ENDED MARCH 31, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 2,013 | $ | 777 | ||||
Adjustments to reconcile net income to net | ||||||||
Cash provided by operating activities: | ||||||||
Depreciation and amortization | 683 | 671 | ||||||
Provision for doubtful accounts and advances | (54 | ) | (81 | ) | ||||
Stock compensation expense | 31 | 199 | ||||||
Profit on sale of investment | (48 | ) | - | |||||
Unrealized gain on investments | (72 | ) | - | |||||
Profit on sale of fixed assets | (36 | ) | - | |||||
Unrealized exchange loss | 619 | 430 | ||||||
Deferred taxes | 228 | (140 | ) | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 2,930 | 565 | ||||||
Unbilled services | (2,746 | ) | 5,109 | |||||
Prepaid taxes | (14 | ) | (120 | ) | ||||
Prepaid expenses and other current assets | (87 | ) | 262 | |||||
Other assets | (241 | ) | 66 | |||||
Restricted cash and investments | 35 | 710 | ||||||
Derivative liability | (218 | ) | (674 | ) | ||||
Accounts payable | 449 | 272 | ||||||
Accrued payroll and related taxes | (808 | ) | (1,828 | ) | ||||
Accrued expenses and other current liabilities | 264 | (847 | ) | |||||
Deferred revenue, Current portion | (156 | ) | 785 | |||||
Deferred revenue, net of current portion | (34 | ) | - | |||||
Income taxes payable | (226 | ) | 131 | |||||
Other long-term liabilities | - | (141 | ) | |||||
Net cash provided by operating activities | $ | 2,512 | $ | 6,146 | ||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | $ | (507 | ) | $ | (130 | ) | ||
Proceeds from sale of equipment | 37 | - | ||||||
Purchases of investments | (6,707 | ) | (741 | ) | ||||
Proceeds from sale of investments | 6,755 | - | ||||||
Net cash used in investing activities | $ | (422 | ) | $ | (871 | ) | ||
Cash flows from financing activities: | ||||||||
Principal payments under capital leases | $ | (35 | ) | $ | (232 | ) | ||
Stock repurchase | - | (881 | ) | |||||
Proceeds from exercise of stock options | 217 | - | ||||||
Net cash provided/(used) in financing activities | $ | 182 | $ | (1,113 | ) | |||
Effect of foreign currency exchange rate changes on cash | $ | 177 | $ | (173 | ) | |||
Net increase in cash and cash equivalents | 2,449 | 3,989 | ||||||
Cash and cash equivalents - beginning of year | $ | 20,783 | $ | 10,161 | ||||
Cash and cash equivalents - end of the period | $ | 23,232 | $ | 14,150 | ||||
See accompanying
notes
6
INTELLIGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010 and 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010 and 2009
NOTE 1- BASIS OF
PRESENTATION
The condensed consolidated financial
statements and accompanying financial information as of March 31, 2010 and for
the three month period ended March 31, 2010 and 2009 are unaudited and, in the
opinion of management, include all adjustments (consisting only of normal
recurring adjustments) which the Company considers necessary for a fair
presentation of the financial position of the Company at such dates and the
operating results and cash flows for those periods. The unaudited condensed
consolidated financial statements included herein have been prepared in
accordance with accounting principles generally accepted in the United States of
America and the instructions of Form 10-Q and Rule 10-01 of Regulation S-X.
Pursuant to accounting requirements of the Securities and Exchange Commission
applicable to quarterly reports on Form 10-Q, the accompanying unaudited
condensed consolidated financial statements and these notes do not include all
disclosures required by accounting principles generally accepted in the United
States of America for audited financial statements. Accordingly, these
statements should be read in conjunction with the accounting policies and notes
to consolidated financial statements included in the Company’s consolidated
financial statements included in our annual report filed on Form 10-K for the
year ended December 31, 2009.
The amounts for the December 31,
2009 balance sheet have been extracted from the audited consolidated financial
statements included in our annual report on Form 10-K for the year ended
December 31, 2009.
The results of the Company’s
operations for the three months period ended March 31, 2010 are not necessarily
indicative of the results of operations to be expected for the full year ending
December 31, 2010.
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of Intelligroup, Inc. and subsidiaries that are
more than 50% owned and controlled and have been prepared in US dollars. All
inter-company balances and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt
instruments and other short-term investments with a maturity of three months or
less, when purchased, to be cash equivalents.
The Company maintains cash and cash equivalent
balances at several financial institutions that are insured by the Federal
Deposit Insurance Corporation up to $250,000. The Company maintains cash
balances in excess of insured amounts.
The Company did not have any cash
equivalents as of March 31, 2010 and December 31, 2009.
Revenue Recognition and Allowance for Doubtful
Accounts
The Company generates revenue from
professional services rendered to customers. Revenue is recognized under the
Company’s contracts generally when persuasive evidence of an arrangement exists,
the sales price is fixed or determinable and collectibility is reasonably
assured. The majority of our revenue is generated under time-and-material
contracts whereby costs and revenue are recognized as services are performed,
with the corresponding cost of providing those services reflected as cost of
revenue. The majority of customers are billed on an hourly or daily basis
whereby actual time is charged directly to the customer. Such method is expected
to result in reasonably consistent profit margins over the contract
term.
7
INTELLIGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010 and 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010 and 2009
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
The Company also derives a portion of revenue
from fixed-price, fixed-time contracts. Revenue generated from most fixed-price
contracts, including most application management and support contracts, is
recognized ratably over the contract term. Certain fixed price contracts are for
implementation services, including design and modification, for which
specifications are provided by the customer. The scope of the work is usually
defined in terms of overall deliverables and the revenue for such work is
ultimately earned by achieving the deliverables. We consider the performance of
service towards the planned deliverable as partial execution of the deliverable
and hence the revenue generated from such fixed-price contracts is recognized
using the percentage of completion (POC) method. The POC method recognizes the
legal and economic results of contract performance on a timely basis. This
method of accounting relies on estimates of total expected contract revenues and
costs. Where the contracts involve only implementation services, the Company
recognizes revenue based on a proportional performance method. The pattern of
performance on these contracts closely resembles the time spent by our employees
and therefore efforts-expended, measured based on the cost of the employee’s
time, is used as a measure for the proportion of services rendered in relation
to the total services expected to be rendered.
The use of the POC method or the proportional
performance method requires significant judgment relative to estimating the
number of hours or days required to complete the contracted scope of work,
including assumptions and estimates relative to the length of time to complete
the project and the nature and complexity of the work to be performed. Our
project delivery and business unit finance personnel continually review labor
hours incurred and estimated total labor hours, which may result in revisions to
the amount of recognized revenue for the contract. Changes in estimates are
accounted for in the period of change. If we do not accurately estimate the
resources required or the scope of work to be performed for a contract or if we
do not manage the project properly within the planned time period, then a loss
may have to be recognized on the contract. Losses are recorded in the period
when they become known, and estimated through the completion of the
contract.
We occasionally derive revenue from projects
involving multiple revenue-generating activities. Accordingly, the revenue from
such projects is accounted for in accordance with Accounting Standards
Codification (“ASC) 605-25 (Previously Emerging Issues Task Force of the
Financial Accounting Standards Board (“FASB”) Issue No. 00-21), “Accounting for
Revenue Arrangements with Multiple Deliverables.” If a contract involves the
provision of multiple service elements, total estimated contract revenue is
allocated to each element based on the fair value of each element. The amount of
revenue allocated to each element is limited to the amount that is not
contingent upon the delivery of another element in the future. Revenue for each
element is then recognized as described above depending upon whether the
contract is a time-and-materials contract or a fixed-price, fixed-time contract.
Any estimation process, including that used in
preparing contract accounting models, involves inherent risk. We reduce the
inherent risk relating to revenue and cost estimates in proportional performance
models through approval and monitoring processes. Risks relating to service
delivery, usage, productivity and other factors are considered in the estimation
process.
The Company accrues for revenue and
receivables for services rendered between the last billing date and the balance
sheet date. Unbilled services as of March 31, 2010 and December 31, 2009
represent services provided through the three months period ended March 31, 2010
and the year ended December 31, 2009, respectively, which is billed subsequent
to the balance sheet date. All such amounts are anticipated to be collected in
the following year.
Reimbursements of out-of-pocket expenses
received from clients have been included as part of revenues in accordance with
ASC No. 605-45 (previously EITF 01-14), “Income Statement Characterization of
Reimbursements Received for “Out-of-Pocket” Expenses Incurred.”
8
INTELLIGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010 and 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010 and 2009
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
We establish billing terms at the time project
deliverables are agreed, and we continually monitor timely payments from
customers and assess collection issues. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our clients to
make required payments. We base our estimates on historical collection and
write-off experience, current trends, credit policy, detailed analysis of
specific client situations and percentage of accounts receivable by aging
category.
Earnings per Common Share
Basic net income per share is computed using the weighted average number
of common shares outstanding for the period. Diluted earnings per share include
additional dilution from potential common stock, such as stock issuable pursuant
to the exercise of stock options. Potential common stock is not included in the
computation of diluted earnings per share when the exercise price of the
outstanding options exceeds the current market value or the Company reports a
loss because to do so would be anti-dilutive for the periods
presented.
For the three month periods ended March
31, 2010 and 2009, respectively, the weighted average number of shares used in
calculating diluted earnings per share includes stock options for 1,291,759 and
21,206 respectively.
For the three month periods ended March
31, 2010 and 2009, respectively, options to purchase, 143,825 and 2,902,817
shares of common stock were not included in the computation of diluted earnings
per share because inclusion would have been anti-dilutive.
Income Taxes
The Company accounts for income taxes using
the asset and liability method of accounting for income taxes. Under this
method, income tax expense is recognized for the amount of taxes payable or
refundable for the current year. In addition, deferred tax assets and
liabilities are recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their tax bases and all operating loss carry forwards, if
any. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates or tax status is recognized in
the consolidated statement of income in the period that includes the enactment
date or the filing/ approval date of the tax status change. Deferred tax assets
are reduced by a valuation allowance if, based on the weight of available
evidence, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
The Company applies a two-step approach for
recognizing and measuring uncertain tax positions. The first step is to evaluate
the tax position for recognition by determining, based on the technical merits,
that the position will be more likely than not sustained upon examination. The
second step is to measure the tax benefit as the largest amount of the tax
benefit that is greater than 50% likely of being realized upon settlement. The
Company includes interest and penalties related to unrecognized tax benefits
within its provision for income tax expense.
The Company records tax expense/benefit based
upon the taxable income/loss recorded in each tax jurisdiction. The Company
recorded an income tax expense of $0.5 million and $0.5 million on a pretax
income of $2.5 million and $1.3 million for the three month periods ended March
31, 2010 and 2009, respectively.
The effective tax rate has decreased to 19.5%
during the three months period ended March 31, 2010 from 40.6% during the three
months period ended March 31, 2009. Changes in the effective rate of taxes are
due to the changes in the geographic distribution of our income and changes in
non taxable income. The difference between the income tax rates for the 2010 and
2009 periods and the statutory rate is primarily due to the utilization of
carried forward net operating losses in the U.S. locations on which a
full valuation allowance has been recorded and earnings taxed in
countries that have rates lower than the United States.
The Company’s India subsidiary received tax
assessments for the fiscal years ended March 31, 1998 through 2003 and fiscal
year ended March 31, 2005 through 2008, challenging the tax exemptions of
certain revenue earned and disallowing certain expenses. The Company has
deposited additional tax of INR 49.1 million (or approximately $1.1 million)
under protest, net of allowance of $0.1 million, as at March 31, 2010 consequent
to the above tax assessments.
9
During the year ended December 31, 2009, the
Company deposited an amount of INR 2.8 million (or approximately $0.1 million)
under protest against the order passed by the tax authorities challenging
certain tax exemptions the Company was previously permitted to take for the
fiscal year ended March 31, 2001. Further, for the tax year ended March 31,
2005, an amount of INR 20.4 million (or approximately $0.4 million) had also
been deposited by the Company under protest, during the 2009, against an
assessment order passed by the tax authorities, challenging the transfer pricing
methodology followed by the Company and non submission of evidence in support of
foreign inward remittance. The Company also received an order from the tax
authorities demanding an additional payment of INR 8 million (or approximately
$0.2 million) for open assessments pertaining to fiscal years ending March 31,
2001 and 2005. The Company has not recorded a reserve on the additional tax paid
under protest as it believes its tax position will most likely be sustained
based on independent merits.
U.S. and Indian transfer pricing regulations
require that any international transaction involving associated enterprises be
at an arm’s-length price. Transactions among the Company’s subsidiaries and the
Company may be required to satisfy such requirements. Accordingly, the Company
determines the pricing among its associated enterprises on the basis of detailed
functional and economic analysis involving benchmarking against transactions
among entities that are not under common control. If the applicable income tax
authorities review any of the Company’s tax returns and determine that the
transfer price applied was not appropriate, the Company may incur increased tax
liability, including accrued interest and penalties.
Goodwill and Intangibles
The Company does not amortize goodwill but
instead tests goodwill at the reporting unit level for impairment at least
annually or as circumstances warrant. If impairment is indicated, a write down
to fair value (normally measured discounting estimated cash flows) is recorded.
Other intangibles represent customer relationships which are amortized on a
straight line basis over their estimated useful lives.
Pension Plan Liability
The Company provides its employees in India with benefits under a defined
benefit pension plan, referred to as the “Gratuity Plan”. The Gratuity Plan
provides a lump sum payment to vested employees on retirement or on termination
of employment in an amount based on the respective employee’s salary and years
of employment. The Company determines its liability under the Gratuity Plan by
actuarial valuation using the projected unit credit method. Under this method,
the Company determines liability based upon the discounted value of salary
increases until the date of separation arising from retirement, death,
resignation or other termination of services. Critical assumptions used in
measuring the plan expense and projected liability under the projected unit
credit method include the discount rate, expected return on assets and the
expected increase in the compensation rates. The Company evaluates these
critical assumptions at least annually. The Company periodically evaluates and
updates other assumptions used in the projected unit credit method involving
demographic factors, such as retirement age and turnover rate, to reflect its
experience. The mortality rates used are consistent with those published by the
Life Insurance Corporation of India.
10
INTELLIGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010 and 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010 and 2009
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
The discount rate enables the Company to state
expected future cash flows at a present value on the measurement date. The
discount rate used is equal to the yield on high quality fixed income
investments in India at the measurement date. The expected rate of return on
plan assets is estimated based on available market information, Indian law which
regulates such investments and historical returns. The measurement date for
these employee retirement benefits coincides with reporting date of the
financial statements.
Share-Based Compensation Plans
The Company’s share-based
compensation plans are described in Note 6. The Company adopted the provisions
of ASC 718 (previously SFAS No. 123R) on January 1, 2006, using the modified
prospective transition method.
During the three months period ended March 31,
2010 and 2009, total no. of options granted were 30,000 and 0 respectively. The
Company recognizes compensation expense for all share-based payment awards based
on the grant date fair value estimated in accordance with the provisions of ASC
718.
The fair value of each option award
is estimated on the date of grant using the Black-Scholes option valuation
model. The Company recognizes the fair value of each option as compensation
expense ratably using the straight-line attribution method over the service
period (generally the vesting period). The Black-Scholes model incorporates the
following assumptions:
- Expected volatility – the Company
estimates the volatility of common stock at the date of grant using a
combination of unadjusted
historical volatility, and historical volatility adjusted for periods of
unusual stock price activity.
- Expected term – the Company
estimates the expected term of options granted based on a combination of
vesting schedules, life of the
option, historical experience and in cases where the Company does not have
significant historical experience, the simplified method of determining expected term outlined
in ASC 718 (previously Staff Accounting Bulletin(“SAB”) 107 and SAB 110) is
used.
- Risk-free interest rate – the
Company estimates the risk-free interest rate using the U.S. Treasury yield
curve in effect at the time of
grant for periods equal to the expected life of the options.
- Dividends – the Company uses an expected dividend yield of zero since it 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.
Additionally, the Company estimates
forfeitures at the time of grant and revises those estimates in subsequent
periods if actual forfeitures differ from those estimates. It uses a combination
of historical data, demographic characteristics and other factors to estimate
pre-vesting option forfeitures and record share-based compensation expense only
for those awards that are expected to vest. The Company issued 112,600 shares
upon exercise of options during the three months period ended March 31, 2010.
There were no shares issued on exercise of options during the three month period
ended March 31, 2009.
11
INTELLIGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010 and 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010 and 2009
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Recent Accounting Pronouncements
In August 2009, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-05,
“Measuring Liabilities at Fair Value” (“ASU 2009-05”). The amendments in this
ASU apply to all entities that measure liabilities at fair value and provide
clarification that in circumstances, in which a quoted price in an active market
for the identical liability is not available, an entity is required to measure
fair value using one or more techniques laid out in this ASU. The guidance
provided in this ASU is effective for the first reporting period (including
reporting periods) beginning after issuance. The implementation of this standard
did not have a material impact on the Company’s consolidated financial
statements.
In October 2009, the FASB issued ASU 2009-13,
“Multiple-Deliverable Revenue Arrangements”, (amendments to FASB ASC Topic 605,
Revenue Recognition) (“ASU 2009-13”). In September 2009, the FASB ratified
Accounting Standards Update (ASU) 2009-13 (ASU 2009-13) (previously Emerging
Issues Task Force (EITF) Issue No. 08-1, Revenue Arrangements with Multiple
Deliverables (EITF 08-1)). ASU 2009-13 superseded EITF 00-21 and addresses
criteria for separating the consideration in multiple-element arrangements. ASU
2009-13 will require companies to allocate the overall consideration to each
deliverable by using a best estimate of the selling price of individual
deliverables in the arrangement in the absence of vendor-specific objective
evidence or other third-party evidence of the selling price. ASU 2009-13 will be
effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010 and early adoption
will be permitted. The Company is currently evaluating the potential impact, if
any, of the adoption of ASU 2009-13 on its consolidated results of operations
and financial condition and whether it will adopt the standard early. ASU
2009-13 will become effective for the Company with its fiscal year beginning
January 1, 2011.
In January 2010, the FASB issued ASU 2010-06,
“Fair Value Measurements and Disclosures”, (amendments to FASB ASC Topic 820,
Fair Value Measurements and Disclosures) (“ASU 2010-06”). ASU 2010-06 requires
entities to disclose separately the amounts of significant transfers in and out
of Level 1 and Level 2 fair value measurements along with the reasons for such
transfers. Entities should also present separate information about purchases,
sales, issuances and settlement activity in Level 3 fair value measurements. The
ASU 2010-06 requires entities to provide fair value measurement disclosures for
each class of assets and liabilities and disclosures about inputs and valuation
techniques. The new disclosures and clarifications of existing disclosures are
effective for interim and annual reporting periods beginning after December 15,
2009 except for the disclosures pertaining to Level 3 fair value measurements.
Those disclosures are effective for interim and fiscal years beginning after
December 15, 2010. This ASU 2010-06 is effective for the Company with its
interim period beginning January 1, 2010. The Company adopted the disclosure
requirements of the standard effective January 1, 2010 to the extent applicable.
The implementation of this standard did not have a material impact on the
Company’s consolidated financial statements.
12
INTELLIGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010 and 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010 and 2009
NOTE 3- LINE OF CREDIT
On May 22, 2008, the Company entered into a
revolving credit loan and security agreement (“Credit Agreement”) with HSBC
Bank, (the “Bank”). The Credit Agreement is comprised of a three year revolving
line of credit pursuant to which the Company can borrow up to $10 million at the
Bank’s Base Rate (as defined in the Credit Agreement) of 3.25% as of March 31,
2010, minus 0.85% percent. The credit facility is collateralized by
substantially all of the assets of the United States based operations and all
subsidiary stock (not to exceed 65% of the Equity Interests of any Foreign
Subsidiary). The maximum borrowing availability under the Credit Agreement is
based upon a percentage of eligible billed and unbilled accounts receivable. The
Credit Agreement provides for certain financial covenants that shall only be
tested as of the end of any fiscal quarter.
The Company was in compliance with
the applicable financial covenants of the Credit Agreement as of March 31, 2010.
A standby letter of credit of $0.1million has
been issued by and drawn upon HSBC banking corporation in favor of a landlord as
security deposit. This letter of credit is secured by a lien on the assets of
the company. The Company estimates undrawn availability under the Credit
Facility to be $9.9 million as of March 31, 2010.
The Company is prohibited from
paying dividends under the terms of the Credit Agreement.
NOTE 4- RELATED PARTY
TRANSACTIONS
Effective August 1, 2005, Intelligroup Asia
Pvt. Ltd. (“IGA”) entered into an agreement to lease certain premises for
certain of the Company’s India operations from ILabs Hyderabad Technology Center
Pvt. Ltd. (“ILabs”), a party with which two members of the Company’s Board of
Directors are affiliated. The terms of the lease agreement provide for, among
other things: (1) a minimum lease period of five years with an option for two
three-year renewal periods; (2) payment of a security deposit equivalent to nine
(9) months’ rent in the amount of 16.3 million Indian rupees (approximately $0.4
million); (3) payment of monthly lease fees in the amount of 1.7 million Indian
rupees (approximately $0.04 million), subject to yearly five percent (5%)
escalation; and (4) monthly operations and maintenance fees of 0.5 million
Indian rupees (approximately $0.01 million). During the three month period ended
March 31, 2010 and 2009, the Company recorded rent expense towards the said
lease of 8.4 million rupees (approximately $0.2 million) and 7.7 million rupees
(approximately $0.17 million) respectively. There are no advance lease rentals
as of March 31, 2010.
Effective December 10, 2009, IGA entered into
an agreement to lease certain additional premises for certain of the Company’s
India operations from ILabs. The lease of demised premises commencing from
January 1, 2010 and terms of the lease agreement provide for, among other
things: (1) a minimum lease period of 3 years with an option for two three-year
renewal periods with both the lessee and the lessor; (2) payment of a security
deposit equivalent to four (4) months’ rent in the amount of 2 million Indian
rupees (approximately $0.05 million); (3) payment of monthly lease fees in the
amount of 0.5 million Indian rupees (approximately $0.01 million), subject to
fifteen percent (15%) escalation once in every three years; (4) monthly
operations and maintenance fees of 0.1 million Indian rupees (approximately
$0.002 million). Rent expense for the three month period ended March 31, 2010
towards the said lease was 1.9 million rupees (approximately $0.04 million).
There are no advance lease rentals as of March 31, 2010.
NOTE 5- LITIGATION
There is no pending litigation to
which the Company is a party or to which any of its property is subject that
would have a material impact on its consolidated financial condition, results of
operations or cash flows in the event we were unsuccessful in such litigation.
However, the Company cannot predict with certainty the outcome of any litigation
or the potential for future litigation and any such matters could adversely
affect its financial condition, results of operations, cash flows and
business.
13
INTELLIGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010 and 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010 and 2009
NOTE 6- SHAREHOLDERS’
EQUITY
Share-Based Compensation Plans
The Company has four share-based
compensation plans that reserve common shares for issuance to key employees,
consultants and directors. The compensation cost that has been charged against
income for those plans was $0.03 million for the three months period ended March
31, 2010 and $0.2 million for the three months period ended March 31, 2009. The
Company did not recognize income tax benefit in the condensed consolidated
statement of operations and comprehensive income for the first three months of
2010 or 2009, due to its accumulated net operating losses. The total options
forfeited during the three month period ended March 31, 2010 and 2009 were
98,725 and 0 respectively.
Stock Options:
The fair value of option grants is
estimated on the date of grant using the Black-Scholes option-pricing model.
There were 30,000 options granted during the three months period ended March 31,
2010. There were no grants issued during the three months period ended March 31,
2009.
Three Months | |||||
Period Ended March 31, | |||||
2010 | 2009 | ||||
Expected Volatility | 66.00% | - | |||
Expected Life(years) | 6.06 years | - | |||
Risk free Interest Rate | 2.73% | - | |||
Expected Dividends | 0% | - |
The weighted average grant date fair value of
options granted during the three months period ended March 31, 2010 was
$2.18.
As of March 31, 2010, there was $0.4
million of total unrecognized compensation cost related to the stock options.
The weighted average period over which the cost expected to be recognized is 1.2
years.
14
INTELLIGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010 and 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010 and 2009
NOTE 6- SHAREHOLDERS’ EQUITY
(Continued)
Share Repurchase
Program:
On October 24 2008, our Board of Directors
approved a share repurchase program of up to $5,000,000 of the Company's common
stock over an 18 month period ending April 24, 2010. The share repurchase
program was funded using the Company's working capital and authorized the
Company to repurchase shares from time to time through open market or privately
negotiated transactions. The program expired on April 24, 2010 and there has
been no repurchase of shares after March 31, 2010.
As of March 31, 2010, a total of 1,197,881
shares have been repurchased at an average price of $1.65 out of which 1,118,581
shares were repurchased at an average price of $1.65 for the year ended December
31, 2009 and a total of 79,300 shares were repurchased at an average purchase
price of $1.64 for the year ended December 31, 2008. The Company has not
repurchased any of its shares during three month period ended March 31, 2010.
All the repurchased shares are retired.
NOTE 7- SEGMENT DATA AND GEOGRAPHIC
INFORMATION
The Company operates in one industry
segment, information technology solutions and services.
The Company has four reportable
geographic operating segments, which are organized and managed on a geographical
basis, as follows:
- United States (“US”) – the largest
segment of the Company, with operations in the US and Puerto Rico. Includes
the operations of the Company’s US subsidiary, Empower, Inc., and all
corporate functions and activities. The US and corporate headquarters is
located in Princeton, New Jersey;
- India – includes the operations of
the Company in India, including services provided on behalf of other group
subsidiaries, primarily to the US. The India offices are located in Hyderabad
and Bangalore, India. A majority of total revenue generated in India is
derived from providing offshore development and support services to customers
through the Company’s affiliated entities in other parts of the world, but
predominantly with the US. This segment also covers our operations in the
United Arab Emirates (“UAE”) and Saudi Arabia;
- Europe – includes the operations
of the Company in Denmark and the United Kingdom. The European offices are
located in Milton Keynes, United Kingdom and Odense in Denmark;
and
- Japan – includes the operations of the Company in Japan. The office is located in Tokyo, Japan.
The CEO has been identified as the
Chief Operating Decision Maker (“CODM”) because he has final authority over
resource allocation decisions and performance assessment. The CODM regularly
receives certain discrete financial information about the geographical operating
segments, including primarily revenue and operating income, to evaluate segment
performance.
Accordingly, the Company’s condensed
consolidated operating results for the three month periods ended March 31, 2010
and 2009 are presented in the following geographic segments (in thousands):
15
INTELLIGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010 and 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010 and 2009
NOTE 7- SEGMENT DATA AND GEOGRAPHIC
INFORMATION (Continued)
United | ||||||||||||||||
States | India | Europe | Japan | Elimination | Total | |||||||||||
Three months period ended March 31, 2010 | ||||||||||||||||
Revenue | 26,965 | 1,652 | 4,077 | 850 | - | 33,544 | ||||||||||
Inter-segment Revenue | 2 | 8,628 | - | - | (8,630 | ) | - | |||||||||
Operating Income / (Loss) | 1,316 | 1,737 | 163 | (142 | ) | 3,074 | ||||||||||
Income Tax Expense | (2 | ) | 533 | (42 | ) | - | 489 | |||||||||
Net Income / (Loss) | 1,314 | 795 | 62 | (158 | ) | 2,013 | ||||||||||
As of March 31, 2010 | ||||||||||||||||
Property & Equipment, net | 377 | 1,786 | 615 | 47 | 2,825 | |||||||||||
Total assets | 49,867 | 36,241 | 8,445 | 1,097 | (25,889 | ) | 69,761 | |||||||||
Three months period ended March 31, 2009 | ||||||||||||||||
Revenue | 23,692 | 1,866 | 4,220 | 1,091 | - | 30,869 | ||||||||||
Inter-segment Revenue | 66 | 7,214 | - | - | (7,280 | ) | - | |||||||||
Operating Income / (Loss) | 169 | 1,177 | 586 | (122 | ) | 1,810 | ||||||||||
Income Tax Expense | 1 | 345 | 184 | - | 530 | |||||||||||
Net Income / (Loss) | 175 | 680 | 253 | (331 | ) | 777 | ||||||||||
As of March 31, 2009 | ||||||||||||||||
Property & Equipment, net | 573 | 2,772 | 1,005 | 54 | 4,404 | |||||||||||
Total assets | 44,632 | 32,565 | 7,602 | 1,607 | (29,280 | ) | 57,126 |
NOTE 8- COMMITMENTS AND
CONTINGENCIES
On July 5, 2000, the Company distributed
SeraNova common stock to its shareholders in a transaction that was structured
to be and was reported as a tax-free spin-off pursuant to Section 355 of the
Internal Revenue Code (“IRC Section 355”). For distributions of stock qualifying
under IRC Section 355, neither the Company nor the Company’s shareholders
recognize any gain or income in connection with the transaction for US federal
income tax purposes. The Company and SeraNova executed a Tax Sharing Agreement,
dated January 1, 2000 (“Tax Sharing Agreement”), whereby SeraNova would
indemnify the Company for any tax liabilities in the event a future transaction
of SeraNova results in the spin-off is being deemed a taxable event. On October
27, 2000, SeraNova and Silverline Technologies, Inc. announced that they had
entered into an agreement and plan of merger, under which Silverline
Technologies, Inc. would acquire control of SeraNova in exchange for American
depository shares of Silverline. Subsequently, SeraNova and Silverline
Technologies, Inc. filed for Chapter 7 Bankruptcy on August 8, 2003. As a
condition to the distribution, SeraNova management represented that there was no
present plan, nor intent to enter into a subsequent transaction that would
disturb the intended tax–free nature of the distribution.
16
INTELLIGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010 and 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010 and 2009
NOTE 8- COMMITMENTS AND CONTINGENCIES
(Continued)
IRC Section 355(e) provides that the Company
may be required to recognize a gain equal to the excess of the fair market value
of the SeraNova shares distributed over their tax basis if the distribution is
part of a plan pursuant to which one or more persons acquire 50% or more of
SeraNova common stock within two years of the distribution date. Should the
spin-off ultimately be construed as taxable the resultant tax liability could be
in the range of $55 million to $65 million and related penalties (if assessed)
and interest could increase the amount by $50 million to $60 million as of March
31, 2010, depending on the facts that ultimately are established. No future
benefits would inure to the Company as a result of imposition of a tax on the
SeraNova distribution, and no reserve has been recorded for this potential tax.
However, should such a tax liability be imposed, the Company may be able to
utilize some of its existing net operating losses to mitigate this tax
liability.
During the three month period ended March 31,
2010, the Company’s India subsidiary received an order from service tax
department amounting to INR 1,122 million (approximately $24.5 million
comprising $11.7 million of service tax, $12.3 million of assessed penalty and
$0.5 million of service tax credit disallowances), alleging that the services
rendered by the Company during the period from June 2003 to September 2004 and
March 2006 to March 2008, were taxable under the Indian Finance Act. The Company
believes that the service tax department has erroneously passed this order by
demanding tax on export revenues which are exempt from tax under applicable law
and disallowing the valid input credits. The Company’s India subsidiary plans to
appeal this service tax order. The Company has not booked a reserve for the
service tax demand because it believes its tax position will most likely be
validated through the appeal process.
Employment Agreements
As of March 31, 2010, the Company
had employment agreements with certain of its executive officers, which provide
for minimum payments in the event of termination for reasons other than just
cause. The aggregate amount of compensation commitment in the event of
termination under such agreements is approximately $1.6 million.
In addition, the Company’s wholly
controlled and majority owned subsidiary Intelligroup Asia Pvt. Ltd. (“IGA”) had
entered into Severance Packages totaling approximately $0.6 million with certain
former members of the IGA management team. Pursuant to the terms of the
Agreement for Severance Package, the Severance Package is activated upon the
fulfillment of certain events, including a change in management of the Company
or IGA. In April 2005, following the termination of the Company’s Chief
Executive Officer, three members of the IGA management team, each of whom had a
Severance Package, resigned. Except as set forth below, to date, the Company has
not received any claim for payment of the Severance Package. In September 2005,
two former members of the IGA management team sent IGA notices under Section 433
and 434 of the Indian Companies Act, 1956 for payment of such Severance Package.
Such claims have not been pursued since such initial notice was served, and the
Company does not believe that such severance amount is owed. In the event the
Company is unsuccessful in defending against such claim for payment, the Company
would owe approximately $0.6 million to such individuals.
NOTE 9- RESTRICTED CASH AND
INVESTMENTS
The various components of restricted
cash and investments consist of the following:
As at | ||||||
Mar 31, | Dec 31, | |||||
Restricted against | 2010 | 2009 | ||||
Lien towards derivative contracts | $ | 389 | 1,039 | |||
Bank guarantees for various statutory and customer related compliances | 133 | 163 | ||||
$ | 522 | 1,202 | ||||
Please refer to Note
10 – Financial instruments for the fair value measurement reporting of the
restricted cash and investments.
17
INTELLIGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010 and 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010 and 2009
NOTE 10- FINANCIAL INSTRUMENTS
The Company measures certain financial assets
and liabilities at fair value on a recurring basis, including derivative
instruments and investments. The fair value measurements of these derivative
instruments and investments were determined using the following inputs of March
31, 2010:
Quoted Prices in | Significant Other | Significant Other | ||||||||||||
Active Markets for | Observable Inputs | Unobservable Inputs | ||||||||||||
Identical Assets | ||||||||||||||
Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||
Assets: | ||||||||||||||
Short-term Investments (Note a) | $ | 2,818 | $ | - | $ | 2,818 | $ | - | ||||||
Bank guarantees & Term Deposits (Note b) | 133 | - | 133 | - | ||||||||||
Investments (Note c) | 2,595 | - | 2,595 | - | ||||||||||
Total | $ | 5,546 | $ | - | $ | 5,546 | $ | - | ||||||
Liabilities: | ||||||||||||||
Derivative Instruments (Note d) | $ | (17 | ) | $ | - | $ | (17 | ) | $ | - | ||||
Total | $ | (17 | ) | $ | - | $ | (17 | ) | $ | - | ||||
a) | Represents term deposits and is reported under the head ‘Short Term Investments’ in the current assets on the consolidated balance sheet as of March 31, 2010. The fair value in the table is the face value of the instruments plus interest accrued up to March 31, 2010. |
The short-term investments and term deposits
referred above are considered as trading securities. The carrying value of these
investments as of March 31, 2010 approximates the fair value. Unrealized gains
of $0.04 million and realized gains of $0.05 million on these investments were
recorded for the three months period ended March 31, 2010. Gross proceeds from
sale of such investments amounted to approximately $6.8 million for the three
months period ended March 31, 2010.
b) | Reported as ‘Restricted cash and investments’ on the consolidated balance sheet as of March 31, 2010. (Please refer Note 9 – Restricted cash and investments.) The fair value is the face value of the instruments plus interest accrued up to March 31, 2010 | ||
c) | Represents non convertible debentures with an amount of $0.4 million reported under ‘Restricted cash and Investments’ and $ 2.2 million reported as ‘Other assets’ on the consolidated balance sheet as of March 31, 2010. (Please refer Note 9 – Restricted cash and investments.) The fair value is derived based on market related inputs based on market determined yield of similar instrument of similar residual maturity and option price derived based on market quotes. | ||
d) | Reported under current liabilities on the consolidated balance sheets. The fair value is derived by independent valuation based on analytical valuation methodology based on Black Scholes framework using forward rates and option volatilities. |
There have been no significant transfers in
and out of Level 2 classification as given in the Table above.
Derivative Instruments:
In the normal course of business, the Indian
subsidiary of the Company actively looks to mitigate the exposure of foreign
currency market risk, by entering into various derivative instruments,
authorized under Company policies, with counterparties that are highly rated
financial institutions. The primary exchange rate exposure of the Indian
subsidiary is to the US Dollar.
18
INTELLIGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010 and 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010 and 2009
NOTE 10- FINANCIAL INSTRUMENTS
(Continued)
The Company uses derivative instruments
consisting of foreign currency exchange option and forward contracts not
designated as hedging instruments under ASC 815-10 to economically hedge
exposure of foreign currency market risk. Changes in the fair value of these
instruments are recognized in the consolidated statement of operations and are
included in foreign exchange gain/ (loss). The Company had outstanding foreign
exchange contracts totaling $4.25 million as of March 31, 2010 and $8.00 million
as of December 31, 2009. The Company did not enter into any new foreign currency
forward contracts during the three months period ended March 31, 2010.
At March 31, 2010, summary
information about the foreign exchange options is as follows:
Option Contracts | Range forward Contracts | |
Notional Amount | $2 million | $2.25 million |
Rates | INR 43.45 | INR 46.25 to 48.12 |
Effective date | 5/18/2007 | 12/09/2009, |
Maturity Dates | 4/28/2010 to 05/26/10 | 4/28/2010 to 12/29/10 |
Fair Value | $ (0.07) million | $ 0.05 million |
The fair values of derivative instruments in
the condensed consolidated balance sheet as of March 31, 2010 and December 31,
2009 are as follows:
As at | |||||||||
Derivative Instruments not designated as | Balance Sheet Location | Mar 31, | Dec 31, | ||||||
hedging instrument under ASC 815: | 2010 | 2009 | |||||||
Fair value of foreign exchange contracts | Liability on derivative instruments | $ | (17 | ) | (389 | ) | |||
Fair Value Total | $ | (17 | ) | (389 | ) | ||||
The effect of derivative instruments on the
condensed consolidated statement of operations for the three month periods ended
March 31, 2010 and 2009 is as follows:
Amount of gain/ (loss)
recognized.
Derivative Instruments not designated as | Location of gain / (loss) recognized on | Three months period | ||||||
hedging instrument under ASC 815: | the Income Statement | ended March 31, | ||||||
2010 | 2009 | |||||||
Foreign Exchange Contracts | Foreign currency transaction gain / (loss), net | $ | 209 | (973 | ) | |||
Total | $ | 209 | (973 | ) | ||||
Please also refer Note 12 below for the
various components of foreign currency transaction gain / (loss) as reported on
the condensed consolidated statement of operations and comprehensive income for
the three month periods ending March 31, 2010 and 2009.
19
INTELLIGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010 and 2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010 and 2009
NOTE 11- EMPLOYEE BENEFIT PLANS
The Gratuity Plan provides a lump sum payment to vested employees on
retirement or on termination of employment in an amount based on the respective
employee’s salary and years of employment with the Company. Liabilities with
regard to the Gratuity Plan are determined by actuarial valuation. Current
service costs for the Gratuity Plan are accrued in the year to which they
relate.
Net Gratuity Plan cost includes the
following components:
Three Months | ||||||||
Period Ended March | ||||||||
2010 | 2009 | |||||||
Service Cost | $ | 28 | 27 | |||||
Interest Cost | 12 | 9 | ||||||
Actuarial (Gain) / Loss | (2 | ) | (20 | ) | ||||
Expected Return on Assets | (5 | ) | (3 | ) | ||||
Net Gratuity Cost | $ | 33 | 13 | |||||
NOTE 12- FOREIGN CURRENCY TRANSACTION
GAIN/(LOSS), NET
Foreign currency transaction gain / (loss)
comprises of two components – i) ASC 830 (previously FAS 52) re-measurement
gains or losses on the accounts receivable denominated in other than the
functional currency and the mark to market gains or losses of the derivative
instruments as follows.
Three Months | |||||||
Period Ended March 31, | |||||||
2010 | 2009 | ||||||
Foreign currency translation/ realization gain /(loss) | $ | (991 | ) | 358 | |||
Derivative unrealized gain / (loss) | 160 | (692 | ) | ||||
Derivative realized gain / (loss) | 49 | (281 | ) | ||||
Total foreign currency transaction gain / (loss) | $ | (782 | ) | (615 | ) | ||
NOTE 13- OTHER COMPREHENSIVE
INCOME
The changes in Other Comprehensive Income are mainly due to the foreign
currency translation adjustments of international subsidiaries.
For the three months period ended March
31, 2010, the Company recorded other comprehensive gain due to translation
adjustment of approximately $1.0 million on account of currency fluctuations in
Asia and Europe. Other comprehensive loss of approximately $1.0 million was
recorded for the three months period ended March 31, 2009.
NOTE 14- SUBSEQUENT EVENTS
As per ASC 855, the Company is required
to disclose significant changes in estimates as on the balance sheet date and to
evaluate subsequent events that occurred after the balance sheet date but before
the financial statements were issued. The Company has concluded that no events
or transactions have occurred which would require adjustments or disclosures in
the Company’s financial statements.
20
INTELLIGROUP, INC.
Item 2 Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion of our results of
operations and financial condition should be read in conjunction with the
Financial Statements and Notes included in Part I. “Financial Information”. This
report contains forward looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 under Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended.
Forward-looking statements include statements
with respect to our beliefs, plans, objectives, goals, expectations,
anticipations, assumptions, estimates, intentions, and future performance, and
involve known and unknown risks, uncertainties and other factors, which may be
beyond our control, and which may cause our actual results, performance or
achievements to be materially different from future results, performance or
achievements expressed or implied by such forward-looking statements.
All statements other than statements of
historical fact are statements that could be forward-looking statements. You can
identify these forward-looking statements through our use of words such as
“may,” “will,” “can” “anticipate,” “assume,” “should,” “indicate,” “would,”
“believe,” “contemplate,” “expect,” “seek,” “estimate,” “continue,” “plan,”
“point to,” “project,” “predict,” “could,” “intend,” “target,” “potential,” and
other similar words and expressions of the future.
Forward-looking statements may not be realized due to a variety of
factors, including, without limitation:
- the impact of the general economic
conditions which has and may continue to impact demand for our services and
strength of the global economic
recovery;
- the inability to generate new
sales and maintain profitability;
- the inability to attract and
retain a sufficient number of highly skilled technical employees, particularly
senior level technical
personnel and project managers;
- changes in the political,
regulatory, and economic conditions in India, which is where a substantial
portion of our operations are
located;
- impact of the economic conditions
that are unique to the particular industry to which we provide
services;
- effects of competition in the
information technology services industry where there is a very high level of
competition for employees and
customers;
- future legislation impacting the
off shore business model and increased anti-off-shoring sentiment in the
United States and isdictions
could significantly affect the demand for our services and our customer
delivery model.
- inability to maintain access to
external funding;
- currency fluctuations may
negatively impact our financial results;
- inability to maintain effective
internal control over financial reporting or to remediate any weaknesses that
may arise in the future;
- claims for damages by third
parties, including liability claims arising from negligent acts, errors,
mistakes or omission in rendering our IT professional services;
- our dependence on a limited number
of large customers;
- a systems failure or disruption in
telecommunications could disrupt our business and result in lost customers and
negative publicity;
- dependence on a limited number of
software partners;
- disruption to our operations,
including disruptions caused by geopolitical conditions in
India;
- the effects of volatility and lack
of liquidity in our common stock;
- our inability to protect our
intellectual property;
- third party claims that our services infringe on their intellectual property rights;
21
INTELLIGROUP, INC.
Item 2 Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
- we may be subject to increased tax
liabilities, including if the spin-off in 2000 of our former subsidiary,
SeraNova, is determined to be taxable. We could be liable in the range of $55
million to $65 million and related penalties (if assessed) and interest could
increase the amount by $50 million to $60 million. In July 2000, we completed the tax-free
spin-off of SeraNova, our former subsidiary. In March 2001, SeraNova and
Silverline Technologies Limited (“Silverline”) consummated the acquisition of
SeraNova by Silverline. Had the acquisition of SeraNova by Silverline been
contemplated at the time of the spin-off, the spin-off would have been a
taxable transaction. Based upon the information available to us, we believe
that such acquisition was not contemplated at the time of the spin-off of
SeraNova by Intelligroup, and accordingly should not impact the tax-free
nature of the spin-off. However, if it were determined that the spin-off was
taxable, Intelligroup may have to bear the liability to pay such tax
liability, which would be material. Please refer to Note 9 to the financial
statements on in our annual report on Form 10-K for the year ended December
31, 2009;
- the Company’s India subsidiary
received an order from Service tax department during the three months period
ended March 31, 2010, amounting to INR 1,122 million (approximately $24.5
million comprising $11.7 million of service tax, $12.3 million of assessed
penalty and $0.5 million of service tax credit disallowances), alleging that
the services rendered by the Company during the period from June 2003 to
September 2004 and March 2006 to March 2008, were taxable under the Finance
Act. The Company believes that the department has erroneously passed this
order by demanding tax on export revenues which are exempt from tax under law
and disallowing the valid input credits. The Company plans to appeal this
service tax order; and
- the factors listed under “Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2009.
All forward-looking statements are expressly
qualified in their entirety by this cautionary notice. You are cautioned not to
place undue reliance on any forward-looking statements, which speak only as of
the date of this report. We have no obligation, and expressly disclaim any
obligation, to update, revise or correct any of the forward-looking statements,
whether as a result of new information, future events or otherwise. We have
expressed our expectations, beliefs and projections in good faith and we believe
they have a reasonable basis. However, we cannot assure you that our
expectations, beliefs or projections will result or be achieved or accomplished.
Overview
The Company plans, consults, builds, supports
and manages enterprise resource planning (“ERP”) solutions based on SAP, Oracle,
PeopleSoft and Microsoft applications and technology platforms and also provide
services around business intelligence, ERP Infrastructure Management, E-Business
ERP Integration, ERP Testing, business process outsourcing or “BPO” and
knowledge process outsourcing or “KPO”.
The Company helps its customers align and
optimize their technology platforms, primarily their ERP systems, with their
businesses. While historically ERP providers had focused on providing solutions
for large market companies with revenues of over $5 billion such systems have
increasingly become mission critical for companies with revenues of between $500
million and $5 billion (“Mid-Tier Market”), as these systems are used to help
them drive greater revenue and productivity as well as to better manage and
control costs.
The Company has worked to position itself as
the “go-to” partner for companies looking for an ERP and extended ERP solutions
partner particularly for Mid-Tier Market and that positioning provides it with
an important competitive edge. This positioning is reflected in the fact that
over 90% of our business is generated from ERP-driven projects.
In this Section, we will discuss the following: (i) key factors in
evaluating the Company’s financial performance; (ii) application of critical
accounting principles, which explains the accounting principles necessary to
understand how the Company records its financial information; (iii) results of
operations - consolidated, in which the Company’s consolidated results are
compared period to period to recognize trends; (iv) results of operations by
business segment, which allows the Company to compare the results of its
different business units; (v) liquidity and capital resources; (vi) recent
accounting pronouncements, which identifies new accounting literature that may
have an impact on the Company’s future results and (vii) a discussion of our
business outlook.
22
INTELLIGROUP, INC.
Item 2 Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Key Factors in Evaluating the Company’s
Financial Performance
Management believes the following factors should be considered when
evaluating the Company’s reported financial information contained in
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
Revenue
The majority of the Company’s revenue is
derived from professional services rendered to customers. Revenue is typically
recognized as services are performed. The Company’s services range from
providing customers with a single consultant to multi-personnel full-scale
projects. Although the Company has contracts with many of its customers to
provide its services, in general, such contracts are terminable upon relatively
short notice, typically not more than 30 days. There can be no assurance that
the Company’s customers will continue to enter into contracts with the Company
or that existing contracts will not be terminated. The Company provides its
services either directly to end-user organizations, or as a member of a
consulting team assembled by another IT consulting firm. Where contractual
provisions permit, customers also are billed for reimbursement of expenses
incurred by the Company on the customers’ behalf.
Fixed Price Projects
The Company has provided services on
certain projects in which it, at the request of the clients, offers a fixed
price for its services. For the three months period ended March 31, 2010,
revenue derived from projects under fixed-time and fixed price service contracts
represented approximately 32% and 16%, respectively, of the Company’s total
revenue. For the three months period ended March 31, 2009, revenue derived from
projects under fixed-time and fixed price service contracts represented
approximately 38% and 9%, respectively, of the Company’s total revenue. No
single fixed price project was material to the Company’s business during the
three months period ended March 31, 2010 and 2009. The Company believes that, as
it pursues its strategy of providing application management services to
customers, it will continue to offer fixed price projects. The Company believes
that there are certain risks related to fixed price arrangements and thus prices
such arrangements to reflect the associated risk. There can be no assurance that
the Company will be able to complete such projects within the fixed price
timeframes. The failure to perform within such fixed price contracts, if entered
into, could have a material adverse effect on the Company’s business, financial
condition and results of operations.
Customer Concentration
The Company has derived and believes that
it will continue to derive a significant portion of its revenue from a limited
number of customers and projects. For the three month periods ended March 31,
2010 and 2009, the Company’s ten largest customers accounted for in the
aggregate approximately 39% and 36% of its revenue, respectively. During the
three month periods ended March 31, 2010 and 2009, no single customer accounted
for 10% or more of revenues. There can be no assurance that such customers will
continue to engage the Company in the future at current levels of retention, if
at all.
Software Partners
For the three month periods ended March
31, 2010 and 2009, the Company derived the following percentages of total
revenue from projects in which the Company implemented, extended, maintained,
managed or supported software developed by SAP and Oracle.
Percentage of Revenues | |||||
Three Months | |||||
Period Ended March 31, | |||||
2010 | 2009 | ||||
SAP | 69% | 77% | |||
Oracle | 17% | 14% | |||
e-Business | 5% | 5% | |||
Others | 9% | 4% | |||
Total | 100% | 100% |
23
INTELLIGROUP, INC.
Item 2 Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Markets
The Company currently serves the United States market with its
headquarters in Princeton, New Jersey, and branch offices in Atlanta, Georgia,
Naperville, Illinois and Milpitas, California. The Company also maintains local
offices to serve the markets in India, the United Kingdom, Denmark, Japan,
Canada and the United Arab Emirates.
Expenses
The Company’s most significant cost is
project personnel expenses, which consist of consultant salaries, payroll taxes,
benefits and subcontractor fees. 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).
Application of Critical Accounting Policies
The preparation of the Company’s
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. The Company’s estimates, judgments and assumptions are
continually evaluated based on available information and experience. Because of
the use of estimates inherent in the financial reporting process, actual results
could differ from those estimates.
Certain of the Company’s accounting
policies require higher degrees of judgment than others in their application.
These include revenue recognition and allowance for doubtful accounts,
impairments and estimation of useful lives of long-term assets, income tax
recognition of current and deferred tax items, assumptions used in valuing
stock-based compensation arrangements and fair value measurements, and accruals
for contingencies.
For a description of our critical
accounting policies and estimates, refer the discussion in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Application of Critical Accounting Policies in our Annual Report on Form 10-K
for the year ended December 31, 2009.
24
INTELLIGROUP, INC.
Item 2 Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Results of Operations – Consolidated – Three
months period ended March 31, 2010 compared to three months period ended March
31, 2009.
The following table sets forth for
the periods indicated certain financial data expressed as a percentage of total
revenue:
Percentage of Revenue | ||||||||
Three month period ended March 31, | ||||||||
2010 | 2009 | |||||||
Revenue
|
100.0 | % | 100.0 | % | ||||
Cost of
Revenues
|
68.2 | 68.8 | ||||||
Gross
Profit
|
31.8 | 31.2 | ||||||
Selling
general and administrative expenses
|
21.0 | 23.5 | ||||||
Depreciation
and amortization
|
1.6 | 1.8 | ||||||
Total
operating expenses
|
22.6 | 25.3 | ||||||
Operating
Income
|
9.2 | 5.9 | ||||||
Interest income | 0.2 | 0.1 | ||||||
Interest expense | (0.1 | ) | 0.0 | |||||
Foreign currency transaction gain (loss), net | (2.3 | ) | (2.0 | ) | ||||
Other income, net | 0.5 | 0.3 | ||||||
Income before income
tax provision
|
7.5 | 4.3 | ||||||
Income
Tax
|
1.5 | 1.7 | ||||||
Net
income
|
6.0 | % | 2.6 | % |
Three months period ended March 31, 2010
compared to three months period ended March 31, 2009.
Revenue: Revenue
has increased by 8.7% for the three months period ended March 31, 2010 as
compared to the three months period ended March 31, 2009. The three month period
ended March 31, 2009 was significantly impacted by global economic crisis. The
improvement in revenue is primarily a result of the increased demand for our IT
consulting services as the global economy continues to recover. The increased
volume of services sold was partially offset by decreases in our average bill
rates. Competitive pressures have resulted in downward pressure on pricing. Our
on site rates reduced by 3% from an average rate of $102 during the three months
period ended March 31, 2009 to an average rate of $99 during the three months
period ended March 31, 2010. Off shore rates are at same level at an average
rate of $21 during the three month periods ended March 31, 2010 and
2009.
Cost of revenue and gross profit: The cost of revenue has increased by 7.7%
from $21.2 million for the three months period ended March 31, 2009 to $22.9
million for the three months period ended March 31, 2010. The increase was
attributable to increase in sub-contractors cost by 6% due to increase in the
headcount of sub-contractors, increase in project related expenses by 0.7% due
to increase in volume of services sold and also increase by 3% due to
fluctuations in the functional currencies of our international subsidiaries. The
above increases in costs were offset by the decrease in payroll costs by 2% due
to decrease in the headcount and the related compensation costs. The gross
profit has increased by 10.8% from $9.6 million for the three months period
ended March 31, 2009 to $10.7 million for the three months period ended March
31, 2010. The increase in gross profit was a result of the increase in the
revenues partially offset by the increase in cost during the three months period
ended March 31, 2010. Gross margin has increased from 31.2% for the three months
period ended March 31, 2009 to 31.8% for the three months period ended March 31,
2010. The increase in gross margin was primarily due to improvement in
utilization rate by 8%. The cost of revenue has increased by 7.7% as opposed to
increase in revenue by 8.7% for the three months ended March 31, 2010 as
compared to three months ended March 31, 2009, thereby contributing to an
increase in gross margin.
25
INTELLIGROUP, INC.
Item 2 Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Selling, general and administrative expenses: Selling, general and administrative expenses
primarily consist of salaries and related benefits for sales and general
administrative personnel, facilities costs, related travel and entertainment and
professional fees. Selling, general and administrative expenses have decreased
by 3.1% from $7.3 million for the three months period ended March 31, 2009 to
$7.0 million for the three months period ended March 31, 2010. The decrease in
selling, general and administrative expenses was mainly due to (i) reduction in
payroll expenses and sales commission by 6.2% on account of reduction in head
count; (ii) fluctuations in the functional currencies of the subsidiaries by
2.8% which was partially offset by a 0.3% increase in other advertising,
insurance and general expenses.
Depreciation and amortization expenses: The Company recorded depreciation and
amortization expenses of $0.6 million for the three month periods ended March
31, 2010 and 2009.
Interest Expense: For the three month periods ended March 31, 2010 and 2009, the Company
recorded $0.02 million towards interest expense.
Foreign Currency gain
(loss): For the three
months period ended March 31, 2010, the Company recorded foreign currency
transaction losses of approximately $0.8 million, as compared to transaction
losses of approximately $0.6 million recorded for the three months period ended
March 31, 2009. The loss recorded during the three months period ended March 31,
2009 was due to marked to market valuation of the outstanding derivative
instruments consequent to significant fluctuations in Indian Rupee (“INR”) and
US Dollar (“USD”). The loss recorded during the three months period ended March
31, 2010 was primarily due to strengthening of INR against USD. We had
outstanding foreign exchange contracts totaling $4.25 million as of March 31,
2010 and $22.6 million as of March 31, 2009.
Interest and Other
Income: Interest and other
income was approximately $0.2 million for the three months period ended March
31, 2010 as compared to $0.1 million for the three months period ended March 31,
2009. The increase is mainly due to accrued interest on short term
investments.
Income tax provision: The Company recorded an income tax provision of $0.5 million on a pretax
income of $2.5 million for the three months period ended March 31, 2010 as
compared to an income tax provision of $0.5 million on a pretax income of $1.3
million for the three months period ended March 31, 2009. The effective tax rate
has decreased to 19.5% during the three months period ended March 31, 2010 from
40.6% during the three months period ended March 31, 2009 primarily due to
changes in the geographic distribution of the income and changes in non taxable
income. The difference between the income tax rates for the 2010 and 2009
periods and the statutory rate is primarily due to the existence of carried
forward net operating losses in the U.S. locations on which a full valuation
allowance has been recorded and earnings taxed in countries that have rates
lower than the United States.
Results of Operations by Business Segment
The Company operates in one industry
segment, information technology solutions and services.
The Company has four reportable
geographic operating segments, which are organized and managed on a geographical
basis, as follows:
26
INTELLIGROUP, INC.
Item 2 Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
- United States (“US”) – the largest
segment of the Company, with operations in the US and Puerto Rico. Includes
the operations of the Company’s
US subsidiary, Empower, Inc., and all corporate functions and activities. The
US and corporate headquarters
is located in Princeton, New Jersey;
- India – includes the operations of
the Company in India, including services provided on behalf of other group
subsidiaries, primarily to the
US. The India offices are located in Hyderabad and Bangalore, India. A
majority of the total revenue
generated in India is derived from providing off shore development and support
services to customers through
the Company’s affiliated entities in other parts of the world, but
predominantly with the United States. This segment also covers our operations in the UAE and Saudi
Arabia;
- Europe – includes the operations
of the Company in Denmark and the United Kingdom. The European offices are
located in Milton Keynes,
United Kingdom; and Odense in Denmark; and
- Japan – includes the operations of the Company in Japan. The office is located in Tokyo, Japan.
The revenues are attributed to each
segment on the basis of the location of the entity which contracts with the
customer and on the basis of the inter-company agreements between the affiliated
entities. The CEO has been identified as the Chief Operating Decision Maker
(“CODM”) because he has final authority over resource allocation decisions and
performance assessment. The CODM regularly receives certain discrete financial
information about the geographical operating segments, including primarily
revenue and operating income, to evaluate segment performance.
Three months period ended March 31,
2010 compared to three months period ended March 31, 2009.
The following discussion compares the
segment results of operations for the three month periods ended March 31, 2010 and 2009.
Revenue and Operating
Income. The following
table displays revenues and operating income by reportable segment (in
thousands).
Three months period ended Mar 31, | |||||||||||||||||||||||||||||
2010 | 2009 | Change in | |||||||||||||||||||||||||||
% of | Operating | % of | Operating | Operating | |||||||||||||||||||||||||
Revenues | Total | Income | Revenues | Total | Income | Revenues | Income | ||||||||||||||||||||||
United States | $ | 26,967 | 80 | % | $ | 1,316 | $ | 23,758 | 77 | % | $ | 169 | $ | 3,209 | $ | 1,147 | |||||||||||||
India | 10,280 | 31 | % | 1,737 | 9,080 | 29 | % | 1,177 | 1,200 | 560 | |||||||||||||||||||
Europe | 4,077 | 12 | % | 163 | 4,220 | 14 | % | 586 | (143 | ) | (423 | ) | |||||||||||||||||
Japan | 850 | 3 | % | (142 | ) | 1,091 | 4 | % | (122 | ) | (241 | ) | (20 | ) | |||||||||||||||
Inter-segment eliminations | (8,630 | ) | -26 | % | (7,280 | ) | -24 | % | (1,350 | ) | |||||||||||||||||||
Total | $ | 33,544 | 100 | % | $ | 3,074 | $ | 30,869 | 100 | % | $ | 1,810 | $ | 2,675 | $ | 1,264 | |||||||||||||
27
INTELLIGROUP, INC.
Item 2 Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
US revenue has increased by 13.5% or $3.2 million, from $23.8 million for
the three month period ended March 31, 2009 to $27.0 million for the three
months period ended March 31, 2010. The increase in revenue was primarily due to
a gradual improvement in IT spending over the last two quarters and continued
improvement in the overall market for IT services as the global economy
recovers. The operating income for US segment increased by $1.1 million from
$0.2 million for the three months period ended March 31, 2009 to $1.3 million
for the three months period ended March 31, 2010, primarily due to increase in
revenues by 13.7% offset by an increase in project related and travel costs by
12%, marketing and administrative expenses by 13% and payroll and subcontracting
costs by 1%.
India revenue has increased by 13.2% or
$1.2 million from $9.1million for the three month period ended March 31, 2009 to
$10.3 million for the three month period ended March 31, 2010. The increase in
revenue is primarily driven by US market showing a gradual improvement in IT
spending over the last two quarters and a consequent increase in demand for
offshore services. Off shore revenues attributable to Company’s other
international segments increased by 19.6% while revenues from local geographic
markets decreased by 11% as compared to the three months period ended March 31,
2010. Our Off shore rates are at same level at an average rate of $21 during the
three months period ended March 31, 2010 and 2009. Operating income for the
India segment has increased by 47.6% from $1.2 million for the three months
ended March 31, 2009 to $1.7 million for the three months period ended March 31,
2010 primarily due to increase in revenues by 13.2%, offset by an increase in
payroll and subcontracting costs by 9%, project related and travel costs by 12%
and marketing and administrative expenses by 2%.
Europe revenue has decreased marginally
by 3.4% or $0.1 million, from $4.2 million for the three months period ended
March 31, 2009 to $4.1 million for the three months period ended March 31, 2010.
Operating income for UK segment decreased by 72.2% from $0.6 million for the
three months period ended March 31, 2009 to $0.2 million for the three months
period ended March 31, 2010. The decrease in operating income was due to a
decrease in revenues by 3.4%, increase in payroll and subcontracting expenses by
38%, project related and travel costs by 13% and offset by decrease in marketing
and administrative expenses by 7%.
Japan revenue decreased by 22.1% or 0.2 million, from $1.1 million for
the three months period ended March 31, 2009 to $0.9 million for the three
months period ended March 31, 2010. The decrease is primarily due to closure of
a project in mid 2009. Japan reported operating loss at same level of $0.1
million during the three month periods ended March 31, 2010 and 2009.
Liquidity and Capital Resources
Cash Position and Cash Flows
We had cash and cash equivalents of $23.2
million as at March 31, 2010 as compared to $20.8 million as at December 31,
2009. We had a working capital of $39.6 million at March 31, 2010 and $36.1
million as at December 31, 2009.
Cash generated from operating activities was $2.5 million for the three
months period ended March 31, 2010, resulting primarily from the net income of
$2.0 million for the period. Cash generated from operating activities was $6.1
million for the three months period ended March 31 2009, resulting primarily
from the net income of $0.8 million for the period increased by $5.6 million due
to realization of accounts receivable and unbilled services balances.
28
INTELLIGROUP, INC.
Item 2 Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The Company invested $0.5 million in net purchase of computer equipment,
internal-use computer software and office furniture, fixtures and leasehold
improvements for the three months period ended March 31, 2010, compared to $0.1
million for the three months period ended March 31, 2009.
Cash provided in financing activities was $0.2 million during the three
months period ended March 31, 2010 as the Company received cash proceeds due to
exercise of stock options by employees. Cash used in financing activities was
$1.1 million during the three months period ended March 31, 2009 as the Company
repurchased stock amounting to $0.9 million during this period.
Credit Facility
On May 22, 2008, the Company entered into a revolving credit loan and
security agreement (“Credit Agreement”) with HSBC Bank, (the “Bank”). The Credit
Agreement is comprised of a three year revolving line of credit pursuant to
which the Company can borrow up to $10 million at the Bank’s Base Rate (as
defined in the Credit Agreement) of 3.25% as of March 31, 2010, minus 0.85%
percent. The credit facility is collateralized by substantially all of the
assets of the United States based operations and all subsidiary stock (not to
exceed 65% of the Equity Interests of any Foreign Subsidiary). The maximum
borrowing availability under the Credit Agreement is based upon a percentage of
eligible billed and unbilled accounts receivable. The Credit Agreement provides
for certain financial covenants that shall only be tested as of the end of any
fiscal quarter.
The Company was in compliance with the
applicable financial covenants of the Credit Agreement as of March 31, 2010.
A standby letter of credit of $0.1million has
been issued by and drawn upon HSBC banking corporation in favor of a landlord as
security deposit. This letter of credit is secured by a lien on the assets of
the company. The Company estimates undrawn availability under the Credit
Facility to be $9.9 million as of March 31, 2010.
The Company is prohibited from
paying dividends under the terms of the Credit Agreement.
Cash to Fund Operating
Activities
The Company relies on the cash
generated by operating activities, cash on hand and the financing available
under its credit facility to fund ongoing operations. The Company’s credit
facility with the Bank represents its sole source of external financing for
ongoing business operations. The Company’s operating plan depends on its cash
generated by operating activities and continued borrowing availability under
this credit facility or securing alternate sources of financing. The Company
must comply with certain covenants or secure from the Bank waivers of any
default on such covenants to maintain its line of credit with the Bank. There
can be no assurances that the Company will be able to maintain compliance with
the applicable financial covenants under its credit agreement or obtain waivers
of any defaults.
The Company’s 2010 operating plan contains
assumptions regarding revenue and expenses. The achievement of the operating
plan depends heavily on the timing of work performed by the Company on existing
projects and the ability of the Company to gain and perform work on new
projects. Project cancellations, delays in the timing of work performed by the
Company on existing projects or the inability of the Company to gain and perform
work on new projects, or ability to timely collect cash from its customers could
have an adverse impact on the Company’s ability to execute its operating plan
and maintain adequate cash flow. In the event actual results do not meet the
operating plan, management believes it could execute contingency plans to
mitigate such effects. Such plans include reductions in capital expenditures and
operating costs, and/or seeking additional financing. At March 31, 2010, we had
cash and cash equivalents and short-term investments of $26.1 million and
working capital of approximately $39.6 million. Accordingly, we do not
anticipate any near-term liquidity issues. Management believes that the Company’s cash on hand and cash generated by
operations and borrowings under its credit facility will be sufficient to fund
the Company’s current and planned operations through at least the next twelve
months.
29
INTELLIGROUP, INC.
Item 2 Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Contractual Obligations and Other Commercial
Commitments
There have been no material changes to the
contractual obligations and other commercial commitments previously disclosed in
our annual report on Form 10-K for the period ended December 31,
2009.
Recent Accounting Pronouncements
In August 2009, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-05,
“Measuring Liabilities at Fair Value” (“ASU 2009-05”). The amendments in this
ASU apply to all entities that measure liabilities at fair value and provide
clarification that in circumstances, in which a quoted price in an active market
for the identical liability is not available, an entity is required to measure
fair value using one or more techniques laid out in this ASU. The guidance
provided in this ASU is effective for the first reporting period (including
reporting periods) beginning after issuance. The implementation of this standard
did not have a material impact on the Company’s consolidated financial
statements
In October 2009, the FASB issued ASU 2009-13,
“Multiple-Deliverable Revenue Arrangements”, (amendments to FASB ASC Topic 605,
Revenue Recognition) (“ASU 2009-13”). In September 2009, the FASB ratified
Accounting Standards Update (ASU) 2009-13 (ASU 2009-13) (previously Emerging
Issues Task Force (EITF) Issue No. 08-1, Revenue Arrangements with Multiple
Deliverables (EITF 08-1)). ASU 2009-13 superseded EITF 00-21 and addresses
criteria for separating the consideration in multiple-element arrangements. ASU
2009-13 will require companies to allocate the overall consideration to each
deliverable by using a best estimate of the selling price of individual
deliverables in the arrangement in the absence of vendor-specific objective
evidence or other third-party evidence of the selling price. ASU 2009-13 will be
effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010 and early adoption
will be permitted. The Company is currently evaluating the potential impact, if
any, of the adoption of ASU 2009-13 on its consolidated results of operations
and financial condition and whether it will adopt the standard early. ASU
2009-13 will become effective for the Company with its fiscal year beginning
January 1, 2011.
In January 2010, the FASB issued ASU 2010-06,
“Fair Value Measurements and Disclosures”, (amendments to FASB ASC Topic 820,
Fair Value Measurements and Disclosures) (“ASU 2010-06”). ASU 2010-06 requires
entities to disclose separately the amounts of significant transfers in and out
of Level 1 and Level 2 fair value measurements along with the reasons for such
transfers. Entities should also present separate information about purchases,
sales, issuances and settlement activity in Level 3 fair value measurements. The
ASU 2010-06 requires entities to provide fair value measurement disclosures for
each class of assets and liabilities and disclosures about inputs and valuation
techniques. The new disclosures and clarifications of existing disclosures are
effective for interim and annual reporting periods beginning after December 15,
2009 except for the disclosures pertaining to Level 3 fair value measurements.
Those disclosures are effective for interim and fiscal years beginning after
December 15, 2010. This ASU 2010-06 is effective for the Company with its
interim period beginning January 1, 2010. The Company adopted the disclosure
requirements of the standard effective January 1, 2010 to the extent applicable.
The implementation of this standard did not have a material impact on the
Company’s consolidated financial statements.
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INTELLIGROUP, INC.
Item 2 Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Business Outlook
Our business and financial condition depend on
the health of the general economy, as well as the demand for information
technology services, particularly in the United States as we derive a
significant portion of our revenue from customers located in the United States.
Our revenue and profits are driven by demand for our services. After extremely
challenging global economic conditions at the end of 2008 and through the first
half of 2009, we see a modest rebound in IT spending which gives opportunities
for continued sequential growth for the balance of the year. While the change
provides a positive outlook for the business and the demand is improving, in the
near term it is creating a more competitive pricing environment for both
projects as well as employee compensation.
While we continued to see a gradual
improvement in IT spending trends during the first quarter, we do not yet see
sufficient reason to accelerate investment in sales and marketing. We believe that the market for IT services has stabilized across many
industry sectors in which we work with the exception of our customers and
prospects in the consumer products and manufacturing sectors continued to
exhibit challenged demand on a sequential basis.
Item 3. Quantitative and Qualitative
Disclosures about Market Risk.
There have been no material changes to the
information on quantitative and qualitative disclosures about market risk
provided in our annual report on Form 10-K for the period ended December 31,
2009.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
We are responsible for maintaining disclosure
controls and procedures designed to ensure that information required to be
disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and regulations,
and that such information is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, as
appropriate, to allow for timely decisions regarding required disclosures. Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
as of the end of the period covered by this report. In designing and evaluating
our disclosure controls and procedures, management recognized that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives and management necessarily is
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures and implementing controls and procedures based
upon the application of management’s judgment. Based on such evaluation, our
principal executive officer and principal financial officer have concluded that,
as of March 31, 2010, our disclosure controls and procedures were effective at
reasonable assurance level as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act.
Changes in Internal Controls
There were no changes in our
internal control over financial reporting during the three months period ended
March 31, 2010 that materially affected or are reasonably likely to materially
affect, our internal control over financial reporting.
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INTELLIGROUP, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There is no pending litigation to which the
Company is a party or to which any of its property is subject that would have a
material impact on its consolidated financial condition, results of operations
or cash flows in the event we were unsuccessful in such litigation. However, the
Company cannot predict with certainty the outcome of any litigation or the
potential for future litigation and any such matters could adversely affect its
financial condition, results of operations, cash flows and
business.
Item 1a. Risk Factors
There have been no material changes
to our risk factors previously disclosed in our annual report on Form 10-K for
the period ended December 31, 2009.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
There are no matters to report
subject to this Item for the three months period ended March 31, 2010.
Item 4. (Removed and
Reserved)
Item 5. Other Information
There are no matters to report
subject to this Item for the period ended March 31, 2010.
Item 6. Exhibits
See exhibit index hereto, which is
incorporated by reference herein.
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INTELLIGROUP, INC.
EXHIBIT INDEX
Exhibit No. | Description of Exhibit | |||
2 | Agreement and Plan of Merger of the Company and its wholly owned subsidiary Oxford Systems Inc. dated December 2, 1996 (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 dated June 8, 2007. | |||
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.) | |||
4.2 | Amendment dated September 29, 2004 to the Shareholder Protection Rights Agreement dated November 6, 2004. (Incorporated by reference to Exhibit No. 4.1 of the Company’s Report on Form 8-K dated September 29, 2004, filed with the Securities and Exchange Commission on October 5, 2004.) | |||
31.1 | † | Certifications of Chief Executive Officer Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
31.2 | † | Certifications of Chief Financial Officer Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
32.1 | † | Certifications of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
32.2 | † | Certifications of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
†
Filed herewith. All other
exhibits previously filed.
33
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 17th day of May 2010.
INTELLIGROUP, INC. | ||
Date: May 17, 2010 | By: | /s/ Vikram Gulati |
Vikram Gulati | ||
Chief Executive Officer | ||
Date: May 17, 2010 | By: | /s/ Alok Bajpai |
Alok Bajpai | ||
Chief Financial Officer and Principal Accounting Officer. |
34